*
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36872
HANCOCK WHITNEY CORPORATION
(Exact name of registrant as specified in its charter)
Mississippi
64-0693170
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Hancock Whitney Plaza, 2510 14th Street,
Gulfport, Mississippi
39501
(Address of principal executive offices)
(Zip Code)
(228) 868-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, par value $3.33 per share
HWC
Nasdaq
6.25% Subordinated Notes
HWCPZ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
86,125,500 common shares were outstanding at July 31, 2023.
Table of Contents
Hancock Whitney Corporation
Index
Part I. Financial Information
Page
Number
ITEM 1.
Financial Statements
5
Consolidated Balance Sheets (unaudited) – June 30, 2023 and December 31, 2022
Consolidated Statements of Income (unaudited) – Three and Six Months Ended June 30, 2023 and 2022
6
Consolidated Statements of Comprehensive Income (unaudited) – Three and Six Months Ended June 30, 2023 and 2022
7
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three and Six Months Ended June 30, 2023 and 2022
8
Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2023 and 2022
9
Notes to Consolidated Financial Statements (unaudited) – June 30, 2023 and 2022
10
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
39
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
65
ITEM 4.
Controls and Procedures
67
Part II. Other Information
Legal Proceedings
68
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Default on Senior Securities
N/A
Mine Safety Disclosures
ITEM 5.
Other Information
69
ITEM 6.
Exhibits
Signatures
70
2
Glossary of Defined Terms
Entities:
Hancock Whitney Corporation – a financial holding company registered with the Securities and Exchange Commission
Hancock Whitney Bank – a wholly-owned subsidiary of Hancock Whitney Corporation through which Hancock Whitney Corporation conducts its banking operations
Company – Hancock Whitney Corporation and its consolidated subsidiaries
Parent – Hancock Whitney Corporation, exclusive of its subsidiaries
Bank – Hancock Whitney Bank
Other Terms:
ACL – allowance for credit losses
AFS – available for sale securities
AMERIBOR - Index created by the American Financial Exchange as a potential replacement for LIBOR; calculated daily as the volume-weighted average interest rate of the overnight unsecured loans on American Financial Exchange
AOCI – accumulated other comprehensive income or loss
ALCO – Asset Liability Management Committee
ALLL – allowance for loan and lease losses
ARRC – Alternative Reference Rates Committee
ASC – Accounting Standards Codification
ASU – Accounting Standards Update
ATM – automated teller machine
Basel III – Basel Committee's 2010 Regulatory Capital Framework (Third Accord)
Beta – amount by which deposit or loan costs change in response to movement in short-term interest rates
BOLI – bank-owned life insurance
bp(s) – basis point(s)
C&I – commercial and industrial loans
CARES Act – Coronavirus Aid, Relief, and Economic Security Act
CD – certificate of deposit
CDE – Community Development Entity
CECL – Current Expected Credit Losses
CEO – Chief Executive Officer
CFPB– Consumer Financial Protection Bureau
CFO – Chief Financial Officer
CME – Chicago Mercantile Exchange
CMO – collateralized mortgage obligation
Core client deposits – total deposits excluding public funds and brokered deposits
Core deposits – total deposits excluding certificates of deposits of $250,000 or more and brokered deposits
Coronavirus – the novel coronavirus declared a pandemic during the first quarter of 2020, resulting in prolonged market disruptions
COVID-19 – disease caused by the novel coronavirus
CRE – commercial real estate
DEI – Diversity, equity and inclusion
DIF – Deposit Insurance Fund
ESG – Environmental, Social and Governance; term used in discussion of risks and corporate policies related to those items
Excess Liquidity – deposits held at the Federal Reserve above normal levels
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FDICIA – Federal Deposit Insurance Corporation Improvement Act of 1991
Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes
monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed
by the President subject to Senate confirmation, and serve 14-year terms.
Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district. This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the
credit structure. They implement the policies of the Federal Reserve Board and also conduct economic research.
FFIEC – Federal Financial Institutions Examination Council
FHA – Federal Housing Administration
FHLB – Federal Home Loan Bank
GAAP – Generally Accepted Accounting Principles in the United States of America
HTM – held to maturity securities
ICS – Insured cash sweep
3
IRA 2022 – Inflation Reduction Act of 2022
IRS – Internal Revenue Service
LIBOR – London Interbank Offered Rate
LIHTC – Low Income Housing Tax Credit
LTIP – long-term incentive plan
MBS – mortgage-backed securities
MD&A – management’s discussion and analysis of financial condition and results of operations
MDBCF – Mississippi Department of Banking and Consumer Finance
MEFD - reportable modified loans to borrowers experiencing financial difficulty as defined by accounting guidance effective January 1, 2023
NAICS – North American Industry Classification System
NII – net interest income
n/m – not meaningful
NSF – Non-sufficient funds
OCI – other comprehensive income or loss
OD – Overdraft
ORE – other real estate defined as foreclosed and surplus real estate
PCD – purchased credit deteriorated loans, as defined by ASC 326
PPNR – Pre-provision net revenue
PPP – Paycheck Protection Program, a loan program administered by the Small Business Administration designed to provide a direct incentive for small businesses to keep workers on payroll during interruptions caused by the COVID-19 pandemic
Reference rate reform – refers to the global transition away from LIBOR and other interbank offered rates toward new reference rates that are more reliable and robust
Repos – securities sold under agreements to repurchase
SBA – Small Business Administration
SBIC – Small Business Investment Company
SEC – U.S. Securities and Exchange Commission
Securities Act – Securities Act of 1933, as amended
Short-term Investments – the sum of Interest-bearing bank deposits and Federal funds sold
SOFR – Secured Overnight Financing Rate
te – taxable equivalent adjustment, or the term used to indicate that a financial measure is presented on a fully taxable equivalent basis
TDR – troubled debt restructuring, as defined by accounting guidance that was superseded effective January 1, 2023
TSR – total shareholder return
U.S. Treasury – The United States Department of the Treasury
4
Item 1. Financial Statements
Hancock Whitney Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30,
December 31,
(in thousands, except per share data)
2023
2022
ASSETS
Cash and due from banks
$
563,736
564,459
Interest-bearing bank deposits
673,650
323,332
Federal funds sold
513
728
Securities available for sale, at fair value (amortized cost of $6,151,183 and $6,310,214)
5,414,689
5,556,041
Securities held to maturity (fair value of $2,540,256 and $2,615,398 )
2,780,990
2,852,495
Loans held for sale (includes $24,163 and $10,843 measured at fair value)
55,902
26,385
Loans
23,789,886
23,114,046
Less: allowance for loan losses
(314,496
)
(307,789
Loans, net
23,475,390
22,806,257
Property and equipment, net of accumulated depreciation of $310,257 and $303,451
326,534
328,605
Right of use assets, net of accumulated amortization of $49,510 and $44,901
106,399
96,884
Prepaid expenses
58,762
44,632
Other real estate and foreclosed assets, net
2,174
2,017
Accrued interest receivable
141,442
131,849
Goodwill
855,453
Other intangible assets, net
50,122
56,193
Life insurance contracts
740,626
729,774
Funded pension assets, net
216,149
216,818
Deferred tax asset, net
200,910
211,418
Other assets
546,707
380,485
Total assets
36,210,148
35,183,825
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest-bearing
12,171,817
13,645,113
Interest-bearing
17,871,684
15,425,236
Total deposits
30,043,501
29,070,349
Short-term borrowings
1,629,538
1,871,271
Long-term debt
236,241
242,077
Accrued interest payable
35,639
9,935
Lease liabilities
125,750
116,422
Other liabilities
585,003
531,143
Total liabilities
32,655,672
31,841,197
Stockholders' equity:
Common stock
309,513
Capital surplus
1,727,745
1,716,884
Retained earnings
2,280,004
2,088,413
Accumulated other comprehensive loss, net
(762,786
(772,182
Total stockholders' equity
3,554,476
3,342,628
Total liabilities and stockholders' equity
Preferred shares authorized (par value of $20.00 per share)
50,000
Preferred shares issued and outstanding
—
Common shares authorized (par value of $3.33 per share)
350,000
Common shares issued
92,947
Common shares outstanding
86,123
85,941
See notes to unaudited consolidated financial statements.
Consolidated Statements of Income
Three Months Ended
Six Months Ended
Interest income:
Loans, including fees
341,456
207,163
656,057
399,913
Loans held for sale
365
443
660
1,134
Securities-taxable
47,501
39,015
95,147
76,179
Securities-tax exempt
4,728
4,718
9,449
9,373
Short-term investments
11,223
3,525
16,563
5,051
Total interest income
405,273
254,864
777,876
491,650
Interest expense:
102,535
166,986
8,829
25,733
959
45,796
2,378
3,094
3,122
6,189
6,248
Total interest expense
131,362
9,132
218,971
17,455
Net interest income
273,911
245,732
558,905
474,195
Provision for credit losses
7,633
(9,761
13,653
(32,288
Net interest income after provision for credit losses
266,278
255,493
545,252
506,483
Noninterest income:
Service charges on deposit accounts
21,491
20,495
42,113
42,169
Trust fees
17,393
17,309
34,127
32,588
Bank card and ATM fees
20,982
21,870
41,703
42,266
Investment and annuity fees and insurance commissions
8,241
8,001
17,108
15,428
Secondary mortgage market operations
2,299
2,990
4,467
6,736
Securities transactions, net
(87
Other income
12,819
14,988
24,037
29,985
Total noninterest income
83,225
85,653
163,555
169,085
Noninterest expense:
Compensation expense
94,121
94,155
186,524
180,148
Employee benefits
20,743
21,015
43,663
42,418
Personnel expense
114,864
115,170
230,187
222,566
Net occupancy expense
12,707
12,225
24,913
23,905
Equipment expense
5,043
4,703
9,779
9,570
Data processing expense
29,562
26,169
57,744
50,408
Professional services expense
8,915
8,423
18,046
16,216
Amortization of intangible assets
2,957
3,586
6,071
7,334
Deposit insurance and regulatory fees
6,463
3,503
12,383
7,243
Other real estate and foreclosed assets income, net
(282
(88
(127
(1,852
Other expense
21,909
13,406
44,026
31,646
Total noninterest expense
202,138
187,097
403,022
367,036
Income before income taxes
147,365
154,049
305,785
308,532
Income taxes expense
29,571
32,614
61,524
63,619
Net income
117,794
121,435
244,261
244,913
Earnings per common share-basic
1.35
1.39
2.81
2.79
Earnings per common share-diluted
1.38
2.80
2.78
Dividends paid per share
0.30
0.27
0.60
0.54
Weighted average shares outstanding-basic
86,096
86,067
86,057
86,362
Weighted average shares outstanding-diluted
86,370
86,354
86,350
86,654
Consolidated Statements of Comprehensive Income
($ in thousands)
Other comprehensive income (loss) before income taxes:
Net change in unrealized loss on securities available for sale cash flow hedges and equity method investment
(103,503
(203,551
(2,559
(594,455
Reclassification of (income) or loss realized and included in earnings
11,245
(5,570
20,765
(9,408
Other valuation adjustments to employee benefit plans
(5,685
(7,987
(7,521
Amortization of unrealized net loss on securities transferred to held to maturity
428
266
922
527
Other comprehensive income (loss) before income taxes
(97,515
(216,842
11,607
(611,323
Income tax expense (benefit)
(22,194
(48,941
2,211
(138,081
Other comprehensive income (loss) net of income taxes
(75,321
(167,901
9,396
(473,242
Comprehensive income (loss)
42,473
(46,466
253,657
(228,329
Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended June 30, 2023 and 2022
Accumulated
Common Stock
Other
(in thousands, except parenthetical share data)
SharesIssued
Amount
CapitalSurplus
RetainedEarnings
ComprehensiveLoss
Total
Balance, March 31, 2023
1,720,623
2,188,561
(687,465
3,531,232
Other comprehensive loss
Comprehensive income
Cash dividends declared ($0.30 per common share)
(26,392
Common stock activity, long-term incentive plans
6,123
41
6,164
Issuance of stock from dividend reinvestment and stock purchase plans
999
Balance, June 30, 2023
Balance, March 31, 2022
1,742,021
1,758,693
(359,276
3,450,951
Comprehensive loss
Cash dividends declared ($0.27 per common share)
(23,672
5,957
33
5,990
919
Repurchase of common stock (804,368 shares)
(37,999
Balance, June 30, 2022
1,710,898
1,856,489
(527,177
3,349,723
Six Months Ended June 30, 2023 and 2022
Comprehensive Loss
Balance, December 31, 2022
Other comprehensive income
Dividends declared ($0.60 per common share)
(52,779
8,927
109
9,036
1,934
Balance, December 31, 2021
1,755,701
1,659,073
(53,935
3,670,352
Dividends declared ($0.54 per common share)
(47,581
9,886
84
9,970
1,800
Repurchase of common stock (1,154,368 shares)
(56,489
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
17,514
14,814
Gain on other real estate and foreclosed assets
(324
(3,276
Loss on sale of securities
87
Deferred tax expense
8,450
11,634
Increase in cash surrender value of life insurance contracts
(7,466
(920
Loss on disposal of assets
651
539
Net (increase) decrease in loans held for sale
(29,454
43,329
Net amortization of securities premium/discount
9,674
21,311
Stock-based compensation expense
12,194
11,379
Net change in derivative collateral liability
85,986
96,591
Net increase (decrease) in interest payable and other liabilities
6,547
(19,009
(Increase) decrease in other assets
(146,238
108,679
Other, net
(6,828
(18,286
Net cash provided by operating activities
214,691
486,831
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale securities
73,219
Proceeds from maturities of securities available for sale
157,474
295,121
Purchases of securities available for sale
(383,398
Proceeds from maturities of securities held to maturity
72,365
77,794
Purchases of securities held to maturity
(6,023
(708,439
Proceeds received upon termination of fair value hedge instruments
16,550
49,167
Net (increase) decrease in short-term investments
(350,103
2,959,439
Net (purchases) redemption of Federal Home Loan Bank stock
(68,057
37,423
Proceeds from sales of loans and leases
27,439
26,619
Net increase in loans
(718,348
(808,525
Purchase of life insurance contracts
(65,000
Purchases of property and equipment
(18,273
(18,212
Proceeds from sales of other real estate and foreclosed assets
1,420
9,378
(7,594
4,277
Net cash provided by (used in) investing activities
(893,150
1,548,863
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
973,152
(599,465
Net decrease in short-term borrowings
(241,733
(1,035,050
Repayments of long-term debt
(480
Dividends paid
(52,350
(47,365
Payroll tax remitted on net share settlement of equity awards
(3,267
(1,799
Proceeds from exercise of stock options
227
Proceeds from dividend reinvestment and stock purchase plans
Repurchase of common stock
Net cash provided by (used in) financing activities
677,736
(1,738,621
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
(723
297,073
CASH AND DUE FROM BANKS, BEGINNING
401,201
CASH AND DUE FROM BANKS, ENDING
698,274
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans
1,322
118
HANCOCK WHITNEY CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of Hancock Whitney Corporation and all other entities in which it has a controlling interest (the “Company”). The financial statements include all adjustments that are, in the opinion of management, necessary to fairly state the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Quarterly Report on Form 10-Q. Some financial information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted in this Quarterly Report on Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations, or cash flows for any other interim or annual period.
Certain prior period amounts have been reclassified to conform to the current period presentation. Such changes include expanding the presentation of the credit quality metrics by vintage to portfolio class from portfolio segment in Note 3 – Loans. These changes in presentation did not have a material impact on the Company's financial condition or operating results.
Use of Estimates
The accounting principles the Company follows and the methods for applying these principles conform to GAAP and general practices followed by the banking industry. These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Accounting Policies
There were no material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022.
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2022-02 "Financial Instruments: Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminated the recognition and measurement guidance as prescribed by Accounting Standards Codification (“ASC”) 310-40 for troubled debt restructurings (“TDRs”) and introduced new requirements for certain modifications of loans to borrowers experiencing financial difficulty (“MEFDs”). Qualifying modifications are interest rate reductions, other-than-insignificant payment delays, term extensions, or any combination of these terms. Our MEFD policy generally considers six months or less to be the time frame that is considered insignificant for payment delays and/or term extensions. Multiple payment delays and/or term extensions to borrowers experiencing financial difficulty within a twelve month period are evaluated collectively. Qualifying modified loans are subject to reporting requirements for the twelve month period following the modification. This standard was adopted on a prospective basis and therefore, only modifications on or after January 1, 2023 are evaluated and reported under the new requirements.
Like TDRs, MEFDs can remain on nonaccrual, move to nonaccrual, return to accrual, or continue to accrue interest, depending on the individual facts and circumstances of the borrower. As allowed by the standard, the Company has elected to evaluate these modified loans for credit loss consistent with policies for the non-modified portfolio, which includes individually evaluating for specific reserves all nonaccrual MEFDs over our existing materiality threshold and collectively evaluating credit loss for all other MEFDs, including those that continue to accrue interest. The credit loss methodology for MEFDs is the same as described in the Allowance for Credit Losses section in the Summary of Significant Accounting Policies disclosed in the Note 1 of the 2022 Form 10-K.
Refer to Note 3 – Loans for disclosures related to reportable MEFDs entered into since adoption, as well as gross charge-offs by class in our vintage disclosures, also required by this standard.
Refer to Note 14 – Recent Accounting Pronouncements for further discussion of accounting standards adopted and issued but not yet adopted at June 30, 2023 and the anticipated impact to the Company’s financial statements.
2. Securities
The following tables set forth the amortized cost, gross unrealized gains and losses, and estimated fair value of debt securities classified as available for sale and held to maturity at June 30, 2023 and December 31, 2022. Amortized cost of securities does not include accrued interest which is reflected in the accrued interest line item on the consolidated balance sheets totaling $28.7 million at June 30, 2023 and $29.1 million at December 31, 2022.
June 30, 2023
December 31, 2022
Gross
Securities Available for Sale
Amortized
unrealized
Fair
cost
gains
losses
value
U.S. Treasury and government agency securities
113,195
3,343
109,852
113,211
2,346
110,865
Municipal obligations
205,306
40
4,841
200,505
207,014
59
3,981
203,092
Residential mortgage-backed securities
2,507,541
141
381,119
2,126,563
2,655,381
224
398,619
2,256,986
Commercial mortgage-backed securities
3,232,868
1,773
339,425
2,895,216
3,234,278
2,032
342,880
2,893,430
Collateralized mortgage obligations
68,773
6,043
62,730
76,830
6,242
70,588
Corporate debt securities
23,500
3,677
19,823
2,420
21,080
6,151,183
1,954
738,448
6,310,214
2,315
756,488
Securities Held to Maturity
422,789
96
49,405
373,480
426,454
21
49,044
377,431
683,143
669
26,561
657,251
698,908
753
26,558
673,103
694,693
71,754
622,939
734,478
72,532
661,946
942,272
91,213
851,059
948,691
87,211
861,480
38,093
2,566
35,527
43,964
2,526
41,438
765
241,499
2,540,256
774
237,871
2,615,398
The following tables present the amortized cost and fair value of debt securities available for sale and held to maturity at June 30, 2023 by contractual maturity. Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.
Debt Securities Available for Sale
Due in one year or less
2,667
2,607
Due after one year through five years
1,007,425
951,597
Due after five years through ten years
3,021,049
2,693,028
Due after ten years
2,120,042
1,767,457
Total available for sale debt securities
Debt Securities Held to Maturity
6,636
6,478
665,030
629,029
836,716
768,352
1,272,608
1,136,397
Total held to maturity securities
The Company held no securities classified as trading at June 30, 2023 and December 31, 2022.
11
The following table presents the proceeds from, gross gains on, and gross losses on sales of securities during the six months ended June 30, 2023 and 2022. Net gains or losses are reflected in the "Securities transactions, net" line item on the Consolidated Statements of Income.
Six Months Ended June 30,
Proceeds
Gross gains
Gross losses
Net loss
Securities with carrying values totaling $4.7 billion and $4.9 billion were pledged as collateral at June 30, 2023 and December 31, 2022, respectively, primarily to secure public deposits or securities sold under agreements to repurchase and as collateral for an available line of credit with the Federal Reserve Bank.
Credit Quality
The Company’s policy is to invest only in securities of investment grade quality. These investments are largely limited to U.S. agency securities and municipal securities. Management has concluded, based on the long history of no credit losses, that the expectation of nonpayment of the held to maturity securities carried at amortized cost is zero for securities that are backed by the full faith and credit of and/or guaranteed by the U.S. government. As such, no allowance for credit losses has been recorded for these securities. The municipal portfolio is analyzed separately for allowance for credit loss in accordance with the applicable guidance for each portfolio as noted below.
The Company evaluates credit impairment for individual securities available for sale whose fair value was below amortized cost with a more than inconsequential risk of default and where the Company had assessed whether the decline in fair value was significant enough to suggest a credit event occurred. There were no securities with a material credit loss event and, therefore, no allowance for credit loss was recorded in any period presented.
The fair value and gross unrealized losses for securities classified as available for sale with unrealized losses for the periods indicated follow.
Available for Sale
Losses < 12 months
Losses 12 months or >
Fairvalue
Grossunrealizedlosses
101,949
1,770
7,903
1,573
114,411
2,165
84,699
2,676
199,110
131,220
6,308
1,989,035
374,811
2,120,255
275,914
16,436
2,567,305
322,989
2,843,219
1,690
310
17,633
3,367
19,323
625,184
26,989
4,729,305
711,459
5,354,489
102,607
754
8,258
1,592
192,334
636,060
49,790
1,611,832
348,829
2,247,892
1,489,974
114,195
1,351,530
228,685
2,841,504
3,275
28,884
2,967
70,587
13,194
1,306
7,386
1,114
20,580
2,475,872
173,301
3,007,890
583,187
5,483,762
12
At each reporting period, the Company evaluates its held to maturity municipal obligation portfolio for credit loss using probability of default and loss given default models. The models were run using a long-term average probability of default migration and with a probability weighting of Moody’s economic forecasts. The resulting credit losses, if any, were negligible and no allowance for credit loss was recorded.
The fair value and gross unrealized losses for securities classified as held to maturity with unrealized losses for the periods indicated follow.
Held to maturity
63,206
3,175
295,332
46,230
358,538
429,205
5,865
192,626
20,696
621,831
215,171
12,457
407,768
59,297
119,234
6,908
731,825
84,305
826,816
28,405
1,663,078
213,094
2,489,894
145,893
13,245
226,499
35,799
372,392
560,288
8,878
64,346
17,680
624,634
391,146
30,515
270,800
42,017
697,827
56,899
163,653
30,312
1,836,592
112,063
725,298
125,808
2,561,890
As of June 30, 2023 and December 31, 2022, the Company had 769 and 757 securities, respectively, with market values below their cost basis. There were no material unrealized losses related to the marketability of the securities or the issuer’s ability to meet contractual obligations. In all cases, the indicated impairment on these debt securities would be recovered no later than the security’s maturity date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. The unrealized losses were deemed to be materially non-credit related at June 30, 2023 and December 31, 2022. The Company has adequate liquidity and, therefore, neither plans to nor expects to be required to liquidate these securities before recovery of the amortized cost basis.
13
3. Loans and Allowance for Credit Losses
The Company generally makes loans in its market areas of south and central Mississippi; southern and central Alabama; northwest, central and south Louisiana; the northern, central and panhandle regions of Florida; certain areas of east and northeast Texas, including Houston, Dallas, Austin, and San Antonio; and the metropolitan areas of Nashville, Tennessee and Atlanta, Georgia.
Loans, net of unearned income, by portfolio are presented at amortized cost basis in the table below. Amortized cost does not include accrued interest, which is reflected in the accrued interest line item in the Consolidated Balance Sheets, totaling $108.5 million and $100.2 million at June 30, 2023 and December 31, 2022, respectively. The following table presents loans, net of unearned income, by portfolio class at June 30, 2023 and December 31, 2022.
Commercial non-real estate
10,113,932
10,146,453
Commercial real estate - owner occupied
3,058,829
3,033,058
Total commercial and industrial
13,172,761
13,179,511
Commercial real estate - income producing
3,762,428
3,560,991
Construction and land development
1,768,252
1,703,592
Residential mortgages
3,581,514
3,092,605
Consumer
1,504,931
1,577,347
Total loans
The following briefly describes the composition of each loan category and portfolio class.
Commercial and industrial
Commercial and industrial loans are made available to businesses for working capital (including financing of inventory and receivables), business expansion, to facilitate the acquisition of a business, and the purchase of equipment and machinery, including equipment leasing. These loans are primarily made based on the identified cash flows of the borrower and, when secured, have the added strength of the underlying collateral.
Commercial non-real estate loans may be secured by the assets being financed or other tangible or intangible business assets such as accounts receivable, inventory, ownership, enterprise value or commodity interests, and may incorporate a personal or corporate guarantee; however, some short-term loans may be made on an unsecured basis, including a small portfolio of corporate credit cards, generally issued as a part of overall customer relationships.
Commercial real estate – owner occupied loans consist of commercial mortgages on properties where repayment is generally dependent on the cash flow from the ongoing operations and activities of the borrower. Like commercial non-real estate, these loans are primarily made based on the identified cash flows of the borrower, but also have the added strength of the value of underlying real estate collateral.
Commercial real estate – income producing
Commercial real estate – income producing loans consist of loans secured by commercial mortgages on properties where the loan is made to real estate developers or investors and repayment is dependent on the sale, refinance, or income generated from the operation of the property. Properties financed include retail, office, multifamily, senior housing, hotel/motel, skilled nursing facilities and other commercial properties.
Construction and land development loans are made to facilitate the acquisition, development, improvement and construction of both commercial and residential-purpose properties. Such loans are made to builders and investors where repayment is expected to be made from the sale, refinance or operation of the property or to businesses to be used in their business operations. This portfolio also includes residential construction loans and loans secured by raw land not yet under development.
Residential mortgages consist of closed-end loans secured by first liens on 1- 4 family residential properties. The portfolio includes both fixed and adjustable rate loans, although most longer-term, fixed rate loans originated are sold in the secondary mortgage market.
14
Consumer loans include second lien mortgage home loans, home equity lines of credit and nonresidential consumer purpose loans. Nonresidential consumer loans include both direct and indirect loans. Direct nonresidential consumer loans are made to finance the purchase of personal property, including automobiles, recreational vehicles and boats, and for other personal purposes (secured and unsecured), and deposit account secured loans. Indirect nonresidential consumer loans include automobile financing provided to the consumer through an agreement with automobile dealerships, though the Company is no longer engaged in this type of lending and the remaining portfolio is in runoff. Consumer loans also include a small portfolio of credit card receivables issued on the basis of applications received through referrals from the Bank’s branches, online and other marketing efforts.
Allowance for Credit Losses
The calculation of the allowance for credit losses is performed using two primary approaches: a collective approach for pools of loans that have similar risk characteristics using a loss rate analysis, and a specific reserve analysis for credits individually evaluated. The allowance for credit losses was developed using multiple Moody’s Analytics (“Moody’s") macroeconomic forecasts applied to internally developed credit models for a two year reasonable and supportable period. The following tables present activity in the allowance for credit losses (ACL) by portfolio class for the six months ended June 30, 2023 and 2022, as well as the corresponding recorded investment in loans at the end of each period.
Commercial
real estate-
commercial
Construction
non-real
owner
and
income
and land
Residential
estate
occupied
industrial
producing
development
mortgages
Six Months Ended June 30, 2023
Allowance for credit losses
Allowance for loan losses:
Beginning balance
96,461
48,284
144,745
71,961
30,498
32,464
28,121
307,789
Charge-offs
(7,503
(73
(72
(28
(6,912
(14,588
Recoveries
2,694
350
3,044
480
1,953
5,493
Net provision for loan losses
4,543
(2,339
2,204
5,243
912
3,681
3,762
15,802
Ending balance - allowance for loan losses
96,195
46,295
142,490
77,141
31,344
36,597
26,924
314,496
Reserve for unfunded lending commitments:
4,984
302
5,286
1,395
25,110
31
1,487
33,309
Provision for losses on unfunded commitments
27
28
(2,227
(8
19
(2,149
Ending balance - reserve for unfunded lending commitments
4,996
329
5,325
1,423
22,883
23
1,506
31,160
Total allowance for credit losses
101,191
46,624
147,815
78,564
54,227
36,620
28,430
345,656
Individually evaluated
7,501
Collectively evaluated
88,694
134,989
306,995
Allowance for loan losses
Loans:
35,697
675
36,372
1,135
37,507
10,078,235
3,058,154
13,136,389
3,580,379
23,752,379
In arriving at the June 30, 2023 allowance for credit losses, the Company weighted the June 2023 baseline economic forecast, which Moody’s defines as the “most likely outcome” based on current conditions and its view of where the economy is headed, with a 40% probability. The June 2023 baseline scenario maintains a somewhat optimistic outlook in its assumptions surrounding the drivers of economic growth, including its expectations of the effectiveness of the Federal Reserve's monetary policy in easing inflationary conditions, though at a slower pace than previously forecasted. The baseline forecast includes sustained economic growth with forecasted annual GDP growth of 1.6%, 1.4% and 2.4% in 2023, 2024 and 2025, respectively, and only a modest increase in unemployment, forecasted at 3.6%, 4.1% and 4.2% for 2023, 2024 and 2025, respectively. This forecast scenario assumes the 10-year U.S. treasury rate will peak in the second quarter of 2024, to approximately 4%. The baseline forecast also assumes the recent bank failures are not considered symptomatic of a serious broader problem and do not weaken the financial system or the economy. Management determined that assumptions provided for in the downside slower near-term growth/mild recessionary scenario (S-2) were also reasonably possible and weighted that scenario as more likely than the baseline at 60%. The S-2 scenario assumes that interest rates remain elevated, global supply chain issues keep inflation elevated and the recent bank failures reduce consumer confidence and cause banks to tighten lending standards. This leads to a mild recession that starts in the third quarter of 2023 lasting three quarters, with the stock market contracting 22%. The S-2 scenario includes forecasted annual GDP growth of 1.2%, 0.3% and 3.0% in 2023, 2024 and 2025, respectively, and unemployment of 4.2%, 6.1% and 4.6% in 2023, 2024 and 2025, respectively.
While economic uncertainty continues, including the possibility of a recession in the near-term, the credit loss outlook on the loan portfolio as a whole has not changed materially since year-end. The modest increase in the allowance for the six months ended June
15
30, 2023 considers continued loan growth, higher individually evaluated loan reserves on our nonaccrual portfolio and a relatively stable economic outlook, with some modest shifts between portfolios and a marginally lower reserve coverage to total loans.
Six Months Ended June 30, 2022
95,888
53,433
149,321
108,058
22,102
30,623
31,961
342,065
(3,747
(857
(4,604
(1,066
(3
(60
(5,627
(11,360
6,603
491
7,094
878
126
3,102
11,727
(5,925
(3,452
(9,377
(24,919
2,478
(2,506
(34,257
92,819
49,615
142,434
82,951
24,703
28,584
29,503
308,175
4,522
323
4,845
1,694
21,907
22
866
29,334
51
91
(274
1,598
552
1,969
4,573
363
4,936
23,505
24
1,418
31,303
97,392
49,978
147,370
84,371
48,208
28,608
30,921
339,478
76
107
18
322
170
636
92,743
49,584
142,327
82,933
24,684
28,262
29,333
307,539
1,559
937
2,496
1,289
120
3,991
905
8,801
9,643,533
2,963,537
12,607,070
3,639,954
1,408,607
2,611,816
1,569,820
21,837,267
9,645,092
2,964,474
12,609,566
3,641,243
1,408,727
2,615,807
1,570,725
21,846,068
The release of credit reserves across most portfolios during the six months ended June 30, 2022 reflected positive economic indicators in our market, continued improvement in our asset quality metrics, and a sustained period of minimal credit losses. In arriving at the allowance for credit losses at June 30, 2022, the Company weighted the baseline economic forecast at 25% and the downside slower near-term growth scenario S-2 at 75%.
Nonaccrual loans and certain reportable modified loan disclosures
The following table shows the composition of nonaccrual loans and those without an allowance for loan loss, by portfolio class.
Total nonaccrual
Nonaccrual without allowance for loan loss
40,268
10,256
4,020
941
2,295
1,461
692
42,563
10,931
5,481
1,633
356
1,240
1,174
370
309
27,458
25,269
1,884
7,473
6,692
78,220
12,066
38,991
4,691
As a part of our loss mitigation efforts, we may provide modifications to borrowers experiencing financial difficulty to improve long-term collectability of the loans and to avoid the need for repossession or foreclosure of collateral. As described in Note 1 – Accounting Policy, accounting and reporting requirements changed related to such modifications effective January 1, 2023, impacting the comparability between periods of the disclosures that follow.
Nonaccrual loans include reportable nonaccruing modified loans to borrowers experiencing financial difficulty (“MEFDs”) totaling $1.6 million at June 30, 2023 and loans modified in troubled debt restructurings (“TDRs”) totaling $2.6 million at December 31, 2022. Total reportable MEFDs, both accruing and nonaccruing, were $2.6 million at June 30, 2023 and total TDRs were $4.5 million at
16
December 31, 2022. At June 30, 2023 and December 31, 2022, the Company had no unfunded commitments to borrowers whose loan terms have been modified as a reportable MEFD or TDR, respectively.
The tables below provides detail by portfolio class for reportable MEFDs entered into during the three and six months ended June 30, 2023.
Three Months Ended June 30, 2023
Term extension
Payment delay
Term extensions and payment delay
Balance
Percentage of portfolio
900
0.01
%
100
0.00
907
0.02
1,582
Total reportable modified loans
909
Reportable modifications to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023 consisted of term extensions ranging from three months to four months and one month to five years, respectively; and payment delays of four to six months for both periods. The reported term extensions and payment delays were considered more than insignificant as they exceeded six months when considering other modifications made in the past twelve months. As of June 30, 2023, all reportable MEFDs had a payment status of current. There were no post modification payment defaults within the three or six months period ended June 30, 2023. A payment default occurs if the loan is either 90 days or more delinquent or has been charged off as of the end of the period presented.
During the three months ended June 30, 2022 one residential mortgage loan and one consumer loan with pre and post modification balances totaling less than $0.1 million were classified as TDRs. During the six months ended June 30, 2022, three residential mortgage loans and three consumer loans with pre and post modification balances totaling $0.2 million were classified as TDRs. The TDRs modified during the six months ended June 30, 2022, included $0.1 million of loans with interest rate reduction and $0.1 million with other modifications. Three commercial non-real estate loans totaling $3.1 million that defaulted during the six months period ended June 30, 2022 had been modified in a TDR during the twelve months prior to default.
17
Aging Analysis
The tables below present the aging analysis of past due loans by portfolio class at June 30, 2023 and December 31, 2022.
30-59dayspast due
60-89dayspast due
Greaterthan90 dayspast due
Totalpast due
Current
TotalLoans
Recordedinvestment> 90 daysand stillaccruing
26,086
15,244
29,531
70,861
10,043,071
742
2,448
21,404
3,332
27,184
3,031,645
2,966
28,534
36,648
32,863
98,045
13,074,716
3,708
18,104
172
1,535
19,811
3,742,617
1,237
666
375
184
1,225
1,767,027
53
6,046
9,231
19,920
35,197
3,546,317
1,538
9,797
3,036
4,462
17,295
1,487,636
1,016
63,147
49,462
58,964
171,573
23,618,313
7,552
4,050
21,329
3,418
28,797
10,117,656
996
19,069
3,346
1,894
24,309
3,008,749
1,623
23,119
24,675
5,312
53,106
13,126,405
2,619
879
2,053
3,558,938
4,029
242
133
4,404
1,699,188
54
28,208
11,056
17,346
56,610
3,035,995
293
8,845
2,806
4,407
16,058
1,561,289
1,619
65,080
38,779
28,372
132,231
22,981,815
4,585
Credit Quality Indicators
The following tables present the credit quality indicators by segment and portfolio class of loans at June 30, 2023 and December 31, 2022. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process.
Commercialnon-realestate
Commercialreal estate -owner-occupied
Totalcommercialand industrial
Commercialreal estate -incomeproducing
Constructionand landdevelopment
Totalcommercial
Grade:
Pass
9,641,587
2,944,869
12,586,456
3,637,979
1,757,523
17,981,958
Pass-Watch
254,542
55,424
309,966
100,027
9,280
419,273
Special Mention
49,664
5,575
55,239
18,422
890
74,551
Substandard
168,139
52,961
221,100
6,000
559
227,659
Doubtful
18,703,441
9,641,117
2,912,057
12,553,174
3,440,648
1,690,756
17,684,578
284,843
49,093
333,936
111,587
12,097
457,620
79,980
6,267
86,247
3,810
196
90,253
140,513
65,641
206,154
4,946
543
211,643
18,444,094
Residentialmortgage
Residential mortgage
Performing
3,554,056
1,497,458
5,051,514
3,066,319
1,570,186
4,636,505
Nonperforming
34,931
26,286
7,161
33,447
5,086,445
4,669,952
Below are the definitions of the Company’s internally assigned grades:
Commercial:
Residential and Consumer:
Vintage Analysis
The following tables present credit quality disclosures of amortized cost by portfolio class and vintage for term loans and by revolving and revolving converted to amortizing at June 30, 2023 and December 31, 2022. The Company defines vintage as the later of origination, renewal or modification date. The gross charge-offs presented in the table are for the six months ended June 30, 2023.
Term Loans
Revolving Loans
Amortized Cost Basis by Origination Year
Revolving
Converted to
2021
2020
2019
Prior
Commercial Non-Real Estate:
933,613
2,143,997
1,279,430
574,614
459,156
984,492
3,189,964
76,321
25,996
43,916
31,946
8,621
5,795
50,105
76,553
11,610
374
9,178
13,290
1,494
928
15,551
5,346
25,344
16,040
13,076
29,987
20,553
11,815
46,867
4,457
985,327
2,213,131
1,337,742
614,716
489,007
1,047,340
3,328,935
97,734
Gross Charge-offs
123
560
52
75
4,401
1,162
7,503
Commercial Real Estate - Owner Occupied:
202,261
669,168
622,617
521,183
301,412
584,480
31,077
12,671
3,561
7,360
4,715
2,850
18,987
17,091
860
574
665
3,961
18,630
7,127
7,364
4,663
13,337
1,204
225,026
683,655
627,968
532,062
325,062
618,869
33,516
Commercial Real Estate - Income Producing:
257,809
885,797
921,288
672,062
369,717
416,420
64,297
50,589
12,061
2,308
347
59,456
22,591
2,564
300
400
18,054
368
3,652
378
298
427
291,576
888,483
921,933
732,755
392,316
419,779
64,597
50,989
73
Construction and Land Development:
225,757
837,674
461,103
89,496
6,823
22,374
109,044
5,252
4,967
1,343
1,455
95
556
384
703
187
46
451
231,427
839,068
462,604
89,591
23,381
109,428
72
Residential Mortgage:
339,250
695,785
870,203
508,117
184,657
952,450
3,594
1,789
3,592
104
1,407
20,482
339,334
697,574
873,795
508,221
186,064
972,932
Consumer Loans:
49,014
74,332
47,360
36,171
44,841
57,928
1,180,993
6,819
71
183
337
575
542
3,987
341
1,437
49,085
74,515
47,697
36,746
45,383
61,915
1,181,334
8,256
85
980
650
314
394
3,694
727
6,912
20
2018
2,600,656
1,450,689
679,355
569,842
267,025
763,122
3,193,769
116,659
68,307
38,949
31,841
11,757
8,237
49,577
66,339
9,836
30,276
13,625
2,443
4,406
1,654
25,184
2,070
29,667
13,807
11,766
21,667
12,792
1,250
39,213
10,351
2,728,906
1,517,070
725,405
607,672
288,376
815,603
3,324,505
138,916
630,121
650,742
537,849
328,364
265,437
447,707
46,730
5,107
7,129
5,299
3,743
13,301
10,872
7,706
893
150
544
822
1,231
3,670
19,899
547
6,715
7,663
7,543
21,465
1,000
809
657,149
656,588
548,851
350,150
285,083
480,548
48,623
6,066
894,522
795,378
660,235
420,435
232,145
317,446
113,487
7,000
1,027
18,070
58,256
20,865
836
467
235
708
2,325
166
376
415
2,785
498
896,199
813,448
721,984
443,633
245,617
319,156
113,954
663,735
711,731
148,579
9,198
15,360
10,854
128,842
2,457
8,233
1,944
643
199
450
35
55
61
380
672,003
713,730
149,222
9,965
15,620
11,684
128,911
631,339
694,104
518,705
192,431
107,675
918,918
3,147
1,058
2,434
716
1,196
2,080
18,802
632,397
696,538
519,421
193,627
109,755
937,720
103,742
58,248
45,641
62,715
41,559
40,489
1,212,958
4,834
193
198
228
758
381
3,341
459
1,603
103,935
58,446
45,869
63,473
41,940
43,830
1,213,417
6,437
Residential Mortgage Loans in Process of Foreclosure
Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. Included in loans at June 30, 2023 and December 31, 2022 were $3.8 million and $4.9 million, respectively, of consumer loans secured by single family residential real estate that were in process of foreclosure. In addition to the single family residential real estate loans in process of foreclosure, the Company also held foreclosed single family residential properties in other real estate owned totaling $1.3 million at June 30, 2023 and $0.4 million at December 31, 2022.
Loans Held for Sale
Loans held for sale totaled $55.9 million and $26.4 million at June 30, 2023 and December 31, 2022, respectively. Loans held for sale is composed primarily of residential mortgage loans originated for sale in the secondary market. At June 30, 2023, residential mortgage loans carried at the fair value option totaled $24.2 million with an unpaid principal balance of $23.8 million. At December 31, 2022, residential mortgage loans carried at the fair value option totaled $10.8 million with an unpaid principal balance of $10.6 million. All other loans held for sale are carried at the lower of cost or market.
4. Short-Term Borrowings
The following table presents information concerning short-term borrowings at June 30, 2023 and December 31, 2022.
Federal funds purchased:
Amount outstanding at period end
1,850
Weighted-average interest at period end
4.65
3.90
Securities sold under agreements to repurchase:
529,138
444,421
1.25
0.53
FHLB borrowings:
1,100,000
1,425,000
5.13
4.70
The following table presents information concerning short-term borrowings for the three and six months ended June 30, 2023 and 2022.
Average amount outstanding during period
1,287
2,735
4,829
2,562
Maximum amount at any month end during period
2,350
Weighted-average interest rate during period
5.17
0.82
5.12
0.57
497,940
523,041
472,001
555,096
625,773
518,014
640,592
0.08
1.05
0.07
1,887,363
698,407
1,766,575
898,099
3,000,000
3,100,000
5.10
0.49
4.93
Federal funds purchased represent unsecured borrowings from other banks, generally on an overnight basis.
Securities sold under agreements to repurchase ("repurchase agreements") are funds borrowed on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury-management services offered to deposit customers. The customer repurchase agreements mature daily and are secured by agency securities. As the Company maintains effective control over assets sold under agreements to repurchase, the securities continue to be presented in the Consolidated Balance Sheets. Because the Company acts as a borrower transferring assets to the counterparty, and the agreements mature daily, the Company's risk is limited.
The $1.1 billion of Federal Home Loan Bank ("FHLB") borrowings at June 30, 2023 consisted of one fixed rate advance with a maturity date of July 3, 2023. The $1.4 billion of FHLB borrowings at December 31, 2022 consisted of one fixed rate note entered into on December 30, 2022, that matured on January 3, 2023. The Company continues to hold FHLB short-term borrowings at levels that will vary based on liquidity needs.
5. Derivatives
Risk Management Objective of Using Derivatives
The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments. The Bank also enters into interest rate derivative agreements as a service to certain qualifying customers. The Bank manages a matched book with respect to these customer derivatives in order to minimize its net interest rate risk exposure resulting from such agreements. In addition, the Bank also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional or contractual amounts and fair values of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets at June 30, 2023 and December 31, 2022.
Derivative (1)
Type ofHedge
Notional orContractualAmount
Assets
Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps - variable rate loans
Cash Flow
1,550,000
105,996
2,100,000
2,301
112,262
Interest rate swaps - securities
Fair Value
513,500
24,912
716,000
43,501
2,063,500
2,816,000
45,802
Derivatives not designated as hedging instruments:
Interest rate swaps
4,996,939
166,068
164,090
4,620,544
172,242
169,712
Risk participation agreements
306,087
298,729
1
Interest rate-lock commitments on residential mortgage loans
35,825
372
10,930
113
Forward commitments to sell residential mortgage loans
19,939
190
13,819
161
To Be Announced (TBA) securities
25,750
102
10,000
78
Foreign exchange forward contracts
115,458
1,886
1,844
123,106
1,643
1,594
Visa Class B derivative contract
42,929
1,403
43,111
1,883
5,542,927
168,457
167,564
5,120,239
174,133
173,330
Total derivatives
7,606,427
193,369
273,560
7,936,239
219,935
285,592
Less: netting adjustment (2)
(84,895
(110,438
(81,471
Total derivative assets/liabilities
108,474
109,497
204,121
Cash Flow Hedges of Interest Rate Risk
The Company is party to various interest rate swap agreements designated and qualifying as cash flow hedges of the Company’s forecasted variable cash flows for pools of variable rate loans. For each agreement, the Company receives interest at a fixed rate and pays at a variable rate. The Company terminated six swap agreements in 2023 and paid cash of approximately $2.9 million, which was recorded as accumulated other comprehensive loss and is being amortized into earnings through the original maturity dates of the respective contracts. Using the elections allowed for ASU 2022-06 "Reference Rate Return (Topic 848)," as amended, the Company converted all of its LIBOR-based swaps to SOFR and replaced the variable rate loan pools with SOFR based instruments during the six months ended June 30, 2023, with minimal impact to financial results. The notional amounts of the swap agreements in place at June 30, 2023 expire as follows: $50 million in 2025; $475 million in 2026; $925 million in 2027; and $100 million thereafter.
Fair Value Hedges of Interest Rate Risk
Interest rate swaps on securities available for sale
The Company is party to forward-starting fixed payer swaps that convert the latter portion of the term of certain available for sale securities to a floating rate. These derivative instruments are designated as fair value hedges of interest rate risk. This strategy provides the Company with a fixed rate coupon during the front-end unhedged tenor of the bonds and results in a floating rate security during the back-end hedged tenor. At June 30, 2023, these single layer instruments have hedge start dates between January 2025 and July
2026, and maturity dates from December 2027 through March 2031. The fair value of the hedged item attributable to interest rate risk is presented in interest income along with the change in the fair value of the hedging instrument.
The hedged available for sale securities are part of closed portfolios of pre-payable commercial mortgage backed securities. In accordance with ASC 815, prepayment risk may be excluded when measuring the change in fair value of such hedged items attributable to interest rate risk under the portfolio layer method (formerly referred to as last-of-layer). At June 30, 2023, the amortized cost basis of the closed portfolio of pre-payable commercial mortgage backed securities totaled $558.9 million, excluding any basis adjustment. The amount that represents the hedged items was $488.5 million and the basis adjustment associated with the hedged items was a loss totaling $25.0 million.
The Company terminated three fair value swap agreements during the six months ended June 30, 2023 and received cash of approximately $16.6 million. At the time of termination, the value of the swap was recorded as an adjustment to the book value of the underlying security, thereby changing its current book yield and extending its duration.
Derivatives Not Designated as Hedges
Customer interest rate derivative program
The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Bank enters into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions. Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Bank also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on the Bank’s normal credit review process.
Mortgage banking derivatives
The Bank also enters into certain derivative agreements as part of its mortgage banking activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell loans to investors on either a best efforts or a mandatory delivery basis. The Company uses these forward sales commitments, which may include To Be Announced (“TBA”) security contracts, on the open market to protect the value of its rate locks and mortgage loans held for sale from changes in interest rates and pricing between the origination of the rate lock and the final sale of these loans. These instruments meet the definition of derivative financial instruments and are reflected in other assets and other liabilities in the Consolidated Balance Sheets, with changes to the fair value recorded in noninterest income within the secondary mortgage market operations line item in the Consolidated Statements of Income.
The loans sold on a mandatory basis commit the Company to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, we may be obligated to pay a pair-off fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Mandatory delivery forward commitments include TBA security contracts on the open market to provide protection against changes in interest rates on the locked mortgage pipeline. The Company expects that mandatory delivery contracts, including TBA security contracts, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions could impact the ultimate effectiveness of any hedging strategies.
Forward commitments under best effort contracts commit the Company to deliver a specific individual mortgage loan to an investor if the loan to the underlying borrower closes. Generally, best efforts cash contracts have no pair-off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded, generally the same day the Company enters into the interest rate lock commitment with the potential borrower. The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments.
At the closing of the loan, the rate lock commitment derivative expires and the Company generally records a loan held for sale at fair value under the election of fair value option.
Customer foreign exchange forward contract derivatives
The Company enters into foreign exchange forward derivative agreements, primarily forward foreign currency contracts, with commercial banking customers to facilitate their risk management strategies. The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions. The Bank has not elected to designate these foreign exchange forward contract derivatives as hedges; as such, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Company is a member of Visa USA. In 2018, the Company sold the majority of its Visa Class B holdings, at which time it entered into a derivative agreement with the purchaser whereby the Company will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. The conversion ratio changes when Visa deposits funds to a litigation escrow established by Visa to pay settlements for certain litigation, for which Visa is indemnified by Visa USA members. The Company is also required to make periodic financing payments to the purchaser until all of Visa’s covered litigation matters are resolved. Thus, the derivative contract extends until the end of Visa’s covered litigation matters, the timing of which is uncertain.
The contract includes a contingent accelerated termination clause based on the credit ratings of the Company. At June 30, 2023 and December 31, 2022, the fair value of the liability associated with this contract was $1.4 million and $1.9 million, respectively. Refer to Note 13 – Fair Value of Financial Instruments for discussion of the valuation inputs and process for this derivative liability.
Effect of Derivative Instruments on the Statements of Income
The effects of derivative instruments in the Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022 are presented in the table below.
Derivative Instruments:
Location of Gain (Loss) Recognizedin the Statements of Income:
Cash flow hedges:
Variable rate loans
Interest income - loans
(9,492
6,013
(17,493
12,767
Fair value hedges:
Securities
Interest income - securities - taxable
3,013
(129
5,763
1,029
Securities- terminations
Noninterest income - securities transactions, net
1,620
Derivatives not designated as hedging:
Residential mortgage banking
Noninterest income - secondary mortgage market operations
1,768
501
2,960
Customer and all other instruments
Noninterest income - other noninterest income
584
2,728
1,167
5,077
Total gain (loss)
(5,878
10,380
(10,062
23,453
Credit Risk-Related Contingent Features
Certain of the Bank’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as a downgrade of the Bank’s credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of the Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. At June 30, 2023, the Company was not in violation of any such provisions. The aggregate fair value of derivative instruments with credit
25
risk-related contingent features that were in a net liability position at June 30, 2023 and December 31, 2022 was $89.6 million and $8.7 million, respectively, for which the Company had posted collateral of $89.4 million and $8.5 million, respectively.
Offsetting Assets and Liabilities
The Bank’s derivative instruments with certain counterparties contain legally enforceable netting provisions that allow for net settlement of multiple transactions to a single amount, which may be positive, negative, or zero. Agreements with certain bilateral counterparties require both parties to maintain collateral in the event that the fair values of derivative instruments exceed established exposure thresholds. For centrally cleared derivatives, the Company is subject to initial margin posting and daily variation margin exchange with the central clearinghouses. Offsetting information in regards to all derivative assets and liabilities, including accrued interest, subject to these master netting agreements at June 30, 2023 and December 31, 2022 is presented in the following tables.
GrossAmounts
Net Amounts
Gross Amounts Not Offset in theStatement of Financial Condition
Description
GrossAmountsRecognized
Offset inthe Statementof Financial Condition
Presented inthe Statementof Financial Condition
FinancialInstruments
CashCollateral
NetAmount
As of June 30, 2023
Derivative Assets
197,313
(87,381
109,932
Derivative Liabilities
111,599
123,717
(122,050
As of December 31, 2022
223,072
(112,338
110,734
32,601
27,852
105,985
116,395
(83,794
The Company has excess posted collateral compared to total exposure due to initial margin requirements for day-to-day rate volatility.
26
6. Stockholders’ Equity
Common Shares Outstanding
Common shares outstanding excludes treasury shares totaling 6.2 million and 6.3 million, with a first-in-first-out cost basis of $235.4 million and $238.6 million, at June 30, 2023 and December 31, 2022, respectively. Shares outstanding also excludes unvested restricted share awards totaling 0.6 million and 0.7 million at June 30, 2023 and December 31, 2022.
Stock Buyback Program
On January 26, 2023, the Company’s board of directors approved a stock buyback program whereby the Company is authorized to repurchase up to 4.3 million shares of its common stock through the program’s expiration date of December 31, 2024. The program allows the Company to repurchase its common shares in the open market, by block purchase, through accelerated share repurchase programs, in privately negotiated transactions, or otherwise, in one or more transactions. The Company is not obligated to purchase any shares under this program, and the board of directors has the ability to terminate or amend the program at any time prior to the expiration date. To date, the Company has not repurchased shares under this program.
Prior to its expiration on December 31, 2022, the Company had in place a stock repurchase program authorized by the board of directors on April 22, 2021, whereby the Company was authorized to repurchase up to 4.3 million shares of its common stock. The program allowed 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. During the first half of 2022, the Company repurchased 1,154,368 shares of its common stock at an average cost of $48.93 per share, inclusive of commissions. In total, the Company repurchased 1.7 million shares at an average cost of $48.77 per share under this plan.
Accumulated Other Comprehensive Income (Loss)
A roll-forward of the components of Accumulated Other Comprehensive Income (Loss) is presented in the table that follows:
Availablefor SaleSecurities
HTM SecuritiesTransferredfrom AFS
EmployeeBenefit Plans
CashFlow Hedges
Equity Method Investment
11,037
153
(80,946
16,284
(463
Net change in unrealized gain (loss)
(547,636
(47,287
468
Reclassification of net income or loss realized and included in earnings
1,707
1,652
(12,767
Valuation adjustments to employee benefit plans
Transfer of net unrealized loss from AFS to HTM securities portfolio
15,405
(15,405
Amortization of unrealized net loss on securities transferred to HTM
Income tax benefit
119,739
3,358
1,430
13,554
138,081
(399,748
(11,367
(85,851
(30,216
(584,408
(10,734
(97,952
(79,093
17,678
(20,943
706
Reclassification of net loss realized and included in earnings
3,272
17,493
Income tax (expense) benefit
(3,737
(207
956
777
(2,211
(570,467
(10,019
(101,245
(81,766
711
Accumulated Other Comprehensive Income or Loss (“AOCI”) is reported as a component of stockholders’ equity. AOCI can include, among other items, unrealized holding gains and losses on securities available for sale (“AFS”), including the Company’s share of unrealized gains and losses reported by a partnership accounted for under the equity method, gains and losses associated with pension or other post-retirement benefits that are not recognized immediately as a component of net periodic benefit cost, and gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges. Net unrealized gains and losses on AFS securities reclassified as securities held to maturity (“HTM”) also continue to be reported as a component of AOCI and will be amortized over the estimated remaining life of the securities as an adjustment to interest income. Subject to certain thresholds, unrealized losses on employee benefit plans will be reclassified into income as pension and post-retirement costs are recognized over the remaining service period of plan participants. Accumulated gains or losses on cash flow hedges of variable rate loans described in Note 5 will be reclassified into income over the life of the hedge. Accumulated other comprehensive loss resulting from the terminated interest rate swaps will be amortized over the remaining maturities of the designated instruments. Gains and losses within AOCI are net of deferred income taxes, where applicable.
The following table shows the line items in the consolidated statements of income affected by amounts reclassified from AOCI.
Amount reclassified from AOCI (a)
Affected line item on
the statement of income
Loss on sale of AFS securities
(1,707
Noninterest income
Tax effect
385
Income taxes
Net of tax
(1,322
(922
(527
Interest income
207
119
(715
(408
Amortization of defined benefit pension and post-retirement items
(3,272
(1,652
Other noninterest expense (b)
736
373
(2,536
(1,279
Reclassification of unrealized gain/(loss) on cash flow hedges
(21,994
6,977
4,953
(1,575
(17,041
5,402
Amortization of gain on terminated cash flow hedges
4,501
5,790
(1,014
(1,307
3,487
4,483
Total reclassifications, net of tax
(16,805
6,876
7. Other Noninterest Income
Components of other noninterest income are as follows:
Income from bank-owned life insurance
3,364
4,273
6,650
7,818
Credit related fees
3,231
2,543
5,996
5,212
Income from derivatives
Other miscellaneous
5,640
5,444
10,224
11,878
Total other noninterest income
8. Other Noninterest Expense
Components of other noninterest expense are as follows:
Corporate value and franchise taxes and other non-income taxes
5,241
4,558
10,494
8,806
Advertising
3,476
3,512
6,732
6,678
Telecommunications and postage
2,712
2,971
5,783
5,896
Entertainment and contributions
2,582
2,440
5,213
5,401
Tax credit investment amortization
1,402
1,004
2,803
2,008
Printing and supplies
1,149
918
2,139
1,921
Travel expense
1,651
1,123
2,697
1,783
Net other retirement expense
(3,312
(7,781
(6,967
(14,553
7,008
4,661
15,132
13,706
Total other noninterest expense
9. Earnings Per Common Share
The Company calculates earnings per share using the two-class method. The two-class method allocates net income to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings. Participating securities consist of nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents.
A summary of the information used in the computation of earnings per common share follows.
($ in thousands, except per share data)
Numerator:
Net income to common shareholders
Net income allocated to participating securities - basic and diluted
1,224
Net income allocated to common shareholders - basic and diluted
116,570
119,591
241,679
241,151
Denominator:
Weighted-average common shares - basic
Dilutive potential common shares
274
287
292
Weighted-average common shares - diluted
Earnings per common share:
Basic
Diluted
Potential common shares consist of stock options, nonvested performance-based awards, nonvested restricted stock units, and restricted share awards deferred under the Company’s nonqualified deferred compensation plan. These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be antidilutive, i.e., increase earnings per share or reduce a loss per share. Potential common shares with weighted averages totaling 239,889 and 111,062 for the three and six months ended June 30, 2023, respectively, and 30,135 and 6,670 for the three and six months ended June 30, 2022, respectively, did not enter the calculation of diluted earnings per share as the impact would have been anti-dilutive.
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10. Retirement Plans
The Company offers a qualified defined benefit pension plan, the Hancock Whitney Corporation Pension Plan and Trust Agreement (“Pension Plan”), covering certain eligible associates. Eligibility is based on minimum age and service-related requirements. The Pension Plan excludes any individual hired or rehired by the Company after June 30, 2017 from eligibility to participate, and the accrued benefits of any participant in the Pension Plan whose combined age plus years of service as of January 1, 2018 totaled less than 55 were frozen as of January 1, 2018 and will not thereafter increase. The Company makes contributions to the Pension Plan in amounts sufficient to meet funding requirements set forth in federal employee benefit and tax laws, plus such additional amounts as the Company may determine to be appropriate.
The Company also offers a defined contribution retirement benefit plan (401(k) plan), the Hancock Whitney Corporation 401(k) Savings Plan and Trust Agreement (“401(k) Plan”), that covers substantially all associates who have been employed 60 days and meet a minimum age requirement and employment classification criteria. The Company matches 100% of the first 1% of compensation saved by a participant, and 50% of the next 5% of compensation saved. Newly eligible associates are automatically enrolled at an initial 3% savings rate unless the associate actively opts out of participation in the plan. Beginning January 1, 2018, the Company makes an additional basic contribution to associates hired or rehired after June 30, 2017 in an amount equal to 2% of the associate’s eligible compensation. For Pension Plan participants whose benefits were frozen as of January 1, 2018, the 401(k) Plan provides an enhanced Company contribution in the amount of 2%, 4% or 6% of such participant’s eligible compensation, based on the participant’s current age and years of service with the Company. Participants vest in basic and enhanced Company contributions upon completion of three years of service.
The Company sponsors a nonqualified defined benefit plan covering certain legacy Whitney employees, under which accrued benefits were frozen as of December 31, 2012 and, as such, no future benefits are accrued under this plan.
The Company sponsors defined benefit post-retirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits. Benefits under the Hancock plan are not available to employees hired on or after January 1, 2000. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007.
The following tables show the components of net periodic benefit cost included in expense for the periods indicated.
Other Post-
(in thousands)
Pension Benefits
Retirement Benefits
For The Three Months Ended June 30,
Service cost
1,979
2,929
Interest cost
5,963
149
Expected return on plan assets
(11,178
(11,711
Amortization of net (gain) or loss and prior service costs
1,911
582
(158
(139
Net periodic benefit cost
(1,325
(4,492
(38
For the Six Months Ended June 30,
3,959
5,729
(21
50
11,751
7,125
(22,356
(23,186
1,930
(409
(278
(2,965
(8,402
(65
(75
11. Share-Based Payment Arrangements
The Company maintains incentive compensation plans that provide for awards of share-based compensation to employees and directors. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in Note 18 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
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At June 30, 2023, the Company had 1,476 outstanding and exercisable stock options, with a weighted average exercise price of $53.73, weighted average remaining contractual term of less than one year and no aggregate intrinsic value. During the six months ended June 30, 2023, no stock options were exercised.
The Company’s restricted and performance-based share awards to certain employees and directors are subject to service requirements. A summary of the status of the Company’s nonvested restricted stock units and restricted and performance-based share awards at June 30, 2023 are presented in the following table.
Weighted
Average
Number of
Grant Date
Shares
Nonvested at January 1, 2023
1,431,515
40.95
Granted
639,257
48.65
Vested
(239,051
45.51
Forfeited
(97,686
40.74
Nonvested at June 30, 2023
1,734,035
43.17
At June 30, 2023, there was $59.1 million of total unrecognized compensation expense related to nonvested restricted and performance share awards and units expected to vest in the future. This compensation is expected to be recognized in expense over a weighted average period of 3.2 years. The total fair value of shares that vested during the six months ended June 30, 2023 was $9.4 million.
During the six months ended June 30, 2023, the Company granted 490,749 restricted stock units (RSUs) to certain eligible employees. Unlike restricted share awards (RSAs), the holders of unvested restricted stock units have no rights as a shareholder of the Company, including voting or dividend rights. The Company has elected to award dividend equivalents on each restricted stock unit not deferred under the Company's nonqualified deferred compensation plan. Such dividend equivalents are forfeited should the employee terminate employment prior to the vesting of the RSU.
During the six months ended June 30, 2023, the Company granted 41,495 performance share awards subject to a total shareholder return (“TSR”) performance metric with a grant date fair value of $51.14 per share and 41,495 performance share awards subject to an operating earnings per share performance metric with a grant date fair value of $46.73 per share to key members of executive management. The number of performance shares subject to TSR that ultimately vest at the end of the three-year performance period, if any, will be based on the relative rank of the Company’s three-year TSR among the TSRs of a peer group of 49 regional banks. The fair value of the performance shares subject to TSR at the grant date was determined using a Monte Carlo simulation method. The number of performance shares subject to operating earnings per share that ultimately vest will be based on the Company’s attainment of certain operating earnings per share goals over the two-year performance period. The maximum number of performance shares that could vest is 200% of the target award. Compensation expense for these performance shares is recognized on a straight line basis over the three-year service period.
12. Commitments and Contingencies
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, nonrevolving 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 future cash requirements of the Company.
A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.
The contract amounts of these instruments reflect the Company’s exposure to credit risk. The Company 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. The Company had a reserve for unfunded lending commitments of $31.2 million and $33.3 million at June 30, 2023 and December 31, 2022, respectively.
The following table presents a summary of the Company’s off-balance sheet financial instruments as of June 30, 2023 and December 31, 2022:
Commitments to extend credit
10,083,714
10,202,464
Letters of credit
439,444
400,505
The Company is party to various legal proceedings arising in the ordinary course of business. Management does not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on the consolidated financial position or liquidity of the Company.
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13. Fair Value Measurements
The FASB defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB’s guidance also establishes a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (“level 1”) and the lowest priority to unobservable inputs such as a reporting entity’s own data (“level 3”). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present for each of the fair value hierarchy levels the Company’s financial assets and liabilities that are measured at fair value on a recurring basis on the consolidated balance sheets at June 30, 2023 and December 31, 2022:
Level 1
Level 2
Level 3
Available for sale debt securities:
Total available for sale securities
Mortgage loans held for sale
24,163
Derivative assets (1)
Total recurring fair value measurements - assets
5,547,326
Derivative liabilities (1)
272,157
Total recurring fair value measurements - liabilities
10,843
5,676,381
202,238
(1) For further disaggregation of derivative assets and liabilities, see Note 5 - Derivatives.
Securities classified as level 2 include obligations of U.S. Government agencies and U.S. Government-sponsored agencies, including “off-the-run” U.S. Treasury securities, residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data.
The Company invests only in securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five and a half years. Company policies generally limit investments to U.S. agency securities and municipal securities determined to be investment grade according to an internally generated score which generally includes a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency.
Loans held for sale consist of residential mortgage loans carried under the fair value option. The fair value for these instruments is classified as level 2 based on market prices obtained from potential buyers.
For the Company’s derivative financial instruments designated as hedges and those under the customer interest rate program, the fair value is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, LIBOR swap curves and Overnight Index swap rate curves, all observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value these derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations for these instruments in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.
The Company also has certain derivative instruments associated with the Bank’s mortgage-banking activities. These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis and To Be Announced securities for mandatory delivery contracts. The fair value of these derivative instruments is measured using observable market prices for similar instruments and is classified as a level 2 measurement.
The Company’s level 3 liability consists of a derivative contract with the purchaser of 192,163 shares of Visa Class B common stock. Pursuant to the agreement, the Company retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Class A common stock, such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and the Company will be compensated for any anti-dilutive adjustments to the ratio. The agreement also requires periodic payments by the Company to the counterparty calculated by reference to the market price of Visa Class A common shares at the time of sale and a fixed rate of interest that steps up once after the eighth scheduled quarterly payment. The fair value of the liability is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are the Company’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. Refer to Note 5 – Derivatives for information about the derivative contract with the counterparty.
The Company believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.
Changes in Level 3 Fair Value Measurements and Quantitative Information about Level 3 Fair Value Measurements
The table below presents a rollforward of the amounts on the consolidated balance sheets for the six months ended June 30, 2023 and the year ended December 31, 2022 for financial instruments of a material nature that are classified within level 3 of the fair value hierarchy and are measured at fair value on a recurring basis:
Balance at December 31, 2021
4,116
Cash settlement
(2,429
Losses included in earnings
Balance at December 31, 2022
(869
389
Balance at June 30, 2023
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The table below provides an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure the financial instrument measured on a recurring basis and classified within level 3 of the valuation. The range of sensitivities that management utilized in its fair value calculations is deemed acceptable in the industry with respect to the identified financial instrument.
Level 3 Class
Derivative liability
Valuation technique
Discounted cash flow
Unobservable inputs:
Visa Class A appreciation - range
6-12%
Visa Class A appreciation - weighted average
9%
Conversion rate - range
1.60x-1.59x
1.61x-1.60x
Conversion rate -weighted average
1.5950x
1.6030x
Time until resolution
3-9 months
3-12 months
The Company’s policy is to recognize transfers between valuation hierarchy levels as of the end of a reporting period.
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent loans individually evaluated for credit loss loans are level 2 assets measured at the fair value of the underlying collateral based on independent third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.
Other real estate owned and foreclosed assets, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer from loans or property and equipment. Subsequently, other real estate owned and foreclosed assets is carried at the lower of carrying value or fair value less estimated selling costs. Fair values are determined by sales agreement or third-party appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the assets.
The fair value information presented below is not as of the period end, rather it was as of the date the fair value adjustment was recorded during the twelve months for each of the dates presented below, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet.
The following tables present the Company’s financial assets that are measured at fair value on a nonrecurring basis for each of the fair value hierarchy levels.
Collateral-dependent loans individually evaluated for credit loss
Other real estate owned and foreclosed assets, net
Total nonrecurring fair value measurements
39,681
4,692
6,709
Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.
Cash, Short-Term Investments and Federal Funds Sold – For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – The fair value measurement for securities available for sale was discussed earlier in the note. The same measurement techniques were applied to the valuation of securities held to maturity.
Loans, Net – The fair value measurement for certain collateral dependent loans that are individually evaluated for credit loss was described earlier in this note. For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows using discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality.
Loans Held for Sale – These loans are either carried under the fair value option or at the lower of cost or market. Given the short duration of these instruments, the carrying amount is considered a reasonable estimate of fair value.
Deposits – The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (“carrying amounts”). The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold under Agreements to Repurchase – For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Short-Term FHLB Borrowings – At June 30, 2023, short-term FHLB borrowings was comprised of one fixed-rate instrument for which the fair value was estimated by discounting the future contractual cash flows using the current market rate at which a borrowing with similar terms could be obtained and, therefore, is reflected as level 2 in the respective table below. At December 31, 2022, short-term FHLB borrowings was comprised of one fixed-rate instrument entered into on December 30, 2022, and maturing on January 3, 2023; as such, the carrying amount of the instrument is a reasonable estimate of the fair value and is reflected as level 1 in the respective table below.
Long-Term Debt – The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained.
Derivative Financial Instruments – The fair value measurement for derivative financial instruments was described earlier in this note.
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The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amounts.
Total Fair
Carrying
Value
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold
1,237,899
Available for sale securities
Held to maturity securities
22,970,743
23,008,250
Derivative financial instruments
Financial liabilities:
30,014,127
Federal funds purchased
Securities sold under agreements to repurchase
FHLB short-term borrowings
1,099,992
195,972
Total FairValue
CarryingAmount
888,519
22,132,683
22,137,375
29,041,635
200,060
14. Recent Accounting Pronouncements
Accounting Standards Adopted During the Six Months Ended June 30, 2023
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method," to provide clarification of and expand upon certain provisions of Topic 815 that became effective with the issuance of ASU 2017-12. The amendments in this update include the following provisions: (1) expand the current last-of-layer method to allow multiple hedged layers of a single closed portfolio and, accordingly, renaming the last-of-layer method to the portfolio layer method; (2) expand the scope of the portfolio layer method to include nonprepayable financial assets; (3) specify that eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot or forward-starting amortizing-notional swaps and that the number of hedged layers corresponds with the number of hedges designated; (4) provide additional guidance on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method whether a single hedged layer or multiple hedged layers are designated, and; (5) specify how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The amendments in this update apply to all entities that elect to apply the portfolio layer method of hedge accounting in accordance with Topic 815.
The amendments in this update were effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Upon adoption, any entity may designate multiple hedged layers of a single closed portfolio solely on a prospective basis. All entities are required to apply the amendments related to hedge basis adjustments under the portfolio layer method, except for those related to disclosures, on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date. Entities have the option to apply the amendments related to disclosures on a prospective basis
37
from the initial application date or on a retrospective basis to each prior period presented after the date of adoption of the amendments in Update 2017-12. Within 30 days after the adoption, an entity may reclassify debt securities classified in the held-to-maturity category at the date of adoption to the available-for-sale category only if the entity applies portfolio layer method hedging to one or more closed portfolios that include those debt securities. The Company adopted this standard effective January 1, 2023, and elected to apply amendments to disclose on a prospective basis with no reclassification of debt securities from held to maturity to available for sale. The impact of adoption was not material to the Company's consolidated financial position or results of operations.
In March 2022, the FASB issued ASU 2022-02, "Financial Instruments: Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update cover two issues: (1) the elimination of TDR recognition and measurement guidance as prescribed by ASC 310-40 and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty; and, (2) for public business entities, the requirement that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.
The amendments in this update were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the elimination of recognition and measurement guidance on troubled debt restructurings by creditors in Subtopic 310-40, an entity may elect to apply a modified retrospective transition by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the fiscal year of adoption, or a prospective approach applied to modifications occurring after the date of adoption. The remainder of amendments should be applied prospectively. The Company adopted this standard effective January 1, 2023, on a prospective basis for all amendments. The adoption of this standard was not material to the Company's consolidated financial position or results of operations. See further discussion of the resulting changes to our policies in Note 1- Basis of Presentation, Accounting Policies.
Accounting Standards Issued But Not Yet Adopted
In March 2023, FASB issued ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method,” to allow reporting entities to have the option to elect and expand the use of the proportional amortization method of accounting for qualifying tax credit equity investments structures that meet certain criteria. Existing guidance under Subtopic 323-70 provides the option to apply the proportional amortization method only to investments in low-income-housing tax credit structures; equity investments in other tax credit structures are typically accounted for under Topic 321, Investments – Equity Securities. Under the provisions of this update, the accounting policy election to apply the proportional amortization method can be made on a tax-credit-program-by-tax-credit-program basis for programs that meeting certain conditions and is not made at the reporting entity or individual investment level. Application of the proportional amortization method to any eligible tax credit investments will result in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization being presented as a component of income tax expense (benefit), as opposed to current guidance under Topic 321, where any investment income, gains and losses and tax credits are all presented gross in the statement of income.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period; if an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently assessing the provisions of this guidance, but does not expect adoption to have a material impact to its consolidated financial position or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The objective of this discussion and analysis is to provide material information relevant to the assessment of the financial condition and results of operations of Hancock Whitney Corporation and subsidiaries during the six months ended June 30, 2023 and selected comparable prior periods, including an evaluation of the amounts and certainty of cash flows from operations and outside sources. This discussion and analysis is intended to highlight and supplement financial and operating data and information presented elsewhere in this report, including the consolidated financial statements and related notes. The discussion contains forward-looking statements within the meaning and protections of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q and in other reports or documents that we file from time to time with the SEC include, but are not limited to, the following:
Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially can be found in Part II, Item 1A. "Risk Factors" herein, in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, or in other periodic reports that we file with the SEC.
You are cautioned not to place undue reliance on these forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.
OVERVIEW
Non-GAAP Financial Measures
Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance. These non-GAAP financial measures have inherent limitations as analytical tools and should not be considered on a standalone basis or as a substitute for analyses of financial condition and results as reported under GAAP. Non-GAAP financial measures are not standardized and therefore, it may not be possible to compare these measures with other companies that present measures having the same or similar names. These disclosures should not be considered an alternative to GAAP.
A reconciliation of those measures to GAAP measures are provided in the Consolidated Financial Results table later in this item. The following is a summary of these non-GAAP measures and an explanation as to why they are deemed useful.
Consistent with the provisions of subpart 229.1400 of the Securities and Exchange Commission’s Regulation S-K, “Disclosures by Bank and Savings and Loan Registrants,” we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent (“te”) basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a statutory federal tax rate of 21% to increase tax-exempt interest income to a taxable equivalent basis. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.
We present certain additional non-GAAP financial measures to assist the reader with a better understanding of the Company’s performance period over period, as well as to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives. These non-GAAP measures may reference the concept “operating.” We use the term “operating” to describe a financial measure that excludes income or expense considered to be nonoperating in nature. Items identified as nonoperating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in our business.
We define Operating Pre-Provision Net Revenue as total revenue (te) less noninterest expense, excluding nonoperating items. Management believes that operating pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.
Current Economic Environment
The U.S economy continues to show resiliency despite continued pressures and recessionary concerns. Second quarter 2023 gross domestic product (GDP) growth of 2.4% on an annual basis was notably higher than projected, and the June 2023 unemployment rate of 3.6% continues to hover near the point of full-employment. Thus far, the Federal Reserve's aggressive approach to curbing inflation has effected change without precipitating a recession. Signs of inflation cooling continued in the second quarter of 2023, with the consumer price index (CPI) headline rate falling to a more than two-year low of 3% on an annual basis; however, core inflation (defined as CPI excluding food and energy intended to measure long-run inflation) has been less responsive. The Federal Reserve issued additional 25-basis point interest rates increase in May and July, and has indicated that further interest rate increases are possible during this hiking cycle, depending on performance indicators. While the strength of the labor market may help prevent or reduce the severity of a potential recession, additional rate increases and the likelihood that interest rates will remain higher for longer are likely to result in below-trend economic growth. The U.S Treasury yield curve inversion deepened during the second quarter of 2023, giving further indication of a possible recession.
Within the financial services industry, a number of institutions are facing both macroeconomic and industry-specific headwinds, including tempered loan growth expectations and escalating expense pressures that have been compounded by recent turmoil in the sector. The rising interest rate environment has steadily affected the affordability of credit, and credit standards as a whole have tightened somewhat in the wake of economic uncertainty and post-pandemic effects on certain loan portfolio segments and lines of business. Despite this, we experienced 2% loan growth in the second quarter of 2023 and have yet to experience any significant decline in credit quality. The rising interest rate environment has also prompted a cumulative shift within deposit composition toward higher cost products and created increased competition for deposits; heightened regulatory scrutiny over the stability of an institution's deposit base and adequate levels of liquidity have compounded deposit retention efforts and other borrowing cost pressures, leading to a decline in net interest income and margin. We are continuously monitoring industry developments, deposit metrics, including the level of uninsured deposits, liquidity position and capital levels to support our ability to weather the current state of macroeconomic and industry-specific volatility.
Economic Outlook
We utilize economic forecasts produced by Moody’s Analytics (Moody’s) that provide various scenarios to assist in the development of our economic outlook. This outlook discussion utilizes the June 2023 Moody’s forecast, the most current available at June 30, 2023. The forecasts are anchored on a baseline forecast scenario, which Moody’s defines as the “most likely outcome” of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario that display varying depictions of economic performance as compared to the baseline.
While the credit loss outlook on our portfolio has not changed significantly, changes in the Moody’s scenarios have led to a shift in our weighting. At March 31, 2023, management applied a weighting of 40% to the baseline scenario, 50% to the mild recessionary S-2 scenario and 10% to the moderate recessionary S-3 scenario. Assumptions underlying the June 2023 baseline and S-2 scenarios shifted somewhat pessimistically from those included in the respective March 31, 2023 scenarios. To align the assumptions underlying
the June 2023 macroeconomic forecasts to our economic outlook, management applied weighting of 40% to the baseline and 60% to the mild recessionary S-2 scenario in the computation of the allowance for credit losses at June 30, 2023.
The baseline scenario continues to incorporate the belief that the Federal Reserve will accomplish its goal of slowing inflation without precipitating a recession. Key assumptions within the June 2023 baseline forecast include the following: (1) the Federal Funds rate has reached its terminal value in the rate hiking cycle, with rate cuts forecasted to begin in March 2024; (2) recent bank failures, while disruptive, are not symptomatic of a broader problem in the financial system; (3) the unemployment rate will increase from its current state of full-employment at 3.6% to 4.1% in 2024, and 4.2% in 2025; (4) GDP will display modest annual growth of 1.6% in 2023, 1.4% in 2024, and 2.4% in 2025; and (5) the 10-year U.S. Treasury yield will peak in the second quarter of 2024 at approximately 4%.
The S-2 scenario predicts a mild recession beginning in the third quarter of 2023 that lasts for three quarters, with the stock market contracting 22%. Contributing to that prediction is the assumption that conflict between Russia and Ukraine spans longer than anticipated in the baseline scenario and results in longer and larger interruption of global commodity supply; in turn, supply chain issues worsen, increasing shortages of affected goods and prolonging elevated inflation. Compounding these factors is the assumption that recent bank failures reduce consumer confidence and cause banks to tighten lending standards. The scenarios also assumes that the 10-year U.S. Treasury yield falls to below 3% until the first quarter of 2025 due to a flight to quality. Because of the fragility of the economy, the Federal Reserve will keep interest rates elevated in efforts to tame inflation, but will begin lowering rates in the fourth quarter of 2023, earlier than expected in the baseline scenario, due to recessionary conditions. Further, the scenario assumes that the unemployment rate averages 4.2% in 2023, 6.1% in 2024 (peaking at 6.4%), and 4.6% in 2025, with the return to full employment in the third quarter of 2025. Further, the S-2 scenario assumes GDP growth of only 1.2% in 2023 and 0.3% in 2024 before returning to a more moderate level of 3.0% in 2025.
As noted earlier, the credit loss outlook for our portfolio as a whole has not changed materially since March 31, 2023. Our asset quality metrics have remained relatively stable over the preceding several quarters, with relatively modest variation in nonaccrual loans and commercial criticized loans and minimal net charge-offs. We continue to closely monitor our portfolio for customers that are sensitive to prolonged inflation and the elevated interest rate environment. We expect full year 2023 loan growth in the low-to-mid single digit range, reflecting our disciplined loan pricing, the potential for economic slowdown and a focus on lending to resilient borrowers with whom we have a full service relationship in light of current economic pressures.
There are a number of uncertainties in the current economic outlook. The effects of inflation and the Federal Reserve's actions to counter those effects in the form of further interest rate increases and quantitative tightening have and are likely to continue to reduce economic growth in the near term. Recent disruption in the financial services industry has negatively affected equity markets, and a prolonged disruption could result in tightening of credit standards and pose risk of further volatility in equity markets. Further, on August 1, 2023, Fitch Ratings downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating to 'AA+' from 'AAA', citing expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. The full extent of the impact of these factors is uncertain and may have a negative impact on the U.S. economy, including the possibility of an economic recession in the near or mid-term.
Highlights of the Second Quarter 2023
We reported net income for the second quarter of 2023 of $117.8 million, or $1.35 per diluted common share, compared to $126.5 million, or $1.45 per diluted common share, in the first quarter of 2023 and $121.4 million, or $1.38 per diluted common share, in the second quarter of 2022.
Second quarter 2023 results compared to first quarter 2023:
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Our results for the second quarter of 2023, while solid, reflect ongoing challenges of the macroeconomic environment and within the financial services industry. The current interest rate environment continued to drive a shift in deposit mix to higher cost products. As a result, deposit betas outpaced loan betas, contributing to a compressing net interest margin. We faced additional headwinds to our efficiency ratio as a result of increased noninterest expense, including deposit insurance and regulatory fees. We continue to maintain what we believe is a stable and diversified deposit base, our asset quality metrics remain at relatively low levels, our allowance for credit losses is robust, and capital levels remain solid. We continue to focus on expense management and growing capital, and remain confident that we are well positioned to weather the challenges of current economic conditions and industry trends.
Consolidated Financial Results
The following table contains the consolidated financial results for the periods indicated.
March 31, 2023
September 30, 2022
June 30, 2022
Income Statement Data:
372,603
345,676
299,737
Interest income (te) (a)
408,110
375,187
348,291
302,340
257,449
783,297
496,780
Interest expense
87,609
50,175
19,430
Net interest income (te)
276,748
287,578
298,116
282,910
248,317
564,326
479,325
6,020
2,487
80,330
77,064
85,337
Noninterest expense
200,884
190,154
193,502
158,420
179,924
170,740
Income tax expense
31,953
36,137
35,351
126,467
143,787
135,389
Balance Sheet Data:
Period end balance sheet data
23,404,523
22,585,585
Earning assets
32,715,630
34,106,792
31,873,027
31,213,449
31,292,910
37,547,083
34,567,242
34,637,525
Noninterest-bearing deposits
12,860,027
14,290,817
14,676,342
29,613,070
28,951,274
29,866,432
Stockholders' equity
3,180,439
Average balance sheet data
23,654,994
23,086,529
22,723,248
22,138,709
21,657,528
23,372,331
21,391,262
33,619,829
32,753,781
32,244,681
31,783,801
32,780,813
33,189,197
32,990,206
36,205,396
35,159,050
34,498,915
34,377,773
35,380,247
35,685,113
35,690,303
12,153,453
12,963,133
13,854,625
14,323,646
14,655,800
12,556,056
14,510,370
29,372,899
28,792,851
28,816,338
29,180,626
29,979,940
29,084,477
30,004,728
3,567,260
3,412,813
3,228,667
3,405,463
3,383,789
3,490,463
3,494,809
Common Shares Data:
Earnings per share - basic
1.45
1.65
1.56
Earnings per share - diluted
1.55
Cash dividends per common share
Book value per share (period end)
41.27
41.03
38.89
37.12
39.08
Tangible book value per share (period end)
30.76
30.47
28.29
26.44
28.37
Weighted average number of shares - diluted
86,282
86,249
86,020
Period end number of shares
86,066
85,686
85,714
43
Performance and other data:
Return on average assets
1.30
1.46
Return on average common equity
13.24
15.03
17.67
15.77
14.39
14.11
14.13
Return on average tangible common equity
17.76
20.49
24.64
21.58
19.77
19.08
19.20
Tangible common equity (b)
7.50
7.16
7.09
6.73
7.21
Tangible common equity Tier 1 (CET1) ratio
11.83
11.60
11.41
11.10
11.08
Net interest margin (te)
3.30
3.55
3.68
3.54
3.04
3.42
2.92
Noninterest income as a percentage of total revenue (te)
23.12
21.83
20.54
23.17
25.65
22.47
26.08
Efficiency ratio (c)
55.33
53.76
49.81
51.62
54.95
54.54
55.47
Allowance for loan losses as a percentage of total loans
1.32
1.33
1.36
1.41
Allowance for credit losses as a percentage of total loans
1.48
1.50
Annualized net charge-offs to average loans
0.06
0.10
(0.01
)%
(0.00
Nonaccrual loans as a percentage of loans
0.33
0.23
0.17
0.18
FTE headcount
3,705
3,679
3,627
3,607
Reconciliation of operating revenue and operating pre-provision net revenue (non-GAAP measure) (te) (d)
284,994
295,501
280,307
Total revenue
357,136
365,324
372,565
365,644
331,385
722,460
643,280
Taxable equivalent adjustment
2,837
2,584
2,615
2,603
2,585
5,421
5,130
Nonoperating revenue
Total revenue (te)
359,973
367,908
375,180
368,247
333,970
727,881
648,410
(202,138
(200,884
(190,154
(193,502
(187,097
(403,022
(367,036
Nonoperating expense
Operating pre-provision net revenue (te)
157,835
167,024
185,026
174,745
146,873
324,859
281,374
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (te) for the second quarter of 2023 was $276.7 million, down $10.8 million, or 4%, compared to the first quarter of 2023 and was $564.3 million for the first six months of 2023, up $85.0 million, or 18%, from the comparable period in 2022.
The decrease in net interest income (te) compared to the first quarter of 2023 is largely attributable to a combination of growth in and prevailing rates on interest-bearing liabilities outpacing those of earning assets. The increase in cost of funds is largely due to an increase in average interest-bearing deposits, with a shift of noninterest-bearing deposits and lower cost interest-bearing transaction and savings deposits into higher cost products, and increased average short-term borrowings and rates. The impact of the additional day in the second quarter of 2023 added approximately $2.3 million to net interest income (te).
The net interest margin for the second quarter of 2023 was 3.30%, down 25 bps from 3.55% in the first quarter of 2023. The decline in the net interest margin from the prior quarter was largely driven by a change in the funding mix as discussed above, with linked-quarter increases of $1.4 billion in average interest-bearing deposits and $288 million in average short-term borrowings, mainly in FHLB advances. The increase in average interest-bearing deposits is primarily attributable to the $1.7 billion increase in average time deposits, largely the result of growth driven by promotional rate offerings and, to a lesser extent, the addition of brokered deposits in March and May. Accordingly, the cost of funds increased 49 bps, including 38 bps related to interest-bearing deposit growth and increased rate offerings, 6 bps related to the increased cost of short-term borrowings and 4 bps related to incremental liquidity held as a cautionary measure following the recent bank failures. The impact of the increased cost of funds was partially offset by a 24 bp increase in the average earning asset yield that was favorably impacted by increases of $568 million in average loans and $425 million in average short-term investments in a rising interest rate environment, partially offset by a decline in average securities of $129 million.
44
The $85.0 million increase in net interest income (te) for the six months ended June 30, 2023 compared to the same period in 2022 includes a $286.5 million increase in interest income (te), partially offset by a $201.5 million increase in interest expense. The increase in interest income is largely due to the rising interest rate environment, a favorable change in the earning asset mix, and an $11.6 million decrease in net premium amortization on the securities portfolio. The favorable change in the average earning asset mix reflects a $2.0 billion increase in loans and a $2.0 billion decline in short-term investments. The increase in interest income was partially offset by a $3.0 million decrease in nonaccrual interest recoveries and a $1.2 million decrease in purchase accounting discount accretion. The increase in interest expense was largely driven by the shift in mix of deposits from noninterest-bearing and low interest-bearing transaction and savings deposits into higher cost products at competitive interest rates in the rising rate environment. In addition, we experienced increased borrowing cost, primarily attributable to FHLB advances, as low fixed-rate instruments were called and replaced with new instruments at prevailing interest rates with higher average balances.
The net interest margin for the six months ended June 30, 2023 was up 50 bps compared to the same period in 2022, largely as a result of the rising interest rate environment and a more favorable earning asset mix. The yield on earning assets was up 172 bps to 4.75%, while the cost of funds increased 122 bps to 1.33%.
Given the pressure on deposit costs and assumed continued shift from noninterest-bearing deposits, we expect to see additional net interest margin compression in the second half of 2023, although likely at a slower pace than what we experienced in the first half of the year. This assumes the one 25 bp increase in the Federal Funds interest rate in July 2023 and then held flat through the end of 2023. This guidance also considers that the noninterest-bearing deposit mix could fall to just below pre-pandemic levels by the end of the year, or about 35% of total deposits.
45
The following tables detail the components of our net interest income (te) and net interest margin.
($ in millions)
Volume
Interest (d)
Rate
Average earning assets
Commercial & real estate loans (te) (a)
18,670.8
280.9
6.03
18,322.2
259.1
5.73
17,562.0
165.9
3.79
Residential mortgage loans
3,469.0
31.4
3.62
3,214.4
28.1
3.49
2,534.6
21.1
3.33
Consumer loans
1,515.2
30.7
8.14
1,549.9
29.2
7.63
1,560.9
19.6
5.03
Loan fees & late charges
(0.4
1.9
Total loans (te) (b)
23,655.0
343.0
5.81
23,086.5
316.0
5.54
21,657.5
208.5
3.86
25.1
0.4
5.83
22.9
0.3
5.21
48.1
3.69
US Treasury and government agency securities
537.4
3.4
2.50
541.3
2.49
387.6
1.7
1.79
Mortgage-backed securities and collateralized mortgage obligations
7,552.0
43.2
2.29
7,668.0
43.3
2.26
7,658.2
36.3
1.90
Municipals (te)
894.9
6.7
3.00
904.3
2.98
912.4
6.8
2.96
Other securities
23.5
0.2
3.51
3.50
21.2
3.34
Total securities (te) (c)
9,007.8
53.5
2.38
9,137.1
53.6
2.35
8,979.4
45.0
2.00
Total short-term investments
931.9
11.2
4.83
507.3
5.3
4.27
2,095.8
3.5
0.67
Total earning assets (te)
33,619.8
408.1
4.87
32,753.8
375.2
4.63
32,780.8
257.4
3.15
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits
10,478.4
41.3
1.58
10,650.4
27.3
1.04
11,412.9
1.3
0.05
Time deposits
3,759.3
36.9
3.93
2,018.6
13.4
2.70
1,005.2
0.15
Public funds
2,981.7
24.3
3.27
3,160.7
23.7
2,906.0
3.3
0.46
Total interest-bearing deposits
17,219.4
102.5
2.39
15,829.7
64.4
15,324.1
5.0
0.13
Repurchase agreements
497.9
445.8
0.8
0.69
523.0
0.1
Other short-term borrowings
1,888.7
24.1
1,652.8
19.3
4.74
701.2
0.9
242.0
3.1
5.11
242.1
240.3
5.20
Total borrowings
2,628.6
28.9
4.40
2,340.7
23.2
4.00
1,464.5
4.1
1.12
Total interest-bearing liabilities
19,848.0
131.4
2.65
18,170.4
87.6
1.95
16,788.6
9.1
0.22
Net interest-free funding sources
13,771.8
14,583.4
15,992.2
Total cost of funds
1.57
1.08
0.11
Net interest spread (te)
276.7
2.21
287.6
2.67
248.3
2.93
Net interest margin
18,497.5
540.1
5.89
17,341.9
316.3
3,342.4
59.4
3.56
2,488.3
42.1
3.38
1,532.4
59.9
7.88
1,561.1
37.9
4.90
6.3
23,372.3
659.0
5.68
21,391.3
402.6
24.0
0.7
5.53
56.1
1.1
4.07
539.3
392.7
1.71
7,609.7
86.5
2.27
7,506.2
70.8
1.89
899.6
2.99
914.4
13.5
2.95
3.32
9,072.1
107.0
2.36
8,834.4
88.0
1.99
720.8
16.6
2,708.4
5.1
0.38
33,189.2
783.3
4.75
32,990.2
496.8
3.03
10,563.9
68.6
1.31
11,418.2
2.5
0.04
2,893.8
50.3
1,046.6
1.0
0.20
3,070.7
3.16
3,029.6
5.4
0.36
16,528.4
167.0
2.04
15,494.4
8.9
472.0
555.1
1,771.4
900.7
2.2
6.2
241.0
5.18
2,485.5
52.0
4.21
1,696.8
8.6
1.02
19,013.9
219.0
2.32
17,191.2
17.5
14,175.3
15,799.0
564.3
2.43
479.3
2.83
Provision for Credit Losses
During the second quarter of 2023, we recorded a provision for credit losses of $7.6 million, compared to $6.0 million in the first quarter of 2023. The provision in the second quarter of 2023 included net charge-offs of $3.4 million and a reserve build of $4.2 million, compared to net charge-offs of $5.7 million and a reserve build of $0.3 million in the first quarter of 2023. The provisions for credit losses in both the second and first quarters of 2023 reflect a modest build for continued loan growth and our relatively stable credit metrics and economic outlook, with the second quarter of 2023 also including an increase in individually evaluated reserves on our nonaccrual portfolio. Net charge-offs in the second quarter of 2023 were $3.4 million, or 0.06% of average total loans on an annualized basis, compared to net charge-offs of $5.7 million, or 0.10%, in the first quarter of 2023. The second quarter of 2023 included net charge-offs of $1.2 million in the commercial portfolio and $2.5 million in the consumer portfolio, partially offset by net recoveries of $0.3 million in the residential mortgage portfolio. The first quarter of 2023 included net charge-offs of $3.4 million in the commercial portfolio and $2.5 million in the consumer portfolio, partially offset by net recoveries of $0.2 million in the residential mortgage portfolio.
We recorded a provision for credit losses of $13.7 million for the six months ended June 30, 2023, compared to a $32.3 million negative provision for credit losses in the same period in 2022. The provision for credit losses in the first six months of 2023 included net charge-offs of $9.1 million and a reserve build of $4.6 million, compared to net recoveries of $0.4 million and a reserve release of $31.9 million in the first six months of 2022. As noted above, the provision for credit losses for the first half of 2023 is reflective of a modest build for continued loan growth, higher individually evaluated reserves on our nonaccrual portfolio, and our relatively stable credit metrics and economic outlook. The negative provision for credit losses in the first half of 2022 reflects the gradual release of
47
pandemic-related allowance as overall credit performance continued to improve. Net charge-offs in the first six months of 2023 were $9.1 million, or 0.08% of average loans, comprised of net charge-offs of $4.6 million in the commercial portfolio and $5.0 million in the consumer portfolio, partially offset by net recoveries of $0.5 million in the residential mortgage portfolio. Net recoveries for the first six months of 2022 were $0.4 million, comprised of net recoveries of $2.4 million in the commercial portfolio and $0.5 million in the residential mortgage portfolio, partially offset by net charge-offs of $2.5 million in the consumer portfolio. The level of recoveries has declined in 2023, returning to a more normalized level of net charge-offs.
We expect to continue to see low to modest charge-offs and provision for credit losses for the remainder of 2023. However, loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.
The discussion labeled "Allowance for Credit Losses and Asset Quality" that appears later in this Item provides additional information on these changes and on general credit quality.
Noninterest Income
Noninterest income totaled $83.2 million for the second quarter of 2023, up $2.9 million, or 4%, from the first quarter of 2023. The increase in noninterest income from the first quarter of 2023 was largely attributable to increases in service charges on deposit accounts, trust fees, credit-related fees and other income, partially offset by a decrease in investment and annuity fees. For the six months ended June 30, 2023, noninterest income totaled $163.6 million, down $5.5 million, or 3%, from the same period in 2022. The decline is largely attributable to decreases in income from derivatives, secondary mortgage market operations, bank-owned life insurance and gains on sales of assets, partially offset by increases in trust fees and investment and annuity fees.
The components of noninterest income are presented in the following table for the indicated periods.
March 31,
20,622
16,734
20,721
8,867
2,168
3,286
2,765
Income from customer and other derivatives
583
4,584
Service charges on deposit accounts are composed of overdraft and nonsufficient funds fees, business and corporate account analysis fees, overdraft protection fees and other customer transaction-related charges. Service charges on deposits totaled $21.5 million for the second quarter of 2023, up $0.9 million, or 4%, from the first quarter of 2023. The increase from the previous quarter is largely attributable to the business segment of this fee category, and includes a $0.7 million increase in business analysis fees, driven by higher activity, balance changes and strong sales activity. For the six months ended June 30, 2023, services charges on deposits totaled $42.1 million, down $0.1 million, or less than 1%, from the same period in 2022. Included in the year over year change are increases in analysis and overdraft fees within the business segment of this fee category, reflecting higher activity, balance changes and strong sales activity and higher instances of overdrafts. These increases were offset by a decrease in consumer overdraft and other service charges, largely the result of the elimination of certain consumer non-sufficient funds and overdraft fees in late fourth quarter 2022.
Trust fee income represents revenue generated from a full range of trust services, including asset management and custody services provided to individuals, businesses and institutions. Trust fees totaled $17.4 million for the second quarter of 2023, an increase of $0.7 million, or 4%, from the prior quarter, largely attributable to seasonal income tax preparation fees. For the six months ended June 30, 2023, trust fees totaled $34.1 million, an increase of $1.5 million, or 5%, from the same period in 2022. The year over year increase was primarily from corporate and institutional trust accounts, largely a product of the rising interest rate environment.
Bank card and ATM fees include interchange and other income from credit and debit card transactions, fees earned from processing card transactions for merchants, and fees earned from ATM transactions. Bank card and ATM fees totaled $21.0 million for the second quarter of 2023, up $0.3 million, or 1%, from the first quarter of 2023. The linked quarter increase reflects a return from the typical seasonal declines in debit and consumer credit card activity of the first quarter of the year, and an increase in credit
48
card/purchasing card revenue, partially offset by a decline in merchant fees. Bank card and ATM fees for the six months ended June 30, 2023 totaled $41.7 million, down $0.6 million, or 1%, from the same period in 2022. The year over year decline was driven primarily by decreases in merchant and ATM fees, partially offset by an increase in credit card/purchasing card revenue.
Investment and annuity fees and insurance commissions, which includes both fees earned from sales of annuity and insurance products, as well as managed account fees, totaled $8.2 million, a decrease of $0.6 million, or 7%, from the first quarter of 2023. The linked quarter change includes a $0.4 million decline in corporate underwriting fees and a $0.2 million decline in annuity sales as the previous quarter included two additional underwriting deals and near record annuity sales performance. Investment and annuity fees and insurance commissions totaled $17.1 million, up $1.7 million, or 11%, for the same period in 2022. The year over year increase includes a $1.7 million increase in annuity fees, reflective of increased demand amid the rising interest rate environment, and a $0.7 million increase in corporate underwriting fees. These increases were partially offset by a $0.6 million decline in other investment fees.
Income from secondary mortgage market operations is comprised of income produced from the origination and sales of residential mortgage loans in the secondary market. We offer a full range of mortgage products to our customers and typically sell longer-term fixed-rate loans while retaining the majority of adjustable-rate loans, as well as loans generated through programs to support customer relationships. Secondary mortgage market operations income will vary based on application volume and pull through rates. Income from secondary mortgage market operations was $2.3 million in the second quarter of 2023, up $0.1 million, or 6%, from the first quarter of 2023. The increase from the first quarter of 2023 is primarily attributable to an increase in the number of loans closed and the percentage of loans sold in the secondary market. The percentage of mortgage loans sold in the secondary market to total originations (as opposed to those held in our portfolio) was 34% in the second quarter of 2023, compared to 24% in the first quarter of 2023. Secondary mortgage market operations income for the six months ended June 30, 2023 totaled $4.5 million, down $2.3 million, or 34%, from the same period in 2022. The year over year decline is largely attributable to a decline in application volume and loans closed, driven by the sharp rise in interest rates that followed a two-year period of very favorable interest rates, partially offset by a higher percentage of originated loans sold in the secondary market, up to 30% compared to 24% in the prior year.
Income from bank-owned life insurance (BOLI) is typically generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. Income from BOLI was $3.4 million for the second quarter of 2023, virtually flat when compared to the prior quarter. Income from BOLI for the six months ended June 30, 2023 totaled $6.7 million, down $1.2 million, or 15% from the same period in 2022. The year over year decrease reflects declines in income from cash surrender value and mortality gains.
Credit-related fees include fees assessed on letters of credit and unused portions of loan commitments. Credit-related fees were $3.2 million for the second quarter of 2023, up $0.5 million, or 17%, from the first quarter of 2023. Credit-related fees for the six months ended June 30, 2023 totaled $6.0 million, up $0.8 million, or 15%, from the same period in 2022. Income from these products will vary based on letters of credit issued, credit line utilization and prevailing assessment rates.
Income from customer and other derivatives is largely derived from our customer interest rate derivative program and totaled $0.6 million for the second quarter of 2023, relatively flat when compared to the first quarter of 2023. For the six months ended June 30, 2023, income from derivatives totaled $1.2 million, down $3.9 million, or 77%, from the same period in 2022. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales and termination activity, and market value adjustments due to market interest rate movement. The substantial year over year decline in derivative income is largely tied to the significant change in the interest rate environment present in each of the comparative periods, which affects demand for variable rate loans and related derivative products, valuation adjustments, and related collateral income/expense for the program as a whole.
Other miscellaneous income is comprised of various items, including income from small business investment companies (SBIC), Federal Home Loan Bank (FHLB) stock dividends, gains on sales of assets, and syndication fees. Other miscellaneous income totaled $5.6 million, up $1.1 million, or 23%, compared to the first quarter of 2023. The increase compared to the first quarter of 2023 was largely driven by a $0.4 million increase in dividends on FHLB stock, attributable to the stock purchased in connection with the incremental borrowings held during the period and an increase in the dividend rate, a $0.2 million increase in SBIC income, and a $0.2 million increase in gain on sale of assets. For the six months ended June 30, 2023, other miscellaneous income totaled $10.2 million, down $1.7 million, or 14%, from the same period in 2022. The year over year decline was largely driven by a $1.9 million decrease in gains on sales of assets, a $0.6 million decrease in other loan fees and a $0.2 million decrease in SBIC income, partially offset by an increase of $1.4 million in FHLB stock dividends.
We expect noninterest income for the full year 2023 will increase 1% to 2% from 2022.
49
Noninterest Expense
Noninterest expense for the second quarter of 2023 was $202.1 million, up $1.3 million, or 1%, from the first quarter of 2023. The increase in noninterest expense from the first quarter of 2023 was largely driven by increases in data processing expense, occupancy and equipment expense, deposit and regulatory fees, and travel expense, partially offset by a decrease in other miscellaneous and personnel expense. For the six months ended June 30, 2023, noninterest expense totaled $403.0 million, up $36.0 million, or 10%, from the same period in 2022. The year over year increase is attributable to most expense categories, notably personnel expense, other retirement expense, data processing expense, regulatory fees, occupancy and equipment, and other miscellaneous expense. Approximately 35% of the year over year increase in noninterest expense is attributable to the increases in other retirement expense and deposit and regulatory fees. A more detailed discussion of these and other noninterest expense variances follows.
The components of noninterest expense for the periods indicated are presented in the following tables.
92,403
22,920
115,323
12,206
4,736
28,182
9,131
3,114
5,920
Other real estate and foreclosed asset expense (income)
155
5,253
3,256
3,071
2,631
1,401
990
1,046
(3,655
8,124
Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and insurance for medical, life and disability. Personnel expense totaled $114.9 million for the second quarter of 2023, down $0.5 million, or less than 1%, from the prior quarter. The linked quarter decline reflects a decrease in benefits expense and incentive pay, partially offset by an increase in salary expense as a result of increased headcount and merit increases effective April 1. For the six months ended June 30, 2023, personnel expense totaled $230.2 million, up $7.6 million, or 3%, from the same period in 2022. The year over year increase reflects higher salary expense of $11.4 million as a result of increased head count and annual merit increases, partially offset by $5.0 million decrease in bonus and incentive pay expense.
Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Occupancy and equipment expenses totaled $17.8 million for the second quarter of 2023, up $0.8 million or 5%, from the prior quarter. The linked quarter increase was largely attributable to increases in property tax and insurance. For the six months ended June 30, 2023, occupancy and equipment expenses totaled $34.7 million, up $1.2 million, or 4%, driven largely by increases in insurance expense and higher depreciation expense on fixed assets.
Data processing expense includes expenses related to third party technology processing and servicing costs, technology project costs and fees associated with bank card and ATM transactions. Data processing expense was $29.6 million for the second quarter of 2023, up $1.4 million, or 5%, from the first quarter of 2023. The linked quarter change is primarily attributable to an increase in costs associated with the implementation of technology enhancement projects, including maintenance and amortization of bank-owned software of $0.3 million and new data processing arrangements of $0.6 million. For the six months ended June 30, 2023, data
processing expense totaled $57.7 million, up $7.3 million, or 15%, from the same period in 2022, also largely attributable to the same factors driving the linked quarter increase.
Professional services expense for the second quarter of 2023 totaled $8.9 million, down $0.2 million, or 2%, from the first quarter of 2023. For the six months ended June 30, 2023, professional services expense totaled $18.0 million, up $1.8 million, or 11%, from the same period in 2022, driven by an increase in consulting fees. Professional service expense may vary from period to period, generally related to consulting and legal needs.
Deposit insurance and regulatory fees totaled $6.5 million, up $0.5 million, or 9%, from the first quarter of 2023. The linked quarter increase is attributable to a $0.3 million increase in the deposit insurance assessment due to slightly higher assessment base and rate, and a $0.2 million increase in state regulatory fees. For the six months ended June 30, 2023, deposit insurance and regulatory fees totaled $12.4 million, up $5.1 million, or 71%, from the same period in 2022. The year over year increase includes $3.3 million attributable to a two-basis point increase in the deposit insurance fund assessment that was effective January 1, 2023 and will remain in effect until the Deposit Insurance Fund reserve ratio to insured deposits meets the FDIC’s long-term goal for the fund. The remaining increase reflects $1.3 million in higher deposit insurance expense resulting from an increase in our assessment base and rates, and $0.5 million in state regulatory fees. The Company expects to incur an additional FDIC deposit insurance charge in 2023 related to a special assessment to recover the costs associated with the systemic risk exception utilized in the March 2023 bank failures, the amount of which is still unknown. See further discussion in the forward-looking comments at the end of this section.
Net gains on sales of other real estate and foreclosed assets outpaced expense by $0.3 million in the second quarter of 2023, compared to expense of $0.2 million in the first quarter of 2023. The level of expense in the comparative period reflects a somewhat typical level of expense of maintaining the ORE portfolio, but can vary depending on sales activity. For the six months ended June 30, 2023, net gains on sales of other real estate and foreclosed assets outpaced expense by $0.1 million, compared to $1.9 million for the same period in 2022, reflecting higher property sales in the prior year. Gains or losses on the sale of other real estate and foreclosed assets may occur periodically and are dependent on the number and type of assets for sale and current market conditions.
Corporate value, franchise and other non-income tax expense for the second quarter of 2023 totaled $5.2 million, virtually unchanged from the prior quarter. For the six months ended June 30, 2023, corporate value, franchise and other non-income tax expense totaled $10.5 million, up $1.7 million, or 19%, from the same period in 2022, largely attributable to bank share tax. The calculation of bank share tax is based on multiple variables, including average quarterly assets, earnings and stockholders’ equity to determine the taxable assessment value.
Business development-related expenses (including advertising, travel, entertainment and contributions) totaled $7.7 million for the second quarter of 2023, up $0.8 million, or 11%, from the first quarter of 2023, largely attributable to travel expense. For the six months ended June 30, 2023, business development-related expenses totaled $14.6 million, up $0.8 million, or 6%, from the same period in 2022 and was also largely attributable to travel expense. The timing and level of business development expense can vary based on business needs and promotional campaigns.
All other expenses, excluding amortization of intangibles, totaled $9.0 million for the second quarter of 2023, down $1.0 million, or 10%, from the first quarter of 2023, primarily due to other lower miscellaneous losses. For the six months ended June 30, 2023, all other expenses, excluding amortization of intangibles, totaled $18.9 million, up $9.9 million from the same period in 2022. The year over year variance is largely attributable to a $7.6 million increase in pension-related other retirement expense that is driven by an increase in the discount rate and other changes in actuarial assumptions for the current plan year. The remaining difference includes higher other miscellaneous loss of $3.2 million largely related to loss recoveries in the prior year.
We expect noninterest expense for the full year 2023 will increase 7.5% to 8.5% from 2022. The anticipated year-over-year increase includes increases in retirement (pension) expense and the two basis point FDIC assessment increase as described above. This guidance does not include any potential expense from a deposit insurance special assessment in connection with the systemic risk exception discussed below.
On May 11, 2023, the FDIC Board of Directors published a notice of proposed rulemaking that would impose a special assessment to recover the loss to the Deposit Insurance Fund arising from the protection of uninsured depositors in connection with the systemic risk determination announced on March 12, 2023, following the closures of Silicon Valley Bank and Signature Bank. While we expect the final rule will be implemented, we believe that it is likely there will be modifications to the proposed calculation. Based on the information currently available, the Company estimates the special assessment expense under the proposed rule to be approximately $24 million. Upon issuance of the final rule, the Company will accrue the full amount of the special assessment expense in the period in which the expense is probable and estimable, which is expected to occur before year end 2023.
Income Taxes
The effective income tax rate for the second quarter of 2023 was approximately 20.1% compared to 20.2% in the first quarter of 2023. The effective tax rate for the first six months of 2023 was 20.1%, compared to 20.6% in the same period of 2022. Based on the current forecast, management expects the effective income tax rate to be approximately 21% in 2023.
Our effective tax rate has historically varied from the federal statutory rate primarily because of tax-exempt income and tax credits. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets we serve and are directed at tax credits issued under the Federal and State New Market Tax Credit (“NMTC”) programs, Low-Income Housing Tax Credit (“LIHTC”) programs, as well as pre-2018 Qualified Zone Academy Bonds (“QZAB”) and Qualified School Construction Bonds (“QSCB”). These investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes.
We have invested in NMTC projects through investments in our own Community Development Entities (“CDE”), as well as other unrelated CDEs. Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years. We have also invested in affordable housing projects that generate federal LIHTC tax credits that are recognized over a ten-year period, beginning in the year the rental activity begins. The amortization of the LIHTC investment cost is recognized as a component of income tax expense in proportion to the tax credits recognized over the ten-year credit period.
Based on tax credit investments that have been made to date in 2023, we expect to realize benefits from federal and state tax credits over the next three years totaling $12.4 million, $9.8 million and $8.2 million in 2024, 2025 and 2026, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.
In August 2022, the Inflation Reduction Act of 2022 (IRA of 2022) was signed into law to address inflation, healthcare costs, climate change and renewal energy incentives, among other things. Included in the IRA of 2022 are provisions for the creation of a 15% corporate alternative minimum tax rate (CAMT) that is effective for tax years beginning January 1, 2023 for corporations with an average annual adjusted financial statement income in excess of $1 billion. Based on information available to date, we do not anticipate our consolidated corporate group to be subject to the 15% CAMT, absent any further changes in law.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity management ensures that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries. As part of the overall asset and liability management process, liquidity management strategies and measurements have been developed to manage and monitor liquidity risk. The Company had access to sufficient liquidity at June 30, 2023, summarized as follows:
Total Available
Amount Used
Net Availability
Available Sources of Funding:
Internal Sources:
Free securities
3,502,219
External Sources:
Federal Home Loan Bank (a)
6,824,213
1,221,175
5,603,038
Federal Reserve Bank
3,418,473
Brokered deposits
4,506,525
1,162,501
3,344,024
1,369,000
Total Available Sources of Funding
19,620,430
2,383,676
17,236,754
Cash and other interest-bearing bank deposits
Total Liquidity
18,474,653
(a) Amount used includes funded advances and letters of credit.
The recent failures of three major regional U.S. banks that included large-scale deposit runs has brought the subject of bank liquidity into focus. Dampened depositor confidence over a financial institution's ability to protect deposit balances in excess of the federally insured limit is thought to pose a higher likelihood of a deposit run, and, in turn, the risk that the institution may have insufficient liquidity to meet the demand. At June 30, 2023, our available on and off-balance sheet liquidity of $18.5 billion is well in excess of our estimated uninsured, noncollateralized deposits of approximately $10.3 billion.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities and repayments of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window. Management has established an internal target for the ratio of free securities to total securities of 20% or greater. As shown in the table below, our ratio of free securities to total securities was 41.23% at June 30, 2023, compared to 28.45% at March 31, 2023 and 41.59% at December 31, 2022. The free securities ratio at March 31, 2023 was impacted by pledging additional securities to the Federal Reserve Bank, done as a precautionary measure to increase borrowing capacity under its discount window as a result of the first quarter bank failures. The total pledged securities were $4.7 billion at June 30, 2023, compared to $6.1 billion at March 31, 2023 and $4.9 billion at December 31, 2022. Both securities and FHLB letters of credit are pledged as collateral related to public funds and repurchase agreements.
September 30,
Liquidity Metrics
Free securities / total securities
41.23
28.45
41.59
49.79
52.61
Core deposits / total deposits
91.63
94.83
98.12
98.93
99.00
Wholesale funds / core deposits
11.00
15.43
7.43
6.23
2.97
Quarter-to-date average loans /quarter-to-date average deposits
80.53
80.18
78.86
75.87
72.24
The liability portion of the balance sheet provides liquidity mainly through the ability to use cash sourced from customers’ interest-bearing and noninterest-bearing deposit accounts. At June 30, 2023, deposits totaled $30.0 billion, an increase of $430.4 million, or 1%, from March 31, 2023 and an increase of $973.2 million, or 3% from December 31, 2022. The increase from both comparative periods was primarily due to the issuance of brokered certificates of deposit, partially offset by an outflow of public funds deposits. Brokered time deposits totaled $1.2 billion as of June 30, 2023, compared to $573 million at March 31, 2023 and $5 million at December 31, 2022. In March 2023, we added $568 million of brokered certificates of deposit that mature in December 2023 and bear interest plus fees of 5.45% per annum. In May 2023, we added $590 million of brokered certificates of deposit that bear interest plus fees of 5.35% annum, of which, $195 million will mature in February 2024 and $395 million will mature in May 2024. The use of brokered deposits as a funding source is subject to certain policies regarding the amount, term and interest rate.
Core deposits consist of total deposits excluding certificates of deposit of $250,000 or more and brokered deposits. Core deposits totaled $27.5 billion at June 30, 2023, down $553.7 million, or 2%, compared to March 31, 2023 and down $1.0 billion, or 3%, compared to December 31, 2022. The decline in core deposits reflects the shift of deposits into certificates of deposits of $250,000 or more, up $394.1 million compared to March 31, 2023 and $810.4 million compared to December 31, 2022, largely due to attractive interest rates offered during those periods. The ratio of core deposits to total deposits was 91.63% at June 30, 2023, compared to 94.83% at March 31, 2023 and 98.12% at December 31, 2022.
Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At June 30, 2023, the Bank had borrowings of $1.1 billion and approximately $5.6 billion available under this line. The unused borrowing capacity at the Federal Reserve’s discount window is approximately $3.4 billion. There were no outstanding borrowings with the Federal Reserve at any date during any period covered by this report. In response to the March 2023 bank failures and resulting liquidity concerns, the Federal Reserve established a Bank Term Funding Program, available to eligible depository institutions to provide an additional source of liquidity secured by U.S. Treasury and government agency and mortgage-backed securities, and other qualifying assets at par. As a cautionary measure, the Bank registered for the program at its inception, but has not, and does not intend to borrow under this program.
Wholesale funds, which are comprised of short-term borrowings, long-term debt and brokered deposits were 11.00% of core deposits at June 30, 2023, compared to 15.43% at March 31, 2023 and 7.43% at December 31, 2022. At June 30, 2023, wholesale funds totaled $3.0 billion, a decrease of $1.3 billion, or 30%, from March 31, 2023 and an increase of $0.9 billion, or 43%, from December 31, 2022. The linked-quarter decrease was primarily due to a $2 billion net decrease in FHLB advances as excess liquidity held as a cautionary measure following the March 2023 bank failures was released, partially offset by the addition of $590 million in brokered
deposits. The increase from December 31, 2022 reflects the addition of $1.2 billion in brokered deposits, partially offset by a net reduction in FHLB advances of $0.3 billion. The Company has established an internal target for wholesale funds to be less than 25% of core deposits.
Another measure used to monitor our liquidity position is the loan-to-deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding). The loan-to-deposit ratio measures the amount of funds the Company lends for each dollar of deposits on hand. Our average loan-to-deposit ratio for the second quarter of 2023 was 80.53%, compared to 80.18% for the first quarter of 2023 and 78.86% for the fourth quarter of 2022. Management has an established target range for the loan-to-deposit ratio of 87% to 89%, but will operate outside that range under certain circumstances, such as those caused by the pandemic where deposits became and remain elevated.
Cash generated from operations is another important source of funds to meet liquidity needs. The Consolidated Statements of Cash Flows included in Part I, Item 1 of this document present operating cash flows and summarize all significant sources and uses of funds during the six months ended June 30, 2023 and 2022.
Dividends received from the Bank have been the primary source of funds available to the Parent for the payment of dividends to our stockholders and for servicing its debt. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent. The Parent targets cash and other liquid assets to provide liquidity in an amount sufficient to fund approximately four quarters of ongoing cash or liquid asset needs, consisting primarily of common stockholder dividends, debt service requirements, and any expected share repurchase or early extinguishment of debt. The Parent may operate below the target level on a temporary basis if a return to the target can be achieved in the near-term, generally not to exceed four quarters. The Parent had cash and liquid assets of $176.0 million at June 30, 2023.
Capital Resources
Stockholders’ equity totaled $3.6 billion at June 30, 2023, up $23.2 million, or 1%, from March 31, 2023 and $211.8 million, or 6%, from December 31, 2022. The increase from March 31, 2023 is attributable to net income of $117.8 million and $7.1 million of long-term incentive plan and dividend reinvestment activity. These factors were partially offset by other comprehensive loss of $75.3 million, net of tax, primarily attributable to fair value adjustments on securities available for sale and cash flow hedges and dividends of $26.4 million. The increase from December 31, 2022 is attributable to net income of $244.3 million, $10.9 million of long-term incentive plan and dividend reinvestment activity, and other comprehensive income of $9.4 million, net of tax; partially offset by dividends of $52.8 million.
The tangible common equity (TCE) ratio was 7.50% at June 30, 2023, up 34 bps compared to 7.16% at March 31, 2023 and 41 bps compared to 7.09% at December 31, 2022. TCE is influenced by net income, tangible net assets, other comprehensive income or loss, and dividends.
The regulatory capital ratios of the Company and the Bank at June 30, 2023 remained well in excess of current regulatory minimum requirements, including capital conservation buffers, by at least $645 million. The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators. Refer to the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion of our capital requirements.
The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods. The capital ratios reflect the election to use the CECL five-year transition rule that allowed for the option to delay for two years the estimated impact of CECL on regulatory capital (0% in 2020 and 2021), followed by a three-year transition (25% in 2022, 50% in 2023, 75% in 2024, and 100% thereafter). The two-year delay includes the full impact of January 1, 2020 cumulative effect impact plus an estimated impact of CECL calculated quarterly as 25% of the current ACL over the January 1, 2020 balance (modified transition amount). The modified transition amount was recalculated each quarter in 2020 and 2021, with the December 31, 2021 impact of $24.9 million plus day one impact of $44.1 million (net of tax) carrying through the remaining three years of the transition, as adjusted by the applicable transition percentage.
Well-
Capitalized
Total capital (to risk weighted assets)
10.00
13.44
13.21
12.97
12.67
12.70
Hancock Whitney Bank
12.54
12.39
12.16
12.28
Tier 1 common equity capital (to risk weighted assets)
6.50
11.68
11.52
11.43
11.20
11.28
Tier 1 capital (to risk weighted assets)
8.00
Tier 1 leverage capital
5.00
9.64
9.63
9.53
9.27
8.68
9.52
9.57
9.54
9.35
8.83
We regularly perform stress analysis on our capital levels. One such scenario included the hypothetical impact of including accumulated other comprehensive losses on market valuations of available for sale securities and cash flow hedges in regulatory capital and a further stress scenario that included both those losses plus losses on the held to maturity investment portfolio in regulatory capital. We estimate that our regulatory capital ratios would remain in excess of the well-capitalized minimums under both of these stress scenarios at June 30, 2023.
On January 26, 2023, our board of directors authorized the repurchase of up to 4,297,000 shares of the Company’s common stock (approximately 5% of the shares of common stock outstanding as of December 31, 2022). The authorization is set to expire on December 31, 2024. The shares may be repurchased in the open market, by block purchase, through accelerated share repurchase plans, in privately negotiated transactions or otherwise, in one or more transactions, from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission. The Company is not obligated to purchase any shares under this program and the repurchase authorization may be terminated or amended by the Board at any time prior to the expiration date. No shares have been repurchased under this program.
On April 27, 2023, our board of directors declared the regular second quarter cash dividend of $0.30 per share. The quarterly common stock cash dividend was paid on June 15, 2023 to shareholders of record on June 5, 2023. The Company has paid uninterrupted dividends to its shareholders since 1967.
The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in fiscal year 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our statement of condition or results of operations.
BALANCE SHEET ANALYSIS
Short-Term Investments
Short-term assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. Short-term investments, including interest-bearing bank deposits and federal funds sold, were $674.2 million at June 30, 2023, down $1.6 billion from March 31, 2023 and up $350.1 million from December 31, 2022. Average short-term investments of $931.3 million for the second quarter of 2023 were up $424.7 million from the first quarter of 2023 and up $635.8 million from the fourth quarter of 2022. Typically, the balance of short-term investments will change on a daily basis depending upon movement in customer loan and deposit accounts. The significant linked quarter decline was largely attributable to the repayment of incremental FHLB advances drawn in March of 2023 and held through early May 2023 as a cautionary measure to provide additional on-balance sheet liquidity in response to the disruption in the financial services industry caused by the recent bank failures.
The purpose of the securities portfolio is to increase profitability, mitigate interest rate risk, provide liquidity and comply with regulatory pledging requirements. Our securities portfolio includes securities categorized as available for sale and held to maturity. Available for sale securities are carried at fair value and may be sold prior to maturity. Unrealized gains or losses on available for sale securities, net of deferred taxes, are recorded as accumulated other comprehensive income or loss in stockholders' equity.
Investment in securities totaled $8.2 billion at June 30, 2023, down $195.0 million from March 31, 2023 and $212.9 million from December 31, 2022. The decrease from both comparative periods reflects net payoffs and paydowns, part of a strategic decision to allow cash inflows from the securities portfolio to fund loan growth. The decrease from March 31, 2023 also reflects $69.2 million unfavorable market valuation adjustment. The decrease from December 31, 2022 was partially offset by a $36.3 million favorable market valuation adjustment on the available for sale portfolio.
At June 30, 2023, securities available for sale totaled $5.4 billion and securities held to maturity totaled $2.8 billion.
Our securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies. We invest only in high quality investment grade securities with a targeted portfolio effective duration generally between two and five and a half years. At June 30, 2023, the average expected maturity of the portfolio was 6.04 years with an effective duration of 4.71 years and a nominal weighted-average yield of 2.32%. Under an immediate, parallel rate shock of 100 bps and 200 bps, the effective durations would be 4.66 and 4.60 years, respectively. At December 31, 2022, the average expected maturity of the portfolio was 6.02 years with an effective duration of 4.87 years and a nominal weighted-average yield of 2.27%. The changes in expected maturity, effective duration, and nominal weighted-average yield were largely the result of maturities, paydowns and the impact from the termination of fair value hedges on available for sale securities. At June 30, 2023, approximately $560 million of our available for sale securities are hedged with $514 million in fair value hedges in order to provide protection and flexibility to reposition and/or reprice the portfolio in a rising interest rate environment, effectively reducing the duration (market price risk) on the hedged securities. Our strategy in the near term will be to utilize the securities portfolio cash flow to fund loan growth and monitor our hedge positions to adjust interest rate sensitivity.
At the end of each reporting period, we evaluate the securities portfolio for credit loss. Based on our assessments, expected credit loss was not material for any period presented, and therefore no allowance for credit loss was recorded.
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Total loans at June 30, 2023 were $23.8 billion, up $385.4 million, or 2%, compared to March 31, 2023, and $675.8 million, or 3%, from December 31, 2022. New loans and fewer paydowns contributed to the growth, with residential mortgage and commercial and industrial portfolios driving the linked quarter growth, and residential mortgage, income-producing commercial real estate and construction portfolios driving the change since year end.
The following table shows the composition of our loan portfolio at each date indicated:
Total loans:
10,013,482
9,905,427
3,050,748
3,033,133
13,064,230
12,938,560
3,758,455
3,686,540
1,726,916
1,541,257
3,329,793
2,843,723
1,525,129
1,575,505
Commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $13.2 billion, or 55% of the total loan portfolio, at June 30, 2023, up $108.5 million, or 1%, from March 31, 2023 and virtually flat compared to December 31, 2022.
The Bank lends mainly to middle market and smaller commercial entities, although it participates in larger shared credit loan facilities. Shared national credits funded at June 30, 2023 totaled approximately $2.8 billion, or 12% of total loans, an increase of $86.0 million compared to the prior quarter and $76.9 million compared to December 31, 2022. At June 30, 2023, approximately $450 million of our shared national credits were with healthcare-related customers, with the remainder in commercial real estate, finance and insurance, and other diverse industries
Our loan portfolio is well diversified by product, client, and geography throughout our footprint. Nevertheless, we may be exposed to certain concentrations of credit risk which exist in relation to different borrowers or groups of borrowers, specific types of collateral, industries, loan products, or regions. The following table provides detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes for all industries, with the exception of energy, which is based on the borrower’s source of revenue (i.e. a manufacturer whose income is derived from energy-related business is reported as energy).
Pct of
( $ in thousands )
Commercial & industrial loans:
Health care and social assistance
1,454,716
1,398,300
1,407,960
1,420,861
1,296,666
Real estate and rental and leasing
1,249,557
1,368,460
1,520,955
1,483,937
1,460,694
Retail trade
1,250,708
1,238,090
1,218,784
1,162,095
1,136,244
Manufacturing
1,143,417
1,149,578
1,145,947
1,123,087
1,046,900
1,052,386
1,025,582
1,034,860
1,021,365
1,047,686
Wholesale trade
1,064,342
999,258
997,930
1,001,960
999,589
Finance and insurance
925,639
914,033
966,683
981,823
914,570
Transportation and warehousing
902,181
852,153
872,234
856,599
837,701
Professional, scientific, and technical services
768,863
732,068
706,430
696,855
653,555
Accommodation, food services and entertainment
714,463
677,488
637,942
669,063
702,313
Public administration
489,503
507,291
542,698
556,938
570,069
Information
417,465
407,754
386,568
332,230
315,071
Other services (except public administration)
393,319
387,396
396,629
405,724
403,874
Admin, Support, Waste Mgmt, Remediation Services
348,540
326,667
314,921
244,399
262,326
Educational services
264,377
282,488
298,126
268,392
280,377
Energy
222,603
227,171
242,076
246,344
246,961
510,682
570,453
488,768
466,888
434,970
Total commercial & industrial loans
57
Commercial real estate – income producing loans totaled approximately $3.8 billion at June 30, 2023, virtually flat compared to March 31, 2023 and up $201.4 million, or 6%, from December 31, 2022. Construction and land development loans totaled approximately $1.8 billion at June 30, 2023, up $41.3 million, or 2%, from March 31, 2023 and $64.7 million, or 4%, from December 31, 2022. The increase from December 31, 2022 in the commercial real estate – income producing loans was largely the result of completed construction projects moving to permanent financing, with the shift from construction largely offset by continued funding on existing lines. We are continuing to limit our growth in income producing real estate with a focus on resilient projects given the current economic environment. The following table details the end-of-period aggregated commercial real estate – income producing and construction loan balances by property type. Loans reflected in 1-4 family residential construction include both loans to construction builders as well as single family borrowers.
Commercial real estate - income producing and construction loans:
Multifamily
1,087,984
1,017,351
870,869
872,944
776,723
Healthcare related properties
844,304
865,414
854,563
851,998
879,474
Retail
822,134
802,220
811,990
803,300
780,454
Industrial
698,409
677,907
613,149
602,739
573,993
Office
555,080
561,248
569,452
585,614
569,055
1-4 family residential construction
593,238
623,293
602,867
588,122
548,286
Hotel/motel and restaurants
448,362
475,377
485,865
453,847
448,949
Other land loans
219,398
219,192
213,159
222,723
221,905
261,771
243,369
242,669
246,510
251,131
Total commercial real estate - income producing and construction loans
5,530,680
5,485,371
5,264,583
5,227,797
5,049,970
The residential mortgage loan portfolio totaled $3.6 billion at June 30, 2023, up $251.7 million, or 8%, from March 31, 2023 and $488.9 million, or 16%, from December 31, 2022. Growth in residential mortgage includes a combination of completed construction loans converting to permanent financing as well new loan growth.
The consumer loan portfolio totaled $1.5 billion at June 30, 2023, down $20.2 million, or 1%, from March 31, 2023 and $72.4 million, or 5%, from December 31, 2022. Changes in the consumer loan portfolio balance include the impact of our exit from the indirect automobile lending market, where the existing portfolio is in run-off.
Management expects the 2023 loan growth percentage to be in the range of low to mid-single digits from the December 31, 2022 balance of $23.1 billion.
58
Allowance for Credit Losses and Asset Quality
The Company's allowance for credit losses was $345.7 million at June 30, 2023, up $4.3 million from $341.4 million at March 31, 2023, and $4.6 million from $341.1 million at December 31, 2022. The $4.3 million linked-quarter increase in the allowance for credit losses is attributable to $3.4 million of net charge-offs and a provision for credit losses of $7.6 million, reflective of loan growth, higher individually evaluated reserves on our nonaccrual portfolio and a relatively consistent credit loss outlook on the portfolio as a whole. Uncertainty related to inflationary pressure and the outcome of the Federal Reserve’s monetary policy continues to result in an elevated reserve relative to pre-pandemic levels. After considering the variables underlying each of the Moody's economic scenarios, management weighed the baseline scenario at 40%, the downside S-2 mild recessionary scenario at 60% in the computation of the allowance for credit losses at June 30, 2023. Each of the scenarios utilized have varying degrees of severity and duration of inflationary pressure, including volatility in commodities prices stemming from geopolitical unrest, the consequences of the Federal Reserve's actions with regard to monetary policy, and the ultimate effects of recent disruption in the financial services industry on credit trends. Refer to the Economic Outlook section of this discussion and analysis for further information on the Moody’s scenarios and our weighting assumptions.
Our allowance for credit loss coverage to total loans was 1.45% at June 30, 2023, virtually unchanged compared to 1.46% at March 31, 2023. The allowance for credit losses on the commercial portfolio was up $2.6 million at $280.6 million, or 1.50% of that portfolio, at June 30, 2023, compared to the March 31, 2023 allowance of $278.0 million, or 1.50%, reflecting stable credit performance. Our residential mortgage allowance for credit loss increased modestly to $36.6 million, 1.02% of that portfolio at June 30, 2023, compared to $34.6 million, or 1.04%, at March 31, 2023, due largely to growth in the portfolio. Our allowance for credit losses on the consumer portfolio was $28.4 million, or 1.89% at June 30, 2023, compared to $28.8 million, or 1.89%, at March 31, 2023. The $4.6 million increase in the allowance for credit loss compared to December 31, 2022 is largely related to loan growth and higher individually evaluated loan reserves on our nonaccrual portfolio, with modest improvement in the economic outlook, resulting in a decline in coverage to total loans from 1.48% to 1.45%.
Criticized commercial loans totaled $302.2 million at June 30, 2023, up $6.7 million, or 2%, from $295.5 million at March 31, 2023 and was virtually unchanged from $301.9 million at December 31, 2022. Criticized loans are defined as those having potential weaknesses that deserve management’s close attention (risk-rated as special mention, substandard and doubtful), including both accruing and nonaccruing loans. The Company routinely assesses the ratings of loans in its portfolio through an established and comprehensive portfolio management process. In addition, the Company often reviews portfolios of loans to determine if there are areas of risk not specifically identified in its loan by loan approach. Criticized commercial loans comprised 1.62% of that portfolio at June 30, 2023, up from 1.59% at March 31, 2023, but down from 1.64% at December 31, 2022, and remain near historically low levels. Our criticized commercial loans at June 30, 2023 are diversified across many industries, with the largest concentrations being construction, totaling $73.4 million; manufacturing, totaling $40.5 million; wholesale trade, totaling $37.3 million; and accommodation, food services and entertainment, totaling $27.8 million. Commercial loans risk rated pass-watch totaled $419.3 million at June 30, 2023, down $36.7 million from $456.0 million at March 31, 2023, and $38.3 million from $457.6 million at December 31, 2022. The pass-watch risk rating includes credits with negative performance trends that reflect sufficient risk to cause concern, but have not risen to the level of criticized.
Net charge-offs were $3.4 million, or 0.06% of average total loans on an annualized basis in the second quarter of 2023, compared to $5.7 million, or 0.10% of average total loans in the first quarter of 2023. Our commercial portfolio had net charge-offs of $1.2 million in the second quarter of 2023, compared to $3.4 million in the first quarter of 2023. Our residential mortgage portfolio had net recoveries of $0.3 million compared to $0.2 million in the first quarter of 2023. Consumer net charge-offs were $2.4 million in the second quarter of 2023 compared to $2.5 million in the first quarter of 2023. For the first six months of 2023, net charge-offs totaled $9.1 million, or 0.08% of average total loans on an annualized basis, compared to a net recovery of $0.4 million in the first six months of 2022. Results for the first half of 2023 reflect a decline in commercial recoveries to more normalized levels.
The following table sets forth activity in the allowance for credit losses for the periods indicated:
Provision and Allowance for Credit Losses
Allowance for loan losses at beginning of period
309,385
317,843
Loans charged-off:
Commercial non real estate
2,975
4,528
1,088
3,747
Commercial real estate - owner-occupied
857
Total commercial & industrial
1,945
4,604
1,062
1,066
Total commercial
3,059
4,589
3,010
7,648
5,673
60
3,549
3,363
2,947
5,627
Total charge-offs
6,616
7,972
5,975
14,588
11,360
Recoveries of loans previously charged-off:
1,661
1,033
4,461
195
1,816
1,228
4,563
1,826
1,234
4,621
3,060
8,098
299
181
466
1,115
838
1,574
Total recoveries
3,240
2,253
6,661
Total net charge-offs
3,376
5,719
(686
9,095
(367
Provision for loan losses
8,487
7,315
(10,354
Allowance for loan losses at end of period
Reserve for Unfunded Lending Commitments:
Reserve for unfunded lending commitments at beginning of period
32,014
30,710
Provision for losses on unfunded lending commitments
(854
(1,295
593
Reserve for unfunded lending commitments at end of period
Total Allowance for Credit Losses
341,399
Total Provision for Credit Losses
Coverage Ratios:
Allowance for loan losses to period-end loans
Allowance for credit losses to period-end loans
Charge-offs ratios:
Gross charge-offs to average loans
0.14
Recoveries to average loans
0.12
Net charge-offs to average loans
Net Charge-offs to average loans by portfolio
(0.14
(0.06
(0.02
(0.03
0.03
(0.08
(0.04
(0.07
0.64
0.66
0.35
0.65
The following table sets forth for the periods indicated nonaccrual loans and loans modified or restructured, by type, and foreclosed and surplus ORE and other foreclosed assets. The table also includes loans past due 90 days or more and still accruing.
Loans accounted for on a nonaccrual basis:
39,361
12,378
3,078
3,563
3,600
Commercial non-real estate - modified/restructured (a)
924
942
965
1,230
Total commercial non-real estate
13,302
4,830
1,709
1,233
2,009
Commercial real estate - owner-occupied - modified/restructured (a)
684
Total commercial real estate - owner-occupied
2,393
2,237
1,501
1,814
1,842
Commercial real estate - income producing - modified/restructured (a)
66
74
Total commercial real estate - income producing
1,916
340
306
349
676
Construction and land development - modified/restructured (a)
Total construction and land development
353
680
30,110
23,946
22,753
18,649
Residential mortgage - modified/restructured (a)
1,323
1,530
1,713
Total residential mortgage
24,283
20,362
6,698
6,646
6,476
7,885
Consumer - modified/restructured (a)
Total consumer
6,523
Total nonaccrual loans
54,344
39,807
38,066
ORE and foreclosed assets
1,976
2,085
3,467
Total nonaccrual loans and ORE and foreclosed assets
80,394
56,320
41,008
41,892
41,533
Modified/Restructured loans - still accruing (a):
1,010
307
316
114
116
1,018
1,142
469
479
Total Modified/restructured loans - still accruing (a)
1,907
1,925
2,492
Total reportable modified loans (a)
2,592
1,618
Total troubled debt restructured loans (a)
4,515
4,768
5,741
Loans 90 days past due still accruing
13,155
2,600
4,697
Ratios:
Nonaccrual loans to total loans
Nonaccrual loans plus ORE and foreclosed assets to loans plus ORE and foreclosed assets
0.34
0.24
0.19
Allowance for loan losses to nonaccrual loans
402.07
569.31
789.38
769.00
809.58
Allowance for loan losses to nonaccrual loans and accruing loans 90 days past due
366.67
458.35
706.33
721.85
720.66
Loans 90 days past due still accruing to loans
Nonaccrual loans plus ORE and foreclosed assets totaled $80.4 million at June 30, 2023, up $24.1 million compared to March 31, 2023 and $39.4 million from December 31, 2022. Nonaccrual loans of $78.2 million increased $23.9 million compared to March 31, 2023 and $39.2 million compared to December 31, 2022, and remains at a relatively low percentage of the total portfolio at 0.33%. The increase in nonaccrual loans compared to both periods was largely attributable to the downgrade of a single credit. ORE and foreclosed assets were $2.2 million at June 30, 2023, relatively flat to both March 31, 2023 and December 31, 2022. Nonaccrual loans plus ORE and other foreclosed assets as a percentage of total loans, ORE and other foreclosed assets was 0.34% at June 30, 2023, up 10 bps compared to March 31, 2023 and 16 bps from December 31, 2022.
We expect to continue to see low to modest charge-offs and provision for credit losses for the remainder of 2023. Loan growth, portfolio mix, asset quality metrics and future assumptions in economic forecasts will drive the level of credit loss reserves.
Deposits provide the most significant source of funding for our interest earning assets. Generally, our ability to compete for market share depends on our deposit pricing and our wide range of products and services that are focused on customer needs. We offer high-quality banking services with convenient delivery channels, including online and mobile banking. We provide specialized services to our commercial customers to promote commercial deposit growth. These services include treasury management, industry expertise and lockbox services. Since early 2020, deposit levels have also been influenced by pandemic-driven factors, such as inflows from government stimulus payments, deposits related to funding PPP loans into business checking accounts and a slowdown in customer spending during the height of the pandemic. In late 2022, we began to see outflows of some of the deposit bases built over the preceding two years, as spending levels have increased amid inflationary conditions and an increase in competition for deposits, though deposits remain above pre-pandemic levels.
The failures of three large U.S. banks in the first half of 2023 has created disruption in the financial services industry. While many factors played a role in the ultimate failures, these institutions had significant industry/demographic concentration within their deposit bases and a high ratio of uninsured deposits. Lack of diversity in concentration within a deposit base may increase the risk of events or trends that could prompt a larger-scale demand for deposits outflow. Concerns over a financial institution's ability to protect deposit balances in excess of the federally insured limit may increase the risk of a deposit run. We consider our deposit base to be seasoned, stable and well-diversified. We also offer our customers an insured cash sweep product (ICS) that allows customers to insure deposits above FDIC insured limits. We have seen increased demand for the ICS product following the recent bank failures, with the balance totaling $220.9 million at June 30, 2023, compared to $111.4 million at March 31, 2023 and $12.2 million at December 31, 2022. At June 30, 2023, we have calculated our average deposit account size by dividing period-end deposits by the population of accounts with balances to be approximately $38,400, which includes $199,100 in our commercial and small business lines (excluding public funds), $132,300 in our wealth management business line, and $18,400 in our consumer business line.
Further, at June 30, 2023, our sources of liquidity exceed uninsured deposits. We have estimated the Bank’s amount of uninsured deposits using the methodologies and assumptions required for FDIC regulatory reporting to be approximately $13.6 billion at June 30, 2023, down from $14.2 billion at March 31, 2023 and $14.7 billion at December 31, 2022. Approximately half of the linked quarter decline in uninsured deposits is related to the reduction of an intercompany deposit balance. Our uninsured deposit total at June 30, 2023 includes approximately $3.3 billion of public funds that have pledged securities as collateral, leaving $10.3 billion of noncollateralized, uninsured deposits compared to total liquidity of $18.5 billion. Our ratio of noncollateralized, uninsured deposits to total deposits was approximately 34.4% at June 30, 2023, compared to 36.2% at March 31, 2023 and 37.9% at December 31, 2022.
Total deposits were $30.0 billion at June 30, 2023, up $430.4 million, or 1%, from March 31, 2023 and $973.2 million, or 3%, from December 31, 2022. Average deposits for the second quarter of 2023 were $29.4 billion, up $580.0 million, or 2%, from the first quarter of 2023.
The following table shows the composition of our deposits at each date indicated.
Interest-bearing retail transaction and savings deposits
10,455,175
10,682,568
10,757,495
10,924,309
11,359,561
Interest-bearing public fund deposits:
Public fund transaction and savings deposits
2,828,301
2,987,565
3,132,828
2,737,074
2,832,720
Public fund time deposits
97,130
98,644
111,397
59,288
50,943
Total interest-bearing public fund deposits
2,925,431
3,086,209
3,244,225
2,796,362
2,883,663
Retail time deposits
3,328,577
2,411,765
1,418,596
934,866
937,676
Brokered time deposits
572,501
4,920
9,190
16,753,043
14,660,457
15,190,090
Noninterest-bearing demand deposits were $12.2 billion at June 30, 2023, down $688.2 million, or 5%, from March 31, 2023 and $1.5 billion, or 11%, from December 31, 2022. The declines from both comparative periods reflect both the continued shift to interest-bearing products, particularly retail time deposits, amid the rising interest rate environment and typical seasonal outflows of public funds deposits. Noninterest-bearing demand deposits comprised 40% of total deposits at June 30, 2023, 43% at March 31, 2023 and 47% at December 31, 2022.
62
Interest-bearing transaction and savings accounts of $10.5 billion at June 30, 2023 were down $227.4 million, or 2%, from March 31, 2023 and $302.3 million, or 3%, from December 31, 2022. Interest-bearing public fund deposits totaled $2.9 billion at June 30, 2023, down $160.8 million, or 5%, from March 31, 2023 and $318.8 million, or 10%, from December 31, 2022. The decrease in public funds is mostly reflective of typical seasonal outflows. Retail time deposits totaled $3.3 billion at June 30, 2023, up $916.8 million, or 38%, from March 31, 2023 and $1.9 billion, or 135%, from December 31, 2022. The increase in retail time deposits reflects the continued shift from noninterest-bearing or lower yielding interest-bearing products amid the rising interest rate environment as depositors take advantage of the current rate offerings. Brokered time deposits of $1.2 billion at June 30, 2023 represents the addition of brokered time deposits of $568 million in March and $590 million in May. These instruments are short-term in nature, maturing between December 2023 and May 2024 bear interest plus fees of either 5.35% or 5.45%.
As previously noted, interest rates paid on deposit accounts continued to increase in the second quarter of 2023, particularly on retail time deposits where we have offered promotional rates. The following table sets forth average balances and weighted-average rates paid on deposits for the second and first quarters of 2023 and the second quarter of 2022.
Mix
Interest-bearing deposits:
Interest-bearing transaction deposits
2,355.0
0.74
8.0
2,468.9
2,674.7
0.09
Money market deposits
5,648.8
2.62
19.2
5,497.3
1.80
19.1
5,806.7
19.4
Savings deposits
2,493.7
8.5
2,684.2
9.3
2,957.6
9.9
3,740.3
3.95
12.7
7.0
979.2
Public Funds
10.2
11.0
9.7
17,219.5
58.6
55.0
15,324.2
51.1
Noninterest-bearing demand deposits
12,153.4
41.4
12,963.2
14,655.8
48.9
29,372.9
100.0
28,792.9
29,980.0
The following sets forth the maturities of time certificates of deposit greater than $250,000 at June 30, 2023.
Three months
567,620
Over three months through six months
417,338
Over six months through one year
341,543
Over one year
25,771
1,352,272
Management expects relatively flat or low single digit end of period deposit growth for 2023 compared to the balance of $29.1 billion at December 31, 2022.
Short-Term Borrowings
At June 30, 2023, short-term borrowings totaled $1.6 billion, down $1.9 billion from March 31, 2023 and down $241.7 million, or 13%, from December 31, 2022. The decline from both comparative periods is primarily attributable to FHLB borrowings. The significant linked quarter decline reflects the repayment of incremental borrowings drawn in March 2023 as a cautionary measure to provide additional on-balance sheet liquidity in response to the disruption in the financial services industry caused by the bank failures. FHLB borrowings totaled $1.1 billion at June 30, 2023 and consisted of one fixed-rate advance maturing July 3, 2023. The remaining variance is largely due to changes in customer repurchase agreements discussed below. Average short-term borrowings of $2.4 billion in the second quarter of 2023 were up $288.0 million, or 14%, from the first quarter of 2023 and up $810.8 million, or 51%, from the fourth quarter of 2022.
Short-term borrowings are a core portion of the Company’s funding strategy and can fluctuate depending on our funding needs and the sources utilized. Customer repurchase agreements and FHLB borrowings are the major sources of short-term borrowings. Customer repurchase agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, amounts available will vary. FHLB borrowings are funds from the Federal Home Loan Bank that are collateralized by certain residential mortgage and commercial real estate loans included in the Bank’s loan portfolio, subject to specific criteria.
63
Long-Term Debt
Long-term debt totaled $236.2 million at June 30, 2023, down $5.9 million, or 2%, from March 31, 2023 and down $5.8 million, or 2%, from December 31, 2022.
Long-term debt at June 30, 2023 includes subordinated notes payable with an aggregate principal amount of $172.5 million, a stated maturity of June 15, 2060, and a fixed rate of 6.25% per annum that qualify as Tier 2 capital of certain regulatory capital ratios. Subject to prior approval by the Federal Reserve, the Company may redeem these notes in whole or in part on any of its quarterly interest payment dates after June 15, 2025.
OFF-BALANCE SHEET ARRANGEMENTS
Loan Commitments and Letters of Credit
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.
The contract amounts of these instruments reflect our exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. At June 30, 2023, the Company had a reserve for unfunded lending commitments totaling $31.2 million.
The following table shows the commitments to extend credit and letters of credit at June 30, 2023 according to expiration date.
Expiration Date
Less than
1-3
3-5
More than
1 year
years
5 years
3,854,996
2,587,327
2,809,459
831,932
353,507
57,103
28,834
10,523,158
4,208,503
2,644,430
2,838,293
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with those generally practiced within the banking industry which require management to make estimates and assumptions about future events. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 14 to our consolidated financial statements included elsewhere in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s net income is materially dependent upon net interest income. The Company’s primary market risk is interest rate risk which stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect financial products and services. In order to manage the exposures to interest rate risk, management measures the sensitivity of net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying interest rate environments.
The following table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in rates at June 30, 2023. Shifts are measured in 100 basis point increments in a range from -500 to +500 basis points from base case, with -300 through +300 basis points presented in the table below. Our interest rate sensitivity modeling incorporates a number of assumptions including loan and deposit repricing characteristics, the rate of loan prepayments and other factors such as loan floors and the impact of off-balance sheet hedges. The base scenario assumes that the current interest rate environment is held constant over a 24-month forecast period and is the scenario to which all others are compared in order to measure the change in net interest income. Policy limits on the change in net interest income under a variety of interest rate scenarios are approved by the Board of Directors. All policy scenarios assume a static volume forecast where the balance sheet is held constant, although other scenarios are modeled.
Estimated Increase
(Decrease) in NII
Change in Interest Rates
Year 1
Year 2
(basis points)
-300
-10.23
-15.42
-200
-6.46
-10.05
-100
-2.90
-4.46
+100
4.22
+200
5.70
8.18
+300
8.37
12.18
The results indicate a general asset sensitivity across most scenarios driven primarily by repricing in variable rate loans and a funding mix which includes a large percentage of noninterest-bearing and lower rate sensitive deposits. As rates have risen over the past year, the funding mix has experienced a shift to more rate sensitive deposit and wholesale funding which has resulted in a lower net interest income at risk measurements compared to recent years. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk with on-or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.
Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet and earnings is fluid and would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets such as adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. All of these factors are considered in monitoring exposure to interest rate risk.
LIBOR Transition
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR). In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. The Company discontinued the use of LIBOR for new contracts after December 31, 2021, with limited exceptions as permitted by regulatory guidance and internal policy.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee (ARRC)) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate (SOFR) as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. Further, the Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the SOFR for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules. In addition, where fallback language allows the Bank to select a benchmark rate, the statutory framework grants the authority to select the Board-selected benchmark replacement as the benchmark replacement, including the safe harbor provisions that, among other things, generally provide that such selection or use will not discharge or excuse performance under, give any person the right to unilaterally terminate or suspend performance under, or constitute a breach, of the contract.
The Bank has adopted several replacement benchmarks to use in place of LIBOR benchmark rates, including Chicago Mercantile Exchange Inc. (CME) Term SOFR, FRB-NY SOFR and AMERIBOR as the primary rates. The replacement benchmark rates adopted by the Bank have been affirmed to comply with the 19 principles set forth by the International Organization of Securities Commissions (IOSCO) for Financial Benchmarks, and it further provides the Bank confidence these replacement benchmarks are based on transparent, market-based transactions. The Bank began using these replacement benchmarks towards the end of the third quarter of 2021. In the first half of 2023, the Company converted all of its LIBOR based cash flow hedges to SOFR and replaced the variable rate loan pools with SOFR based instruments, with limited financial impact or cost.
Effective July 3, 2023, all remaining LIBOR instruments were transitioned in accordance with the statutory framework established by the Federal Reserve with no material financial impact. While we have not had any material issues to-date, the discontinuance of LIBOR could result in customer uncertainty and disputes arising as a consequence of the transition, and could result in damage to our reputation and loss of customers.
Item 4. Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2023, the Company’s disclosure controls and procedures were effective.
Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, including subsidiaries, is party to various legal proceedings arising in the ordinary course of business. We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, in evaluating an investment in the Company’s securities, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our 2022 Form 10-K, and as disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, which could materially affect the Company's business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.
There are no material changes during the period covered by this Report to the risk factors previously disclosed in our 2022 Form 10-K or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company has in place a Board approved stock buyback program whereby the Company is authorized to repurchase up to 4.3 million shares of its common stock through the program’s expiration date of December 31, 2024. The program allows the Company to repurchase its common shares in the open market, by block purchase, through accelerated share repurchase programs, in privately negotiated transactions, or otherwise, in one or more transactions. Following is a summary of repurchases during the three months ended June 30, 2023.
Total number of shares or units purchased
Average price paid per share
Total number of shares purchased as part of a publicly announced plan or program
Maximum number of shares that may yet be purchased under such plans or programs
April 1, 2023 - April 30, 2023
4,297,000
May 1, 2023 - May 31, 2023
June 1, 2023 - June 30, 2023
Item 5. Other Information
Pursuant to Item 408(a) of Regulation S-K, none of the Company's directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023.
Item 6. Exhibits
(a) Exhibits:
Exhibit Number
Filed Herewith
Form
Exhibit
Filing Date
Second Amended and Restated Articles of Hancock Whitney Corporation
8-K
5/1/2020
3.2
Second Amended and Restated Bylaws of Hancock Whitney Corporation
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
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File
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.
By:
/s/ John M. Hairston
John M. Hairston
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Michael M. Achary
Michael M. Achary
Senior Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
August 4, 2023