Hancock Whitney Corp

NASDAQ:HWC

Earnings Call Transcript 2022-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct the question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded.

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

[Trisha Carlson, IR Manager]

Thank you, and good afternoon.

During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein.

You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing.

Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results and our actual results and performance could differ materially from those set forth in our forward-looking statements.

Hancock Whitney undertakes no obligation to update or revise any forward-looking statement, and you are cautioned not to place undue reliance on such forward-looking statements. Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.

Participating in today's call are John Hairston, President and CEO; Mike Achary, CFO; and Chris Ziluca, Chief Credit Officer.

I will now turn the call over to John Hairston.

[John Hairston, President and CEO]

Good afternoon, everyone, and thank you for joining us late in the day. Today's results reflect one of the highest performing quarters in the history of our company. Results were straightforward with no noise, just another solid quarter. EPS of $1.55 was up $0.17 linked quarter with net income up $14 million and PPNR of $28 million. Similar to last quarter, loan growth exceeded our expectations ending the quarter with $22.6 billion, up $739.5 million or 14% linked quarter annualized.

As noted on Slide 6, the growth was across our footprint and across all lines of business reflecting fewer payoffs and higher line utilization. Loan growth in the quarter was partially funded by the remaining excess liquidity on our balance sheet. This shift in earning asset mix coupled with the most recent Fed rate increases, drove a 50 basis point widening in our net interest margin.

Our asset quality metrics remain near historically low levels, with net charge-offs of only $1.3 million. Criticized loans up only slightly and non-performing loans basically unchanged linked quarter. We booked a provision of $1.4 million this quarter and continue to report a strong reserve at 1.50%.

Last quarter, we exceeded our goal of getting under a 55% efficiency ratio. And this quarter, the team delivered an impressive improvement to 51.6%, which we believe is the best in our company's history. Rates helped drive the revenue component of the measure and will offset the slight increase in personnel-related expenses, with additional rate hikes projected in November and December we have an opportunity to report an efficiency ratio of 50% or better perhaps in the fourth quarter.

Overall, our capital remains solid with leverage up 59 basis points, CET1 up 4 basis points and total risk-based capital was stable. The rate environment once again impacted our AOCI and was the main driver of the 48 basis point decline in TCE. Our top capital priority continues to be earnings support for the common dividend and organic balance sheet growth.

We are mindful of macroeconomic events and trends which may impact us. Today, we believe we are well positioned for those possibilities. Our balance sheet has natural hedges to absorb interest rate volatility and should a recessionary period begin, we entered with excellent asset quality, a strong ACL, solid capital and a diverse loan portfolio. We have a great deal of momentum both in core banking and improving efficiency, effectiveness and positioning the company for organic growth.

Technology innovation continues and is impactful to our improvement priorities. Coupled with today's results, we hope you see a company focused on improving shareholder value.

With that, we'll turn to Mike for further comments.

[Michael Achary, CFO]

Thanks, John, and good afternoon, everyone. As John mentioned, this was one of the best quarters in our company's history, and we are very pleased with the results. EPS for the quarter was $1.55. PPNR was up 19%, ROA at 1.56%, ROTCE above 20%, NIM over 3.5% and good stable asset quality with no significant issues.

I'll begin my comments with the balance sheet. During the quarter, we grew loans $740 million, added $98 million to the bond portfolio and funded $915 million of deposit runoff. We started the third quarter with about $871 million of excess liquidity. So to fund our earning asset growth and deposit runoff, we did increase our FHLB borrowings, $800 million net of $200 million of advances that were called earlier in the quarter.

But while we did see a greater-than-expected decline in deposits, our mix remains best-in-class. About 1/4 of the decline was in DDA and primarily due to continued spending and deployment of excess liquidity by our customers. Another 1/4 of the decline was related to seasonality in our public fund book with the balance of the runoff in interest-bearing deposits and related to consumer spending and higher rates.

Going forward, our expectation in the fourth quarter is to fund the guided loan growth of $200 million to $450 million with seasonal deposit growth.

Fees and expenses, I think, are self-explanatory with nothing especially remarkable. I will call out that the quarter's expense growth of $6.4 million, most was related to higher incentive compensation and also higher spend related to ongoing technology projects.

Our third quarter NIM was up a very impressive 50 basis points from last quarter and came in at 3.54%. We expect the NIM will continue to widen as rate increases albeit at a slower pace going forward. As we've said before, given our current level of asset sensitivity and current low deposit betas, the NIM responds very quickly to large and frequent rate hikes such as those we've seen recently. Stability in our core deposit mix, especially DDAs, was helpful as well.

With our loan book at 58% variable, we continue to be modestly asset sensitive. And certainly, with both the frequency and magnitude of the recent Fed rate hikes, you see that asset sensitivity reflected in the third quarter NIM expansion. Most of our variable loans reprice with 30-day LIBOR and will react quickly to rate hikes but a growing level are also now tied to SOFR and Ameribor.

Slides 13 and 18 in the earnings deck provide a pretty good road map of how we expect to be impacted by rising rates. Our September NIM came in at 3.62%. And so with the 150 basis points of rate hikes projected through the December Fed meeting, we're guiding for 2 to 3 basis points of NIM expansion for every 25 basis points of rate hikes.

Applying the math gives us a potential fourth quarter NIM between 3.74% and 3.8%, allowing that a lot of this is hard to predict, the assumptions that can materially move the needle or around deposit mix and betas and our ability to fund most of the projected loan growth with our expected seasonal fourth quarter deposit increases.

Our cost of deposits for the third quarter was 18 basis points, up only 11 basis points linked quarter. That's a total deposit beta of 8% for the quarter and about 6% cycle to date. We expect deposit costs to be up meaningfully in the fourth quarter and could see a fourth quarter deposit beta in the 16% to 17% range. That translates into a cost of deposits of around the range of mid-40 basis points.

Overall, for the cycle, we continue to believe that we should do no worse than the 25% we saw with the last upgrade cycle and certainly hope to beat that level. During our meetings with many of you in the past quarter, we were asked about 2023 and also about updating our CSOs. As per our normal practice, we'll provide guidance for 2023 as well as updated CSOs on the fourth quarter earnings call in January.

Our guidance essentially for the fourth quarter of 2022 is on Slide 17 of the earnings deck and starts with Fed funds at the current level of 3.25%. Again, we're assuming 275 basis point hikes in November and then December to arrive at 4.75 by the end of 2022.

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

[John Hairston, President and CEO]

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

[Operator]

[Operator Instructions] The first question comes from Jennifer Demba from Truist Securities. Your line is open.

[Jennifer Demba, Truist Securities]

Thank you, good afternoon. Question on -- you noted loan growth is likely to be slower in the fourth quarter. Are you seeing any slowdown in demand here in October? Or are you just assuming -- are you just kind of being more selective with your loans at this point?

[John Hairston, President and CEO]

A little bit of a blend of both, Jennifer. I think one item just for transparency sake, is we did have about a $75-million-line utilization or a line draw that occurred literally in the last days of September that we knew would only be around for a couple of weeks or so. So we start out October down to $75 million and have that to make up.

So that's part of the difference. The remainder is a blend of exactly what you said. We are a little bit more selective in the areas of -- in loan segments that typically find themselves under a little more pressure in recessionary periods. We are being a little bit more jaundiced towards.

And then the remainder was a slight compression in the pipeline that began in September, but it doesn't appear to really be because of cash flow issues. It seems to be just more I think the impact of a higher cost of debt and people using their own money for expenditures versus borrowings. And so that's really the purpose of the range being a little lower.

I will also just note the range is a little wider than normally. And that's in the fourth quarter. Typically, we see line utilization increase a bit more in the fourth quarter. This being an unusual period given the slope of the short-term rates going up.

We have a range of what we expect in utilization that was a big driver for the $200 million to $450 million. And then also I don't know what's harder to predict utilization or payoffs because each of the last couple of quarters, we expected more payoffs or paydowns than we received. And the third quarter was incredibly unimpactful from a payoff perspective.

So that's kind of everything that led to the math. There's no estimates in there. It's literally just the math of all our different assumptions and pipeline rolled together to give that $200 million to $450 million. Was that enough information? Or would you care to ask a clarifying point?

[Jennifer Demba, Truist Securities]

That helps a lot. Second question is what's your buyback appetite at this point?

[John Hairston, President and CEO]

Mike, do you want to address that one?

[Michael Achary, CFO]

Yes. Jennifer, this is Mike. So certainly, our buyback appetite continues to remain opportunistic. Certainly, you can see that in the third quarter, we stepped down quite a bit from the 800,000 shares or so that we purchased in the second quarter to just 50,000 in the third quarter. Part of that was it wasn't a disruption in our stock price.

So not as much of an opportunity we thought to buy back shares. But certainly, we're very cognizant of where our TCE ratio is right now. It's not driving the decision on the buyback. But certainly, we're cognizant of that number below 7% and also cognizant of a desire to kind of build capital as we go into next year. So I think all those factors together combined to continue to be opportunistic, but certainly mindful of those factors.

[Jennifer Demba, Truist Securities]

Thanks so much.

[John Hairston, President and CEO]

You bet. Thank you for the questions.

[Operator]

Our next question comes from Catherine Mealor with KBW. Please proceed.

[Catherine Mealor, KBW]

Thanks. Good afternoon.

[John Hairston, President and CEO]

Good afternoon, Catherine.

[Catherine Mealor, KBW]

I want to see if you could just give us updated thoughts on the size of your bond book like there is another quarter where there's a big delta between the end of period balance versus the average balance, which is how we should think about modeling that in the near term?

[Michael Achary, CFO]

Yes, I would certainly use, Catherine, the end of period balance of the bond portfolio came in at about $9.2 billion for the quarter. You might recall that we did buy some bonds, a little bit later in the quarter. So the $9.2 billion is the number to use kind of going forward. And as we've kind of talked about in both the opening comments and in the earnings deck itself, our strategy around the bond book, at least for now, is to keep that level flat at around $9.2 billion going forward.

[Catherine Mealor, KBW]

Got it. Okay. But I'm looking at end of period at 8.3 versus the average at 9.2. Is there something else that's a delta between those 2?

[Michael Achary, CFO]

It might be the unrealized loss in the bond portfolio. That would be the only difference that I could think of.

[Catherine Mealor, KBW]

Got it. That's right. Okay. I'll see that in the footnote. I see it. Got it. Okay. Perfect. And so then my next question is just on the deposit betas. It's just -- it's incredible how low your beta was relative to what we're seeing at some other companies. And I know you mentioned that you think that beta will increase as you move into next quarter.

Just -- if you could just kind of anecdotally about what you're seeing maybe in customer behavior. When you're growing deposits, where are you seeing most of that growth coming from and what the incremental rate of new deposits are. And just kind of give us a little bit of color around where you're going to see most of that increase come from next quarter? Thanks.

[Michael Achary, CFO]

Yes. So as far as the implication of growth next quarter, really, a lot of that is going to come from kind of our normal seasonal inflows of public fund deposits. Typically, we see that level increase in the month of December around $200 million or so.

So again, in terms of how we're thinking about managing the balance sheet, it may be aspirational, but certainly what we'd like to do in the fourth quarter and really going forward is to fund our loan growth with as much deposit growth as we can. And certainly, in the fourth quarter, we have again, the seasonal inflows of deposits that will certainly be helpful, I think, to match off what we think the loan growth will be in the fourth quarter.

As John kind of mentioned, we're looking at a range of $200 million to about $450 million, which we admit is a pretty big range. But certainly, the objective is to match off again, the loan growth with funding from deposits. To do that, we do think that will meaningfully increase our cost of deposits in the fourth quarter as we kind of indicated from the opening remarks.

So the -- there's certainly the cadence and how this is choreographed over the past couple of quarters going into the fourth quarter is pretty much exactly how we thought it would pan out. And certainly, I think we've kind of talked about over the last couple of quarters. So certainly, in the fourth quarter, what we see is a higher cost of deposits. And certainly, deposit betas beginning the process of catching up.

So we have started off pretty low with our deposit betas. But again, we do see those catching up at least somewhat in the fourth quarter to the levels that we kind of talked about.

[Catherine Mealor, KBW]

Great. And one more if I could just stay on the margin topic on loan yields. The loan beta was also really strong this quarter. You mentioned that you think the deposit betas should be similar to last cycle. Any reason to believe the loan beta should be better or worse than last cycle that.

[Michael Achary, CFO]

I think a little bit better. Yes. On the loan beta, we think we'll top out a little bit better. Last cycle, it came in or topped out at about 48% cumulative we think that this cycle will come in the 50% to maybe 52% range. So certainly a little bit better.

And then on the deposit side, as we've indicated, we think we'll do no worse than last time at 25% and certainly strive to do better.

[Catherine Mealor, KBW]

Great. Thank you.

[Operator]

Our next question comes from Michael Rose with Raymond James. Your line is open.

[Michael Rose, Raymond James]

Thanks for taking my questions. You called out an increase. I know it's small in criticized balances, but then I didn't see much color on there. Can you just give some color just more broadly, are there any sort of asset classes or loan categories that you're maybe getting a little bit more cautious on it for some banks that are pulling back in construction lending, anything like that at this point? Thanks.

[Christopher Ziluca, Chief Credit Officer]

Michael, it's Chris Ziluca. Yes, we -- obviously, leading into the pandemic, we spent a lot of time kind of scrubbing our portfolio because that created a lot of uncertainty that turned out okay. But we've built a lot of routines around that. And what we've been seeing is because of the inflationary pressures, some of our customers had increased cost and labor costs. And as you pointed out, in the contractor space, it's an area that we've kind of narrowed our focus on to be a bit more careful about.

That's really the primary driver is some of the increased cost to operate that's creating some margin pressure for certain customers. But other than that, we're really just being a little bit more cautious about what might be pressure sectors in a recessionary environment at this point.

[Michael Rose, Raymond James]

Okay. Maybe just a follow-up on that. It looks like you're only using a 25% weighting towards, I think, the -- I don't have it in front of me, the baseline scenario now 75% towards kind of slower growth. I guess from a -- you guys have a very healthy reserve. Would you expect to grow that, assuming that the backdrop continues to soften here? I would think that you would?

[John Hairston, President and CEO]

You want to start that, Mike?

[Michael Achary, CFO]

Yes. Mike, this is Mike. And yes, you're correct. As far as the macroeconomic assumptions that we're currently using in our ACL model, we're at 25% baseline, 75% S2, which is the slower growth scenario. And actually, that mix of scenarios is exactly the same that we used in the second quarter.

So that hasn't changed. And how we think about that on a go-forward basis obviously, depends on a lot of factors. Certainly, the most significant of which is where the economy seems to be going as we head into the fourth quarter and next year.

As far as building reserves going forward, I don't know that you'll see a big build in the fourth quarter. And as far as what happens and what we do in 2023, I think certainly depends on the economy. And whether we do have a credit cycle or a recession of some sort. If the latter two happened, then I think it would be reasonable to expect some sort of reserve build as we go through the year, especially if we have obviously loan growth to match that off with.

We'll talk much more about 2023 at next quarter's call in mid-January as we usually do. But this was just a couple of thoughts about the reserve going forward, I think.

[Michael Rose, Raymond James]

Okay, great. Thanks for taking my questions.

[Operator]

Our next question comes from Brett Rabatin with Hovde Group. Please proceed.

[Brett Rabatin, Hovde Group]

Good afternoon, everyone. Wanted to first talk about the guidance and just make sure I understand these numbers and I might be a little rough here. But if I back into the PPNR of 20% growth, I get an efficiency ratio a little higher than the 50% guidance that you're giving. If I get closer to 50% efficiency ratio, the PPNR number goes a little higher than 20%. Is there a way to think about the levers there? And maybe you could talk a little bit about any expense spend you intend to continue on the technology side?

[Michael Achary, CFO]

Yes. Brett, I'll go ahead and start. And with respect to the guidance, what you may be running into is just simply rounding of pretty big numbers as we think about the year as a whole. And again, as that translates into the fourth quarter. So as far as the efficiency ratio is concerned, it does take a whole lot to move that either above or below kind of the 50% to 51% level. But I think certainly, within a respectable range what you kind of recite is accurate. John, do you want to give some thoughts on the technology spend?

[John Hairston, President and CEO]

Sure. It's not a big factor for Q4. But as we've talked about on this call the last year or so, we have continued to invest heavily in technology with the 3 priorities being efficiency, effectiveness and having a less -- or a more frictionless experience for our clients, particularly in the digital space.

This quarter being fourth quarter, we will wrap up the complete uplift of the retail organization that started last year as we've been rolling that different releases of technology out in different geographies. And then move on next year to a fairly significant modernization of our ATMs and digital front office, particularly when it comes to sales and account aggregation on the deposit and the loan side.

So all the tech spend, which has been absorbed through the expense savings that we generated has been fairly benign of an impact on the expense base. And I would expect that to continue. It will be some modest uptick. But right now, all of our expense pressure, it isn’t 100%, but it sort of rounds there is really in personnel, which is, I think, different than any other industry or player in our industry is experiencing.

So the tech upgrades will continue throughout next year and probably beyond just as we continue our quest for more efficiency and effectiveness and to continue having a peer is or better efficiency ratio down the road.

[Brett Rabatin, Hovde Group]

Okay. That's helpful. And then I just want to go back to the deposit beta question again, just kind of given you've been so successful with the deposit costs so far. And obviously, 4Q is going to be a little bit of a catch up. As we think about '23, I'm curious if your thought process is as you continue to need to fund growth that you somewhat cannibalize your low-cost rates with higher pricing or if you think you'll be able to maintain, to some extent, the advantage that you presently have peers in your markets?

[Michael Achary, CFO]

Yes. Brett, I presume that you're talking about our deposit mix primarily. So obviously, where we are now at 49% DDA is certainly enviable and certainly a trait that we're extremely proud of and certainly think that's a hallmark of a core deposit franchise. So we think that as we go through '23, assuming rates continue to track up a bit over the course of the year.

Certainly, we expect to probably see some migration in that mix from the current 49% or so to something a little bit less than that as we kind of go through that rate environment. But at the same time, we are pivoting up this quarter, the fourth quarter to higher deposit rates and certainly think and believe, again, as I mentioned earlier, that we'll be able to complete this cycle with the deposit beta really no worse than we did last time. So hopefully that was helpful.

[Brett Rabatin, Hovde Group]

Okay, I really appreciate the color. Thanks so much.

[Operator]

Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Your line is open.

[Kevin Fitzsimmons, D. A. Davidson]

Good afternoon, everyone. I just want to -- on the deposit level. So it was definitely a large linked quarter decline in deposits and the guide. I appreciate the guide on the seasonality of the public fund deposit coming up. But the decline that you saw in the other deposit categories in the third quarter, I mean, the things that were driving that, are they -- have they simply run its course?

Or is it simply a matter of pricing up? Like you've lagged and now you're going to step up even more and that's going to kind of bring to a halt that level of outflow in those other kind of deposits going forward?

[Michael Achary, CFO]

Yes. Very good question, Kevin, and I'll get started and John can certainly add some color. But again, when we think about the deposit outflows that we had during the third quarter, again, about 1/4 of those were seasonal outflows related to public fund deposits. So completely expected and predicted.

Another quarter or so were in DDA deposits. And again, as John mentioned in his opening remarks, a lot of that was really related to customers spending money and using some of their own working capital in their own businesses and households. But certainly, a little bit less than half of the deposit outflows during the quarter were in interest-bearing deposit categories, whether that's to some extent time, but obviously, mostly money market and savings accounts. And certainly, we think that some of that was rate related. And we think that certainly, some of those deposits that left during the quarter were likely more of the higher rate sensitive type money in customers.

So the pivot in the fourth quarter to higher deposit rates as we've kind of been talking about through the cycle, is really right on queue. And certainly, I think we should do a real good job, and I think will certainly help to retain any more of the rate-sensitive money that remains on our balance sheet. At least that's how we're thinking about the fourth quarter and the reason for the pivot up in deposit rates.

And again, the objective is to fund as much of our quarter's loan growth with deposit growth as we can. And then on an aspirational basis, same thing kind of going forward. So John, anything you want to add to that?

[John Hairston, President and CEO]

I guess the only color I'd add would be -- our -- and I know it seems like it was forever ago that we were in what we would call a normal environment, but our normal loan-to-deposit ratio hovers between 85% and 87%. Our average for 3Q was 76%. So we really have quite a long way to go as we ease our mix and earning asset mix back to, I guess, a more normal mix between the bond portfolio and the loan portfolio.

And so we're not really in a position to have to be a leading rate rising organization and probably won't be for a long while. The guidance that Mike shared earlier around fourth quarter is built around the notion that we want to close the gap a bit between movement in the overall loan book and movement in the overall deposit book. But we will still see the LD ratio continue to increase, which is it's a tailwind for NIM over the next several quarters.

So if you think about it just in terms of puts and takes, the earning asset mix improvement will continue to be beneficial to interest income. And then whatever deposit beta migration we see upward would be the offset to that. And so our intent to preserve as much of that favorable NIM as we can for as long as we can. So hopefully, that color gives you a little bit more theme behind why would do what we're doing and what.

[Kevin Fitzsimmons, D. A. Davidson]

Yes, that's helpful. And I guess with the goal being to fund as much of the loan growth with deposits, it's probably going to be -- that loan to deposit ratio maybe grinds hot doesn't -- it's not going to be in leaps and bounds in the near term, I would suspect.

[John Hairston, President and CEO]

No, we don't want it to be. I mean we'd like it to be a nice, steady migration that's really nothing remarkable.

[Kevin Fitzsimmons, D. A. Davidson]

Got it. Got you. One, in terms of the loan growth that you're looking at going forward and I know mortgage has been more of a source of just putting more mortgages on the balance sheet and makes sense. Is that something you're going to keep doing as much of or a little less going forward? I don't know if you have a certain target of what you want that to be relative to the overall loan book?

[John Hairston, President and CEO]

Yes, good question. And there was a time when we were awash with excess liquidity and portfolio mortgage was a way of deploying that money to help us with support of net interest income. Obviously, we're in a different environment now. So the closing time from authorization of a mortgage credit is -- I guess, has never been any longer than it is right now just as long as it takes appraisals and surveys and what not to happen.

So we would expect the portfolio for mortgage to grow a little more for a quarter or two longer. And then as we get towards the -- either of the second quarter, absolutely by the second half of '23, it'll plan off and may drift downwards a little bit depending on what the rate environment is.

So we would rather grow -- we'd rather grow in credit and will be working hard to do is in revolving credit that's lines only and continue our asset sensitivity for a little while longer. And we can push the sensitivity further with hedging strategies that have been pretty successful so far. So mortgage will play off probably early to mid-next year and then up again to decline a bit over time.

[Kevin Fitzsimmons, D. A. Davidson]

Okay. And one last one on credit. You guys phrased the modest charge-offs and provision in fourth quarter. Is what you had in third quarter, what you would characterize as modest? I know that's difficult, but I'm just trying to get some kind of range around what you view as modest for provisioning. How wide that range could be?

[Christopher Ziluca, Chief Credit Officer]

Yes. This is Chris Ziluca. I mean I guess I'll talk about it in terms of how we did with charge-offs, then Mike can kind of talk about the provisioning element of that. But we don't really have a line of sight to anything significant at this point in time. And obviously, we're really at the beginning of the period.

So it's really hard to say for sure. But if you think about our historic average charge-off levels, we're going to certainly be better than that during the upcoming period or 2. And I just want to remind you as well, I mean we're really at historically low levels in terms of charge-offs, in terms of criticized loan levels and in terms of NPLs. So anything up is going to look more significant even if it's not really that material.

[Michael Achary, CFO]

Yes. And the only thing I would add to that, Kevin, is if you look at the $1.3 million of net charge-offs this quarter, I'd probably categorize that as low. And as far as modest, it would be something a little bit more than $1.2 million. So not to be evasive, but using those kinds of terms are pretty general, but I think you get the picture around what we mean by low and certainly something at the modest level.

As far as the overall provision is concerned, it will depend on all the factors we've already talked about, where our commercial criticized NPLs are, what kind of loan growth we have in any given quarter and really where the economy is as much as anything else. So we'll always strive to at least cover our charge-offs and then put something extra aside to compensate for the quarter's loan growth. And then the delta really just becomes all the other factors that I mentioned. So it's certainly very dynamic. I would describe it that way.

[Kevin Fitzsimmons, D. A. Davidson]

Okay, thanks Mike.

[Michael Achary, CFO]

You bet. Good to hear from you.

[Operator]

Our next question comes from Brad Milsaps. Please proceed.

[Brad Milsaps, Piper Sandler]

Good afternoon. Mike, just maybe a quick follow-up on the balance sheet. You mentioned the FHLB borrowings that you added in the quarter. Can you describe what maybe -- are those all short-term kind of overnight advances? And might you use cash flows from the bond portfolio to pay those off? Or do we need to think about sort of that kind of being a more permanent part of your funding? Just kind of curious how you plan to use the bond portfolio kind of vis-a-vis wholesale funding resources?

[Michael Achary, CFO]

Sure. Absolutely. So as far as the FHLB borrowings that we have on the balance sheet at the end of the quarter, it's right at $1 billion. And actually, instead of pursuing kind of the overnight market, we've kind of termed those out. So they're really in two pieces. The first is $600 million that matures in mid-November. And the second piece is $400 million, and that one matures in mid-December.

And we have both of those priced at a little bit of a discount to the overnight Fed funds rate. So I think going forward, we'll tend to use kind of that structured approach to the short-term borrowings as opposed to just straight overnight. But that's certainly dependent upon where rates go and what our balance sheet needs are in terms of additional funding.

Related to the bond portfolio, again, the guidance that we gave was at least for the foreseeable future, call it, the next couple of quarters, we're looking to keep the size of the bond portfolio kind of flat at the current $9.2 billion. And really two reasons for that, first and foremost, the reinvestment yields right now are certainly very attractive.

And secondly, I mean, we're looking to extend our asset duration and continuing to reinvest in the bond portfolio with fixed rate instruments at those levels is certainly a good way, we think, to do that. So that's kind of how we think about those two items. Hopefully, that was helpful.

[Brad Milsaps, Piper Sandler]

Yes. Thanks Mike. And then just one follow-up. You guys have done an excellent job on expenses this year, and I know you're not prepared to give guidance for '23, but I know you've used a lot of cost savings to fund a lot of investments in technology and lenders. Mike, in your mind, are there still buckets of cost savings that are still out there that you guys might not have tapped into yet? Or do you think you'll sort of be at the mercy, so to speak, of the inflationary environment that we're in, just kind of bigger picture, how you're thinking about expenses going forward.

[Michael Achary, CFO]

Sure, be glad to. So we would certainly prefer to not be at the mercy of inflation going forward. I don't think anybody really would want of the all understand -- yes, I certainly understand the context of your question.

But having said that, look, I think we've talked about this on prior calls a couple of times that really going back a number of years since we put our two companies together, some 12 years or so ago. I think one of the things that we really have institutionalized at our company is this notion of cost control and really making sure that we're getting value for the dollars that we're spending. And certainly, we've done a lot of very hard work over the past couple of years in getting to the company -- or getting the company to the point where we really have become, I think, one of the more efficient banking companies out there.

And certainly, with the tailwind of higher rates, we've been able to push our efficiency ratio down to, we think, pretty impressive levels. So we're not looking to give that back. But having said that, we're certainly cognizant of the need to continue to reinvest in our company. And certainly, we've done that, and we'll continue to do that going forward.

One of the things that we invested in a year or so ago was this notion of strategic procurement. And that is at the point where we think it's paying some nice dividends. And I think those dividends will begin to really grow and become more significant as we go through the next couple of years. So we look at an area like that as a way to kind of continue to cut expenses where that's appropriate to do so, which puts us in a position to take those savings and reinvest them back in the company. So I think that's kind of how we think about that particular item going forward. So John, anything you want to add to that?

[John Hairston, President and CEO]

Yes. I think you explained it well. The only thing I'd add to it is -- like Mike said, we've been playing the same hand of making smart investments to improve our efficiency really for several years. The strategic procurement group really just got online about a quarter or so ago to have an opportunity. And they really don't get to show their value until you have contracts renewing or consolidation opportunities occur. And so that will happen on a full run rate basis for next year and the year after. So we look forward to good news from there.

In addition, I mean, this has been a really terrific year, right? So one of the primary increases in personnel costs for us have been incentives as our bankers have done a terrific job and the back of the house has done a terrific job supporting all that growth and tech rollouts and some incentive pay for this year has been probably the highest we've ever had.

And in a slowing environment that might -- that's not the way we want to save money. But if the environment does slow down a bit next year, it might be a little tougher for the incentive payments to be as big as they were this year. It just depends on the macro.

And then also as our workforce has changed, the ability to harvest occupancy expense reductions through the consolidation of some buildings and the reduction of floors that we have in lease space. Those opportunities will continue to happen over the next year or 2.

And then finally, there's a lot of runway left and improving efficiency from all the technology work that we've done. I mentioned earlier. We're near the end of the retail side. There's a good bit more of that work to do over the next two or three years. And while it may not be a headline, one big, huge quarter where you see big onetime expenses and then lots of savings afterwards.

Every one of those smaller projects yields a reduction in costs that we can invest back in the company or use it to combat some of the inflationary pressure. So I think we still got a fair amount of runway to improve efficiency. And when the rate environment slows down and deposit betas catch up we get to a normalized NIM in that environment that I think harvesting those efficiencies through some of the work we're doing is going to become more important.

And so it's been happening throughout the year, but I think top line revenue kind of seized all the focus, but all the work that's been done so far didn't really get to shine as much as I think it will in the latter part of '23 and '24. Hopefully, I gave you some more context.

[Brad Milsaps, Piper Sandler]

Yes, thank you guys. Appreciate taking question.

[John Hairston, President and CEO]

Sure. You bet.

[Operator]

Thank you. Our follow-up question is from Christopher Marinac with Janney Montgomery Scott. Your line is open.

[Christopher Marinac, Janney Montgomery]

Thanks, good afternoon. And we appreciate you hosting the call. Just wanted to follow up, I guess, on a question a couple of callers ago as it relates to the DDA ratio. When we go back in time to the '16 to '19 time frame, the DDA ratio was a lot lower. Is it possible that it gets back into that high 30s, Mike? Is there anything structural that's kind of keeping you from going back to where it would have been kind of pre-COVID? Just want to get a little deeper on just history on what it applies to today.

[Michael Achary, CFO]

Yes. Great observation, Chris. So again, coming into the kind of the pre-COVID period, our deposit mix as it relates to DDAs was probably in the 36%, 37%, 38% range. It would obviously kind of vary within that range. And in the COVID years, we have stepped up pretty dramatically to where we are now at the 49% or even 50% level.

And I think as we've talked about, a good deal in other venues and in prior calls, not sure that the 49% in this rate environment is something that's completely sustainable. We do think that, that 49% is likely to kind of track down certainly in the context of the current high rate environment and likely to get higher as we go through the next couple of quarters.

Where it lands is really hard to predict and so many different factors at play there. But it's hard to see it going down to the pre-pandemic levels. And we think it probably settles maybe somewhere in the low to mid-40% range. That's how we kind of think about that. But obviously, what we're built to do is to continue to grow that deposit category. And we would absolutely love to keep the mix where it is, but I certainly think that there are factors at work that will likely decrease that a bit over time.

[John Hairston, President and CEO]

Chris, this is John. The only thing I'd add to Mike's comments. You asked the question, is anything structurally different? I don't know if it rises to the level of the structural word, but a number of years ago, we endeavor to increase our lending focus primarily in C&I and operating companies and lines of credit and we, at the same time, invested fairly heavily in the treasury part of our business to provide services to depository relationships that allowed us to compete with the organization is a good bit bigger than ourselves.

And that effort was very successful. And so part of the reason that our variable rate componentry is so high was that effort and part of the reason that we got more than our fair share of DDAs as deposits flowed into banking in the last several years was the -- I think, the skillful rollout of a lot of different products and a really high-quality team in our treasury group.

So that's really what's -- the only thing that's different. And so that's enabled us to be a lot less dependent on wholesale funding, on brokered CDs and really on even retail CDs. So I think the mix of deposits really is fundamentally different. And our ability to settle in that low to mid-40s that Mike mentioned earlier will be tied to how much we can continue that success as we get into a little higher rate environment. I hope that color has helped.

[Christopher Marinac, Janney Montgomery]

No, it is. And I guess just a quick follow-up. If we think about on the other side of the balance sheet or same side, the debt component, it would be normal for the debt to rise over time. I know it's not a prediction about the next couple of quarters, but just if you've used debt to a slightly great degree, that really would not be out of line with kind of how you've run the bank for the longer haul. Is that fair to think about that?

[Michael Achary, CFO]

Yes, I think that's right, Chris. I think certainly, you could see the borrowing component of our overall funding mix likely to increase as we go through the current environment.

[Christopher Marinac, Janney Montgomery]

Great. Thanks again for the background this afternoon. We appreciate it.

[John Hairston, President and CEO]

You bet. Thanks for staying in the late call.

[Operator]

[Operator Instructions] The next question comes from Matt Olney with Stephens. Please proceed.

[Matt Olney, Stephens, Inc.]

Thanks guys. I think all my questions have been addressed. Just a bigger picture question. Your legacy markets are still in some sensitive areas for market disruption from some pending and recently announced bank M&A deals. I'm curious what you're seeing with this? Anything out there that's impactful through new hires, producers or back office or I guess, thinking about higher rates and higher deposit costs. Anything to note from a market disruption standpoint? Thanks.

[John Hairston, President and CEO]

Sure. Good question. Thanks for the last question being a lay-up question. That's a good one. On Slide 28, you can sort of see the history of our banker hires the last several quarters. We added another 5 this quarter. And the focus, obviously, of who we're hiring is coming from banks that are our size or larger that bring value to the table very rapidly.

The focus of both our acquired and our current folks will be turning a little bit more towards liquidity gathering than liquidity deployment in the coming quarters. And typically, disruption makes that a little easier to do. So it's -- so I would think the benefit of disruption over the next four to eight quarters may be more in gathering depository accounts and particularly commercial depository than in liquidity deployment.

So -- and I think next year will be a more disruptive year than this past one has been. So we look forward -- and our bankers are quite aware of those opportunities. And take advantage of it where they can.

[Matt Olney, Stephens, Inc.]

Yes. Makes sense. Congrats on the quarter. Thank you.

[John Hairston, President and CEO]

Yes, thank you. Thanks for hanging in there.

[Operator]

Thank you. There are no questions waiting at this time. So I will now pass it back to John Hairston for closing remarks.

[John Hairston, President and CEO]

Thank you to me, and thanks for moderating the call today. Thanks, everyone, for your interest, and we look forward to seeing you soon on the road.