Hancock Whitney Corp Q3 FY2022 Earnings Call

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.

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.

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.

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 roadmap 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.

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

The first question comes from Jennifer Demba from Truist Securities. Your line is open.

Thank you, good afternoon. I have a question regarding the slower loan growth expected in the fourth quarter. Are you noticing any decrease in demand this October, or are you simply being more selective with your loans at this time?

A little bit of both, Jennifer. For transparency, we had about a $75 million line utilization or draw at the end of September, which we knew would only last a couple of weeks. So we start October down $75 million and need to make that up. That's part of the difference. Additionally, we are being more selective in loan segments that usually face more pressure during recessionary periods. We are exercising caution in those areas. There was also a slight compression in the pipeline that began in September, but that doesn't seem to be due to cash flow issues. It appears to be more related to the higher cost of debt, with people opting to use their own funds for expenditures rather than borrowing. This is why our range is lower than usual. I also want to point out that the range is wider than normal for the fourth quarter, where we typically see an increase in line utilization. This time, however, is unique due to the rise in short-term rates. Our expected utilization plays a significant role in the $200 million to $450 million range. Additionally, we struggle to predict utilization or payoffs accurately. In the last couple of quarters, we've anticipated more payoffs or paydowns than we've actually seen, and the third quarter had minimal impact from payoffs. So, this is everything that goes into our calculations. There are no estimates; it's purely the math based on our various assumptions and pipeline rolled together to arrive at that range. Was that sufficient information, or would you like me to clarify something further?

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

Mike, do you want to address that one?

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.

Thanks so much.

You bet. Thank you for the questions.

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

Thanks. Good afternoon.

Good afternoon, Catherine.

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?

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.

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?

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

Got it. That's correct. I understand. Perfect. My next question is about the deposit betas. It's notable how low your beta is compared to other companies. You mentioned that you believe beta will increase next quarter. Can you share any observations regarding customer behavior? When you're increasing deposits, where is most of that growth coming from, and what are the rates for new deposits? Additionally, could you provide some insight into where you expect to see the most growth next quarter? Thanks.

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 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.

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.

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.

Great. Thank you.

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

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.

Yes, leading into the pandemic, we focused a lot on reviewing our portfolio due to the uncertainty it caused, which ultimately turned out well. We have established routines around this. We've noticed that inflationary pressures have led to some of our customers facing increased costs, particularly in labor. As you mentioned, we have become more cautious in the contractor space, which is an area we've chosen to focus on carefully. The main concern is the rising operational costs that are creating margin pressures for certain customers. Aside from that, we are simply being more cautious about potential pressure points in a recessionary environment.

Okay. Maybe just a follow-up on that. It looks like you're only using a 25% weighting towards the baseline scenario and 75% towards slower growth. Given that you have a very healthy reserve, would you expect to grow that if the backdrop continues to soften? I would think that you would?

You want to start that, Mike?

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.

Okay, great. Thanks for taking my questions.

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

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?

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?

Certainly. It’s not a major factor for the fourth quarter. However, as we have discussed over the past year, we have been heavily investing in technology with three main priorities: improving efficiency, enhancing effectiveness, and creating a more seamless experience for our clients, especially in the digital realm. In this fourth quarter, we will complete the full uplift of our retail organization, which began last year, as we have been gradually rolling out various technology releases in different regions. Next year, we plan to undertake a significant modernization of our ATMs and digital front office, focusing on sales and account aggregation for deposits and loans. The technology expenses have been offset by the cost savings we have achieved and have had a minimal impact on our overall expenses, a trend I expect to continue. There may be a slight increase, but currently, the primary pressure on our expenses derives from personnel costs, which sets us apart from others in our industry. The technology upgrades will persist into next year and likely beyond, as we continue our efforts to improve efficiency and aim for a competitive or better efficiency ratio in the future.

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?

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.

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

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

Good afternoon, everyone. I want to discuss the deposit levels. There was a significant decline in deposits linked to the previous quarter, and I appreciate the guidance regarding the seasonality of public fund deposits. However, regarding the decline observed in other deposit categories in the third quarter, can you clarify if those trends have simply run their course? Or is it a matter of adjusting pricing? Have you fallen behind, and are you now planning to increase rates further to reduce the outflow from those other types of deposits going forward?

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 cue. 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?

I would like to add that our normal loan-to-deposit ratio typically stays between 85% and 87%. For the third quarter, our average was 76%. This indicates that we still have quite a distance to cover as we adjust our asset mix to achieve a more standard balance between our bond and loan portfolios. Consequently, we are not positioned to lead in rate increases for the foreseeable future. The guidance shared earlier for the fourth quarter is based on our aim to narrow the gap between changes in the overall loan and deposit books. We expect the loan-to-deposit ratio to continue rising, which will be beneficial for net interest margin in the upcoming quarters. Therefore, when considering the various factors, improvements in our earning asset mix should positively impact interest income, while any upward movement in deposit rates may serve as a counterbalance. Our goal is to maintain as much of the favorable net interest margin as possible for as long as we can. I hope this explanation provides more insight into our strategy and intentions.

Yes, that's helpful. I believe the goal is to support loan growth primarily through deposits, so the loan to deposit ratio may improve gradually rather than dramatically in the near term, I would expect.

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.

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?

Yes, that’s a great question. There was a time when we had an abundance of liquidity, and using portfolio mortgages was a way to utilize that capital to support our net interest income. However, the current environment is different. The time taken from mortgage credit authorization to closing has likely never been longer due to the requirements for appraisals and surveys. We anticipate that the mortgage portfolio will see slight growth over the next quarter or two. By the second half of 2023, we expect growth to stabilize and possibly decline depending on interest rates. We prefer to focus on growing our credit, particularly in revolving credit lines, and we will continue to maintain our asset sensitivity for a while longer. We can enhance that sensitivity through successful hedging strategies. The mortgage contributions will probably taper off by early to mid-next year, followed by a gradual decrease over time.

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?

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 two. 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.

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.

Okay, thanks Mike.

You bet. Good to hear from you.

Our next question comes from Brad Milsaps. Please proceed.

Good afternoon. Mike, I wanted to follow up on the balance sheet. You mentioned the FHLB borrowings added during the quarter. Could you clarify if those are all short-term overnight advances? Will you use cash flows from the bond portfolio to pay them off, or should we consider this as a more permanent part of your funding? I'm curious about your plans for using the bond portfolio in relation to wholesale funding resources.

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.

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.

Certainly. We would prefer not to be affected by inflation moving forward. I understand the context of your question. We've discussed this on previous calls and for many years since merging our two companies about 12 years ago. One important practice we have established is cost control, ensuring we get value for the money we spend. We have worked hard in recent years to become one of the more efficient banking companies. With the benefit of higher rates, we've improved our efficiency ratio significantly, and we don't intend to give that back. However, we also recognize the importance of reinvesting in our company, and we are committed to doing that. A year ago, we invested in strategic procurement, which is starting to yield positive results. We expect these results to grow and become more impactful in the coming years. We view this as an opportunity to reduce expenses where suitable, allowing us to reinvest those savings back into the company. That's our approach regarding expenses moving forward. John, do you have anything to add?

Yes, I believe you articulated that well. I would like to add that, as Mike mentioned, we have been consistently making smart investments to enhance our efficiency for several years now. The strategic procurement group just became operational about a quarter ago, and their value will become evident when we begin renewing contracts or have consolidation opportunities. This will be at full capacity next year and the following year, so we anticipate positive outcomes from that. Furthermore, this year has been exceptional. A significant portion of our personnel cost increase has been due to incentives, driven by the outstanding performance of our bankers and the support from our backend operations in managing growth and technological implementations. The incentive pay this year is the highest we have ever seen. In a slowing environment, we do not want to cut costs that way, but if the economy slows slightly next year, it might be more challenging for the incentive payments to be as substantial as this year, depending on macroeconomic factors. Additionally, as our workforce evolves, we will continue to identify ways to reduce occupancy expenses by consolidating some of our buildings and decreasing leased floor space. These opportunities will persist over the next couple of years. Lastly, there is still significant potential for improved efficiency from our technological efforts. We are nearing completion of our retail enhancements, but there remains a considerable amount of work over the next two to three years. While these improvements may not produce immediate, large-scale savings, each smaller project contributes to cost reductions that can be reinvested into the company or used to offset inflationary pressures. We still have ample opportunities to enhance efficiency. As the interest rate environment normalizes and deposit betas align, the focus on capturing efficiencies from our ongoing initiatives will become increasingly crucial. This progress has been ongoing throughout the year, but top-line revenue has captured most of the attention. However, I believe the efforts made so far will become more evident in the latter part of 2023 and into 2024. I hope this provides you with additional insight.

Yes, thank you guys. Appreciate taking question.

Sure. You bet.

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

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.

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.

Chris, this is John. I would like to add to Mike's comments regarding your question about structural changes. While it may not be a fundamental shift, several years ago, we focused on enhancing our lending in commercial and industrial sectors as well as operating companies and lines of credit. Simultaneously, we invested significantly in our treasury operations to service our banking relationships, allowing us to compete with much larger organizations. This initiative proved very successful. Consequently, part of the reason our variable rate component is so high stems from this effort, and we captured a significant portion of demand deposit accounts as deposits increased in the last few years, thanks to the effective introduction of various products and a strong treasury team. This is essentially what's different now. It has allowed us to rely less on wholesale funding, brokered CDs, and even retail CDs. Thus, the composition of our deposits has fundamentally changed. Our ability to maintain levels in the low to mid-40s, as Mike mentioned, will depend on how effectively we can sustain this success in a higher rate environment. I hope that clarifies things.

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?

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.

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

Thank you. Our next question comes from Matt Olney with Stephens. Please proceed.

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.

Sure. That's a good question. On Slide 28, you can see our history of banker hires over the last several quarters. We added five more this quarter. We're focusing on hiring from banks that are our size or larger, as they can quickly add value. Our emphasis, both for new hires and current staff, will shift more towards gathering liquidity rather than deploying it in the upcoming quarters. Typically, disruption makes this process easier. Therefore, I believe that the advantages of disruption in the next four to eight quarters will be more about attracting depository accounts, especially commercial accounts, than about deploying liquidity. Next year is likely to be more disruptive than this past year, and our bankers are well aware of these opportunities and will take advantage of them where possible.

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

Yes, thank you. Thanks for hanging in there.

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

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.