HANCOCK WHITNEY CORP (HWC) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 year ended December 31, 2022 and selected 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, which 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. See Forward-Looking Statements in Part I of this Annual Report.

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. A reconciliation of those measures to GAAP measures are provided in Table 1 “Consolidated Financial Results” and Table 29 “Quarterly Consolidated Financial Results” of this section. The following is an overview of the non-GAAP measures used and the reasons why management believes they are useful and important in understanding the Company’s financial condition and results of operations included below.

Consistent with the provisions of Subpart 229.1400 of 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 interest income from certain loans and investments using the statutory federal tax rate (21% for all periods presented) to increase tax-exempt interest income to a taxable-equivalent basis. This measure is the preferred industry measurement of net interest income and 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. 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 the Company’s business. However, these non-GAAP financial measures have inherent limitations and should not be considered in isolation or as a substitute for analysis of results or capital position under U.S. GAAP.

We define Operating Revenue as net interest income (te) and noninterest income less nonoperating revenue. We define Operating Pre-Provision Net Revenue as operating revenue (te) less noninterest expense, excluding nonoperating items. Management believes that operating revenue and pre-provision net revenue are useful financial measures because they enable investors and others to assess the Company’s performance period over period and management’s success in executing its strategic initiatives, as well as measuring the ability to generate capital to cover credit losses through a credit cycle.

As of January 1, 2022, the Company has determined that it will no longer include any immaterial results from storm-related expenses and income in nonoperating items.

EXECUTIVE OVERVIEW

We are pleased to report that 2022 was another outstanding year for our company. The financial results reflect not only progress made during the year, but also the culmination of decisions made during the last several years to better position the company for today’s rapidly changing economic environment. The following financial review provides a discussion of our financial condition, changes in financial condition and results of operations.

Current Economic Environment

During the year ended December 31, 2022, economic conditions were greatly influenced by a persistent high level of inflation and the Federal Reserve's actions to curb it. Early COVID-19 pandemic response measures in the form of virus containment measures and various forms of government stimulus created pervasive, lingering supply chain and labor market disruptions. Consumers shifted spending towards goods and away from services, further placing stress on supply chains, and the supply of goods could not meet consumer demands, resulting in price increases. These stresses have been exacerbated by the impact of recent geopolitical conflict upon commodity supply, all of which have led to a steadily rising rate of inflation that reached a 40-year high in June 2022. In response to escalating inflation, the Federal Reserve began quantitative tightening and has undertaken an aggressive approach in setting the target Federal Funds Rate through the issuance of a series of seven interest rate increases between March 2022 and December 2022 totaling 425 basis points.

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Thus far, there have been mixed indications of whether the Federal Reserve's monetary policy has begun to effect change. The rate of inflation remains elevated, but had declined to 6.5% on an annualized basis in December 2022, down from its peak of 9.1% in June. However, Real Gross Domestic Product (“GDP”) increased 2.1% in 2022 (inclusive of growth of 3.2% and 2.9% in the third and fourth quarters, respectively). Further, the U.S. economy reached a full-employment level in July 2022, defined as an unemployment rate of 3.5% or lower and a prime-age employment-to-population ratio of 80%, and remained near that mark at year end. Additional changes in interest rates are expected in the near-term; the extent of which, and the favorable or unfavorable impact of these actions upon equity markets and economic conditions remains uncertain.

Despite persistent inflationary pressures, the market areas we serve continued to show indications of economic health during the year. We experienced full-year core loan growth (excluding PPP) of approximately 12%, and our credit quality indicators remain strong. The growth in the loan portfolio, largely funded by the remaining excess liquidity on our balance sheet, was across our geographic footprint and diverse across most business lines. This shift in earning assets from excess liquidity into higher-yielding loans, along with the net impact of the seven interest rate increases, contributed to a 31 basis point expansion of our net interest margin compared to the prior year. Increased cost of living amid inflationary conditions, and heightened competition for deposits in the rising interest rate environment has put pressure on our deposit base, which decreased 5% from the same time last year.

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 December 2022 Moody’s forecast, the most current available at December 31, 2022. The forecasts are anchored on a baseline forecast scenario, which Moody’s defines as the “most likely outcome” of where the economy is headed based on current conditions. Several upside and downside scenarios are produced that are derived from the baseline scenario and incorporate varying degrees of favorable and unfavorable adjustments to economic indicators and circumstances as compared to the baseline. The macroeconomic variables underlying the December 2022 economic scenarios differ in certain respects from the comparable forecasts available at December 31, 2021, given the shift in economic circumstances and risks.

The December 2022 baseline forecast maintains a generally 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. The baseline scenario assumes the Federal Reserve will continue quantitative tightening measures by means of runoff at a rate of $100 billion in securities per month, and that it will issue 25-basis point interest rate increases at each of the January and March meetings, with the expectation that interest rate cuts will begin in late 2023 and occur through 2024. The baseline scenario also estimates a weaker pace of job growth in 2023 (as compared to 2022), which will lead to an increase in the unemployment rate to 4.2% by the first quarter of 2024, declining to 4.0% by the end of 2024. Further, GDP growth is estimated to be 1.9% in 2022, 0.9% in 2023, and 2.0% in 2024.

The macroeconomic variables underlying the downside scenario (S-2) are less optimistic compared to those underlying the baseline. Supply-chain issues worsen and increasing shortages of affected goods keep the inflation elevated longer than expected in the baseline scenario. Additionally, higher wage increases than those forecasted in the baseline scenario further contribute to inflationary pressures. In turn, the Federal Reserve responds by raising the target interest rate more than what is assumed in the baseline and the U.S. falls into a recession in first quarter 2023 that spans three quarters. The S-2 forecast assumes unemployment rates of 5.7% and 5.4% in 2023 and 2024, respectively, and a 0.5% contraction of GDP in 2023, before returning to a positive rate of 1.3% in 2024. Management has deemed the assumptions provided for in the S-2 scenario to be more likely than the baseline scenario, and as such, the baseline scenario and the S-2 scenario were given probability weightings of 25% and 75%, respectively, in the calculation of our allowance for credit losses calculation at December 31, 2022. The weighting of the S-2 scenario reflects management's view that the forecasted economic circumstances and outcomes included the S-2 scenario, including a mild recession, to be more likely to occur in the near term.

At December 31, 2022, the credit loss outlook on our portfolio as a whole was somewhat improved from the prior period end. Our portfolio has grown and changed in composition to some extent with the paydown of substantially all of our PPP loans. Our asset quality metrics have remained stable, with little change in commercial criticized loans, a decline in nonperforming loans and only minimal credit losses. We continue to closely monitor our portfolio, particularly borrowers that are sensitive to prolonged inflation and the rising interest rate environment. We expect loan growth could slow amid the current or further rising interest rate environment and as we continue to focus on lending to resilient borrowers in light of current economic pressures.

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. The full extent of the impact of the Federal Reserve’s actions to date to reduce inflation and the potential scope of additional Federal Reserve actions are uncertain and may have a significant negative impact on the U.S. economy, including the possibility of an economic recession in the near or midterm. While uncertainty over the consequences of these actions remains, we expect that the current interest rate environment will continue to contribute favorably to our net interest income, net interest margin and overall operating results in the near term, although not at the pace experienced in 2022, and will be dependent on our ability to manage funding costs.

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Highlights of 2022 Financial Results

Net income for the year ended December 31, 2022 was $524.1 million, or $5.98 per diluted common share, compared to $463.2 million, or $5.22 per diluted common share in 2021. There were no nonoperating items in 2022. The results for 2021 included $35.9 million (pre-tax), or $0.31 per share after tax, of net nonoperating expense items, including $38.3 million of expense related to efficiency initiatives, $4.4 million of hurricane-related expenses and $4.2 million loss on extinguishment of debt, partially offset by $11.0 million of nonoperating income. The following is an overview of financial results for the year ended December 31, 2022:

•
Net income of $524.1 million, or $5.98 per diluted common share

•
Operating pre-provision net revenue of $641.1 million, up $103.5 million, or 19%, from 2021

•
Negative provision for credit losses of $28.4 million in 2022 reflective of a reserve release of $30.3 million and net charge-offs of $1.9 million, compared to a negative provision of $77.5 million in 2021 that reflected a reserve release of $108.7 million and net charge-offs of $31.2 million

•
Core loan growth of $2.5 billion, or 12%, and a $492 million reduction of PPP loans due to forgiveness resulted in an overall increase in total loans of $2.0 billion, or 9%, in 2022

•
Deposits of $29.1 billion at December 31, 2022 decreased $1.4 billion, or 5%; noninterest-bearing deposits comprised 47% of total deposits at both December 31, 2022 and 2021

•
Common equity tier 1 capital ratio of 11.41%, up 32 basis points (bps) from December 31, 2021

•
Criticized commercial loans and nonperforming loans remained near historically low levels throughout 2022

•
Net interest margin increased 31 bps to 3.26% during 2022, driven by rising interest rates and a favorable change in the earning asset mix

•
Efficiency ratio improved to 52.93% during 2022, down from 57.29% in 2021

The results of the year ended December 31, 2022 were one of the best in our Company’s history. We experienced strong loan growth reflecting robust loan demand across or geographic footprint and within specialty lines of business. Our loan growth combined with the rising rate environment contributed to the expansion of our net interest margin and revenue growth. We remain in a solid capital position with tangible common equity ratio of 7.09% and a common equity tier 1 ratio of 11.41%. We will continue to manage capital in the best interests of the company and our shareholders. We beat our 55% efficiency ratio goal several quarters early, ending the year with a 52.93% ratio. We were able to achieve our target by not only the thoughtful execution of expense management and efficiency initiatives, but also a focus on revenue generation through new banker hires in growth markets. Despite the impact of the volatile economic environment our markets and clients, our credit metrics remained strong. Criticized commercial loans and nonperforming loans remained near historically low levels throughout 2022. We are pleased at how our portfolio has performed during these unprecedented times but also mindful of current macroeconomic trends that could impact our clients or our business. We believe that we remain well-positioned should a recessionary period begin.

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Additional information related to our results and outlook are included in the discussions that follow.

Table 1. Consolidated Financial Results

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(a) Interest income includes the net impact of discount accretion and premium amortization arising from business combinations totaling $4.7 million, $8.6 million, and $15.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

(b) For analytical purposes, management adjusts interest income and net interest income for tax-exempt items to a taxable equivalent basis using a federal income tax rate of 21%.

(c) The tangible common equity ratio is common stockholders’ equity less intangible assets divided by total assets less intangible assets.

(d) The efficiency ratio is noninterest expense to total net interest (te) and noninterest income, excluding amortization of purchased intangibles and nonoperating items.

(e) See non-GAAP financial measures section of this analysis for a discussion of these measures.

RESULTS OF OPERATIONS

The following is a discussion of results from operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. Refer to previously filed Annual Reports on Form 10-K Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of prior year variances.

Net Interest Income

Net interest income was $1.1 billion, up $116.8 million, or 13%, from $933.2 million in 2021. Net interest income is the primary component of our earnings and represents the difference, or spread, between revenue generated from interest-earning assets and the interest expense related to funding those assets. For analytical purposes, net interest income is adjusted to a taxable equivalent basis (te) using the statutory federal tax rate of 21% on tax exempt items (primarily interest on municipal securities and loans).

Net interest income (te) was $1.1 billion in 2022, up $115.9 million, or 12%, from $944.4 million in 2021, and included an increase in interest income (te) of $154.0 million partially offset by an increase of $38.0 million in interest expense. The increase in interest income is largely attributable to the impact that the series of Federal Reserve interest rate increases during the year had upon new and repricing earning assets, a favorable change in the mix of earning assets, and, to a lesser extent, a $14.8 million decrease in net premium/discount amortization on the securities portfolio. These factors were partially offset by decreases of $48.5 million in PPP fee income, $8.9 million in net nonaccrual interest recoveries, and $3.9 million in purchase accounting accretion. The increase in interest expense is attributable to a higher cost of funds, driven by interest rate increases, the impact of which was partially offset by an improved funding mix with an increase in average noninterest-bearing deposits and decreases in average interest-bearing deposits.

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The yield on earning assets (te) was 3.53% in 2022, up 43 bps from 2021. The increase was mainly attributable to the impact of the rising interest rate environment upon the loan and investment portfolios, and a favorable change in the mix of average earning assets, with loans up $707 million, investment securities up $907 million, and short-term investments down $1.1 billion. The loan yield was up 40 bps to 4.32%, reflecting the impact of the rise in interest rates on new and repricing loans. During 2022, the proportion of our loan portfolio tied to variable rates, including hybrid adjustable rate mortgages (ARMs), averaged approximately 57%. The yield on investment securities increased 19 bps in 2022 to 2.11% as new investments were made at higher yields amid the rising interest rate environment, along with yield enhancements from the termination of certain fair value hedges on available for sale securities.

The cost of funds increased 12 bps to 0.27% in 2022 from 0.15% in 2021, primarily as a result of the rising interest rate environment. Average interest-bearing deposit costs increased 21 bps in 2022 to 38 bps from 17 bps in 2021. Other short-term borrowing costs, which consist largely of Federal Home Loan Bank advances, increased to 1.83% in 2022 from 0.49% in 2021, as $1.1 billion of low fixed-rate Federal Home Loan Bank advances entered into in late 2019 and early 2020 were called in mid-2022 and subsequently replaced with borrowings at current market rates. The rate on long-term debt decreased 13 bps to 5.19%, largely due to a shift in mix of the debt resulting from the redemption of $150 million of subordinated notes in June of 2021.

The net interest margin is the ratio of net interest income (te) to average earning assets. The net interest margin increased 31 bps to 3.26% in 2022 from 2.95% in 2021, due primarily to the factors outlined above.

While we remain asset sensitive, we expect further shifts in deposit mix to higher-cost products could offset the benefits of expected interest rate increases in the near-term. Managing funding costs will be a key element in our future performance.

Discussions of Asset/Liability Management and Net Interest Income at Risk later in this item provide additional information regarding our management of interest rate risk and the potential impact from changes in interest rates, respectively.

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TABLE 2. Summary of Average Balances, Interest and Rates (te) (a)

(a)
Taxable equivalent (te) amounts are calculated using federal income tax rate of 21%.

(b)
Includes nonaccrual loans.

(c)
Average securities do not include unrealized holding gains or losses on available for sale securities.

(d)
Included in interest income is net purchase accounting accretion of $4.7 million, $8.6 million and $15.4 million for the years December 31, 2022, 2021, and 2020, respectively.

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TABLE 3. Summary of Changes in Net Interest Income (te) (a) (b)

(a)
Taxable equivalent (te) amounts are calculated using a federal income tax rate of 21%.

(b)
Amounts shown as due to changes in either volume or rate includes an allocation of the amount that reflects the interaction of volume and rate changes. This allocation is based on the absolute dollar amounts of change due solely to changes in volume or rate.

(c)
Includes nonaccrual loans.

(d)
Average securities do not include unrealized holding gains or losses on available for sale securities.

Provision for Credit Losses

During the twelve months ended December 31, 2022, we recorded a negative provision for credit losses of $28.4 million, compared to a negative provision for credit loss of $77.5 million in 2021. Following the significant reserve build in 2020 in response to the economic impact of the COVID-19 pandemic, improvement in overall credit performance and in economic indicators within our footprint in 2021 and 2022 allowed for the gradual release of certain of those reserves. The negative provision for credit losses recorded in 2022 included a $34.3 million release of allowance for funded loan losses, partially offset by a $4.0 million build in the reserve for unfunded lending commitments and net charge-offs of $1.9 million, or 0.01% of average loans outstanding. The negative provision for credit losses recorded in 2021 includes a $108.1 million release of allowance for funded loan losses and a $0.6 million release of the reserve for unfunded lending commitments, offset by net charge-offs of $31.2 million, or 0.15% of average loans outstanding.

As noted above, 2022 net charge-offs totaled $1.9 million, a decrease of $29.3 million from 2021. Net charge-offs in 2022 included $7.4 million of consumer net charge-offs, partially offset by net recoveries of $3.9 million in the commercial portfolio and $1.6 million in the residential mortgage portfolio. Net charge-offs in 2021 included $25.5 million of commercial net charge-offs, of which $13.3 million related to a single legacy energy credit, and $6.4 million of consumer net charge-offs, partially offset by net recoveries of $0.7 million in the residential mortgage portfolio.

Loan growth, portfolio composition, credit quality metrics and assumptions in economic forecasts will drive the level of credit loss reserves. At present, we expect low to modest charge-offs and provision in the first quarter of 2023.

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Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Allowance for Credit Losses” provides additional information on changes in the allowance for credit losses and general credit quality.

Noninterest Income

Noninterest income for the twelve months ended December 31, 2022 totaled $331.5 million, a $32.8 million, or 9%, decrease from 2021. There were no nonoperating items reported in noninterest income in 2022. Nonoperating items totaled $11.0 million in 2021, comprised of a $4.6 million gain on the sale of the remaining Hancock Horizon Funds, $3.6 million related to a hurricane-related insurance settlement and $2.8 million gain on the sale of Mastercard stock. From January 1, 2022 forward, the Company will not include immaterial results from storm-related income or expense as nonoperating items. 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. Excluding nonoperating items in 2021, noninterest income in 2022 was down $21.9 million, or 6%, largely driven by a decrease in secondary mortgage market income, primarily the result of the rising interest rate environment, and decreases in other specialty fee categories, partially offset by increases in service charges, bank card and ATM fees, and trust fees.

Table 4 presents, for each of the three years ended December 31, 2022, 2021 and 2020, the components of noninterest income, along with the percentage changes between years.

TABLE 4. Noninterest Income

n/m – not meaningful

Service charges on deposit accounts include consumer, business, and corporate deposit account servicing fees, as well as overdraft and nonsufficient funds fees, overdraft protection fees, and other customer transaction-related fees. Service charges on deposit accounts were $87.7 million, up $6.6 million, or 8%, from 2021. The increase from 2021 was largely attributable to an increase in non-sufficient funds and overdraft fees, as instances of overdrafts increased as the elevated balances began to run down amid deposit balance runoff. In December 2022, we eliminated consumer (retail) nonsufficient funds fees and certain overdraft fees. As a result, we expect these fees will decrease by approximately $10 million to $11 million annually. We believe these changes are in line with the evolving retail banking industry, as traditional banks adjust products to meet consumer needs and provide them with the tools needed to help manage their overall finances. We expect to see improving account acquisition rates in 2023 with this change and as we launch additional retail products and features.

Trust fee income represents revenue generated from asset management services provided to individuals, businesses and institutions. Trust fees totaled $65.1 million in 2022, a $2.2 million, or 4%, increase from 2021, primarily attributable to an increase of $5.7 million in corporate and institutional trust fees and a decrease of $3.3 million in employee benefit trust and external distribution fees. The increase in corporate and institutional trust fees is largely interest rate driven, as the rising interest rate environment allowed for the resumption of certain fee assessments that are generally waived in a lower interest rate environment. Trust assets under management decreased to $9.1 billion at December 31, 2022, compared to $9.8 billion at December 31, 2021.

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Bank card and ATM fees include 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 $84.6 million in 2022, up $5.5 million, or 7%, compared to 2021. The growth from 2021 is the result of an increase in card activity during the year as spending remained strong. In addition, card revenue in 2021 was unfavorably impacted by disruption from Hurricane Ida.

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 $28.8 million in 2022, compared to $29.5 million in 2021. The $0.8 million, or 3%, decrease is partly attributable to a temporary business disruption as a result of conversion to an outsourced sales and service

platform.

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 and mortgage loans generated through programs to support customer relationships. Income from secondary mortgage market operations totaled $11.5 million in 2022, a decrease of $25.2 million, or 69%, from 2021. The decline is largely attributable to both a decline in refinancing activity, driven by the rising interest environment, and a lower percentage of originated loans sold in the secondary market, as we are retaining a higher volume of mortgage loans in our held for investment portfolio. The number of mortgage applications received in 2022 was down 30% compared to those received in 2021. The percentage of mortgage loans sold in the secondary market to total originations (as opposed to those held in our portfolio), was 22% in 2022, down from 48% in 2021. Secondary mortgage market operations income will vary based on application volume and the number of loans ultimately closed and sold.

Income from bank-owned life insurance (“BOLI”) is generated through insurance benefit proceeds as well as the growth of the cash surrender value of insurance contracts held. BOLI income decreased $2.4 million, or 13%, to $15.9 million in 2022. The decrease when compared to 2021 is largely attributable to $4.4 million of income received in connection with the purchase of policies in the first quarter of 2021.

Income from derivatives, largely derived from our customer interest rate derivative program, totaled $5.8 million in 2022, compared to $13.5 million in 2021. The decrease from 2021 is primarily attributable to a decrease in customer demand to execute interest rate swaps as a result of an increase in the overall interest rate environment when compared to the prior year. Derivative income can be volatile and is dependent upon the composition of the portfolio, volume and mix of sales activity and market value adjustments due to market interest rate movement.

Other miscellaneous income is comprised of various items, including income from small business investment companies, FHLB stock dividends, gain/losses from sales of other assets, and syndication fees. Other miscellaneous income for the year ended December 31, 2022 was $21.7 million, down $10.3 million from the previous year. Excluding the nonoperating items from 2021, comprised of the $4.6 million gain on the sale of Hancock Horizon Funds, the $3.6 million gain on hurricane-related insurance settlement and the $2.8 million gain on the sale of MasterCard stock, other miscellaneous income in 2022 was relatively flat when compared to 2021.

We expect noninterest income to increase 3% to 4% in 2023, inclusive of the estimated $10 million to $11 million decrease in certain consumer nonsufficient funds and overdraft fees.

Noninterest Expense

Noninterest expense for the twelve months ended December 31, 2022 totaled $750.7 million, down $56.3 million, or 7%, compared to 2021. There were no nonoperating expenses in 2022 compared to $46.9 million in 2021, of which $38.3 million was related to initiatives put in place to improve overall efficiency and operating performance. Such initiatives included the Voluntary Early Retirement Incentive Program (VERIP), under which approximately 260 associates retired, a reduction in force initiative whereby a net of approximately 150 positions were eliminated, and the consolidation of 18 financial centers. Nonoperating expense in 2021 also includes $4.2 million of loss on extinguishment of debt attributable to the redemption of the $150 million 5.95% subordinated notes, and $4.4 million in expenses related to Hurricane Ida, which includes damage to facilities, recovery cost, charitable contributions to organizations providing recovery assistance, temporary housing, and distribution of meals, ice, and fuel. Excluding nonoperating items in 2021, noninterest expense decreased $9.4 million, or 1%, in 2022. The largest individual components of the decrease in operating expense were professional fees and other real estate and foreclosed asset expense. Explanations of the variances are discussed below in more detail.

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Table 5 presents, for each of the three years ended December 31, 2022, 2021 and 2020, noninterest expense, along with the percentage changes between years. Table 6 presents nonoperating expense included in noninterest expense (Table 5) by component for the same periods.

TABLE 5. Noninterest Expense

n/m - not meaningful

TABLE 6. Nonoperating Expense

Personnel expense consists of salaries, incentive compensation, long-term incentives, payroll taxes, and other employee benefits such as 401(k), pension, and medical, life and disability insurance. Personnel expense totaled $460.6 million, a decrease of $21.7 million, or 5%, compared to 2021. The prior year includes $24.4 million of nonoperating expense attributable to efficiency initiatives, including the VERIP and reduction in force. Excluding the nonoperating items, personnel expense was up $2.7 million, or 1%, as the impact of annual merit increases was largely offset by a decrease in the average full-time equivalent headcount following the VERIP and reduction in force initiatives.

Occupancy and equipment expenses are primarily composed of lease expenses, depreciation, maintenance and repairs, rent, taxes, and other equipment expenses. Total occupancy and equipment expenses of $67.3 million decreased $0.6 million, or 1%, in 2022

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compared to 2021. The decrease was largely related to expense control measures, including the consolidation of 18 financial centers in 2021.

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 totaling $103.9 million was up $7.2 million, or 7%, from 2021, reflective of increases in data processing software amortization and third party processing expense that are linked to technology enhancement initiatives, and an increase in card transaction-related processing expense that is linked to bank card and ATM card activity.

Professional services expense totaling $36.1 million decreased $12.6 million, or 26%, from 2021, primarily due to decreases of $10.2 million in consulting and other professional services, largely the result of PPP-related consulting and legal fees incurred in 2021, and $2.0 million in lending-related legal expense.

Amortization of intangibles in 2022 totaled $14.0 million, a $2.6 million, or 16%, decrease from 2021 as a result of the accelerated amortization methods used.

Deposit insurance and regulatory fees totaling $14.9 million increased $1.3 million, or 10%, from 2021, reflective of current period growth in the core loan portfolio, a substantial reduction in no/low risk PPP loans, and the decline in excess liquidity present in 2021. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment schedules uniformly by 2 bps beginning with the first quarterly assessment period of 2023. The increased assessment is expected to remain in effect until the Deposit Insurance Fund reserve ratio to insured deposits meets the FDIC’s long-term goal for reserve ratios of the Deposit Insurance Fund. We anticipate this change will increase our quarterly deposit insurance expense by approximately $1 million to $2 million, but could vary depending upon our assessment base.

Other real estate and foreclosed assets expense reflected net gains of $4.4 million in 2022, compared to net gains of $0.2 million in 2021. The twelve months ended December 31, 2022 includes a $1.8 million gain on the sale of stock in a former borrower received in satisfaction of debt. 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.

Business development-related expenses (including advertising, travel, entertainment and contributions) totaling $28.5 million were up $5.5 million, or 24%, from 2021 and is reflective of increases in marketing-related efforts, sponsorships and direct mail campaigns.

Corporate value, franchise taxes, and other non-income taxes totaled $16.7 million, an increase of $2.3 million, or 16%, from 2021, largely attributable to bank share tax, which was favorably impacted in 2021 as a result of the net loss recorded in 2020.

Noninterest expense in both 2022 and 2021 was reduced by a net credit in other retirement expense. The net credit in 2022 of $29.7 million was $1.8 million, or 6%, greater than 2021, based on certain actuarial assumptions and performance of pension plan assets. We expect the net credit in other retirement expense related to the pension plan will decrease in 2023 by approximately $2.8 million per quarter.

All other expenses totaling $42.7 million decreased $29.0 million, or 40%, from 2021 primarily due to $22.2 million of nonoperating expenses incurred in 2021, including $13.9 million of loss on facilities and equipment due to the consolidation of 18 financial centers, $4.2 million of loss on extinguishment of debt, and $4.2 million of expense related to Hurricane Ida. Excluding these nonoperating expenses, other expense was down $6.7 million, or 14%, including $4.6 million of insurance other property related gains in 2022 and various smaller items.

We expect noninterest expense for the year 2023 to increase approximately 6% to 7% compared to 2022. The anticipated year-over-year increase includes increases in retirement (pension) expense and the FDIC assessment as described above. Excluding these items, noninterest expense is expected to increase approximately 4% to 5%.

Income Taxes

We recorded income tax expense at an effective rate of 20.5% in 2022, compared to 18.5% in 2021. The comparability of the effective tax rate between 2022 and 2021 is affected by higher pre-tax book income in 2022 that diluted the relative impact of net tax benefits related to tax credit investments, tax-exempt interest income and bank-owned life insurance. Additionally, the 2021 effective tax rate included a $4.9 million income tax benefit that increased the 2020 net operating loss, which was carried back to a 35% statutory tax rate year under the CARES Act. Based on the current forecast, management expects the effective tax rate to be approximately 21% in 2023.

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Our effective tax rate has historically varied from the federal statutory rate primarily due to 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 contract program are the major components of tax-exempt income.

Table 7 reconciles reported income tax expense to that computed at the statutory tax rate of 21% for the years ended December 31, 2022, 2021 and 2020.

TABLE 7. Income Taxes

The main source of tax credits has been investments in tax-advantage securities and tax credit projects. These investments are made primarily in the markets we serve and directed at tax credits issued under the Federal and State New Market Tax Credit (“NMTC”), Low-Income Housing Tax Credit (“LIHTC”) and pre-2018 Qualified Zone Academy Bonds (“QZAB”) and Qualified School Construction Bonds (“QSCB”) programs. The investments generate tax credits which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. Additionally, the amortization of the LIHTC investment cost will be recognized as a component of income tax expense in proportion to the tax credits recognized over the 10-year credit period of each project.

We have invested in NMTC projects through investments in our own CDEs, 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.

Based only on tax credit investments that have been made through 2022, we expect to realize benefits from federal and state tax credits over the next three years totaling $11.6 million, $11.7 million and $9.1 million for 2023, 2024 and 2025, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.

At December 31, 2022, we had a net deferred tax asset of $211 million, which is comprised of $347 million in deferred tax assets (net of state valuation allowance), offset by $136 million of deferred tax liabilities. Several factors are considered in determining the recoverability of the deferred tax asset components, such as the history of taxable earnings, reversal of taxable temporary differences, future taxable income and tax planning strategies. Based on our review of these factors, we have established a $3.6 million valuation allowance for state net operating losses.

In August 2022, the Inflation Reduction Act of 2022 (IRA) was signed into law to address inflation, healthcare costs, climate change and renewal energy incentives, among other things. Included in the IRA are provisions for the creation of a 15% corporate alternative minimum tax (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.

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BALANCE SHEET ANALYSIS

Short-Term Investments

At December 31, 2022, short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, totaled $324.1 million, a decrease of $3.5 billion from December 31, 2021. Average short-term investments for 2022 totaled $1.5 billion, a $1.1 billion decrease from $2.7 billion in 2021. Typically, these balances will change on a daily basis depending upon movement in customer loan and deposit accounts. The decline from December 31, 2021 is the result of the redeployment of excess liquidity that had been present on our balance sheet for the better part of two years attributable to pandemic-related factors. Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. See further discussion in the “Liquidity” section that follows.

Investment Securities

Our investment in securities was $8.4 billion at December 31, 2022, compared to $8.6 billion at December 31, 2021. The investment securities portfolio is managed by ALCO to assist in the management of interest rate risk and liquidity while providing an acceptable rate of return. At December 31, 2022, the amortized cost of securities available for sale totaled $6.3 billion and securities held to maturity totaled $2.9 billion, compared to $7.0 billion and $1.6 billion, respectively, at December 31, 2021. To provide some protection from the impact of future interest rate changes upon accumulated other comprehensive income, we reclassified securities available for sale with an aggregate fair value of $561.8 million to the securities held to maturity portfolio during the first quarter of 2022.

Our securities portfolio consists mainly of residential and commercial mortgage-backed securities that are issued or guaranteed by U.S. government agencies. We invest only in high quality investment grade securities and manage the investment portfolio duration generally between two and five and a half years. 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%. Under an immediate, parallel rate shock of 100 bps and 200 bps, the effective duration would be 4.83 years and 4.77 years, respectively. At December 31, 2021, the average expected maturity of the portfolio was 5.80 years with an effective duration of 4.25 years and a nominal weighted-average yield of 1.87%. The change in expected maturity, effective duration, and nominal weighted-average yield is attributable to reinvestment of securities portfolio cash flow, portfolio growth, and the impact of cash flows from the termination of 25 fair value hedge instruments during the year.

We have in place last-of-layer swaps on certain fixed-rate commercial mortgage backed securities. As of December 31, 2022, we had approximately $716 million in notional amount of forward-starting fixed payer swaps that convert the latter portion of the term of these available for sale securities to a floating rate. These derivative instruments are designated as fair value hedges of interest rate risk. This strategy provides 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 the end of each reporting period, we evaluate the securities portfolio for credit loss. Based on our assessments, expected credit loss was negligible for all reporting periods in 2022 and 2021, and therefore no allowance for credit loss was recorded.

There were no investments in securities of a single issuer, other than U.S. Treasury and U.S. government agency securities and mortgage-backed securities issued or guaranteed by U.S. government agencies that exceeded 10% of stockholders’ equity. We do not invest in subprime or “Alt A” home mortgage-backed securities. Investments classified as available for sale are carried at fair value, while held to maturity securities are carried at amortized cost. Unrealized holding gains (losses) on available for sale securities are excluded from net income and are recognized, net of tax, in other comprehensive income and in accumulated other comprehensive income, a separate component of stockholders’ equity.

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The following table presents debt securities at amortized cost by type at December 31, 2022 and 2021:

TABLE 8. Debt Securities by Type

The amortized cost, fair value and yield of debt securities at December 31, 2022, by final contractual maturity, are presented in the table below. Securities are classified according to their final contractual maturities without consideration of scheduled and unscheduled principal amortization, potential prepayments or call options. Accordingly, actual maturities will differ from their reported contractual maturities. The expected average maturity years presented in the table includes scheduled principal payments and assumptions for prepayments. The yield calculation does not include adjustments to amortized cost of available for sale securities for active fair value hedges.

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TABLE 9. Debt Securities Maturities by Type

Loan Portfolio

Total loans at December 31, 2022 were $23.1 billion, compared to $21.1 billion at December 31, 2021. The $2.0 billion, or 9%, increase is primarily attributable to $2.5 billion of core loan growth (excluding PPP loans) as loan demand increased across our geographic footprint and within specialty lines of business, partially offset by $492 million of PPP loan forgiveness.

The composition of our loan portfolio at December 31, 2022 and 2021 was as follows:

TABLE 10. Loans Outstanding by Type

The commercial and industrial (“C&I”) loan portfolio includes both commercial non-real estate and commercial real estate – owner occupied loans. C&I loans totaled $13.2 billion, or 57% of the total loan portfolio, at December 31, 2022, an increase of $746 million from December 31, 2021. The increase is largely attributable to core loan growth of $1.2 billion, partially offset by PPP loan forgiveness of $492 million.

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Our commercial and industrial customer base is diversified over a range of industries, including wholesale and retail trade in various durable and nondurable products and the manufacture of such products, financial and professional services, healthcare services, energy, marine transportation and maritime construction, and agricultural production. We lend mainly to middle-market and smaller commercial entities, although we do participate in larger shared-credit loan facilities generally with businesses/sponsors operating in our market areas that are well known to the relationship officers. Shared national credits funded at December 31, 2022 totaled approximately $2.7 billion, or 12% of total loans, compared to $2.1 million, or 10% of total loans at December 31, 2021. Our shared national credit industry concentration at December 31, 2022 includes approximately $509 million of health care-related facilities, $513 million in finance and insurance and $426 million in real estate, rental and leasing, with the remaining to various other industries.

The following table provides detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes for all industries, with the exceptions of energy, which is based on the borrower’s source of revenue (i.e. manufacturer whose income is derived from energy-related business is reported as energy), and PPP loans, as those are expected to be 100% SBA guaranteed and therefore have limited credit risk.

TABLE 11. Commercial & Industrial Loans by Industry Concentration

Commercial real estate – income producing loans totaled $3.6 billion at December 31, 2022, an increase of $96 million, or 3%, from December 31, 2021. The net increase reflects organic growth as well as construction loans converting to permanent financing, partially offset by approximately $684 million in paydowns.

Construction and land development loans totaled approximately $1.7 billion at December 31, 2022, compared to $1.2 billion at December 31, 2021, an increase of $475 million, or 39%. The increase was primarily due to demand throughout our footprint, with the funding of new and existing loans outpacing loans converting to permanent financing.

The following table details the end-of-period aggregated commercial real estate – income producing and construction loan balances by property type. Loans reflected in 1-4 Family Residential Construction include both loans to construction builders as well as single-family borrowers.

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TABLE 12. Commercial Real Estate– Income Producing and Construction by Property Type Concentration

Residential mortgages totaled $3.1 billion at December 31, 2022, up $669 million, or 28%, from December 31, 2021. The increase in mortgage loans is due primarily to a lower level of originated loans sold in the secondary mortgage market, which was down to 22% for 2022 compared to 48% in 2021, partially offset by a $311 million, or 16%, decrease in overall production. Consumer loans totaled $1.6 billion at December 31, 2022, slightly down compared to December 31, 2021. The small decline in the consumer loan portfolio is due in part to a decrease of $108 million attributable to the wind down of our indirect auto lending portfolio, a business line that we have exited, largely offset by an increase in demand for other consumer products.

The following table shows average loans by category, the effective taxable equivalent yield and the percentage of total loans for each of the preceding three years:

TABLE 13. Average Loans

The following table sets forth the contractual maturity by portfolio segment at December 31, 2022.

TABLE 14. Loan Maturities by Type

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The sensitivity to interest rate changes for the portion of our loan portfolio that matures after one year is shown below.

TABLE 15. Loan Sensitivity to Changes in Interest Rates

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

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Asset Quality

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

TABLE 16. Nonperforming Assets

Nonperforming assets were $42.9 million at December 31, 2022, a decrease of $23.9 million, or 36%, compared to $66.8 million at December 31, 2021. The decrease in nonperforming assets was driven by an $18.4 million decrease in nonperforming loans, which includes nonaccrual loans and loans modified in a troubled debt restructurings (TDRs) still accruing. The decline in nonperforming loans was primarily attributable to repayments, return to accrual status after an appropriate re-performance period, and charge-offs. ORE and foreclosed assets totaled $2.0 million at December 31, 2022, a decrease of $5.5 million from December 31, 2021, as asset sales outpaced foreclosures.

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Our level of nonperforming loans continued to improve in 2022, are near historic lows and compare favorably within our peer group. Nonperforming loans totaled $40.9 million at December 31, 2022, compared to $59.3 million at December 31, 2021, and was comprised of $7.5 million of commercial loans, $26.3 million of residential mortgage loans and $7.2 million of consumer loans.

Loans modified in TDRs totaled $4.5 million at December 31, 2022, compared to $10.6 million at December 31, 2021, including $2.6 million and $6.8 million, respectively, of loans reported as nonaccrual loans. TDRs arise when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would otherwise not be considered is granted to the borrower. Certain loans modified in a TDR may continue to accrue interest when the individual facts and circumstances of the borrower indicate that we will collect all amounts due. Accruing TDRs totaled $1.9 million at December 31, 2022, down from $3.8 million at December 31, 2021.

Criticized commercial loans totaled $301.9 million at December 31, 2022, up $14.7 million, or 5%, compared to December 31, 2021. The increase in criticized commercial loans includes a $45.6 million increase in the commercial non real estate portfolio, partially offset by declines in all other commercial portfolios. Criticized loans are defined as those having potential or well-defined weaknesses that deserve management’s close attention (risk-rated special mention, substandard and doubtful), including both accruing and nonaccruing loans. Criticized commercial loans comprised 1.64% of that portfolio at December 31, 2022, down from 1.68% at December 31, 2021 and remain near historically low levels. Our commercial criticized loans at December 31, 2022 are spread across many industries, with the largest concentrations being construction, totaling $75.7 million; manufacturing, totaling $43.7 million; transportation and warehousing, totaling $43.4 million; and energy support services, totaling $36.0 million. Commercial loans risk rated pass-watch totaled $457.6 million at December 31, 2022, compared to $320.4 million at December 31, 2021. 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. The increase in the pass-watch portfolio reflects the impact of the end of economic stimulus and COVID-related modifications, along with the challenging economic environment, including prolonged inflation and labor shortages, among other things.

Allowance for Credit Losses

At December 31, 2022, the allowance for credit losses was $341.1 million, comprised of $307.8 million in allowance for loan losses and $33.3 million in the reserve for unfunded lending commitments. The allowance for credit losses decreased $30.3 million from $371.4 million at December 31, 2021, which was comprised of $342.1 million in allowance for loan losses and $29.3 million in the reserve for unfunded lending commitments. Our allowance for credit losses coverage to total loans was 1.48% at December 31, 2022 compared to 1.76% at December 31, 2021, and reflects improvement in economic conditions in our markets since last year end. While coverage is down year-over-year, it remains elevated compared to pre-pandemic levels as uncertainty remains in our economic outlook.

The decrease in the allowance for credit losses from December 31, 2021 includes reductions of $29.9 million in collectively evaluated reserves and $0.4 million in individually evaluated reserves (generally used for nonperforming loans and loans modified in a troubled debt restructuring), reflecting improvements in asset quality. The Company probability-weighted two Moody’s macroeconomic scenarios in the calculation of our collectively evaluated allowance for credit losses. The downside recessionary S-2 scenario (anchored on the baseline) was weighted more heavily at 75% and the baseline scenario was weighted 25% as management deemed the forecasted economic circumstances and outcomes included the S-2 scenario to be more likely to occur in the near term.

The December 2022 baseline forecast used in our analysis maintains a generally optimistic outlook in its assumptions, including the following: Current global oil prices hold at the current level and begins to decline slowly mid-2023, reaching the estimated long-run equilibrium of $70 per barrel by 2024; full-employment defined as unemployment at 3.5% and labor force participation of 62.5% is already achieved; the Federal Reserve issues two additional 25-basis point interest rate increases in early 2023 before rate reductions begin in late 2023 and continue throughout 2024; and reflects positive GDP growth throughout the forecast period, with annual growth of 0.9% in 2023 and 2.0% in 2024. The S-2 scenario assumes that supply chain issues worsen, increasing shortages of affected goods and keeping inflation elevated longer than expected in the baseline scenario. The Federal Reserve in turn reacts by raising interest rates more than assumed in the baseline scenario, causing the economy to fall into recession in the first quarter of 2023, lasting for three quarters with a peak to trough decline of 1.4%, resulting in a full year GDP reduction of 0.5% in 2023 and a return to growth of 1.3% in 2024. Further, the S-2 scenario assumes that the weakening economy causes unemployment to rise in the 2023, reaching a peak of 6.4% and a return to full employment not achieved until the first quarter of 2025. Additional information on the Moody’s forecast is provided in the “Economic Outlook” section of this document.

Loan growth, portfolio composition, asset quality metrics and future assumptions in economic forecasts drive the level of credit loss reserves. The allowance for credit losses on commercial loans decreased to $279.0 million, or 1.51% of that portfolio, at December 31, 2022, compared to $307.9 million, or 1.80% at December 31, 2021. The allowance for credit losses on residential mortgage loans increased to $32.5 million, or 1.05%, at December 31, 2022, compared to $30.6 million, or 1.26%, at December 31, 2021, mainly

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reflective of growth in the portfolio, combined with improved economics. Our allowance for credit losses on consumer loans was $29.6 million, or 1.88 % at December 31, 2022, compared to $32.8 million, or 2.07% at December 31, 2021.

Net charge-offs during 2022 were $1.9 million, or 0.01% of average total loans, down from $31.2 million, or 0.15% of average total loans, for the year ended December 31, 2021. In 2022, the commercial portfolio had net recoveries $3.9 million, compared to net charge-offs of $25.5 million in 2021. Commercial net charge-offs in 2021 included $14.1 million of energy-related charge-offs, with $13.3 million associated with a single legacy credit. Residential mortgage loans had net recoveries of $1.6 million in 2022, compared to $0.7 million in 2021. Net charge-offs of consumer loans totaled $7.4 million in 2022, compared to $6.4 million in 2021.

Loan growth, portfolio composition, credit quality metrics and assumptions in economic forecasts will drive the level of credit loss reserves. At present, we expect low to modest charge-offs and provision in the first quarter of 2023.

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The following table sets forth activity in the allowance for loan losses for the periods indicated.

TABLE 17. Summary of Activity in the Allowance for Credit Losses

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An allocation of the loan loss allowance by major loan category is set forth in the following table for the periods indicated.

TABLE 18. Allocation of Allowance for Loan Losses by Category

Deposits

Total deposits were $29.1 billion at December 31, 2022, down $1.4 billion, or 5%, from December 31, 2021. Average deposits of $29.5 billion for 2022 were up $0.4 billion, or 1%, over 2021. Since early 2020, deposit levels have 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 2022, we began to see gradual outflows of some of the deposit bases built over the preceding two years, as spending levels have increased amid inflationary conditions, and increased competition for deposits.

The composition of deposits at December 31, 2022 and 2021 is as follows:

TABLE 19. Deposits

At December 31, 2022, noninterest-bearing demand deposits were $13.6 billion, down $0.7 billion, or 5%, from December 31, 2021. Noninterest-bearing demand deposits comprised 47% of total deposits at both December 31, 2022 and 2021.

Interest-bearing transaction and savings accounts of $10.7 billion at December 31, 2022 decreased $0.9 billion, or 8%, from December 31, 2021. Interest-bearing public fund deposits totaled $3.2 billion at December 31, 2022, down $50.4 million, or 2%, from December 31, 2021. Year-end public fund account balances are subject to annual fluctuations dependent upon a number of factors, including the timing of tax collections. Seasonal cash inflows from public entities in the fourth quarter of each year typically results in higher balances than at other times during the year with subsequent reductions in the first quarter of the following year. Time deposits other than public funds totaled $1.5 billion at December 31, 2022, up $326 million, or 29%, from December 31, 2021.

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Table 20 sets forth average balances and weighted-average rates paid on deposits for each year in the three-year period ended December 31, 2022, as well as the percentage of total deposits for each category. Table 21 sets forth the maturities of time certificates of deposit greater than $250,000 at December 31, 2022.

TABLE 20. Average Deposits

TABLE 21. Maturity of Time Certificates of Deposit greater than or equal to $250,000*

* Includes public fund time deposits

We have estimated the Bank’s amount of uninsured deposits to be approximately $14.7 billion, using the methodologies and assumptions required for FDIC regulatory reporting.

Management expects the level of customer deposits at December 31, 2023 be relatively flat or slightly up compared to December 31, 2022.

Short-Term Borrowings

Short-term borrowings totaled $1.9 billion at December 31, 2022, up $206 million, or 12% from December 31, 2021. Average short-term borrowings for 2022 totaled $1.4 billion, down $304 million, or 18%, compared to 2021. The variance compared to December 31, 2021 reflects the repayment of $1.1 billion of low fixed-rate FHLB borrowings that were called at the option of the FHLB, and the addition of $1.43 billion in a new FHLB borrowing that bears interest at current market interest rates. Short-term borrowings are a core portion of the Company’s funding strategy, the balance of which can fluctuate depending on our funding needs and the sources utilized.

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Table 22 sets forth balances of short-term borrowings for each of the past three years. Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase and borrowings from the FHLB. Customer repurchase agreements are a source of customer funding. These agreements are offered mainly to commercial customers to assist them with their ongoing 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, the amounts available over time will vary.

TABLE 22. Short-Term Borrowings