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| HBHC > SEC Filings for HBHC > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
The purpose of this discussion and analysis is to focus on significant changes and events in the financial condition and results of operations of Hancock Holding Company and our subsidiaries (Hancock) during 2008 and selected prior periods. This discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this report, including the consolidated financial statements and related notes. Certain information relating to prior years has been reclassified to conform to the current year's presentation.
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects us from unwarranted litigation, if actual results are different from management expectations. This discussion and analysis contains forward-looking statements and reflects management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.
EXECUTIVE OVERVIEW
Net income for the year ended December 31, 2008 was $65.4 million, a decrease of $8.5 million, or 11.5%, from 2007's net income of $73.9 million. Diluted earnings per share were $2.05, a decrease of $0.22 from 2007's diluted earnings per share of $2.27. Our return on average assets for 2008 was 1.02% compared to 1.26% for 2007.
Our year-end results were heavily impacted by the continuing financial crisis and on-going national economic recession. Weaknesses in residential development and rising unemployment levels in our market areas also impacted earnings which had a significant impact on our net charge-off levels and resulted in a higher allowance for loan losses in 2008. As a result of these difficult national and regional issues, we recorded a provision for loan losses of $36.8 million, which represents an increase of $29.2 million compared to 2007. Of the $36.8 million provision, $17.1 million was recorded in the fourth quarter of 2008 as a result of the ongoing recession, the continued rise in unemployment levels, and an increase in non-performing loans and higher past dues. Net charge-offs for 2008 were $22.2 million, or 0.57% of average loans and were up $14.9 million compared to 2007. Of the $22.2 million in net charge-offs in 2008, $12.6 million of that was recorded in the fourth quarter of 2008 and was primarily related to the construction and land development segments as the housing market continued to struggle. The construction and land development loan segment represents approximately 13.7% of Hancock's total loan portfolio, or about $585.4 million at year end 2008. These weakening economic conditions also impacted our allowance for loan losses, which increased to 1.45% of period-end loans at December 31, 2008 from the 1.31% recorded at December 31, 2007.
Our balance sheet showed strong growth during 2008. At year end, our total asset level reached $7.2 billion, an increase of $1.1 billion, or 18.4%, from December 31, 2007. We experienced strong growth in loans in 2008. Period-end loans were up $652.9 million, or 18.2%, from December 31, 2007. Loan growth increased across our loan categories of commercial/ real estate, direct consumer, indirect consumer, and finance company loans. All of the growth in assets was organic growth as we did not record any acquisitions in the past year. We also experienced strong growth in deposits over the past year. Period-end deposits at December 31, 2008 were $5.9 billion, up $921.4 million, or 18.4%, from December 31, 2007. Our growth was related to deposit rate campaigns in growing markets in addition to customers seeking a safe and secure bank for their money as some other banks experienced capital concerns in 2008. We continue to remain well capitalized with total equity of $609.5 million at December 31, 2008, up $55.3 million, or 10.0%, from December 31, 2007.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (te) 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 internal analytical purposes, management adjusts net interest income to a "taxable equivalent" basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans). Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income (te).
Another significant statistic in the analysis of net interest income is the effective interest differential (also referred to as the net interest margin), which is the ratio of net interest income (te) to our average earning assets. The difference between the average yield on earning assets and the effective rate paid for all deposits and borrowed funds, non-interest-bearing as well as interest-bearing is the net interest spread. Since a portion of the Bank's deposits does not bear interest, such as demand accounts, the rate paid for all funds is lower than the rate on interest-bearing liabilities alone. The net interest margin (te) for the years 2008, 2007, and 2006 was 3.80%, 4.08%, and 4.23%, respectively.
Net interest income (te) of $219.9 million was recorded for the year 2008, an increase of $4.9 million, or 2.3%, from 2007. We experienced a decrease of $17.5 million, or 8%, from 2007 to 2006. The factors contributing to the changes in net interest income (te) for 2008, 2007 and 2006 are presented in Tables 1 and 2. Table 1 is an analysis of the components of average balance sheets, levels of interest income and expense and the resulting earning asset yields and liability rates. Table 2 details the overall changes in the level of net interest income into rate and volume.
The increase of $4.9 million in net interest income (te) in 2008 from 2007 was caused by an increase in average earnings assets of $521.9 million, or 9.9%. In 2008, our average loan growth increased $445.9 million, or 13%, from 2007 along with a slight increase in average securities of $17.3 million. With short-term interest rates down significantly from last year, our loan yield fell 107 basis points, pushing the yield on average earnings assets down 77 basis points. There was also an unfavorable change in 2008 in our average funding mix with most new deposits more heavily weighted to mostly time deposits of $304.2 million and lower levels of non-interest bearing transaction deposits of $51 million.
When comparing 2007 to 2006, the primary driver of the $17.5 million, or 8% decrease, in net interest income (te) was a $223.9 million, or 4%, decrease in average earning assets. In 2008, our average loan growth increased $366 million offset by a decrease in average securities of $495 million. There was an unfavorable change in 2007 in our average funding mix with higher levels of more costly time deposits of $233 million and lower levels of transaction deposits of $205 million. The impact of this change on net interest margin was managed by reducing rates paid on the interest bearing deposits.
Recognizing the importance of interest differential to total earnings, management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional, and area economics our loan and investment policies are designed to maximize interest differential while maintain sufficient liquidity and availability of funds for purposes of meeting existing commitments and for investment in loans and other investment opportunities that may arise.
The following table is a summary of average balance sheets that reflects average interest earned, average interest paid, average yield and average rate:
TABLE 1. Summary of Average Balance Sheets (w/Net Interest Income (te) & Interest Rates)
--------------------------- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Years Ended December 31,
2008 2007 2006
--------------------------------------------------------------------------- ---------------------------------- -
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- -- --------- -- ------ -- ----------- -- --------- -- ------ -- ----------- -- --------- -- ------ -
(In thousands)
Assets
Interest-Earnings Assets:
Loans* (te) $ 3,873,908 $ 254,347 6.57 % $ 3,428,009 $ 261,944 7.64 % $ 3,062,222 $ 235,067 7.68 %
U.S. Treasury securities 11,366 296 2.60 % 29,095 1,379 4.74 % 63,668 3,018 4.74 %
U.S. agency securities 349,931 16,000 4.57 % 810,299 41,111 5.07 % 1,270,128 60,701 4.78 %
CMOs 150,692 7,465 4.95 % 94,731 3,997 4.22 % 154,673 6,142 3.97 %
Mortgage-backed
securities 1,012,274 52,564 5.19 % 534,893 27,190 5.08 % 491,130 23,313 4.75 %
Obligations of states and
political subdivisions:
taxable 52,070 1,661 3.19 % 50,944 1,189 2.33 % 20,205 350 1.73 %
nontaxable (te) 120,237 7,659 6.37 % 146,060 9,590 6.57 % 151,681 10,416 6.87 %
Other corporate
securities 47,428 2,061 4.34 % 60,692 3,223 5.31 % 70,629 3,559 5.04 %
Total investment in
securities 1,743,998 87,706 5.03 % 1,726,714 87,679 5.08 % 2,222,114 107,499 4.84 %
Federal funds sold and
short-term investments 175,891 3,838 2.18 % 117,158 5,613 4.79 % 211,511 9,760 4.61 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Total interest-earning
assets (te) 5,793,797 345,891 5.97 % 5,271,881 355,236 6.74 % 5,495,847 352,326 6.41 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Non-earning assets:
Other assets 685,946 626,451 600,238
Allowance for loan losses (53,354 ) (46,443 ) (64,285 )
- --------- - --------- - ---------
Total assets $ 6,426,389 $ 5,851,889 $ 6,031,800
- --------- - --------- - ---------
Liabilities and
Stockholder's Equity
Interest-bearing
Liabilities:
Interest-bearing
transaction deposits $ 1,415,288 13,751 0.97 % $ 1,419,077 18,135 1.28 % $ 1,623,597 14,931 0.92 %
Time deposits 1,843,966 70,659 3.83 % 1,778,854 81,223 4.57 % 1,545,834 62,807 4.06 %
Public funds 1,046,484 26,642 2.55 % 803,589 33,561 4.18 % 771,146 32,354 4.20 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Total interest-bearing
deposits 4,305,738 111,052 2.58 % 4,001,520 132,919 3.32 % 3,940,577 110,092 2.79 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Customer repurchase
agreements 524,712 14,491 2.76 % 216,730 8,023 3.70 % 250,603 9,060 3.62 %
Other interest-bearing
liabilities 30,186 536 1.78 % 11,280 289 2.56 % 30,580 1,517 4.96 %
Capitalized Interest - (77 ) 0.00 % - (995 ) 0.00 % - (806 ) 0.00 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Total interest-bearing
liabilities 4,860,636 126,002 2.59 % 4,229,530 140,236 3.32 % 4,221,760 119,863 2.84 %
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Non-interest bearing:
Demand deposits 876,669 927,656 1,128,850
Other liabilities 104,279 132,320 167,534
Stockholders' equity 584,805 562,383 513,656
- --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -- - --------- -- - ------- -- - ---- -
Total liabilities &
stockholders' equity $ 6,426,389 2.17 % $ 5,851,889 2.66 % $ 6,031,800 2.18 %
- --------- - ---- -- - --------- - ---- -- - --------- - ----
Net interest income and
margin (te) $ 219,889 3.80 % $ 215,000 4.08 % $ 232,463 4.23 %
- ------- - ------- - -------
Net earning assets and
spread $ 933,161 3.38 % $ 1,042,349 3.42 % $ 1,280,795 3.57 %
- --------- - ---- -- - --------- - ---- -- - --------- - ----
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*Loan interest income includes loan fees of $483,000, $1.3 million and $9.0 million for each of the three years ended December 31, 2008, 2007 and 2006. Non-accrual loans in average balances and income on such loans, if recognized, is recorded on a cash basis. Tax equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.
The following table presents the change in interest income and the change in interest expense:
TABLE 2. Summary of Changes in Net Interest Income (te)
--------------------------------------------------------------------------------------------------------------------
2008 Compared to 2007 2007 Compared to 2006
--------------------------------------- --- ----------------------------------------- -
Due to Due to
Change in Total Change in Total
----------------------- Increase ------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- --- --------- --- ----------- --- ---------- --- ---------- --- ----------- -
(In thousands)
Interest Income (te)
Loans $ 31,558 ($ 39,155 ) ($ 7,597 ) $ 30,204 ($ 3,327 ) $ 26,877
U.S. Treasury securities (622 ) (461 ) (1,083 ) (1,639 ) - (1,639 )
U.S. agency securities (21,386 ) (3,725 ) (25,111 ) (17,270 ) (2,320 ) (19,590 )
CMOs 2,678 790 3,468 (1,902 ) (243 ) (2,145 )
Mortgage-backed securities 24,777 597 25,374 2,157 1,720 3,877
Obligations of states and
political subdivisions:
Taxable 25 447 472 684 155 839
Nontaxable (te) (1,365 ) (566 ) (1,931 ) (528 ) (298 ) (826 )
FHLB stock and other
corporate securities (634 ) (528 ) (1,162 ) (336 ) - (336 )
Total investment in
securities 3,473 (3,446 ) 27 (18,834 ) (986 ) (19,820 )
Federal funds and short-term
investments 2,080 (3,855 ) (1,775 ) (4,507 ) 360 (4,147 )
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Total interest income (te) $ 37,111 ($ 46,456 ) ($ 9,345 ) $ 6,863 ($ 3,953 ) $ 2,910
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Interest-bearing transaction
deposits $ 48 $ 4,336 $ 4,384 $ 2,060 ($ 5,264 ) ($ 3,204 )
Time deposits (2,884 ) 13,448 10,564 (10,112 ) (8,304 ) (18,416 )
Public funds (8,416 ) 15,335 6,919 (1,356 ) 149 (1,207 )
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Total interest-bearing
deposits (11,252 ) 33,119 21,867 (9,408 ) (13,419 ) (22,827 )
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Securities sold under
repurchase agreements (8,945 ) 2,477 (6,468 ) 1,250 (213 ) 1,037
Other interest-bearing
liabilities (22 ) (1,143 ) (1,165 ) 1,095 322 1,417
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Total interest expense (20,219 ) 34,453 14,234 (7,063 ) (13,310 ) (20,373 )
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
Change in net interest
income (te) $ 16,892 ($ 12,003 ) $ 4,889 ($ 200 ) ($ 17,263 ) ($ 17,463 )
- ------- --- -- ------ --- --- ------- --- -- ------- --- -- ------- --- --- ------- -
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Provision for Loan Losses
Weaknesses in residential development and rising unemployment levels in our market areas had a significant impact on our net charge-off levels and resulted in a higher allowance for loan losses in 2008 than 2007. Net charge-offs were $22.2 million, an increase of $14.9 million, or 206.3%, from 2007 to 2008. The increase was primarily reflected in our construction and land development loan segment. The construction and land development loan segment represents approximately 13.7% of Hancock's total loan portfolio, or about $585.4 million at year end 2008. The provision for loan losses was $36.8 million in 2008, an increase of $29.2 million, or 384.5% from 2007. Major drivers of the overall higher level of the provision for loan losses were an increase in period-end loans of $652.9 million, or 18.2%, from December 31, 2007, continued weakness in the local and national economies, and increases in nonperforming loans and higher past dues. The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to absorb inherent losses in the loan portfolio. The amount of provision for each period is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, identified loan impairment, management's assessment of the loan portfolio quality, the value of collateral, as well as, overall economic factors. Our allowance for loan losses as a percent of period-end loans was 1.45% at December 31, 2008, an increase of 14 basis points from 1.31% at December 31, 2007.
Net charge-offs were $7.2 million for 2007, an increase of $0.2 million, or 3.1%, from 2006 to 2007. The provision for loan losses in 2007 was $7.6 million. In 2006, we reversed $20.8 million of the allowance for loan losses through the provision primarily due to better than expected loss experience with Hurricane Katrina storm impacted credits. The allowance for loan losses as a percent of period-end loans was 1.31% in 2007, a decrease of 12 basis points from 1.44% in 2006.
Noninterest Income
Table 3 presents a three-year analysis of the components of noninterest
income. Overall, noninterest income of $127.8 million was reported in 2008, as
compared to $120.7 million for 2007 and $106.5 million for 2006. This represents
an increase of $7.1 million, or 6%, from 2007 to 2008 and an increase of $14.2
million, or 13%, from 2006 to 2007.
TABLE 3. Noninterest Income
----------------------------- -- - ------- -- -- -------- ---- - ------- -- -- -------- ---- -- ------- -
2008 % Change 2007 % Change 2006
--------- -- ----------- ---- --------- -- ----------- ---- ---------- -
(In thousands)
Service charges on deposit
accounts $ 44,243 6 % $ 41,929 16 % $ 36,228
Trust fees 16,858 6 % 15,902 20 % 13,286
Insurance commissions and
fees 16,554 -14 % 19,229 0 % 19,248
Investment and annuity fees 10,807 24 % 8,746 46 % 5,970
Debit card and merchant fees 11,082 9 % 10,126 8 % 9,365
ATM fees 6,856 15 % 5,983 12 % 5,338
Secondary mortgage market
operations 2,977 -20 % 3,723 6 % 3,528
Other fees and income 13,576 -8 % 14,740 8 % 13,622
Net storm-related gains - N/M * - N/M * 5,084
Securities gains/(losses) 4,825 N/M * 308 N/M * (5,169 )
- ------- -- -- -------- ---- - ------- -- -- -------- ---- -- ------- -
Total non-interest income $ 127,778 6 % $ 120,686 13 % $ 106,500
- ------- -- -- -------- ---- - ------- -- -- -------- ---- -- ------- -
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*Not meaningful
Noninterest income increased $7.1 million, or 6%, when comparing 2008 to 2007. Increases were experienced in service charges on deposit accounts, trust fees, investment and annuity fees, debit card and merchant fees, ATM fees, and securities gains/(losses). Service charges on deposit accounts increased $2.3 million, or 6%, when compared to 2007, due to a $1.3 million increase in overdraft fees as a result of an increase in rate per item, effective January 1, 2008, in addition to the increase in period-end deposits of $921 million in 2008. Trust fee income increased $1.0 million, or 6%, when compared to the previous year. Investment and annuity fees increased $2.1 million, or 24%, from 2007 to 2008 due to an increase in annuity sales to customers from our subsidiary, Hancock Investment Services. Debit card and merchant fees increased $1.0 million or 9% and ATM fees increased $0.9 million or 15% due to an increase in customers. Securities gains increased $4.5 million in 2008. For additional information on securities activity, see Note 2 of Notes to the Consolidated Financial Statements. Insurance commissions and fees decreased $2.7 million or 14%, mainly due to our subsidiary Magna Insurance Company's reduction of the annuity business which was accelerated with the 1035 exchange program promoted in the fourth quarter of 2007. Other fees and income decreased $1.2 million, or 8%, and secondary mortgage market operations decreased $0.7 million, or 20%.
Increases in noninterest income, when comparing 2007 to 2006, were experienced in service charges on deposit accounts, trust fees, investment and annuity fees, insurance commissions and fees, debit card and merchant fees, ATM fees, secondary mortgage market operations, and other fees and income. Service charges on deposit accounts increased $5.7 million, or 16%, when compared to 2006. This was caused by service charge fee increases in 2007 on consumer and business accounts and an increase in accounts from the expanding Alabama market. Trust fee income increased $2.6 million, or 20%, when compared to the previous year as a result of increases in assets under care (either managed or in custody). Investment and annuity fees increased $2.8 million, or 46%, from 2006 to 2007 and there were higher levels of other fees and income (up $1.1 million or 8%).
Noninterest Expense
Table 4 presents an analysis of the components of noninterest expense for
the years 2008, 2007 and 2006. The level of operating expenses decreased $3.3
million, or 2%, from 2007 to 2008 and increased $13.6 million, or 7%, from 2006
to 2007.
TABLE 4. Noninterest Expense
------------------------------ -- - ------- - -- -------- ---- - ------- -- -- -------- ---- - ------- -
2008 % Change 2007 % Change 2006
- ------- - -- -------- ---- - ------- -- -- -------- ---- - ------- -
(In thousands)
Employee compensation $ 88,670 5 % $ 84,654 0 % $ 84,569
Employee benefits 21,103 -5 % 22,305 16 % 19,184
- ------- - -- -------- ---- - ------- -- -- -------- ---- - ------- -
Total personnel expense 109,773 3 % 106,959 3 % 103,753
Equipment and data processing
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