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| HBHC > SEC Filings for HBHC > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Overview
General
The following discussion should be read in conjunction with our financial statements included with this report and our financial statements and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2008 Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section below entitled "Forward-Looking Statements."
We were organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and are headquartered in Gulfport, Mississippi. We currently operate more than 150 banking and financial services offices and more than 130 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida and Alabama through four wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA), Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL) and Hancock Bank of Alabama, Mobile, Alabama (Hancock Bank AL). Hancock Bank MS, Hancock Bank LA, Hancock Bank FL and Hancock Bank AL are referred to collectively as the "Banks." Hancock Bank subsidiaries include Hancock Investment Services, Hancock Insurance Agency, and Harrison Finance Company.
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At September 30, 2009, we had total assets of $6.8 billion and employed on a full-time equivalent basis 1,252 persons in Mississippi, 562 persons in Louisiana, 50 persons in Florida and 39 persons in Alabama.
RESULTS OF OPERATIONS
Net income for the third quarter of 2009 totaled $15.2 million, a decrease of $0.8 million, or 4.9%, from the third quarter of 2008. Diluted earnings per share for the third quarter of 2009 were $0.47, a decrease of $0.03 from the same quarter a year ago. Return on average assets for the third quarter of 2009 was 0.87% compared to 1.00% for the third quarter of 2008.
Our third quarter net income was significantly impacted by a higher level of net charge-offs and non-performing assets due to the ongoing recession and continued rise in unemployment. Net charge-offs for 2009's third quarter were $13.5 million, or 1.24 percent of average loans, compared to $4.2 million, or 0.42% of average loans in the third quarter of 2008. Of the overall increase in net charge-offs of $9.3 million, $8.6 million was reflected in commercial loans and the balance of $0.7 million in consumer loan categories. The higher level of commercial net charge-offs were largely confined to land development and commercial real estate credits in various parts of our four state footprint. Non-performing assets increased $21.3 million while other real estate owned increased $7.6 million from the third quarter of 2008.
Total assets increased $60.3 million, or 0.9% compared to September 30, 2008. Period-end loans increased $179.3 million, or 4.4%, from the same quarter a year ago. Period-end deposits increased $5.4 million, or 0.1%, from September 30, 2008. We also remain very well capitalized with total equity of $654.8 million at September 30, 2009, up $53.9 million, or 9.0%, from September 30, 2008.
Net Interest Income
Net interest income (te) for the third quarter increased $3.3 million, or 5.8 percent, while the net interest margin (te) of 3.86 percent was 13 basis points narrower than the same quarter a year ago. Growth in average earning assets was strong compared to the same quarter a year ago with an increase of $519.3 million, or 9.0 percent, reflected in higher average loans (up $348.4 million) and short-term investments (up $457.9 million) partially offset by lower securities (down $286.9 million). With short-term interest rates down significantly from the same quarter a year ago, our loan yield fell 61 basis points, pushing the yield on average earning assets down 76 basis points. However, total funding costs over the same quarter a year ago were down 64 basis points.
Provision for Loan Losses
The amount of the allowance for loan losses equals the cumulative total of the provision for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off. A specific loan is charged-off when management believes, after considering, among other things, the borrower's financial condition and the value of any collateral, that collection of the loan is unlikely. Provisions are made to the allowance to reflect incurred losses associated with our loan portfolio. We recorded a provision for loan losses of $13.5 million in the third quarter which is a $5.4 million increase in the provision for loan losses compared to $8.1 million for the quarter ended September 30, 2008. This increase was necessary to adjust the allowance to the level dictated by the Company's reserving methodologies. The provision remains elevated due to the ongoing recession and continued rise in unemployment.
Allowance for Loan Losses and Asset Quality
At September 30, 2009, the allowance for loan losses was $63.9 million compared with $61.7 million at December 31, 2008, an increase of $2.2 million. The increase in the allowance for loan losses through the first nine months of 2009 is primarily attributed to an increased estimated provision for pooled loan loss analysis based on our historical charge-off, delinquency, and non-accrual quarterly history. We do not offer subprime home mortgage loans, and therefore, our increased reserve is not associated with those high risk loans. The only higher risk loans we offer are through our finance company but those loans are immaterial to our loan portfolio. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses. Within the allowance for loan losses modeling, adequate segregation of geographic and specific loan types are documented and analyzed for appropriate risk metrics. We maintain a continuous credit quality policy that establishes acceptable loan-to-value thresholds on the front end underwriting process. Residential home values are continuously monitored by each market. As of September 30, 2009, mortgage real estate loans were approximately 11.42% of the total loan portfolio (excluding loans held for sale). A detailed description of our methodology was included in our annual report on Form 10-K for the year ended December 31, 2008. Management believes the September 30, 2009 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 1.24% for the third quarter of 2009, compared to 0.42% in the third quarter of 2008. The majority of the increase in net charge-offs, as compared to the same time last year, was caused by the weakening local real estate markets, mostly in commercial real estate loans. Of the overall increase in net charge-offs of $27.0 million, $24.2 million was reflected in commercial loans, $2.5 million in consumer loan categories, with the balance of $0.3 million in mortgage loans. The higher level of commercial net charge-offs were largely confined to land development and commercial real estate credits across all markets.
Nonaccrual loans were $35.6 million at September 30, 2009, an increase of $13.7 million, from $21.9 million at September 30, 2008. This increase is due to the weakening real estate markets across all markets due to the ongoing recession.
The following information is useful in determining the adequacy of the loan loss allowance and loan loss provision. The ratios are calculated using average loan balances (amounts in thousands).
At and for the
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Net charge-offs to average loans
(annualized) 1.24 % 0.42 % 1.14 % 0.34 %
Provision for loan losses to average
loans (annualized) 1.24 % 0.81 % 1.21 % 0.70 %
Allowance for loan losses to average
loans 1.48 % 1.45 % 1.49 % 1.52 %
Gross charge-offs $ 14,762 $ 5,133 $ 40,183 $ 13,299
Gross recoveries $ 1,267 $ 969 $ 3,552 $ 3,707
Non-accrual loans $ 35,558 $ 21,875 $ 35,558 $ 21,875
Accruing loans 90 days or more past due $ 7,766 $ 6,082 $ 7,766 $ 6,082
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Noninterest Income
Noninterest income for the third quarter of 2009 was up $0.3 million, or 1%, compared to the same quarter a year ago. Service charges on deposit accounts were up $0.7 million, or 6% because of increased overdrafts and secondary mortgage market operations income was up $0.7 million, or 81% due to increased volume of secondary market loans. Because of the historically low rate environment, the refinancing of current loans increased during the first nine months of 2009. These increases were partially offset by decreases in investment and annuity fees (down $0.4 million or 17%) because of decreased production, and trust fees (down $0.3 million or 7%) because of reduced market values of accounts due to poor economic conditions. Noninterest income for the first nine months of 2009 was down $4.4 million, or 5%, compared to the first nine months of 2008 for the same reasons stated above additionally offset by a $1.4 million decrease in income from insurance operations that occurred mostly in the first quarter due to a decrease in credit life premium production. Also contributing to the reduction of noninterest income from the first nine months of last year were securities transaction gains of $6.0 million in the first quarter of 2008. We received proceeds from the VISA IPO which resulted in a $2.8 million realized securities gain and we had a $3.2 million net gain for a fair value adjustment of a transfer on trading securities we reclassified from trading to available for sale because we intended to hold them for a longer period of time.
The components of noninterest income for the three and nine months ended September 30, 2009 and 2008 are presented in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands)
Service charges on deposit accounts $ 11,795 $ 11,108 $ 33,540 $ 32,777
Trust fees 4,008 4,330 11,189 13,080
Credit card merchant discount fees 2,845 2,805 8,309 8,229
Income from insurance operations 3,526 3,819 11,026 12,419
Investment and annuity fees 2,007 2,421 6,559 7,957
ATM fees 1,862 1,718 5,536 5,166
Secondary mortgage market operations 1,482 817 4,467 2,347
Income from bank owned life insurance 1,322 1,553 4,591 4,577
Outsourced check income (24 ) 28 (44 ) 263
Letter of credit fees 343 312 1,015 852
Gain on sale of property and equipment 14 14 1,374 677
Other income 1,167 1,269 6,345 4,031
Securities transactions gains, net 61 (79 ) 61 5,999
Total noninterest income $ 30,408 $ 30,115 $ 93,968 $ 98,374
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Noninterest Expense
Operating expenses for the third quarter of 2009 were $0.3 million, or 0.5%, higher compared to the same quarter a year ago. The main increase from the same quarter a year ago was reflected in higher levels of deposit insurance and regulatory fees which were up $1.5 million, or 165%, due to a higher FDIC assessment rate and increased fees due to insurance on noninterest bearing transaction accounts. Total personnel expense also increased $0.5 million, or 2%, due to increased pension and postretirement expense. There were also some offsets to the increase in operating expenses over the same quarter a year ago. Legal and professional services expense was down $0.7 million, or 20%, due to a reduction in other professional services and reduced commissions paid in Magna Insurance Company and advertising expense was down $0.9 million, or 41%. Operating expenses for the first nine months of 2009 were $12.0 million, or 8%, higher compared to the first nine months of 2008. Deposit insurance and regulatory fees increased $8.4 million due to a $3.4 million FDIC special assessment in the second quarter of 2009 and increased fees due to insurance on noninterest bearing transaction accounts. Personnel expense increased $7.3 million primarily to lower deferrals of salary loan origination costs and increased pension expense. These increases were partially offset by decreases in advertising ($1.7 million or 31%), legal and professional services ($1.4 million or 15%) and postage and communication ($0.8 million or 11%).
The following table presents the components of noninterest expense for the three and nine months ended September 30, 2009 and 2008.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(In thousands)
Employee compensation $ 22,688 $ 24,392 $ 68,926 $ 65,575
Employee benefits 6,425 4,272 19,664 15,751
Total personnel expense 29,113 28,664 88,590 81,326
Equipment and data processing expense 7,057 7,420 21,513 21,952
Net occupancy expense 5,144 5,188 15,215 14,491
Postage and communications 2,313 2,396 6,239 6,995
Ad valorem and franchise taxes 780 622 2,313 2,746
Legal and professional services 2,749 3,447 7,866 9,275
Stationery and supplies 490 366 1,398 1,344
Amortization of intangible assets 354 360 1,064 1,089
Advertising 1,301 2,187 3,729 5,437
Deposit insurance and regulatory fees 2,335 880 10,279 1,895
Training expenses 116 123 295 476
Other real estate owned expense, net 307 265 885 397
Insurance expense 492 421 1,400 1,595
Other fees 913 1,017 2,909 2,999
Non loan charge-offs 729 81 953 288
Other expense 1,556 2,046 5,165 5,501
Total noninterest expense $ 55,749 $ 55,483 $ 169,813 $ 157,806
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Income Taxes
For the nine months ended September 30, 2009 and 2008, the effective income tax rates were approximately 19% and 27%, respectively. Because of the reduced level of pretax income in 2009, the tax exempt interest income and the utilization of tax credits had a significant impact on the effective tax rate. The total amount of tax-exempt income earned during the first nine months of 2009 was $15.6 million compared to $13.5 million in the comparable period in 2008. Tax-exempt income for the nine months ended September 30, 2009 consisted of $3.8 million from securities and $11.8 million from loans and leases. Tax-exempt income for the first nine months of 2008 consisted of $4.4 million from securities and $9.1 million from loans and leases. The total amount of tax credits earned during the first nine months of 2009 was $3.3 million compared to $2.3 million in the comparable period in 2008. The source of the tax credits for 2009 resulted from investments in New Market Tax Credits, Qualified Zone Activity Bonds Credits, Work Opportunity Tax Credits, related to hiring individuals in the Go Zone, and Historic Tax Credits.
Selected Financial Data
The following tables contain selected financial data comparing our consolidated
results of operations for the three and nine months ended September 30, 2009 and
2008.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Per Common Share Data (In thousands, except per share data)
Earnings per share:
Basic $ 0.48 $ 0.51 $ 1.35 $ 1.81
Diluted $ 0.47 $ 0.50 $ 1.34 $ 1.79
Cash dividends per share $ 0.24 $ 0.24 $ 0.72 $ 0.72
Book value per share (period-end) $ 20.54 $ 18.95 $ 20.54 $ 18.95
Weighted average number of shares:
Basic 31,857 31,471 31,828 31,402
Diluted (1) 32,058 31,905 32,003 31,826
Period-end number of shares 31,877 31,702 31,877 31,702
Market data:
High price $ 42.38 $ 68.42 $ 45.56 $ 68.42
Low price $ 29.90 $ 33.34 $ 22.51 $ 33.34
Period-end closing price $ 37.57 $ 51.00 $ 37.57 $ 51.00
Trading volume 11,676 23,562 46,790 55,296
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(1) There were no anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2009 and September 30, 2008.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Performance Ratios (dollar amounts in thousands)
Return on average assets 0.87 % 1.00 % 0.81 % 1.22 %
Return on average common equity 9.38 % 10.90 % 9.06 % 13.16 %
Earning asset yield (tax equivalent
("TE")) 5.26 % 6.02 % 5.26 % 6.11 %
Total cost of funds 1.39 % 2.03 % 1.54 % 2.21 %
Net interest margin (TE) 3.86 % 3.99 % 3.71 % 3.90 %
Common equity (period-end) as a percent
of total assets (period-end) 9.62 % 8.91 % 9.62 % 8.91 %
Leverage ratio (period-end) 8.33 % 8.66 % 8.33 % 8.66 %
FTE headcount 1,903 1,941 1,903 1,941
Asset Quality Information
Non-accrual loans $ 35,558 $ 21,875 $ 35,558 $ 21,875
Foreclosed assets $ 9,775 $ 2,197 $ 9,775 $ 2,197
Total non-performing assets $ 45,333 $ 24,072 $ 45,333 $ 24,072
Non-performing assets as a percent of
loans and foreclosed assets 1.06 % 0.59 % 1.06 % 0.59 %
Accruing loans 90 days past due $ 7,766 $ 6,082 $ 7,766 $ 6,082
Accruing loans 90 days past due as a
percent of loans 0.18 % 0.15 % 0.18 % 0.15 %
Non-performing assets + accruing loans
90 days past due to loans and foreclosed
assets 1.25 % 0.74 % 1.25 % 0.74 %
Net charge-offs $ 13,495 $ 4,164 $ 36,631 $ 9,592
Net charge-offs as a percent of average
loans 1.24 % 0.42 % 1.14 % 0.34 %
Allowance for loan losses $ 63,850 $ 57,200 $ 63,850 $ 57,200
Allowance for loan losses as a percent
of period-end loans 1.50 % 1.40 % 1.50 % 1.40 %
Allowance for loan losses to NPAs +
accruing loans 90 days past due 120.25 % 189.69 % 120.25 % 189.69 %
Provision for loan losses $ 13,495 $ 8,064 $ 38,756 $ 19,669
Average Balance Sheet
Total loans $ 4,301,651 $ 3,953,235 $ 4,288,186 $ 3,768,626
Securities 1,478,755 1,765,702 1,570,025 1,777,036
Short-term investments 486,035 28,161 496,413 94,810
Earning assets 6,266,441 5,747,098 6,354,624 5,640,472
Allowance for loan losses (63,850 ) (54,786 ) (63,075 ) (51,739 )
Other assets 774,676 682,316 769,949 681,645
Total assets $ 6,977,267 $ 6,374,628 $ 7,061,498 $ 6,270,378
Noninterest bearing deposits $ 931,188 $ 869,881 $ 933,412 $ 869,655
Interest bearing transaction deposits 1,459,377 1,408,013 1,473,179 1,410,665
Interest bearing public fund deposits 1,223,272 1,062,127 1,365,265 990,498
Time deposits 1,946,975 1,763,609 1,952,805 1,766,541
Total interest bearing deposits 4,629,624 4,233,749 4,791,249 4,167,704
Total deposits 5,560,812 5,103,630 5,724,661 5,037,359
Other borrowed funds 655,556 587,939 589,025 546,695
Other liabilities 117,326 98,913 113,108 107,460
Common stockholders' equity 643,573 584,146 634,704 578,864
Total liabilities & common stockholders'
equity $ 6,977,267 $ 6,374,628 $ 7,061,498 $ 6,270,378
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