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HBHC > SEC Filings for HBHC > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for HANCOCK HOLDING CO


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Recent Economic and Industry Developments

Recent reports from the Federal Reserve point to continued modest expansion of economic activity throughout most of Hancock's market area. Activity at energy related businesses operating mainly in Hancock's south Louisiana and Houston, Texas market areas remained at high levels with generally positive prospects for the remainder of 2013. Travel and tourism, which is important to several of the Company's market areas, also remained strong and is expected to remain above prior year levels, despite concerns over the impact of gas prices on summer vacation travel. Retail sales activity is generally improved from prior year levels and auto sales continue at a strong pace. The Texas market in particular continues to perform well, but overall retail activity is mixed, with signs that the expiration of the payroll tax cut, increased fuel and healthcare costs, and tepid employment growth have had some impact on consumer spending and confidence. Reports on manufacturing activity were generally positive, with increased optimism in some sectors.

The markets for both residential and commercial properties continue to show some improvement in our market areas. Home sales are growing modestly year-over-year, and prices are trending higher for some markets and product categories, especially in Florida and Texas. New home construction activity is also showing some continued improvement.

The commercial real estate market saw gains in occupancy and rental rate, with continued strong demand in the apartment sector. The office and industrial sector appears poised for growth over the next 12 to 18 months in response to improved business activity, but the retail sector remains soft. Investor interest in commercial real estate appears to have spread to secondary and tertiary markets, especially for multifamily housing.

The recovery of the overall U.S. economy continues, but the rate of growth is slow and erratic. Competition among financial services firms remains intense for high quality customers, with downward pressure on loan pricing. The Federal Reserve has responded to the slow and tenuous recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate.

Highlights of First Quarter 2013 Financial Results

Net income for the first quarter of 2013 was $48.6 million, or $0.56 per diluted common share, compared to $47.0 million, or $0.54 in the fourth quarter of 2012. Net income was $18.5 million, or $0.21, in the first quarter of 2012. There were no merger-related costs in the first quarter of 2013 or the fourth quarter of 2012. The first quarter of 2012 included $33.9 million of pre-tax merger-related expenses.

Included in the Company's first quarter of 2013 results are:

Approximately $7.5 million pre-tax, or $.06 per diluted common share, of higher than expected loan accretion related to cash collected on zero carrying value acquired loan pools.

Approximately $6.6 million pre-tax, or $.05 per diluted common share, of net loan loss provision taken on the FDIC covered portfolio.

Approximately $1.1 million, or $.01 per diluted common share, of one-time tax benefits related to specific tax credits.

Due to continued rate pressure on earning assets and other economic headwinds impacting overall revenue, management expects near term earnings to remain flat to slightly down from current levels.


Management expects these pressures and headwinds will continue into the foreseeable future. Therefore, as part of its ongoing planning process, management reviewed its long-term strategic plan to determine the most effective and efficient way of operating the consolidated organization. As part of this review, it was determined that certain areas of the Company needed to be right-sized or retooled, and as a result management announced an efficiency and process improvement initiative designed to reduce overall annual expense levels by $50 million over the next seven quarters. Certain one-time costs, such as severance, professional fees and lease buyouts, are expected to be incurred to implement the efficiency initiative, although the scale of such costs cannot currently be estimated with certainty.

Operating income for the first quarter of 2013 was $48.6 million or $0.56 per diluted common share, compared to $46.6 million, or $0.54 in the fourth quarter of 2012. Operating income was $40.5 million, or $0.47, in the first quarter of 2012. We define operating income as net income excluding tax-effected merger-related expenses and securities transaction gains or losses. The Selected Financial Data below includes a reconciliation of net income to operating income.

Hancock's return on average assets (ROA) was 1.03% for the first quarter of 2013, compared to 0.99% in the fourth quarter of 2012. Operating ROA was 1.03% in the first quarter of 2013 compared to 0.98% and 0.85% in the fourth quarter and first quarters of 2012, respectively.

Total assets at March 31, 2013 were $19.1 billion, a decrease of $400 million from December 31, 2012. The decrease is partly related to the seasonal and short-term nature of certain balance sheet items, as is discussed below in the "Balance Sheet Analysis" section. Average total assets for the first quarter of 2013 were $19.2 billion, up slightly from the fourth quarter of 2012 and flat compared to the same period in 2012.

Common shareholders' equity totaled $2.5 billion at March 31, 2013, up almost $24 million from year-end 2012. The Company continued to build its strong capital base, and the tangible common equity (TCE) ratio improved 37 basis points to 9.14% at March 31, 2013. On April 30, the company's board of directors authorized the repurchase of up to 5% of the company's outstanding common stock. The shares may be repurchased through privately negotiated transactions and in the open-market from time to time, depending on market conditions and other factors.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (taxable equivalent or TE) for the first quarter of 2013 totaled $176.7 million, a $6.1 million (3%) decline from the fourth quarter of 2012. Approximately $3.0 million of the decline was related to having two fewer days in the first quarter of 2013 compared to the fourth quarter of 2012. Net interest income was down $2.6 million (1%) compared to the first quarter of 2012, which had one more day than the current quarter. Average earning assets for the first quarter of 2013 were $16.5 billion, up approximately $0.3 billion compared to both the fourth quarter of 2012 and the same quarter a year ago. 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).

The reported net interest margin (TE) for the first quarter of 2013 was 4.32%, down 16 basis points (bps) from the fourth quarter of 2012 and down 11 bps from the first quarter of 2012. The current quarter's core margin (net interest margin (TE) calculated excluding total net purchase accounting adjustments) of 3.41% compressed approximately 20 bps compared to the fourth quarter of 2012 and approximately 40 bps compared to the first quarter of 2012, mainly from a decline in the core yields on the loan and securities portfolios.

The reported and core margins were favorably impacted during the first quarter of 2013 by the investment of approximately $1 billion of year-end excess liquidity earning 25 basis points into mortgage-back securities earning approximately 1.65%. Because the majority of the transactions were completed in late February 2013, the full quarter's impact from the change in mix will be reflected in second quarter results.

The reported margin for the first quarter of 2013 was also favorably impacted by approximately $7.5 million of higher than expected loan accretion related to significant cash collections on certain acquired loan pools with zero carrying value. Changes in activity related to prepayments and payoffs in the acquired portfolio can cause quarterly accretion levels to be volatile.


The overall reported yield on earning assets was 4.60% in the first quarter of 2013, a decrease of 16 bps from the fourth quarter of 2012 and 21 bps from the first quarter of 2012. The reported loan portfolio yield of 5.83% for the current quarter was down 12 bps from the fourth quarter of 2012 and 21 bps from the first quarter of 2012. Recent activity in commercial lending has been in very competitively priced segments. Rates on all new loans booked in the first quarter were in the range of 3.00 and 3.50%. The yield on the investment portfolio continues to decline as proceeds from maturities and paydowns are reinvested at the current lower market rates.

The overall cost of funding earning assets was 0.28% in the first quarter of 2013, unchanged from the fourth quarter of 2012 and down 10 bps from the first quarter of 2012. The mix of funding sources was generally stable. Interest-free sources, including noninterest bearing demand deposits funded over 30% of earning assets through this period. The overall rate paid on interest-bearing deposits was 0.27% in the current quarter, down slightly from the fourth quarter of 2012 and 14 bps below the first quarter of 2012. The decreases were primarily due to the impact of the sustained low rate environment on overall deposit rates including the re-pricing of time deposits. The opportunity to re-price time deposits at significantly lower rates over the near term has largely been eliminated.

As earning assets continue to reprice at lower rates, and with little opportunity to further lower funding costs, management expects 5-10 bps of compression in the core margin in the near term. All else equal, and adjusting for the volatility noted above related to loan accretion, management also anticipates compression in the reported margin of 10-20 bps in the near term, with most resulting from lower expected accretion levels.

The following table details the components of our net interest income and net interest margin.

--------------------------------------------------------------------------------
                                                                                            Three Months Ended
                                                    March 31, 2013                          December 31, 2012                           March 31, 2012
(dollars in millions)                     Interest        Volume        Rate        Interest        Volume        Rate        Interest        Volume        Rate
Average earning assets
Commercial & real estate
loans (te) (a) (b)                       $    113.3     $  8,277.1       5.55 %    $    113.0     $  8,262.8       5.44 %    $    112.5     $  8,017.7       5.64 %
Mortgage loans                                 25.7        1,626.6       6.31            28.0        1,613.9       6.94            26.4        1,549.1       6.82
Consumer loans                                 26.5        1,626.2       6.61            28.6        1,667.1       6.82            28.6        1,626.1       7.05
Loan fees & late charges                        0.6                                       3.1                                       0.8

Total loans (te)                              166.1       11,529.9       5.83           172.7       11,543.8       5.95           168.3       11,192.9       6.04

US Treasury securities                           -             0.1       4.68              -             0.2       4.65              -             0.1       4.67
US agency securities                             -             5.4       1.09              -            18.2       1.08             1.3          219.3       2.30
CMOs                                            7.1        1,534.9       1.85             7.2        1,577.1       1.83             6.8        1,361.2       1.99
Mortgage backed securities                     11.6        2,163.6       2.15            10.5        1,891.7       2.22            14.4        2,321.7       2.48
Municipals (te)                                 2.6          217.0       4.71             3.0          238.7       4.93             3.3          284.1       4.60
Other securities                                 -             8.3       1.96             0.1            6.9       5.43             0.1            8.1       6.21

Total securities (te) (c)                      21.3        3,929.3       2.17            20.8        3,732.8       2.21            25.9        4,194.5       2.46

Total short-term investments                    0.6        1,058.5       0.25             0.6          969.0       0.25             0.5          852.8       0.25

Average earning assets (te)              $    188.0     $ 16,517.7       4.60 %    $    194.1     $ 16,245.6       4.76 %    $    194.7     $ 16,240.2       4.81 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                         $      1.7     $  5,982.4       0.11 %    $      1.7     $  5,931.0       0.12 %    $      2.2     $  5,626.0       0.16 %
Time deposits                                   4.1        2,406.8       0.69             4.5        2,448.7       0.73             6.9        2,795.9       0.99
Public funds                                    1.0        1,608.9       0.25             0.9        1,332.1       0.26             1.2        1,531.1       0.31

Total interest-bearing deposits                 6.8        9,998.1       0.27             7.1        9,711.8       0.29            10.3        9,953.0       0.41

Short-term borrowings                           1.3          763.7       0.70             1.3          847.1       0.60             1.6          862.5       0.76
Long-term debt                                  3.2          396.4       3.27             2.9          321.7       3.60             3.5          375.4       3.78

Total interest-bearing liabilities       $     11.3     $ 11,158.2       0.41 %    $     11.3     $ 10,880.6       0.41 %    $     15.4     $ 11,190.9       0.55 %

Net interest-free funding sources                          5,359.5                                   5,365.0                                   5,049.3

Total Cost of Funds                      $     11.3     $ 16,517.7       0.28 %    $     11.3     $ 16,245.6       0.28 %    $     15.4     $ 16,240.2       0.38 %

Net Interest Spread (te)                 $    176.7                      4.19 %    $    182.8                      4.35 %    $    179.3                      4.26 %
Net Interest Margin (te)                 $    176.7     $ 16,517.7       4.32 %    $    182.8     $ 16,245.6       4.48 %    $    179.3     $ 16,240.2       4.43 %

(a) Tax equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.

(b) Includes nonaccrual loans and loans held for sale.

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


Provision for Loan Losses

Hancock recorded a total provision for loan losses for the first quarter of 2013 of $9.6 million, down from $28.1 million in the fourth quarter of 2012 and $10.0 million in the first quarter of 2012. Excluding the impact of the fourth quarter bulk sale described later in the discussion of "Allowance for Loan Losses and Asset Quality," provision expense for the fourth quarter of 2012 was $14.4 million. The provision for non-covered loans was $3.0 million in the first quarter of 2013, compared to $14.2 million in the fourth quarter of 2012, excluding the impact of the bulk sale. In the first quarter of 2012, the provision for non-covered loans was $8.4 million. The decrease from the prior quarters mainly reflects the lower level of non-covered net charge-offs and the impact from a slowdown in newly identified impaired loans. Management does not expect to maintain this lower level of non-covered provision in the near term.

The net provision from the covered portfolio was $6.6 million in the first quarter of 2013 compared to $0.2 million for the fourth quarter of 2012 and $1.6 million in the first quarter of 2012. During the first quarter of 2013 the Company recorded an $8.5 million impairment on certain pools of covered loans, with a related increase of $1.9 million in the Company's FDIC loss share receivable. Approximately $6.5 million of the impairment relates to changes in the estimated timing of cash flows. The remaining $2.0 million reflects increased credit losses and is largely offset by additional expected FDIC loss share claims.

The section below on the "Allowance for Loan Losses and Asset Quality" provides additional information on changes in the allowance for loans losses and general credit quality. Certain differences in the determination of the allowance for loan losses for originated loans and for acquired performing loans and acquired impaired loans (which includes all covered loans) are described in Note 4 to the consolidated financial statements.

Noninterest Income

Noninterest income totaled $60.2 million for the first quarter of 2013, down $4.7 million (7%) from the fourth quarter of 2012, and down $1.3 million (2%) from the first quarter of 2012. The first quarters of both years included virtually no securities gains, while the fourth quarter of 2012 included $0.6 million in securities gains.

Service charges on deposits totaled $19.0 million for the first quarter of 2013, compared to $20.2 million in the fourth quarter of 2012, and $16.3 million in the first quarter of 2012. The decline in the current quarter compared to the fourth quarter of 2012 reflects the impact of one less business day and higher average personal deposit account balances in the first quarter, with higher seasonal holiday activity in the fourth quarter of 2012. The $2.7 million (17%) increase from the first quarter of 2012 was primarily the result of new and standardized products and services the Company began offering across its footprint in conjunction with the core systems integration in March 2012.

Bank card fees in the first quarter of 2013 were flat linked quarter, and down $1.0 million (12%) from the first quarter of 2012. Restrictions on debit card interchange rates that arose from the implementation of the Durbin amendment to the Dodd-Frank Act began impacting Whitney Bank in the fourth quarter of 2011 and Hancock Bank at the beginning of the third quarter of 2012. The restrictions reduced Hancock Bank fees by approximately $2.0 million per quarter. This decline was partially offset by a $1.1 million increase in merchant processing revenue from the year-earlier period. The increase in merchant fees starting in the third quarter of 2012 was related to the reacquisition of the Company's merchant business and a change in the terms of the servicing agreement. The reacquisition also added approximately $0.5 million to quarterly expense for the amortization of acquired intangibles. The Durbin interchange restrictions also negatively impacted ATM fees beginning in the third quarter of 2012.

Fees from secondary mortgage operations in the first quarter of 2013 were down $0.8 million (15%) compared to the fourth quarter of 2012, but up $0.4 million (10%) from the year-earlier period. Mortgage loan sales slowed during the first quarter of 2013, partly due to seasonal trends in demand. Overall, home mortgage origination volumes have benefited as consumers take advantage of historically low rates to refinance or purchase their homes in an improving economic environment. Future production levels will depend on, among other factors, the movement of market interest rates, continued strengthening in the home purchase market, and the level of demand for refinancing.


Other miscellaneous income decreased $3.2 million from the first quarter of 2012. There was no accretion recognized on the FDIC loss share receivable in the first quarter of 2013 or the fourth quarter of 2012, compared to $3.0 million in the first quarter of 2012.

The components of noninterest income for the three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012 are presented in the following table:

                                                         Three Months Ended
                                            March 31,       December 31,       March 31,
(In thousands)                                2013              2012             2012
Service charges on deposit accounts        $    19,015     $       20,232     $    16,274
Trust fees                                       8,692              8,273           8,738
Bank card fees                                   7,483              7,591           8,464
Investment and annuity fees                      4,577              4,743           4,415
ATM fees                                         3,575              3,935           4,334
Secondary mortgage market operations             4,383              5,160           4,002
Insurance commissions and fees                   3,994              3,588           3,477
Income from bank owned life insurance            3,299              2,711           2,891
Credit related fees                              1,441              1,551           1,989
Income from derivatives                            631              1,509             908
Safety deposit box income                          551                482             534
Gain on sale of assets                             314              2,192              81
Other miscellaneous                              2,232              2,341           5,387
Securities transactions gain/(loss), net            -                 623              12

Total noninterest income                   $    60,187     $       64,931     $    61,506

Noninterest Expense

Noninterest expense for the first quarter of 2013 totaled $159.6 million, up $1.7 million (1%) from the fourth quarter of 2012. The current quarter's total is down $11.9 million (7%) from the first quarter of 2012, excluding $33.9 million of merger-related expenses in the earlier period. This decrease is primarily related to cost savings realized as Whitney's acquired operations were successfully integrated into Hancock, including the impact of branch consolidations and the core systems conversion. The operating expense level for the fourth quarter of 2012 reflects realization of 100% of the cost savings initially targeted for the Whitney acquisition.

Noninterest expense for the first quarter of 2013 included the impact of expected seasonal fluctuations in certain expense categories such as personnel expense. Overall, there were no significant trends underlying the changes in noninterest expense categories in the current period compared to the fourth quarter of 2012.


The following table presents the components of noninterest expense for the three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012.

                                                               Three Months Ended
                                                March 31,         December 31,        March 31,
(In thousands)                                     2013               2012               2012
Compensation expense                            $   71,351       $       69,838       $   72,569
Employee benefits                                   16,576               17,520           19,302

Personnel expense                                   87,927               87,358           91,871

Net occupancy expense                               12,326               12,683           14,401
Equipment expense                                    5,301                5,051            5,877
Data processing expense                             11,534               10,412           13,152
Professional services expense                        7,946                8,250            8,562
Telecommunications and postage                       4,028                4,369            5,776
Advertising                                          2,177                1,252            1,540
Deposit insurance and regulatory fees                3,646                3,774            3,392
Amortization of intangibles                          7,555                7,730            8,304
Insurance expense                                    1,066                1,066            1,597
Ad valorem and franchise taxes                       2,202                1,713            2,207
Printing and supplies                                1,309                1,329            1,770
Public relations and contributions                   1,722                1,221            1,619
Travel expense                                       1,113                1,293            1,116
Other real estate owned expense, net                   708                2,236            2,433
Tax credit investment amortization                   1,426                1,437            1,513
Merger-related expenses                                 -                    -            33,913
Other miscellaneous expense                          7,616                6,746            6,420

Total noninterest expense                       $  159,602       $      157,920       $  205,463

Noninterest expense, excluding debt
repurchase and merger-related expenses          $  159,602       $      157,920       $  171,550

Income Taxes

The effective income tax rate for the first quarter of 2013 was approximately 25%, compared to 20% in the fourth quarter of 2012 and 17% in the first quarter of 2012. The increase from the prior quarter is mainly related to additional new market tax credits and historical rehabilitation tax credits that lowered the rate for the fourth quarter of 2012. As noted earlier, an additional tax credit also impacted the first quarter of 2013. Management expects the effective tax rate to fall in the range between 26% and 28% in 2013. The effective tax rate of 17% in the first quarter of 2012 included the impact of certain discrete items related mainly to the transfers of branches from Whitney Bank to Hancock Bank in that period. As a result of the transfers, the Company's state tax profile changed, and deferred taxes were re-measured accordingly.

The Company's effective tax rates have varied from the 35% federal statutory rate primarily because of tax-exempt income and the availability of tax credits. Interest income from the financing of state and local governments and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The source of the tax credits for 2013 and 2012 has been investments that generate new market tax credits, low-income housing credits and qualified bond credits.


Selected Financial Data

The following tables contain selected financial data as of and for the
three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012.



                                                                 Three Months Ended
                                                 March 31,          December 31,          March 31,
                                                   2013                 2012                2012
Per Common Share Data
Earnings per share:
Basic                                           $      0.56        $         0.55        $      0.22
Diluted                                         $      0.56        $         0.54        $      0.21
Operating earnings per share: (a)
. . .
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