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

Show all filings for HANCOCK HOLDING CO

Form 10-Q for HANCOCK HOLDING CO


8-Aug-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 improvement 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 expectations of further improvement in the second half of 2013. The travel and tourism industry, which is important to several of the Company's market areas, continues to see strong demand that exceeds expectations and is forecast to continue into 2014. Retailers are showing mixed results, but recent sales activity continues to exceed prior year levels and a steady rate of growth is expected in the near term. The Texas retail market continues to be a top performer. Consumer spending should be supported by relatively stable prices, modest improvement in labor markets and rising home values, but consumers remain cautious and generally conservative in their spending behavior. Reports on manufacturing activity were generally positive, with expectations of continued improvement for the remainder of 2013.

The real estate markets for both residential and commercial properties continue to show improvement. Sales of existing homes continued to grow, outpacing supply and putting upward pressure on home prices. Sales activity was strongest in our Florida and Texas markets. New home sales and construction are ahead of prior year levels and growing, but demand exceeds supply as some builders have had difficulties with financing and with a shortage of developed lots.

The commercial real estate market continues to improve, with growing demand for office and industrial space in certain market areas and continued high occupancy and rising rental rates for apartments throughout the region. Commercial construction activity has increased in these sectors, although a wider variety of projects may be in the planning stages.

The recovery of the overall U.S. economy continues; however, the rate of growth is not consistent across all regions leading to slow and erratic overall improvement. National unemployment rates continue to decrease, but are still well above desired levels. 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 Second Quarter 2013 Financial Results

Net income for the second quarter of 2013 was $46.9 million, or $0.55 per diluted common share, compared to $48.6 million, or $0.56 per diluted common share, in the first quarter of 2013. Net income was $39.3 million, or $0.46 per diluted common share, in the second quarter of 2012, which included pre-tax merger-related expenses of $11.9 million.

Included in the Company's second quarter 2013 results are:

Approximately $245 million linked-quarter net loan growth, or 9% annualized, and over $760 million, or 7%, year-over-year loan growth (each excluding the FDIC-covered portfolio).

Core net interest income (TE) and net interest margin (NIM) remained relatively stable compared to the first quarter of 2013, and combined with growth in fee income, led to improved core revenue.

Continued improvement in overall asset quality metrics.


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Initiated a 5% common stock buyback in May through an accelerated share repurchase (ASR) program, receiving 2.8 million shares to-date.

The Company defines its core results as reported results less the impact of total net purchase accounting adjustments. A reconciliation of the reported net interest margin to core margin is provided in the discussion of "Net Interest Income" below.

Management expects earnings to remain flat to slightly down from current levels for the remainder of 2013, as expected declines and volatility in purchase-accounting loan accretion and other adjustments continue to impact reported results.

The Company remains on track to achieve its efficiency and expense reduction target for the first quarter of 2014. In May of 2013, the Company announced the planned closing of approximately 40 branch locations across its 5-state footprint as part of the expense reduction initiative. In late July 2013, the Company announced agreements to sell 10 of these 40 branch locations. A significant portion of the cost savings targeted for the first quarter of 2014 will be derived from these closures and sales. Currently, the Company plans to close the majority of the branches on August 30, 2013, with the remaining branches scheduled to close or be sold by year-end. Management expects one-time costs associated with the branch sales and closures to be booked in the third quarter of 2013. These costs are expected to be lower than previous guidance of between $18 and $22 million. The branch sales, which are subject to regulatory approvals and certain closing conditions, will be reflected in Hancock's fourth quarter 2013 financial results. The buyers expect to acquire approximately $54 million in loans and $60 million in deposits booked in these 10 retail branches.

Hancock's return on average assets (ROA) was 0.99% for the second quarter of 2013, compared to 1.03% in the first quarter of 2013 and 0.83% in the second quarter of 2012. ROA was 1.00% in the second quarter of 2012 on an operating basis, which excludes tax-effected merger-related expenses in that period.

Common shareholders' equity totaled $2.3 billion at June 30, 2013, down almost $132 million from March 31, 2013. The tangible common equity (TCE) ratio declined 62 basis points (bps) to 8.52% at June 30, 2013. The linked-quarter decline mainly reflects the $115 million (63 bps) used in May 2013 to execute the ASR program to repurchase Hancock Holding Company outstanding common stock. Additionally, while the Company continued to add to its strong capital base through retained earnings, accumulated other comprehensive income (a component of equity) declined $47 million (26 bps) from March 31, 2013. The decline mainly reflects the impact of increased market rates on the valuation of the securities portfolio.


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RESULTS OF OPERATIONS

Net Interest Income

Net interest income (taxable equivalent or TE) for the second quarter of 2013 totaled $171.8 million, a $4.9 million (3%) decline from the first quarter of 2013. Approximately $4.4 million of this decline was related to a lower level of total purchase-accounting loan accretion on acquired loans in the second quarter of 2013, mainly related to the volatility in excess cash recoveries, as detailed below in the table reconciling the Company's reported net interest margin to its core margin. Excess cash recoveries include cash collected on certain acquired loan pools with a zero carrying value. Average earning assets were virtually unchanged between these quarterly periods. 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).

Net interest income (TE) for the second quarter of 2013 was down $8.5 million (5%) compared to the second quarter of 2012, primarily due to declining loan and investment yields. Total net purchase-accounting adjustments increased net interest income (TE) in the second quarter of 2013 by an additional $5.3 million compared to the second quarter of 2012. Average earning assets for the second quarter of 2013 were up $344 million compared to second quarter of 2012, driven mainly by net loan growth.

The reported net interest margin (TE) for the second quarter of 2013 was 4.17%, down 15 basis points (bps) from the first quarter of 2013 and down 31 bps from the second quarter of 2012. The current quarter's core margin of 3.38% compressed approximately 3 bps compared to the first quarter of 2013 and approximately 42 bps compared to the second quarter of 2012, mainly from a decline in the core yields on the loan and securities portfolios. The core margin represents reported net interest income (TE) excluding total annualized net purchase-accounting adjustments as a percent of average earning assets. A reconciliation of the Company's reported and core margins is presented below.

The overall reported yield on earning assets was 4.42% in the second quarter of 2013, a decrease of 18 bps from the first quarter of 2013 and 38 bps from the second quarter of 2012. The reported loan portfolio yield of 5.47% for the current quarter was down 36 bps from the first quarter of 2013 and 57 bps from the second quarter of 2012. Excluding purchase-accounting accretion, the core loan yield of 4.23% in the current quarter was down 18 bps from the first quarter of 2013 and 61 bps from a year earlier. Recent activity in commercial lending has been in very competitively priced segments. The average rates on all new loans booked in the second quarter of 2013 was around 3.20% to 3.25%. The earning asset yield in the second quarter of 2013 benefited from the full-quarter impact of the investment of approximately $1 billion in excess liquidity earning 25 bps into mortgage-backed securities earning approximately 1.65% in the latter half of the first quarter.


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The overall cost of funding earning assets was 0.25% in the second quarter of 2013, down 3 bps from the first quarter of 2013 and down 7 bps from the second 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 0.25% in the current quarter, down slightly from the first quarter of 2013 and 7 bps below the second 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.

Net interest income (TE) for the first six months of 2013 totaled $348.6 million, an $11.0 million (3%) decrease from the first half of 2012, primarily due to declining loan and investment yields. Total net purchase-accounting adjustments increased net interest income (TE) for the first half of 2013 by an additional $17.4 million compared to the first six months of 2012. Year-to-date average earning assets were up $306 million (2%) over 2012.

The reported net interest margin for the first six months of 2013 was 4.24% compared to 4.45% in 2012, while the core margin declined to 3.39% in 2013 compared to 3.80% in 2012. Changes in net interest income (TE) and the net interest margin between the year-to-date periods reflected for the most part the same factors that affected the quarterly comparisons.

The following tables detail the components of our net interest income and net interest margin and provide a reconciliation of the Company's core net interest margin to its reported margin.


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                                                                                            Three Months Ended
                                                    June 30, 2013                             March 31, 2013                            June 30, 2012
(dollars in millions)                     Interest        Volume        Rate        Interest        Volume        Rate        Interest        Volume        Rate
Average earning assets
Commercial & real estate
loans (te) (a) (b)                       $    103.4     $  8,418.1       4.92 %    $    113.3     $  8,284.4       5.54 %    $    108.8     $  7,946.8       5.50 %
Mortgage loans                                 27.5        1,625.7       6.78            25.7        1,626.6       6.31            28.7        1,548.8       7.41
Consumer loans                                 26.5        1,579.4       6.74            26.5        1,618.9       6.64            28.4        1,644.5       6.92
Loan fees & late charges                        1.2                                       0.6                                       1.5

Total loans (te)                              158.6       11,623.2       5.47           166.1       11,529.9       5.83           167.4       11,140.1       6.04

US Treasury and agency securities                -             0.1       2.67              -             5.6       1.24             0.7          142.1       2.09
CMOs                                            7.5        1,589.0       1.88             7.1        1,534.8       1.85             8.0        1,578.5       2.02
Mortgage backed securities                     13.2        2,593.3       2.04            11.6        2,163.6       2.15            13.9        2,296.1       2.43
Municipals (te)                                 2.6          233.0       4.51             2.6          217.0       4.71             2.7          266.7       4.11
Other securities                                0.1            8.0       2.79              -             8.3       1.96             0.1            9.3       2.79

Total securities (te) (c)                      23.4        4,423.4       2.11            21.3        3,929.3       2.17            25.4        4,292.7       2.37

Total short-term investments                    0.3          453.6       0.25             0.6        1,058.5       0.25             0.5          733.5       0.26

Average earning assets (te)              $    182.3     $ 16,500.2       4.42 %    $    188.0     $ 16,517.7       4.60 %    $    193.3     $ 16,166.3       4.80 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                         $      1.5     $  5,965.8       0.10 %    $      1.7     $  5,982.4       0.11 %    $      1.8     $  5,881.7       0.12 %
Time deposits                                   3.8        2,415.4       0.63             4.1        2,406.8       0.69             5.0        2,604.4       0.77
Public funds                                    0.9        1,483.3       0.23             1.0        1,608.9       0.25             1.1        1,517.7       0.29

Total interest-bearing deposits                 6.2        9,864.5       0.25             6.8        9,998.1       0.27             7.9       10,003.8       0.32

Short-term borrowings                           1.1          790.1       0.54             1.3          763.7       0.70             1.6          831.9       0.78
Long-term debt                                  3.2          393.6       3.28             3.2          396.4       3.27             3.5          380.8       3.72

Total interest-bearing liabilities       $     10.5     $ 11,048.2       0.38 %    $     11.3     $ 11,158.2       0.41 %    $     13.0     $ 11,216.5       0.47 %

Net interest-free funding sources                          5,452.0                                   5,359.5                                   4,949.8

Total Cost of Funds                      $     10.5     $ 16,500.2       0.25 %    $     11.3     $ 16,517.7       0.28 %    $     13.0     $ 16,166.3       0.32 %

Net Interest Spread (te)                 $    171.8                      4.04 %    $    176.7                      4.19 %    $    180.3                      4.33 %
Net Interest Margin (te)                 $    171.8     $ 16,500.2       4.17 %    $    176.7     $ 16,517.7       4.32 %    $    180.3     $ 16,166.3       4.48 %

(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.


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                                                                       Six Months Ended
                                                   June 30, 2013                             June 30, 2012
(dollars in millions)                    Interest        Volume        Rate        Interest        Volume        Rate
Average earning assets
Commercial & real estate
Loans (te) (a) (b)                      $    216.7     $  8,351.7       5.23 %    $    221.3     $  7,982.2       5.57 %
Mortgage loans                                53.2        1,626.1       6.55            55.1        1,549.0       7.12
Consumer loans                                53.0        1,599.0       6.69            56.9        1,635.3       6.98
Loan fees & late charges                       1.8                                       2.4

Total loans (te)                             324.7       11,576.8       5.65           335.7       11,166.5       6.04

US Treasury and agency securities               -             2.8       1.27             2.0          180.8       2.23
CMOs                                          14.6        1,562.1       1.86            14.8        1,469.8       2.01
Mortgage backed securities                    24.8        2,379.6       2.09            28.3        2,308.9       2.45
Municipals (te)                                5.2          225.0       4.61             6.0          275.4       4.36
Other securities                               0.1            8.2       2.37             0.2            8.7       4.38

Total securities (te) (c)                     44.7        4,177.7       2.14            51.3        4,243.6       2.42

Total short-term investments                   0.9          754.4       0.25             1.0          793.2       0.25

Average earning assets (te)             $    370.3     $ 16,508.9       4.51 %    $    388.0     $ 16,203.3       4.80 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                        $      3.2     $  5,974.0       0.11 %    $      3.9     $  5,753.8       0.14 %
Time deposits                                  7.9        2,411.1       0.66            11.9        2,700.2       0.88
Public funds                                   1.8        1,545.8       0.24             2.3        1,524.4       0.30

Total interest-bearing deposits               12.9        9,930.9       0.26            18.1        9,978.4       0.36

Short-term borrowings                          2.4          777.0       0.62             3.3          847.2       0.77
Long-term debt                                 6.4          395.0       3.28             7.1          378.1       3.76

Total interest-bearing liabilities      $     21.7       11,102.9       0.39 %    $     28.5     $ 11,203.7       0.50 %

Net interest-free funding sources                         5,406.0                                   4,999.6

Total Cost of Funds                     $     21.7     $ 16,508.9       0.27 %    $     28.5     $ 16,203.3       0.35 %

Net Interest Spread (te)                $    348.6                      4.12 %    $    359.5                      4.30 %
Net Interest Margin (te)                $    348.6     $ 16,508.9       4.24 %    $    359.5     $ 16,203.3       4.45 %

(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.


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Reconciliation of Reported Net Margin to Core Margin



                                                Three Months Ended                            Six Months Ended
                                   June 30,         March 31,          June 30,          June 30,          June 30,
(in thousands)                       2013              2013              2012              2013              2012
Net interest income (TE)         $    171,822      $    176,741      $    180,293      $    348,563      $    359,530
Whitney expected loan
accretion:
Performing                             12,800            13,700            14,339            26,500            30,012
Credit impaired                        15,900            14,600             7,313            30,500            15,313
Peoples First expected loan
accretion                               4,075             4,502            11,162             8,577            18,362
Escess cash recoveries - total          3,100             7,500                -             10,600                -

Total loan accretion                   35,875            40,302            32,814            76,177            63,687
Whitney premium bond
amortization                           (3,401 )          (3,521 )          (6,292 )          (6,922 )         (13,305 )
Whitney and Peoples First CD
accretion                                 230               290               880               520             2,001

Total net purchase accounting
adjustments (PAAs) impacting
net interest income                    32,704            37,071            27,402            69,775            52,383

Net interest income (TE) -
core                             $    139,118      $    139,670      $    152,891      $    278,788      $    307,147

Average earning assets           $ 16,500,215      $ 16,517,702      $ 16,166,291      $ 16,508,910      $ 16,203,247
Net interest margin - reported           4.17 %            4.32 %            4.48 %            4.24 %            4.45 %
Net purchase accounting
adjustments (%)                          0.79 %            0.91 %            0.68 %            0.85 %            0.65 %

Net interest margin - core               3.38 %            3.41 %            3.80 %            3.39 %            3.80 %

Provision for Loan Losses

Hancock recorded a total provision for loan losses for the second quarter of 2013 of $8.3 million, down from $9.6 million in the first quarter of 2013. The provision for non-covered loans was $7.9 million in the second quarter of 2013, compared to $3.0 million in the first quarter of 2013. The increase was related mainly to the net growth in the originated loan portfolio during the second quarter, including the impact of the migration to the originated portfolio of approximately $380 million of loans previously accounted for in the acquired portfolio.

During the second quarter of 2013, the Company recorded a $1.4 million impairment on certain pools of covered loans, with a related increase of $1.0 million in the Company's FDIC loss share receivable. The net provision from the covered portfolio was $0.4 million in the second quarter of 2013 compared to $6.6 million for the first quarter of 2013. The first quarter provision included approximately $6.5 million of impairment related to changes in the estimated timing of cash flows which does not result in an offsetting impact on the loss share receivable.

The section below on "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 3 to the consolidated financial statements.


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Noninterest Income

Noninterest income totaled $63.9 million for the second quarter of 2013, up $3.7 million (6%) from the first quarter of 2013, and relatively flat compared to second quarter of 2012.

Service charges on deposits totaled $19.9 million for the second quarter of 2013, up $0.8 million compared to the first quarter of 2013, and down $1.0 million from the second quarter of 2012. The linked-quarter increase partly reflects the impact of two additional business days in the second quarter of 2013. Year-to-date, service charge income increased $1.7 million (5%) in 2013 due in part to new and standardized products and services the Company began offering across its footprint in conjunction with the core systems integration in March 2012.

Fees from trust, investment and annuity and insurance fees totaled $19.8 million in the second quarter of 2013, up $2.6 million (15%) linked quarter and $2.7 million (16%) over the second quarter of 2012. In the first six months of 2013, these fee income categories grew $4.3 million (13%) compared to 2012. Improved stock market values and new business were the primary factors contributing to the increases. The linked-quarter fee increase also reflected some seasonality in these lines of business.

Bank card fees and ATM fees totaled $11.4 million in the second quarter of 2013, up $0.3 million (3%) from the first quarter of 2013 due to higher transaction volumes. Compared to the second quarter of 2012, bankcard and ATM fees were down $1.5 million (12%) in the current quarter. Through the first half of 2013, bankcard and ATM fees declined $3.3 million (13%) compared to the first half of 2012. Restrictions on debit card interchange rates arising 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 an estimated $2.0 million per quarter. This decline was partially offset by an increase in merchant processing revenue starting in the third quarter of 2012 that 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.

Fees from secondary mortgage operations in the second quarter of 2013 were down $0.2 million (6%) compared to the first quarter of 2013, and up $1.1 million (37%) from the year-earlier period. 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 for the second quarter of 2013 decreased $0.8 million from the second quarter of 2012, and the year-to-date total for 2013 declined $4.0 million. There was no accretion recognized on the FDIC loss share receivable in 2013, compared to $2.0 million recognized in the second quarter of 2012 and $5 million year-to-date in 2012.


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The components of noninterest income for the three-month periods ended June 30, 2013, March 31, 2013 and June 30, 2012 and the six-month periods ended June 30, 2013 and 2012 are presented in the following table:

                                                     Three Months Ended                   Six Months Ended
                                           June 30,       March 31,      June 30,             June, 30
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