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

Show all filings for HANCOCK HOLDING CO

Form 10-Q for HANCOCK HOLDING CO


8-Nov-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 some further improvement over the coming months. The travel and tourism industry, which is important within several of the Company's market areas, continues to see strong demand that is forecast to continue for the remainder of the year and into 2014. Retailers are showing improved sales over prior-year levels, but continue to experience limited pricing power. This trend is expected to continue 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, although the pace of growth has slowed in certain sectors.

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.

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. Continued improvement in the commercial real estate market is expected over the next several months.

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, exerting 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 Third Quarter 2013 Financial Results

Net income in the third quarter of 2013 was $33.2 million, or $0.40 per diluted common share, compared to $46.9 million, or $0.55, in the second quarter of 2013. Net income was $47.0 million, or $0.55 per diluted common share, in the third quarter of 2012. Operating income for the third quarter of 2013 was $46.8 million, or $0.56 per diluted common share, compared to $46.9 million, or $0.55, in the second quarter of 2013 and $49.8 million, or $0.58, in the third quarter of 2012. The Company defines its operating income as net income excluding tax-effected securities transactions and one-time noninterest expense items. A reconciliation of net income to operating income is included in the later section on "Selected Financial Data." Management believes that operating income provides a useful measure of financial performance that helps investors compare the Company's fundamental operations over time.

Highlights of the Company's third quarter of 2013 results:

Net income included one-time noninterest expense items of $20.9 million, or $13.6 million after tax, or $0.17 per share. These one-time costs were mainly associated with our efficiency initiator.

Core net interest income (te) and net interest margin remained relatively stable on a linked-quarter basis. (The Company defines its core results as reported results less the impact of 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.)

A linked-quarter increase of $4.6 million, or a tax-effected $.04 per diluted share, in purchased loan accretion.


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Approximately $92 million linked-quarter net loan growth, or 3% annualized, and $465 million, or 4%, year-over-year loan growth (each excluding the FDIC-covered portfolio).

Continued improvement in overall asset quality metrics.

The Company remains on track to achieve its efficiency and expense reduction target for the first quarter of 2014, a significant portion of which will be derived from branch closures and sales. In August of 2013, the Company completed the previously announced closing of 26 branch locations across its five-state footprint. The sales of 10 additional branches, which were also announced previously, are subject to regulatory approvals and certain closing conditions, and are scheduled for the fourth quarter 2013 and first quarter 2014. The buyers expect to acquire approximately $54 million in loans and $60 million in deposits booked in these 10 retail branches. As noted earlier, certain one-time costs associated with the branch closures and sales were recognized in noninterest expense for the third quarter of 2013.

Hancock's return on average assets (ROA) was 0.70% for the third quarter of 2013, compared to 0.99% in the second quarter of 2013 and 1.00% in the third quarter a year ago. On an operating basis, which excludes tax-effected one-time noninterest expenses, ROA was 0.99% in the third quarter of 2013 and 1.07% in the third quarter of 2012.

Common shareholders' equity totaled $2.4 billion at September 30, 2013 and the tangible common equity (TCE) ratio increased 16 basis points (bps) to 8.68% at September 30, 2013.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (taxable equivalent or "te") for the third quarter of 2013 was $174.1 million, up $2.3 million from the second quarter of 2013. Average earnings assets were $16.4 billion in the third quarter of 2013, down $116 million, or less than 1%, from the second quarter of 2013. 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 linked-quarter increase in net interest income (te) reflected mainly a higher level of total purchase-accounting loan accretion in the third quarter of 2013. The periodic recasting of the amount and timing of expected cash flows from acquired-impaired loan pools leads to inherent volatility in the amount of loan accretion recognized. This volatility can be enhanced when the acquired-impaired portfolio is weighted more toward larger commercial credits than toward homogenous smaller consumer credits.

Net interest income (te) for the third quarter of 2013 was down $6.0 million (3%) compared to the third quarter of 2012, primarily due to declining loan and investment yields. Total net purchase-accounting adjustments increased net interest income (te) in the third quarter of 2013 by $4.1 million compared to the third quarter of 2012. Average earning assets for the third quarter of 2013 were up $555 million (4%) compared to third quarter of 2012, driven mainly by net loan growth.

The net interest margin was 4.23% for the third quarter of 2013, up 6 basis points (bps) from the second quarter of 2013, but down 31 bps from the third quarter of 2012. The current quarter's core margin of 3.37% (reported net interest income (te) excluding total net purchase accounting adjustments, annualized, as a percent of average earning assets) compressed 1 basis point compared to the second quarter of 2013. The continued decline in the core loan yield was offset by the favorable impact of net loan growth on the earning asset mix, an improvement in the yield on investment securities and a slight decline in the cost of funds. The core margin in the third quarter of 2013 was down 38 bps from a year earlier. A reconciliation of the reported and core margins is presented below.


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The overall reported yield on earning assets was 4.47% in the third quarter of 2013, an increase of 5 bps from the second quarter of 2013 and a decrease of 37 bps from the third quarter of 2012. The reported loan portfolio yield of 5.41% for the current quarter was down 6 bps from the second quarter of 2013 and 54 bps from the third quarter of 2012. Excluding purchase-accounting accretion, the core loan yield of 4.12% in the current quarter was down 11 bps from the second quarter of 2013 and 53 bps from a year earlier. Company loan pricing initiatives helped raise the average rate on new loans funded in the third quarter of 2013 by approximately 30 bps compared to the second quarter of 2013, although new loan yields continue to reflect the low rate environment and competitive pricing in certain commercial sectors.

The overall cost of funding earning assets was 0.24% in the third quarter of 2013, down 1 bps from the second quarter of 2013 and down 6 bps from the third 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 0.24% in the current quarter, down slightly from the second quarter of 2013 and 7 bps below the third 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 nine months of 2013 totaled $522.7 million, a $17.0 million (3%) decrease from the first nine months of 2012, primarily due to declining loan and investment yields. Total net purchase-accounting adjustments increased net interest income (te) for the first nine months of 2013 by $21.4 million compared to the first nine months of 2012. Year-to-date average earning assets were up $389 million (2%) over 2012.

The reported net interest margin for the first nine months of 2013 was 4.24% compared to 4.48% in 2012, while the core margin declined to 3.38% in 2013 compared to 3.78% 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
                                                  September 30, 2013                          June 30, 2013                           September 30, 2012
(dollars in millions)                     Interest        Volume        Rate        Interest        Volume        Rate        Interest        Volume        Rate
Average earning assets
Commercial & real estate
loans (te) (a) (b)                       $    109.4     $  8,582.9       5.06 %    $    103.4     $  8,418.1       4.92 %    $    109.1     $  8,018.6       5.41 %
Mortgage loans                                 25.0        1,668.2       5.99            27.5        1,625.7       6.78            28.5        1,573.6       7.25
Consumer loans                                 25.7        1,570.3       6.51            26.5        1,579.4       6.74            29.9        1,667.4       7.14
Loan fees & late charges                        0.7             -                         1.2             -                         0.9             -

Total loans (te)                              160.8       11,821.4       5.41           158.6       11,623.2       5.47           168.4       11,259.6       5.95

US Treasury and agency securities                -             5.6       2.34              -             0.1       2.67             0.1           18.4       1.10
CMOs                                            7.3        1,463.4       1.99             7.5        1,589.0       1.88             7.8        1,663.7       1.88
Mortgage backed securities                     13.0        2,410.7       2.16            13.2        2,593.3       2.04            12.5        2,097.1       2.39
Municipals (te)                                 2.7          247.1       4.39             2.6          233.0       4.51             2.8          252.8       4.51
Other securities                                0.1            8.5       2.51             0.1            8.0       2.79             0.1            7.2       3.58

Total securities (te) (c)                      23.1        4,135.3       2.24            23.4        4,423.4       2.11            23.3        4,039.2       2.30

Total short-term investments                    0.3          427.9       0.23             0.3          453.6       0.25             0.3          531.2       0.23

Average earning assets (te)              $    184.2     $ 16,384.6       4.47 %    $    182.3     $ 16,500.2       4.42 %    $    192.0     $ 15,830.0       4.84 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                         $      1.4     $  5,919.7       0.09 %    $      1.5     $  5,965.8       0.10 %    $      1.7     $  5,869.3       0.11 %
Time deposits                                   3.7        2,384.3       0.61             3.8        2,415.4       0.63             4.8        2,473.5       0.78
Public funds                                    0.7        1,302.4       0.23             0.9        1,483.3       0.23             1.0        1,426.4       0.28

Total interest-bearing deposits                 5.8        9,606.4       0.24             6.2        9,864.5       0.25             7.5        9,769.2       0.31

Short-term borrowings                           1.1          820.5       0.52             1.1          790.1       0.54             1.5          794.9       0.76
Long-term debt                                  3.2          385.2       3.28             3.2          393.6       3.28             2.9          317.4       3.65

Total borrowings                                4.3        1,205.7       1.40             4.3        1,183.7       1.45             4.4        1,112.3       1.58

Total interest-bearing liabilities       $     10.1     $ 10,812.1       0.37 %    $     10.5     $ 11,048.2       0.38 %    $     11.9     $ 10,881.5       0.44 %

Net interest-free funding sources                          5,572.5                                   5,452.0                                   4,948.5

Total Cost of Funds                      $     10.1     $ 16,384.6       0.24 %    $     10.5     $ 16,500.2       0.25 %    $     11.9     $ 15,830.0       0.30 %

Net Interest Spread (te)                 $    174.1                      4.10 %    $    171.8                      4.04 %    $    180.1                      4.40 %
Net Interest Margin                      $    174.1     $ 16,384.6       4.23 %    $    171.8     $ 16,500.2       4.17 %    $    180.1     $ 15,830.0       4.54 %

(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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                                                                      Nine Months Ended
                                                 September 30, 2013                        September 30, 2012
(dollars in millions)                    Interest        Volume        Rate        Interest        Volume        Rate
Average earning assets
Commercial & real estate loans (te)
(a) (b)                                 $    326.0     $  8,429.5       5.17 %    $    330.3     $  7,994.4       5.52 %
Mortgage loans                                78.2        1,640.3       6.36            83.7        1,557.2       7.16
Consumer loans                                78.8        1,589.4       6.63            86.9        1,646.1       7.05
Loan fees & late charges                       2.5             -                         3.2             -

Total loans (te)                             485.5       11,659.2       5.56           504.1       11,197.7       6.01

US Treasury and agency securities              0.1            3.8       1.81             2.0          126.3       2.17
CMOs                                          21.8        1,528.8       1.90            22.6        1,534.9       1.96
Mortgage backed securities                    37.8        2,390.1       2.11            40.9        2,237.8       2.43
Municipals (te)                                7.9          232.5       4.53             8.9          267.8       4.42
Other securities                               0.2            8.3       2.42             0.3            8.2       4.15

Total securities (te) (c)                     67.8        4,163.5       2.17            74.7        4,175.0       2.39

Total short-term investments                   1.2          644.3       0.24             1.3          705.2       0.25

Average earning assets (te)             $    554.5     $ 16,467.0       4.50 %    $    580.1     $ 16,077.9       4.82 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                        $      4.6     $  5,955.7       0.10 %    $      5.6     $  5,792.6       0.13 %
Time deposits                                 11.6        2,402.1       0.64            16.7        2,624.0       0.85
Public funds                                   2.6        1,463.8       0.24             3.3        1,491.5       0.29

Total interest-bearing deposits               18.8        9,821.6       0.26            25.6        9,908.1       0.35

Short-term borrowings                          3.4          791.6       0.58             4.8          842.7       0.76
Long-term debt                                 9.6          391.7       3.28            10.0          344.7       3.86

Total borrowings                              13.0        1,183.3       1.47            14.8        1,187.4       1.66

Total interest-bearing liabilities      $     31.8       11,004.9       0.39 %    $     40.4       11,095.5       0.49 %

Net interest-free funding sources                         5,462.1                                   4,982.4

Total Cost of Funds                     $     31.8     $ 16,467.0       0.26 %    $     40.4     $ 16,077.9       0.34 %

Net Interest Spread (te)                $    522.7                      4.11 %    $    539.7                      4.33 %
Net Interest Margin                     $    522.7     $ 16,467.0       4.24 %    $    539.7     $ 16,077.9       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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Reconciliation of Reported Net Interest Margin to Core Margin



                                                                 Three Months Ended                                     Nine Months Ended
                                               September 30,          June 30,          September 30,          September 30,          September 30,
(dollars in millions)                              2013                 2013                2012                   2013                   2012
Net interest income (te)                      $         174.1        $    171.8        $         180.1        $         522.7        $         539.7
Purchase accounting adjustments
Loan accretion                                           38.3              36.0                   37.0                  114.4                  100.7
Whitney premium bond amortization                        (2.8 )            (3.4 )                 (5.9 )                 (9.6 )                (19.1 )
Whitney and Peoples First CD accretion                    0.1               0.2                    0.4                    0.6                    2.4

Total net purchase accounting adjustments                35.6              32.8                   31.5                  105.4                   84.0

Net interest income (te)-core                 $         138.5        $    139.0        $         148.6        $         417.3        $         455.7

Average earning assets                        $      16,384.6        $ 16,500.2        $      15,830.0        $      16,467.0        $      16,077.9
Net interest margin-reported                             4.23 %            4.17 %                 4.54 %                 4.24 %                 4.48 %
Net purchase accounting adjustments (%)                  0.86 %            0.79 %                 0.79 %                 0.86 %                 0.70 %

Net interest margin-core                                 3.37 %            3.38 %                 3.75 %                 3.38 %                 3.78 %

Provision for Loan Losses

During the third quarter of 2013, Hancock recorded a total provision for loan losses of $7.6 million, down from $8.3 million in the second quarter of 2013. The provision for non-covered loans was $6.5 million in the third quarter of 2013, compared to $7.9 million in the second quarter of 2013. The net provision from the covered portfolio was $1.0 million for the third quarter of 2013 compared to $0.4 million for the second quarter of 2013.

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.

Noninterest Income

Noninterest income totaled $63.1 million for the third quarter of 2013, down $0.8 million (1%) from the second quarter of 2013, and down $0.7 million (1%) from the third quarter of 2012.

Service charges on deposits totaled $20.5 million for the third quarter of 2013, up $0.7 million (3%) from the second quarter of 2013, and down $0.3 million from the third quarter of 2012. Year-to-date, service charge income increased $1.4 million (2%) 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.

Trust, investment and annuity and insurance fees totaled $18.3 million, down $1.5 million (8%) from the second quarter of 2013 and up $2.3 million (14%) from the third quarter of 2012. The linked-quarter decrease reflects some seasonality in these lines of business, in addition to the impact of higher equity market valuations in the second quarter of 2013. In the first nine months of 2013, these fee income categories grew $5.6 million (11%) compared to 2012. Improved stock market values and new business were the primary factors contributing to the increases.

Bank card and ATM fees totaled $12.2 million in the third quarter of 2013, up $0.8 million (7%) from the second quarter of 2013. Compared to the third quarter of 2012, bank card and ATM fees were up $0.4 million (3%) in the current quarter. Year-to-date 2013, bank card and ATM fees in 2013 were down $2.9 million (8%)


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compared to 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 totaled $2.5 million for the third quarter of 2013, down $1.7 million (40%) linked-quarter, and down $1.8 million (43%) from the year-earlier period. The decline mainly reflects a lower level of loans sold during the quarter, as a result of a strategic decision to retain more residential mortgages on the balance sheet. Mortgage loan originations also slowed toward the end of the third quarter of 2013, reflecting mainly the impact of increased longer-term market interest rates.

Other miscellaneous income for the third quarter of 2013 decreased $0.8 million from the third quarter of 2012 and $1.0 million compared to the year-earlier period. The year-to-date total for 2013 declined $5.7 million, reflecting mainly a reduction in the accretion recognized on the FDIC loss share receivable.

The components of noninterest income are presented in the following table for the indicated periods:

                                                   Three Months Ended                        Nine Months Ended
                                     September 30,      June 30,       September 30,           September 30,
                                         2013             2013             2012             2013          2012
(In thousands)
Service charges on deposit
accounts                            $        20,519     $  19,864     $        20,834     $  59,398     $  58,015
Trust fees                                    9,477         9,803               7,743        27,972        24,464
Bank card and ATM fees                       12,221        11,399              11,870        34,678        37,586
Investment and annuity fees                   5,186         5,192               4,269        14,955        13,291
Secondary mortgage market
operations                                    2,467         4,139               4,311        10,989        11,328
Insurance commissions and fees                3,661         4,845               4,045        12,500        12,103
Income from bank owned life
insurance                                     2,574         2,873               2,870         8,764         8,617
Credit related fees                           2,995         1,533               1,545         5,969         5,130
Income from derivatives                       1,257         1,408                 455         3,296         2,091
Safety deposit box income                       467           462                 502         1,480         1,524
Gain on sale of assets                          801           162               2,705         1,277         2,909
Other miscellaneous                           1,432         2,217               1,693         5,863        10,830
Securities transactions
gain/(loss), net                                 -             -                  917            -            929

Total noninterest income            $        63,057     $  63,897     $        63,759     $ 187,141     $ 188,817

. . .

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