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HBHC > SEC Filings for HBHC > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for HANCOCK HOLDING CO

Form 10-K for HANCOCK HOLDING CO


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to focus on significant changes and events in the financial condition and results of operations of Hancock Holding Company and our subsidiaries during 2013 and selected prior periods. This discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this report, including the consolidated financial statements and related notes.

FORWARD-LOOKING STATEMENTS

In accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995, this annual report contains forward-looking statements that reflect management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," "project," "forecast" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are subject to risks and uncertainties, and our future results of operations could differ materially from our historical results or current expectations reflected by such forward-looking statements. Some of these risks are discussed in "Item 1A. Risk Factors" and include, without limitation:

general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services;

disruptions to the credit and financial markets, either nationally or globally, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies and the adverse effects of the ongoing sovereign debt crisis in Europe;

changes in the interest rate environment may reduce net interest margins and/or the volumes and values of loans made or held as well as the value of other financial assets held;

competitive pressures among depository and other financial institutions may increase significantly;

legislative, regulatory or accounting changes, including changes resulting from the implementation of the Dodd-Frank Act may adversely affect the businesses in which Hancock is engaged;

local, state or federal taxing authorities may take tax positions that are adverse to us;

reduction in Hancock's credit ratings;

adverse changes may occur in the securities markets;

unpredictable natural or other disasters could have an adverse effect on us by materially interrupting our operations or the ability or willingness of our customers to access the financial services we offer; and

deposit attrition, customer loss and/or revenue loss following completed mergers and acquisitions may be greater than expected.

We undertake no obligation to update any forward-looking statements. You are cautioned that forward-looking statements are not guarantees of future performance, our actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements and you should not place undue reliance on these forward-looking statements.

EXECUTIVE OVERVIEW

Recent Economic and Industry Developments

Recent reports from the Federal Reserve indicate a moderate improvement of economic activity throughout most of Hancock's market areas. Activity at energy-related businesses, which are concentrated mainly in Hancock's


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south Louisiana and Houston, Texas market areas, remained generally strong. Tourism and convention activity, which is important to several of the Company's market areas, showed expanding levels of activity in both leisure and business travel, and is expected to continue to grow in 2014 based on advanced booking reports. Retail sales for the 2013 holiday season were generally positive, despite prior concerns from retailers about the fewer number of shopping days in 2013 compared to 2012. Manufacturing activity has strengthened, with an increase in employment and orders of production, accompanied by decreasing finished inventory levels. Nearly one-half of manufacturers within the Company's footprint expect production to increase over the next three to six months.

The real estate market for residential properties has begun to slow down. Although sales have been either flat or slightly up compared to prior year, they have been below brokers' expectations in recent months. Home sales are expected to remain flat or increase slightly year-over-year. New home construction activity is meeting expectations. Most builders had increases in sales year-over-year and the forecast for new home sales is positive. The sustainability of a housing market recovery will be sensitive to the continued availability of attractive financing rates, the ability of prospective homeowners to meet underwriting standards, the rate of foreclosed properties entering the market and consumer expectations about future economic conditions, among other factors. Commercial construction activity has improved modestly, with new build-to-suit projects breaking ground, while landlords are continuing to develop apartments to attract renters.

The majority of companies within our market had stable employment levels. Pricing pressures remained stable in most industries, increasing between one and three percent. However, some skilled and professional positions are seeing above-average wage increases and higher starting pay due to competition. Currently, there are acute labor shortages for auditors, engineers, construction workers, and truck drivers. In addition, many companies have hired contract labor instead of permanent staff, amid concerns about healthcare reform.

Loan demand across most of the markets that Hancock serves has increased slightly, but competition for quality borrowers remains stiff. Auto lending, energy lending, and some commercial real estate development financing all had increased activity, while retail remained virtually flat. Mortgage lending on both new and existing homes began to slow down as mortgage rates started to increase. The implementation of qualified mortgage requirements in 2014 may have a further negative impact on mortgage lending.

The overall U.S. economy continued to expand, with most all regions showing modest to moderate growth rates. Confidence in the prospect of a higher rate of sustained growth is improving for businesses and consumers alike, although uncertainties remain about such matters as the health of the international economy and the implications of pending or proposed changes in U.S. fiscal and tax policies and regulations.

Acquisition of Whitney Holding Corporation

On June 4, 2011, Hancock acquired Whitney Holding Corporation, the parent of Whitney National Bank based in New Orleans, Louisiana, in a stock and cash transaction. The total purchase price was approximately $1.6 billion, including 40.8 million Hancock common shares issued to Whitney common shareholders at a fair value of $1.3 billion and $308 million paid by the Company to purchase and subsequently retire Whitney's preferred stock and common stock warrant that had been issued under TARP. The fair value of the assets acquired, excluding goodwill, totaled $11.2 billion, and included $6.5 billion in loans, $2.6 billion of investment securities, and $224 million of identifiable intangible assets. Liabilities assumed were $10.1 billion, including $9.2 billion of deposits.

Highlights of 2013 Financial Results

Net income for the year ended December 31, 2013 was $163.4 million, compared to $151.7 million in 2012. This increase was mainly due to a decrease in expenses, resulting from cost savings realized as Whitney's acquired operations were successfully integrated into Hancock. Diluted earnings per share for 2013 were $1.93, an $0.18 increase from 2012. Operating income, which excludes tax-effected one-time noninterest expenses, and securities gains and losses, totaled $188.0 million, a $4.0 million (2%) increase over 2012. Diluted earnings per share on


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operating income were $2.22 for 2013, a $0.09 improvement over 2012. Hancock's return on average assets (ROA) for 2013 was 0.86% compared to 0.80% for 2012, while the operating ROA increased to 0.99% in 2013, compared to 0.97% in 2012.

As part of its ongoing planning process, management determined that certain areas of the Company needed to be right-sized or retooled in order to achieve our long-term profitability and efficiency targets. As a result, management announced an expense and efficiency initiative in early 2013 that is designed to reduce overall annual expense levels by $50 million as compared to annualized expenses for the first quarter of 2013. Management set a target for one-half of the expense reduction to be achieved by the first quarter of 2014 and the remainder by the fourth quarter of 2014. In addition to the expense reduction target, the Company also set a longer-term sustainable efficiency ratio target of 57%-59% for 2016. The Company remains on track to achieve the expense targets, with a significant portion of the first quarter's target being derived from branch consolidation and sales. In 2013, the Company completed the previously announced consolidation of 28 branch locations across its five-state footprint. The sales of 10 additional branches, which were also announced previously, were completed in the fourth quarter of 2013 and the first quarter of 2014. The branches sold were small retail locations with approximately $11 million in loans and $32 million in deposits. Certain one-time costs associated with the branch closures and other activities related to the expense and efficiency initiative were recognized in noninterest expense during the third and fourth quarters of 2013.

Net interest income (taxable equivalent "te") in 2013 totaled $691.1 million, a $31.3 million (4%) decrease from 2012. The reported net interest margin decreased 28 basis points (bps) to 4.20% in 2013. The core net interest margin, which is calculated excluding total net purchase accounting adjustments, decreased 35 bps to 3.39% in 2013.

The provision for loan losses was $32.7 million in 2013 compared to $54.2 million in 2012, with the provision taken in each year primarily driven by loans not covered under FDIC loss-sharing agreements. Approximately $13.7 million of the 2012 provision was associated with a bulk sale of non-covered problem loans toward the end of that year. Net charge-offs from the non-covered portfolio during 2013 were $24.3 million, or 0.21% of average total loans. This compares to the net non-covered charge-offs of $55.0 million, or 0.49% of average total loans, in 2012. The determination of allowances for covered loans and other acquired-impaired loans is discussed in Note 1 to the consolidated financial statements.

Total assets at December 31, 2013 were $19.0 billion, down about 2% from the prior year-end. Total loans increased $747.0 million (6%) during 2013, and were up $904 million (8%) excluding the FDIC-covered portfolio. During 2013, net growth in commercial non-real estate (C&I), commercial real estate (CRE) and residential mortgage loans was partially offset by net reductions in construction and land development and consumer loans.

At December 31, 2013, total deposits were $15.4 billion, down about 2% from the end of 2012, primarily due to decreased time deposits. Noninterest-bearing demand deposits decreased less than 2% and comprised 36% of total deposits at December 31, 2013.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) is the primary component of our earnings and represents the difference, or spread, between revenue generated from interest-earning assets and the interest expense related to funding those assets. For analytical purposes, net interest income is adjusted 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 2013 totaled $691.1 million, a $31.3 million (4%) decrease from 2012 as interest and fees on loans declined $38.1 million. The reported net interest margin declined 28 bps to 4.20% in 2013. The net interest margin is the ratio of net interest income (te) to average earnings assets. The core margin (net interest


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margin calculated excluding total net purchase accounting adjustments) was approximately 3.39% in 2013, down 35 bps from 2012. The core margin was relatively stable during 2013 after decreasing throughout 2012, mainly from a decline in the core yields on the loan and securities portfolios. Changes in activity related to prepayments and payoffs in the acquired portfolio can cause quarterly purchased loan accretion income to be volatile.

The overall reported yield on earning assets was 4.45% in 2013, down 35 bps from 2012. The reported loan portfolio yield was 5.45% in 2013 compared to 6.00% in 2012. Recent growth in commercial loans has been in very competitively priced segments. The reported yield on the mainly fixed-rate portfolio of investment securities declined 12 bps from 2012, reflecting lower yields available on the reinvestment of maturities and repayments. The mix of average earning assets improved moderately in 2013, as the proportion of loans increased to 71.3% of earnings assets compared to 70.0% in 2012 with a corresponding decline in short-term investments.

The cost of funding earning assets declined to 0.25% in 2013, down 7 bps from 2012. The overall rate paid on interest-bearing deposits declined 8 bps from 2012 to 0.25% in 2013. This decrease was due primarily to the impact of the sustained low rate environment on deposit rates in general and on the re-pricing of time deposits in particular. The mix of funding sources improved during 2013, as higher-cost time deposits continued to decrease as a percentage of total deposits, and interest-bearing transaction and savings deposits increased. Interest-free sources, including noninterest-bearing demand deposits, funded almost 34% of average earnings assets in 2013 compared to 32% in 2012.

Net interest income (te) for 2012 totaled $722.5 million, a $189.3 million (36%) increase over 2011. Earning assets in 2012 were up almost 30% over 2011, reflecting mainly the Whitney acquisition in June 2011. The net interest margin improved by 23 bps to 4.48% in 2012 compared to 2011.

The overall yield on earning assets was relatively flat at 4.80% in 2012. Loan yields increased 3 bps to 6.00% in 2012, partially due to positive adjustments to the yield earned on the acquired Whitney portfolio based on its favorable post-merger performance. The yield on our investment portfolio declined 69 bps from 2011. Both the lower yields available on the reinvestment of repayments and maturities from the Company's mainly fixed-rate investment portfolio, as well as the market yield on Whitney's acquired investment portfolio at the acquisition date, contributed to the decrease in investment portfolio yield. The mix of average earning assets improved as the percentage of loans to earning assets increased from 68% to 70%, and short-term investments declined by a similar amount to less than 5%.

The cost of funding earning assets was 0.32%, a 25 basis point decrease from 2011. The overall rate paid on interest-bearing deposits declined 34 bps from 2011 to 0.33% in 2012. This decrease was due primarily to the impact of the sustained low rate environment on deposit rates and the expected runoff or re-pricing of higher-rate time deposits from People's First. The mix of funding sources improved during 2012, related mainly to the full-year effect of the composition of the acquired Whitney deposit base. Interest-free sources, including noninterest-bearing demand deposits, funded 32% of average earnings assets in 2012 compared to 26% in 2011.

The factors contributing to the changes in net interest income (te) for 2013, 2012, and 2011 are presented in Tables 1 and 2 below. Table 1 shows average balances and related interest and rates and provides a reconciliation of reported and core NIM. Table 2 details the effects of changes in balances (volume) and rates on net interest income in 2013 and 2012.


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TABLE 1. Summary of Average Balances, Interest and Rates (te) (a)



                                                                                                     Years Ended December 31,
                                                                    2013                                       2012                                       2011
                                                     Average                                    Average                                    Average
                                                     Balance         Interest       Rate        Balance         Interest       Rate        Balance         Interest       Rate
                                                                                                          ($ in millions)
Assets
Interest-Earnings Assets:
Loans (te) (b)                                      $ 11,725.2      $    638.7       5.45 %    $ 11,284.7      $    676.8       6.00 %    $  8,514.0      $    508.4       5.97 %
Investment securities:
U.S. Treasury and government agency securities            28.1             0.6       2.16            99.1             2.1       2.12           286.2             5.6       1.97
CMOs                                                   1,502.9            29.6       1.97         1,545.5            29.8       1.93           742.5            18.9       2.55
Mortgage-backed securities                             2,367.3            51.7       2.19         2,150.8            51.3       2.39         1,772.2            55.6       3.14
Obligations of states and political subdivisions:
taxable                                                   87.1             3.3       3.73            59.8             2.8       4.73            57.5             3.1       5.32
nontaxable (te)                                          146.2             7.1       4.85           200.7             9.0       4.48           191.7             9.3       4.84
Other securities                                           8.5             0.2       2.44             7.9             0.4       4.43            24.3             1.1       4.60

Total investment in securities (te) (c)                4,140.1            92.5       2.23         4,063.9            95.4       2.35         3,074.4            93.6       3.04
Federal funds sold and short-term investments            578.6             1.4        .24           771.5             1.9       0.25           955.3             2.1       0.22

Total earning assets (te)                             16,443.9           732.6       4.45 %      16,120.1           774.1       4.80 %      12,543.7           604.1       4.82 %

Non-earning assets:
Other assets                                           2,623.0                                    2,951.4                                    2,281.2
Allowance for loan losses                               (137.9 )                                   (136.3 )                                   (102.8 )

Total assets                                        $ 18,929.0                                 $ 18,935.4                                 $ 14,722.1

Liabilities and Stockholder's Equity
Interest-bearing Liabilities:
Interest-bearing transaction and savings deposits   $  5,962.1      $      6.0       0.10 %    $  5,827.3      $      7.4       0.13 %    $  4,100.4      $      8.5       0.21 %
Time deposits                                          2,350.5            14.9       0.63         2,580.0            21.2       0.82         2,901.5            42.1       1.45
Public funds                                           1,410.7             3.3       0.23         1,451.5             4.1       0.29         1,314.6             5.1       0.39

Total interest-bearing deposits                        9,723.3            24.2       0.25         9,858.8            32.7       0.33         8,316.5            55.7       0.67

Repurchase agreements                                    763.3             4.4       0.58           760.9             5.9       0.78           681.5             7.0       1.03
Other interest-bearing liabilities                        42.8             0.1       0.21            82.9             0.1       0.14           114.6             0.2       0.14
Long-term debt                                           389.2            12.8       3.28           338.9            12.9       3.80           205.0             8.1       3.95

Total interest-bearing liabilities                    10,918.5            41.5       0.38 %      11,041.5            51.6       0.47 %       9,317.5            71.0       0.76 %

Noninterest-bearing:
Demand deposits                                        5,393.9                                    5,251.4                                    3,400.1
Other liabilities                                        230.0                                      241.7                                      203.4
Stockholders' equity                                   2,386.6                                    2,400.8                                    1,801.1

Total liabilities & stockholders' equity            $ 18,929.0                                 $ 18,935.4                                 $ 14,722.1

Net interest income and margin (te)                                 $    691.1       4.20 %                    $    722.5       4.48 %                    $    533.1       4.25 %

Net earning assets and spread                       $  5,525.4                       4.07 %    $  5,078.6                       4.33 %    $  3,226.2                       4.06 %

Interest cost of funding earning assets                                              0.25 %                                     0.32 %                                     0.57 %

(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 do not include unrealized holding gains or losses on available for sale securities.


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Reconciliation of Reported Net Interest Margin to Core Margin



                                                      Years Ended December 31,
 (dollars in millions)                          2013            2012            2011
 Net interest income (te)                         691.1           722.5      $    533.1
 Purchase accounting adjustments
 Loan accretion                                   144.7           141.2            64.9
 Whitney premium bond amortization                (11.5 )         (24.5 )         (17.4 )
 Whitney and Peoples First CD accretion             0.7             2.7             3.8

 Total net purchase accounting adjustments        133.9           119.4            51.3

 Net interest income (te)-core               $    557.2      $    603.1      $    481.8

 Average earning assets                      $ 16,443.9      $ 16,120.1      $ 12,543.7
 Net interest margin-reported                      4.20 %          4.48 %          4.25 %
 Net purchase accounting adjustments (%)           0.81 %          0.74 %          0.41 %

 Net interest margin-core                          3.39 %          3.74 %          3.84 %

TABLE 2. Summary of Changes in Net Interest Income (te) (a) (b)



                                                2013 Compared to 2012                          2012 Compared to 2011

                                              Due to                  Total                   Due to                  Total
                                             Change in               Increase               Change in                Increase
                                       Volume         Rate          (Decrease)        Volume          Rate          (Decrease)
                                                                           (In thousands)
Interest Income (te)
Loans (te) (c)                        $ 25,694      $ (63,812 )    $    (38,118 )    $ 166,170      $   2,259      $    168,429
Investment securities:
U.S. Treasury and government agency
securities                              (1,534 )           36            (1,498 )       (3,943 )          377            (3,566 )
CMOs                                      (833 )          670              (163 )       16,388         (5,498 )          10,890
Mortgage-backed securities               4,929         (4,531 )             398         10,533        (14,773 )          (4,240 )
Obligations of states and political
subdivisions:
Taxable                                  1,106           (682 )             424            120           (350 )            (230 )
Nontaxable (te)                         (2,595 )          699            (1,896 )          424           (718 )            (294 )
Other securities                            28           (167 )            (139 )         (731 )          (42 )            (773 )

Total investment in securities (te)      1,101         (3,975 )          (2,874 )       22,791        (21,004 )           1,787
Federal funds sold and short-term
investments                               (468 )          (53 )            (521 )         (440 )          228              (212 )

Total interest income (te)              26,327        (67,840 )         (41,513 )      188,521        (18,517 )         170,004

Interest-bearing transaction
deposits                                   166         (1,520 )          (1,354 )        2,846         (3,966 )          (1,120 )
Time deposits                           (1,768 )       (4,579 )          (6,347 )       (4,251 )      (16,578 )         (20,829 )
Public funds                              (114 )         (751 )            (865 )          495         (1,496 )          (1,001 )

Total interest-bearing deposits         (1,716 )       (6,850 )          (8,566 )         (910 )      (22,040 )         (22,950 )

Repurchase agreements                       18         (1,503 )          (1,485 )          753         (1,825 )          (1,072 )
Other interest-bearing liabilities         (40 )           11               (29 )          (75 )           39               (36 )
Long-term debt                           1,035         (1,158 )            (123 )        5,307           (538 )           4,769

Total interest expense                    (703 )       (9,500 )         (10,203 )        5,075        (24,364 )         (19,289 )

Net interest income (te) variance     $ 27,030      $ (58,340 )    $    (31,310 )    $ 183,446      $   5,847      $    189,293

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


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(b) Amounts shown as due to changes in either volume or rate includes an allocation of the amount that reflects the interaction of volume and rate changes. This allocation is based on the absolute dollar amounts of change due to changes in volume or rate.

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

Provision for Loan Losses

The provision for loan losses was $32.7 million in 2013 compared to a provision of $54.2 million in 2012. The majority of the decrease is due to the impact of a bulk sale of problem loans in 2012. The sale added $13.7 million to the . . .

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