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HBHC > SEC Filings for HBHC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for HANCOCK HOLDING CO

Form 10-Q for HANCOCK HOLDING CO


9-May-2014

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 among energy-related businesses operating mainly in Hancock's south Louisiana and Houston, Texas market areas remained strong 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, saw an increase in activity after a sluggish January. The outlook is positive over the next six months and the industry is expected to increase year-over-year. Retailers are showing improved sales over prior-year levels, but continue to express concern over increased healthcare premiums having an impact on personal discretionary income. Reports on manufacturing activity were generally positive, although the severe winter weather suppressed production earlier this year.

The real estate markets for residential properties were mixed. Sales of existing homes were soft, mainly due to higher home prices, limited inventory, and somewhat higher mortgage rates. Although the outlook for home sales has weakened since the last quarter, most brokers have indicated that they expect to see continued improvement over prior-year levels. New home sales and construction activity are ahead of prior-year levels and growing.

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, continuing to exert 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 2014 Financial Results

Net income in the first quarter of 2014 was $49.1 million, or $0.58 per diluted common share, compared to $34.7 million, or $0.41, in the fourth quarter of 2013. Net income was $48.6 million, or $0.56 per diluted common share, in the first quarter of 2013. Operating income for the first quarter of 2014 and the first quarter of 2013 was the same as net income, while operating income for the fourth quarter of 2013 was $45.8 million, or $0.55 per diluted share. 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.

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


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longer-term sustainable efficiency ratio target of 57% - 59% for 2016. The Company achieved its first quarter 2014 expense target primarily as a result of the branch consolidation and sales, and is on track to achieve its remaining targets. 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.

Prior to the close of business on March 31, 2014, Whitney Bank (headquartered in New Orleans, Louisiana) was merged into Hancock Bank (headquartered in Gulfport, Mississippi). The consolidated entity was renamed Whitney Bank. Whitney Bank does business under the brand names "Hancock Bank" in Mississippi, Alabama and Florida, and "Whitney Bank" in Louisiana and Texas.

Highlights of the Company's first quarter of 2014 results:

Continued improvement in the overall quality of earnings (replacing declining purchase accounting income with core results)

Operating expenses declined $10.1 million linked-quarter, or 6%, exceeding the first quarter's expense goal and achieving the targeted fourth quarter goal ahead of schedule

Efficiency ratio improved to 62%; additional branch closures and the previously announced divestiture of selected insurance lines of business will fund revenue-generating projects that will contribute to achieving the efficiency ratio target for 2016 of 57%-59%

Core net interest income (TE) was flat linked-quarter; core net interest margin (NIM) narrowed 3 basis points (bps) (we define our core results as reported results less the impact of net purchase accounting adjustments)

Approximately $231 million linked-quarter net loan growth, or 8% annualized, and approximately $1.2 billion, or 11%, year-over-year loan growth (each excluding the FDIC-covered portfolio)

Purchase accounting loan accretion declined $0.6 million; expect continuation of quarterly declines with accelerating declines in the second half of 2014

Continued improvement in overall asset quality metrics

Return on average assets (ROA) (operating) improved to 1.05% from 0.97% in the fourth quarter of 2013 and 1.03% in the first quarter a year ago

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (taxable equivalent or "te") for the first quarter of 2014 was $168.2 million, virtually unchanged from the fourth quarter of 2013. Average earnings assets were $16.7 billion in the first quarter of 2014, a $364 million (2%) increase from the fourth quarter of 2013, as average loans were up $476 million (4%). Net interest income (te) for the first quarter of 2014 was down $8.5 million (5%) compared to the first quarter of 2013, primarily due to a reduced level of total purchase-accounting loan accretion in the first quarter of 2014. 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).


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The net interest margin was 4.06% for the first quarter of 2014, down 3 bps from the fourth quarter of 2013, and down 26 bps from the first quarter of 2013. 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 3 bps compared to the fourth quarter of 2013 and 4 bps compared to the first quarter of 2013. The continued decline in the core loan yield was partially offset by the favorable impact of net loan growth on the earning asset mix and an improvement in the yield on investment securities. A reconciliation of the reported and core margins is presented below.

The overall reported yield on earning assets was 4.29% in the first quarter of 2014, a decrease of 3 bps from the fourth quarter of 2013 and a decrease of 31 bps from the first quarter of 2013. The reported loan portfolio yield of 5.00% for the current quarter was down 10 bps from the fourth quarter of 2013 and 83 bps from the first quarter of 2013. Excluding purchase-accounting accretion, the core loan yield of 4.02% in the current quarter was down 7 bps from the fourth quarter of 2013 and 38 bps from a year earlier. Partially offsetting the decrease in loan yields, the yield on the security portfolio yield was 2.47% for the first quarter of 2014, an increase of 4 bps from the fourth quarter of 2013 and 30 bps over the first quarter of 2013. This increase primarily resulted from decreased discount amortization primarily due to a reduced level of security prepayments.

The overall cost of funding earning assets was 0.23% in the first quarter of 2014, unchanged from the fourth quarter of 2013 and down 5 bps from the first quarter of 2013. The mix of funding sources improved in the first quarter of 2014 compared to the first quarter of 2013. Interest-free sources, including noninterest-bearing demand deposits, funded 34.6% of earning assets in the current period, up from 32.4% a year ago. The overall rate paid on interest-bearing deposits was 0.22% in the current quarter, down slightly from the fourth quarter of 2013 and 5 bps below the first quarter of 2013. 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 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
                                                               March 31, 2014                          December 31, 2013                           March 31, 2013
(dollars in millions)                                 Volume        Interest       Rate         Volume        Interest       Rate         Volume        Interest       Rate
Average earning assets
Commercial & real estate loans (te) (a) (b)         $  9,095.7     $    107.9       4.81 %    $  8,629.0     $    104.2       4.79 %    $  8,281.2     $    113.3       5.54 %
Mortgage loans                                         1,720.6           21.3       4.96         1,701.1           23.5       5.52         1,592.7           25.3       6.36
Consumer loans                                         1,563.1           23.1       6.00         1,573.4           24.4       6.15         1,618.9           26.5       6.64
Loan fees & late charges                                    -             0.8                         -             1.0                         -             0.6

Total loans (te)                                      12,379.4          153.1       5.00        11,903.5          153.1       5.10        11,492.8          165.7       5.83

Loans held for sale                                       19.2            0.2       4.06            18.8            0.1       2.28            37.1            0.4       3.91
US Treasury and agency securities                         93.5            0.5       2.25           100.2            0.6       2.22             5.6             -        1.22
Mortgage-backed securities and CMOs                    3,612.8           21.2       2.34         3,725.4           21.6       2.32         3,698.4           18.7       2.02
Municipals (te)                                          217.0            2.5       4.56           235.8            2.4       4.14           217.0            2.6       4.71
Other securities                                          12.3            0.1       3.86             9.3            0.1       2.48             8.3             -        1.96

Total securities (te) (c)                              3,935.6           24.3       2.47         4,070.7           24.7       2.43         3,929.3           21.3       2.17

Total short-term investments                             406.2            0.2       0.23           383.6            0.2       0.23         1,058.5            0.6       0.25

Average earning assets (te)                         $ 16,740.4     $    177.8       4.29 %    $ 16,376.6     $    178.1       4.32 %    $ 16,517.7     $    188.0       4.60 %

Average interest-bearing liabilities
Interest-bearing transaction and savings deposits   $  6,072.1     $      1.5       0.10 %    $  5,981.1     $      1.4       0.09 %    $  5,982.3     $      1.7       0.11 %
Time deposits                                          2,170.4            3.1       0.58         2,197.5            3.3       0.60         2,406.8            4.1       0.69
Public funds                                           1,526.6            0.8       0.20         1,253.2            0.7       0.21         1,608.9            1.0       0.25

Total interest-bearing deposits                        9,769.1            5.4       0.22         9,431.8            5.4       0.23         9,998.0            6.8       0.27

Short-term borrowings                                    785.1            1.0       0.54           848.9            1.1       0.51           763.7            1.3       0.69
Long-term debt                                           386.0            3.2       3.34           381.6            3.1       3.27           396.4            3.2       3.28

Total interest-bearing liabilities                    10,940.2            9.6       0.36 %      10,662.3            9.6       0.36 %      11,158.1           11.3       0.41 %

Net interest-free funding sources                      5,800.2                                   5,714.3                                   5,359.6

Total Cost of Funds                                 $ 16,740.4     $      9.6       0.23 %    $ 16,376.6     $      9.6       0.23 %    $ 16,517.7     $     11.3       0.28 %

Net Interest Spread (te)                                           $    168.2       3.93 %                   $    168.5       3.96 %                   $    176.7       4.19 %
Net Interest Margin                                 $ 16,740.4     $    168.2       4.06 %    $ 16,376.6     $    168.5       4.09 %    $ 16,517.7     $    176.7       4.32 %

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

(b) Includes nonaccrual loans

(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
                                              March 31,          December 31,         March 31,
(dollars in millions)                            2014                2013                2013
Net interest income (te)                          $168.2                $168.5            $176.7
Purchase accounting adjustments
Loan accretion                                      29.7                  30.2              40.2
Whitney premium bond amortization                   (1.5 )                (1.8 )            (3.5 )
Whitney and Peoples First CD accretion               0.1                   0.1               0.3

Total net purchase accounting adjustments           28.3                  28.5              37.0

Net interest income (te) - core                   $139.9                $140.0            $139.7

Average earning assets                        $ 16,740.4             $16,376.6        $ 16,517.7
Net interest margin - reported                      4.06 %                4.09 %            4.32 %
Net purchase accounting adjustments (%)             0.69 %                0.69 %            0.91 %

Net interest margin - core                          3.37 %                3.40 %            3.41 %

Provision for Loan Losses

During the first quarter of 2014, Hancock recorded a total provision for loan losses of $8.0 million, up from $7.3 million in the fourth quarter of 2013. The provision for non-covered loans was $8.3 million in the first quarter of 2014, compared to $7.9 million in the fourth quarter of 2013. The net provision for the covered portfolio was a credit of $0.3 million for the first quarter of 2014 compared to a credit of $0.5 million for the fourth quarter of 2013. The net provision for the covered portfolio was $6.6 million for the first quarter of 2013. The decrease in the provision year-over-year was caused by reductions in the estimates on future losses within the covered portfolio.

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 4 to the consolidated financial statements in the Form 10-K.

Noninterest Income

Noninterest income totaled $56.7 million for the first quarter of 2014, down $2.3 million (4%) from the fourth quarter of 2013, and down $3.5 million (6%) from the first quarter of 2013. Excluding the effect of the amortization of the FDIC loss share receivable, noninterest income was virtually flat compared to the prior quarter and up $0.4 million compared to the first quarter of 2013.

Service charges on deposits totaled $18.7 million for the first quarter of 2014, down $0.9 million (5%) from the fourth quarter of 2014, and down $0.3 million (2%) from the first quarter of 2013. Bank card and ATM fees totaled $10.6 million in the first quarter of 2014, down $0.7 million (6%) from the fourth quarter of 2013. Compared to the first quarter of 2013, bank card and ATM fees were down $0.5 million (4%) in the current year. A portion of these decreases compared to the prior quarter is due to two fewer business days in the current quarter.


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Trust, investment and annuity and insurance fees totaled $18.9 million, up $0.8 million (4%) from the fourth quarter of 2013 and up $1.7 million (10%) from the first quarter of 2013. Improving stock market values and new business were primary factors in the increases. Included in this total was $3.7 million of insurance revenue. Hancock announced on April 1, 2014 the divestiture of selected insurance business lines, which contributed approximately half of first quarter insurance revenues.

Fees from secondary mortgage operations totaled $2.0 million for the first quarter of 2014, a $0.4 million (27%) increase over the fourth quarter of 2013, but down $2.4 million (55%) from first quarter of 2013. The increase compared to the prior quarter reflects a higher level of loans sold during the quarter. The decline compared to the same quarter in 2013 reflects reduced loan sales as a result of an overall slowing of mortgage refinancing.

Gains on the sale of assets increased over $1.0 million compared both to the prior quarter and to the first quarter of 2013. Included in this increase was the deposit premium related to the sale of three branches in the first quarter of 2014.

Amortization on the FDIC loss share receivable totaled $3.9 million in the first quarter of 2014 compared to $1.6 million in the fourth quarter of 2013 year. These amounts reflect a reduction in the amount of expected reimbursements under the loss sharing agreements due to lower loss projections for the related covered loan pools. Higher levels of amortization of the loss share receivable are anticipated in 2014 as projected losses from the covered portfolio have decreased.

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

                                                                Three Months Ended
                                                March 31,          December 31,          March 31,
                                                  2014                 2013                2013
(In thousands)
Service charges on deposit accounts            $    18,712              $ 19,605        $    19,015
Trust fees                                          10,238                10,214              8,692
Bank card and ATM fees                              10,569                11,261             11,058
Investment and annuity fees                          4,952                 4,619              4,577
Secondary mortgage market operations                 1,965                 1,554              4,383
Insurance commissions and fees                       3,744                 3,304              3,994
Amortization of FDIC loss share receivable          (3,908 )              (1,649 )               -
Income from bank owned life insurance                2,314                 2,459              3,299
Credit related fees                                  2,732                 2,755              1,441
Income from derivatives                                759                 1,379                631
Gain on sale of assets                               1,682                   655                314
Safety deposit box income                              513                   443                551
Other miscellaneous                                  2,427                 2,295              2,232
Securities transactions                                 -                    105                 -

Total noninterest income                       $    56,699              $ 58,999        $    60,187


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Noninterest Expense

Noninterest expense for the first quarter of 2014 totaled $147.0 million. Noninterest expense totaled $174.2 million in the fourth quarter of 2013, including $17.1 million of one-time expenses related to the expense and efficiency initiative. Excluding these costs, noninterest expense totaled $157.1 million in the fourth quarter of 2013, $10.1 million (6%) more than the current quarter. Noninterest expense in the first quarter of 2013 totaled $159.6 million. The decreases are primarily related to cost savings related to Hancock's expense and efficiency initiative.

Total personnel expense was $81.4 million in the first quarter of 2014, down $3.5 million (4%) from the fourth quarter of 2013 excluding one-time expenses, and down $6.5 million (7%) compared to the first quarter of 2013. Occupancy and equipment expenses totaled $15.5 million in the first quarter of 2014. This total is down $0.8 million (5%) from the fourth quarter of 2013 and down $2.1 million (12%) from the first quarter of 2013. The reductions in personnel, occupancy and equipment expenses reflect the effect of the closure or sales of several branches during 2013 and the first quarter of 2014 and other expense and efficiency initiatives as management continually looks to rationalize the branch network.

All other expenses, excluding amortization of intangibles, totaled $43.0 million in the first quarter of 2014, $5.7 million (12%) less than the fourth quarter of 2013 (excluding one-time expenses), and $3.5 million (8%) less than the first quarter of 2013. Major components of these decreases were reductions in advertising and professional services.

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

                                                        Three Months Ended
                                           March 31,       December 31,      March 31,
                                              2014             2013             2013
   (In thousands)
   Compensation expense                    $   67,165           $ 69,128     $   71,351
   Employee benefits                           14,267             15,784         16,576

   Personnel expense                           81,432             84,912         87,927

   Net occupancy expense                       11,266             11,613         12,326
   Equipment expense                            4,274              4,679          5,301
   Data processing expense                     12,419             12,018         11,534
   Professional services expense                6,409              8,727          7,946
   Amortization of intangibles                  7,038              7,178          7,555
   Telecommunications and postage               3,583              3,948          4,028
   Deposit insurance and regulatory fees        2,967              3,279          3,646
   Other real estate owned expense, net         1,777              1,535            708
   Advertising                                  1,759              3,098          2,177
   Ad valorem and franchise taxes               2,661              2,534          2,202
   Printing and supplies                        1,329              1,149          1,309
   Insurance expense                            1,040              1,076          1,066
   Travel                                         896              1,197          1,113
   Entertainment and contributions              1,412              1,305          1,722
   Tax credit investment amortization           2,172              3,228          1,426
   One-time expenses                               -              17,116             -
   Other expense                                4,548              5,621          7,616

   Total noninterest expense               $  146,982           $174,213     $  159,602

One-time expenses in the fourth quarter of 2013 included $6.7 million in personnel expenses, $3.1 million in professional services and $7.3 million in other miscellaneous expenses related to branch closures.


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Income Taxes

The effective income tax rate for the first quarter of 2014 was approximately 27%, compared to 20% for the fourth quarter of 2013, and 25% for the first quarter of 2013. Management expects the annual effective tax rate to approximate 26% to 27% in 2014.

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 2014 and 2013 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 the dates and for the
periods indicated.



                                                                  Three Months Ended
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