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HBHC > SEC Filings for HBHC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for HANCOCK HOLDING CO

Form 10-Q for HANCOCK HOLDING CO


8-Aug-2014

Quarterly Report


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

OVERVIEW

Recent Economic and Industry Developments

July 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 continued 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 with many local hotels and resorts reporting high occupancy levels. Companies reported several tourism-related capital projects in progress that are anticipated to encourage travel to the areas in which we operate. However, some hospitality experts have concerns that rising gas prices could have a negative impact on travel and tourism. Retailers are showing improved sales over prior-year levels, and the outlook for the remainder of the year is positive. Auto sales were especially strong, with one industry contact stating that sales were back to pre-recession levels. Reports on manufacturing activity were generally positive, with purchasing managers expecting higher production over the next three to six months.

The real estate markets for residential properties were slightly down to flat. Sales of existing homes were soft, mainly due to higher home prices and limited inventory. Although the outlook for home sales has weakened since the last quarter, most brokers remained positive and 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 expected to steadily improve.

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 full employment levels and labor force participation rates remain near historic lows. 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 and low inflation rate. In addition, in July, the Federal Reserve began gradually curtailing the expansion of their portfolio of Treasuries and mortgage bonds. The bond-buying initiative is expected to conclude by the end of the year.

Highlights of Second Quarter 2014 Financial Results

Net income in the second quarter of 2014 was $40.0 million, or $0.48 per diluted common share, compared to $49.1 million, or $0.58, in the first quarter of 2014. Net income was $46.9 million, or $0.55 per diluted common share, in the second quarter of 2013. Net income for the second quarter of 2014 reflects the after-tax impact of certain nonoperating items totaling $12.1 million. There were no adjustments between operating income and net income for the first quarter of 2014, the second quarter of 2013, or the first six months of 2013. Net income for the six months ended June 30, 2014 was $89.1 million, or $1.06 per diluted common share, compared to $95.4 million, or $1.11 per diluted common share, for the six months ended June 30, 2013. The year-over-year decrease is due to the previously mentioned nonoperating expenses that occurred in the second quarter of 2014.


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Operating income for the second quarter of 2014 was $49.6 million or $.59 per diluted common share, compared to $49.1 million, or $.58 in the first quarter of 2014. Operating income was $46.9 million, or $.55, in the second quarter of 2013. We define operating income as net income excluding tax-effected securities transactions gains or losses and nonoperating expense items. Management believes that operating income provides a useful measure of financial performance that helps investors compare the Company's fundamental operations over time. A reconciliation of net income to operating income is included in the later section on "Selected Financial Data."

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

Ongoing improvement in the overall quality of earnings (replacing declining purchase accounting income with core results); core net interest income (taxable equivalent or "te") increased approximately $0.7 million linked-quarter; core net interest margin (NIM) narrowed 2 basis points
(bps) (we define our core net interest income and core net interest margin results as reported results less the impact of net purchase accounting adjustments, see below for further discussion); noninterest income increased approximately $1.0 million after adjusting for the impact from the amortization of the FDIC loss share receivable and normalizing for the sale of selected insurance lines in early second quarter 2014

Operating expenses declined $2.3 million, or 1.5% linked-quarter, exceeding the Company's expense management goals; however, management expects increases in operating expense in the near-term as investments are made in revenue-generating initiatives

Included in earnings was the after-tax impact of $12.1 million in nonoperating items related to the following:

a $10.3 million expense for the settlement of an assessment related to the FDIC's targeted review of certain previously received reimbursements for claims under the loss share agreements

a $3.5 million expense for the early redemption of $115 million in fixed rate reverse repurchase obligations

$7.5 million in expense for various expense and efficiency initiatives and other items

a $9.4 million gain from the sale of the Company's property and casualty and group benefits insurance intermediary business

Approximately $383 million, or 13% linked-quarter annualized net loan growth, and approximately $1.3 billion, or 12% year-over-year loan growth
(each excluding the FDIC-covered portfolio)

Purchase accounting loan accretion declined $1.6 million linked-quarter; management expects sizeable quarterly declines in both the third and fourth quarters of 2014

Continued improvement in asset quality metrics

Solid capital levels with a tangible common equity (TCE) ratio of 9.29%

In July, Board of Directors authorized a 5% buyback of common stock issued and outstanding that is authorized through December 31, 2015

Return on average assets (ROA) from operating income of 1.04% compared to 1.05% in the first quarter of 2014 and 0.99% in the second quarter a year ago

RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) for the second quarter of 2014 was $167.3 million, down $0.9 million from the first quarter of 2014 primarily due to the $1.6 million decline in purchase accounting accretions. Excluding this impact, core net interest income increased $0.7 million due to the positive impact from an increase in earning assets, a better earning asset mix and one more day of interest accruals. These favorable items were partially offset by the continued decline in core loan yields. Average earning assets were $16.8 billion in the second quarter of 2014, up $51.3 million from the first quarter of 2014, as average loans were up $301.5 million, or 2%, while average investment securities and short-term investments decreased $219.1 million, or 6%, and $26.6 million, or 7%, respectively.

Net interest income (te) for the second quarter of 2014 was down $4.4 million, or 3%, compared to the second quarter of 2013, primarily due to a $6.0 million reduction in total purchase accounting accretion. A $291.5 million increase in average earning assets and a more favorable earning asset mix offset a 26 bps decrease in the core loan yield. For 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 3.99% for the second quarter of 2014, down 7 bps from the first quarter of 2014, and down 18 bps from the second quarter of 2013. The current quarter's core margin of 3.35% (reported net interest income (te) excluding purchase accounting accretion, annualized, as a percent of average earning assets) compressed 2 bps compared to the first quarter of 2014 and 3 bps compared to the second quarter of 2013. The continued decline in the core loan yield was partially offset by the favorable impact of net loan growth and reduced investment securities on the earning asset mix.

The overall reported yield on earning assets was 4.21% in the second quarter of 2014, a decrease of 8 bps from the first quarter of 2014 and 21 bps from the second quarter of 2013. The reported loan portfolio yield of 4.86% for the current quarter was down 14 bps from the first quarter of 2014 and 61 bps from the second quarter of 2013. Excluding purchase accounting loan accretion, the core loan yield of 3.97% in the current quarter was down 5 bps from the first quarter of 2014 and 26 bps from a year earlier.

The overall cost of funding earning assets was 0.22% in the second quarter of 2014, virtually unchanged from the first quarter of 2014 and down 3 bps from the second quarter of 2013. The mix of funding sources improved in the second quarter of 2014 compared to the second quarter of 2013. Interest-free sources, including noninterest-bearing demand deposits, funded 35.1% of earning assets in the current period, up from 33.0% a year ago. The overall rate paid on interest-bearing deposits was 0.22% in the current quarter, unchanged from the first quarter of 2014 and 4 bps below the second 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.

Although only having a minor impact on the second quarter 2014 results, the Company redeemed a portion of its outstanding debt in June 2014 by unwinding $115 million in fixed rate reverse repurchase obligations with an average rate of 3.43%. The early redemption will save approximately $3.7 million in annualized interest expense.

Net interest income (te) for the first six months of 2014 totaled $335.5 million, a $13.1 million, or 4%, decrease from the first half of 2013. Excluding a $14.8 million decrease in purchase accounting accretion, net interest income was relatively flat for the first six months of 2014 as compared to the same period of 2013. A $257 million, or 2%, increase in average earning assets, a more favorable earning asset mix, a 31 basis point increase in investment yields and a 5 basis point decrease in the costs of funds offset a 33 basis point decrease in the core loan yield.

The reported net interest margin for the first six months of 2014 was 4.03% compared to 4.24% in 2013, while the core margin declined to 3.36% in 2014 compared to 3.40% in 2013. 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.


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                                                                                            Three Months Ended
                                                    June 30, 2014                             March 31, 2014                            June 30, 2013
(dollars in millions)                      Volume        Interest       Rate         Volume        Interest       Rate         Volume        Interest       Rate
Average earning assets
Commercial & real estate
loans (te) (a) (b)                       $  9,355.2     $    108.2       4.64 %    $  9,095.7     $    107.9       4.81 %    $  8,415.6     $    103.3       4.92 %
Mortgage loans                              1,744.3           21.0       4.83         1,720.6           21.3       4.96         1,599.9           27.3       6.78
Consumer loans                              1,581.4           23.6       5.99         1,563.1           23.1       6.00         1,579.4           26.5       6.74
Loan fees & late charges                         -             0.8                         -             0.8                         -             1.2

Total loans (te)                           12,680.9          153.6       4.86        12,379.4          153.1       5.00        11,594.9          158.3       5.47

Loans held for sale                            14.7            0.1       4.14            19.2            0.2       4.06            28.3            0.3       3.53
US Treasury and agency securities                -              -        0.00            93.5            0.5       2.28             0.1             -        4.66
Mortgage-backed securities and CMOs         3,490.9           20.1       2.30         3,612.8           21.2       2.34         4,182.3           20.7       1.98
Municipals (te) (a)                           205.8            2.4       4.63           217.0            2.5       4.56           233.0            2.6       4.51
Other securities                               19.8            0.1       1.19            12.3            0.1       3.87             8.0            0.1       2.79

Total securities (te) (c)                   3,716.5           22.6       2.43         3,935.6           24.3       2.47         4,423.4           23.4       2.11

Total short-term investments                  379.6            0.2       0.22           406.2            0.2       0.23           453.6            0.3       0.25

Average earning assets (te)              $ 16,791.7     $    176.5       4.21 %    $ 16,740.4     $    177.8       4.29 %    $ 16,500.2     $    182.3       4.42 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                         $  6,078.1     $      1.5       0.10 %    $  6,072.1     $      1.5       0.10 %    $  5,965.8     $      1.5       0.10 %
Time deposits                               2,026.4            3.0       0.60         2,170.4            3.1       0.58         2,415.4            3.8       0.63
Public funds                                1,450.3            0.7       0.21         1,526.6            0.8       0.20         1,483.3            0.9       0.23

Total interest-bearing deposits             9,554.8            5.2       0.22         9,769.1            5.4       0.22         9,864.5            6.2       0.25

Short-term borrowings                         957.4            0.9       0.34           785.1            1.0       0.54           790.1            1.1       0.54
Long-term debt                                380.2            3.1       3.32           386.0            3.2       3.34           393.6            3.2       3.28

Total borrowings                            1,337.6            4.0       1.19         1,171.1            4.2       1.46         1,183.7            4.3       1.45

Total interest-bearing liabilities         10,892.4            9.2       0.34 %      10,940.2            9.6       0.36 %      11,048.2           10.5       0.38 %

Net interest-free funding sources           5,899.3                                   5,800.2                                   5,452.0

Total cost of funds                      $ 16,791.7     $      9.2       0.22 %    $ 16,740.4     $      9.6       0.23 %    $ 16,500.2     $     10.5       0.25 %

Net interest spread (te)                                $    167.3       3.87 %                   $    168.2       3.93 %                   $    171.8       4.04 %
Net interest margin                      $ 16,791.7     $    167.3       3.99 %    $ 16,740.4     $    168.2       4.06 %    $ 16,500.2     $    171.8       4.17 %

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

(b) Includes nonaccrual loans

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


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                                                                       Six Months Ended
                                                   June 30, 2014                             June 30, 2013
(dollars in millions)                     Volume        Interest       Rate         Volume        Interest       Rate
Average earning assets
Commercial & real estate loans (te)
(a) (b)                                 $  9,226.1     $    216.1       4.72 %    $  8,348.8     $    216.7       5.23 %
Mortgage loans                             1,732.5           42.4       4.89         1,596.3           52.6       6.60
Consumer loans                             1,572.3           46.8       6.00         1,599.0           53.0       6.69
Loan fees & late charges                        -             1.4                         -             1.8

Total loans (te)                          12,530.9          306.7       4.93        11,544.1          324.1       5.65

Loans held for sale                           16.9            0.3       4.10            32.7            0.6       3.65
US Treasury and agency securities             46.5            0.5       2.26             2.8             -        1.29
Mortgage-backed securities and CMOs        3,551.5           41.3       2.32         3,941.7           39.4       2.00
Municipals (te) (a)                          211.4            4.9       4.59           225.0            5.2       4.61
Other securities                              16.1            0.2       2.22             8.2            0.1       2.37

Total securities (te) (c)                  3,825.5           46.9       2.45         4,177.7           44.7       2.14

Total short-term investments                 392.9            0.4       0.23           754.4            0.9       0.25

Average earning assets (te)             $ 16,766.2     $    354.3       4.25 %    $ 16,508.9     $    370.3       4.51 %

Average interest-bearing liabilities
Interest-bearing transaction and
savings deposits                        $  6,075.1     $      3.0       0.10 %    $  5,974.0     $      3.2       0.11 %
Time deposits                              2,098.0            6.1       0.59         2,411.1            7.9       0.66
Public funds                               1,488.3            1.5       0.20         1,545.8            1.8       0.24

Total interest-bearing deposits            9,661.4           10.6       0.22         9,930.9           12.9       0.26

Short-term borrowings                        871.7            1.9       0.43           777.0            2.4       0.62
Long-term debt                               383.1            6.3       3.33           395.0            6.4       3.28

Total borrowings                           1,254.8            8.2       1.32         1,172.0            8.8       1.51

Total interest-bearing liabilities        10,916.2           18.8       0.35 %      11,102.9           21.7       0.39 %

Net interest-free funding sources          5,850.0                                   5,406.0

Total cost of funds                     $ 16,766.2     $     18.8       0.22 %    $ 16,508.9     $     21.7       0.27 %

Net interest spread (te)                               $    335.5       3.90 %                   $    348.6       4.12 %
Net interest margin                     $ 16,766.2     $    335.5       4.03 %    $ 16,508.9     $    348.6       4.24 %

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

(b) Includes nonaccrual loans

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


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Due to the significant, unsustainable contribution from purchase accounting accretion, management believes that core net interest income and core margin provide meaningful financial measures to investors of the Company's performance over time. The following table provides a reconciliation of reported and core net interest income and reported and core net interest margin.

Reconciliation of Reported Net Interest Margin to Core Margin



                                                      Three Months Ended                    Six Months Ended June 30,
                                           June 30,       March 31,        June 30,         June 30,           June 30,
(dollars in millions)                        2014            2014            2013             2014               2013
Net interest income (te) (a)              $    167.3      $    168.2      $    171.8      $       335.5       $    348.6
Purchase accounting accretion
Loan accretion                                  28.0            29.7            35.9               57.8             76.2
Whitney premium bond amortization               (1.4 )          (1.5 )          (3.4 )             (3.0 )           (6.9 )
Whitney and Peoples First CD accretion           0.1             0.1             0.2                0.1              0.5

Total net purchase accounting accretion         26.7            28.3            32.7               54.9             69.8

Net interest income (te) - core           $    140.6      $    139.9      $    139.1      $       280.6       $    278.8

Average earning assets                    $ 16,791.7      $ 16,740.4      $ 16,500.2      $    16,766.2       $ 16,508.9
Net interest margin - reported                  3.99 %          4.06 %          4.17 %             4.03 %           4.24 %
Net purchase accounting accretion (%)           0.64 %          0.69 %          0.79 %             0.67 %           0.85 %

Net interest margin - core                      3.35 %          3.37 %          3.38 %             3.36 %           3.40 %

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

Provision for Loan Losses

During the second quarter of 2014, Hancock recorded a total provision for loan losses of $6.7 million, down from $8.0 million in the first quarter of 2014 and $8.3 million in the second quarter of 2013. The provision for noncovered loans was $6.8 million in the second quarter of 2014, compared to $8.3 million in the first quarter of 2014 and $7.9 million in the second quarter of 2013. The provision for the covered portfolio was a small net credit in each of the three-month periods. For the first six months of 2014, the total provision for loan losses was $14.7 million, down from $17.8 million for the same period in 2013. The decrease in the provision year-over-year was caused primarily by reductions in the expected 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 Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Noninterest Income

Noninterest income totaled $56.4 million for the second quarter of 2014, relatively flat compared to the first quarter of 2014, but down $7.5 million from the second quarter of 2013. Excluding the impact of lost revenue from the sale of certain insurance business lines during the second quarter of 2014 and the impact from the amortization of the FDIC loss share receivable discussed further below, second quarter 2014 noninterest income increased approximately $1.0 million from first quarter 2014. Noninterest income totaled $113.1 million for the first six months of 2014, down $11.0 million, or 9%, from the first six months of 2013.


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Service charges on deposits totaled $19.3 million for the second quarter of 2014, up $0.6 million, or 3%, from the first quarter of 2014, but down $0.6 million, or 3%, from the second quarter of 2013. The increase from the first quarter of 2014 to the second quarter of 2014 reflects the impact of two additional business days in the second quarter of 2014.

Bank card fees and ATM fees totaled $11.6 million in the second quarter of 2014, up $1.0 million, or 10%, from the first quarter of 2014 and relatively flat compared to the second quarter of 2013. The increase from the first quarter 2014 to the second quarter of 2014 was due to seasonally higher transaction volume.

Trust, investment and annuity fees and insurance fees totaled $18.5 million for the second quarter of 2014, down $0.5 million, or 2%, from the first quarter of 2014 and down $1.4 million, or 7%, from the second quarter of 2013. Trust fees were up $1.3 million from the first quarter due in part to seasonal revenue as well as growth in the value of assets managed. This increase was offset by a $1.8 million decrease in insurance fees as result of the Company selling its property and casualty and group benefits insurance intermediary business in April 2014.

Fees from the secondary mortgage operations in the second quarter of 2014 were down $0.2 million, or 11%, compared to the first quarter of 2014 and down $2.4 million, or 58%, compared to the second quarter of 2013. Through the first six months of 2014, fees from the secondary mortgage operations decreased $4.8 million compared to the first six months of 2013. The decline reflects reduced loan sales as a result of an overall slowing of mortgage refinancing activity as well as an increase of originated mortgages being held for investment.

The $1.9 million reduction in gains on the sale of assets compared to the prior quarter reflects the deposit premium received in the first quarter of 2014 related to the sale of the three branches.

Amortization of the FDIC loss share receivable totaled $3.3 million in the second quarter of 2014 compared to $3.9 million in the first quarter of 2014. For the first six months of 2014, amortization of the FDIC loss share receivable totaled $7.2 million. There was no amortization recorded in the first six months of 2013. The amortization reflects a reduction in the amount of expected reimbursements under the loss share agreements due to lower loss projections for the related covered loan pools. Elevated levels of amortization of the loss share receivable are anticipated throughout 2014 as projected losses from the covered portfolio have decreased.


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

                                                        Three Months Ended                     Six Months Ended
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