UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2013
OR
For the transition period from to
Commission File Number 0-13089
HANCOCK HOLDING COMPANY
(Exact name of registrant as specified in its charter)
(228) 868-4000
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
84,884,269 common shares were outstanding as of May 1, 2013.
Hancock Holding Company
Index
Part I. Financial Information
ITEM 1. Financial Statements
Consolidated Balance Sheets — March 31, 2013 (unaudited) and December 31, 2012
Consolidated Statements of Income (unaudited) — Three months ended March 31, 2013 and 2012
Consolidated Statements of Comprehensive Income (unaudited) — Three months ended March 31, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three months ended March 31, 2013 and 2012
Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2013 and 2012
Notes to Consolidated Financial Statements (unaudited) — March 31, 2013
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
ITEM 4. Controls and Procedures
Part II. Other Information
ITEM 1. Legal Proceedings
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Default on Senior Securities
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
ITEM 6. Exhibits
Signatures
Item 1. Financial Statements
Hancock Holding Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Federal funds sold
Securities available for sale, at fair value (amortized cost of $2,804,411 and $1,986,882)
Securities held to maturity (fair value of $1,848,886 and $1,710,465)
Loans held for sale
Loans
Less: allowance for loan losses
unearned income
Loans, net
Property and equipment, net of accumulated depreciation of $158,423 and $160,592
Prepaid expenses
Other real estate, net
Accrued interest receivable
Goodwill
Other intangible assets, net
Life insurance contracts
FDIC loss share receivable
Deferred tax asset, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand
Interest-bearing savings, NOW, money market and time
Total deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ equity
Common stock—$3.33 par value per share; 350,000,000 shares authorized, 84,881,970 and 84,847,796 issued and outstanding, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited condensed consolidated financial statements.
1
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Interest income:
Loans, including fees
Securities—taxable
Securities—tax exempt
Federal funds sold and other short term investments
Total interest income
Interest expense:
Deposits
Long-term debt and other interest expense
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Trust fees
Bank card fees
Investment and annuity fees
ATM fees
Secondary mortgage market operations
Insurance commissions and fees
Other income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Compensation expense
Employee benefits
Personnel expense
Net occupancy expense
Equipment expense
Data processing expense
Professional services expense
Amortization of intangibles
Telecommunications and postage
Deposit insurance and regulatory fees
Advertising
Other expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Dividends paid per share
Weighted avg. shares outstanding-basic
Weighted avg. shares outstanding-diluted
2
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income:
Net change in unrealized gain
Reclassification adjustment for net losses realized and included in earnings
Amortization of unrealized net gain on securities transferred to held-to-maturity
Other comprehensive income, before income taxes
Income tax (benefit) expense
Other comprehensive income
Comprehensive income
3
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share and per share data)
Balance, January 1, 2012
Cash dividends declared ($0.24 per common share)
Common stock activity, long-term incentive plan, including excess income tax benefit of $15
Balance, March 31, 2012
Balance, January 1, 2013
Common stock activity, long-term incentive plan, including excess income tax benefit of $102
Balance, March 31, 2013
4
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
(Gains) losses on other real estate owned
Deferred tax expense (benefit)
Increase in cash surrender value of life insurance contracts
Loss on disposal of other assets
Net decrease in loans originated for sale
Net amortization of securities premium/discount
Amortization of intangible assets
Stock-based compensation expense
Decrease in interest payable and other liabilities
Funds collected under FDIC loss share agreements
Increase in FDIC loss share receivable
Decrease in other assets
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of securities held to maturity
Purchases of securities held to maturity
Net decrease in interest-bearing bank deposits
Net increase in federal funds sold and short term investments
Net decrease in loans
Purchases of property, equipment and intangible assets
Proceeds from sales of property and equipment
Proceeds from sales of other real estate
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits
Net increase (decrease) in short-term borrowings
Repayments of long-term debt
Issuance of long term debt
Dividends paid
Proceeds from exercise of stock options
Net cash used in financing activities
NET DECREASE IN CASH AND DUE FROM BANKS
CASH AND DUE FROM BANKS, BEGINNING
CASH AND DUE FROM BANKS, ENDING
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans
Transfers from available for sale securities to held to maturity securities
5
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the accounts of Hancock Holding Company and all other entities in which it has a controlling interest (the “Company”). The financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. Some financial information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s 2012 Annual Report on Form 10-K. Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations, or cash flows for any other interim or annual period.
Use of Estimates
The accounting principles the Company follows and the methods for applying these principles conform with U.S. GAAP and with those generally practiced within the banking industry. These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Critical Accounting Policies and Estimates
There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in our Form 10-K for the year ended December 31, 2012.
2. Fair Value
The Financial Accounting Standards Board (FASB) defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB’s guidance also established a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
6
2. Fair Value (continued)
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present for each of the fair value hierarchy levels the Company’s assets and liabilities that are measured at fair value (in thousands) on a recurring basis in the consolidated balance sheets.
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities
Municipal obligations
Corporate debt securities
Mortgage-backed securities
Collateralized mortgage obligations
Equity securities
Total available-for-sale securities
Derivative assets (1)
Total recurring fair value measurements—assets
Liabilities
Derivative liabilities (1)
Total recurring fair value measurements—liabilities
7
Notes to Consolidated Financial Statements – (continued)
Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and certain other debt and equity securities. Level 2 classified securities include residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data. The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two to five years. Company policies limit investments to securities having a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency. There were no transfers between valuation hierarchy levels during the periods shown.
The fair value of derivative financial instruments, which are predominantly interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, such as LIBOR swap curves and Overnight Index Swap rate (“OIS”) curves, observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value the derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations in their entirety in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.
8
The Company also has certain derivative instruments associated with the Banks’ mortgage-banking activities. These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis. The fair value of these derivative instruments is measured using observable market prices for similar instruments and classified as level 2 measurements.
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent impaired loans are reported at the fair value of the underlying collateral. Impairment is measured based on the fair value of the collateral, which is typically derived from third-party appraisals that take into consideration prices in observed transactions involving similar locations or based on other market-based information such as recent sales activity for similar assets in the property’s market, in accordance with ASC 310 and are consequently considered level 2 assets. However, in some cases a discounted cash flow valuation technique is used and these assets are considered level 3 using a range of 3.15% to 8% as the discount for expected levels of future cash flows.
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs. Fair values are determined by sales agreement or third-party appraisal. However, in some cases an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price. The Company may apply discount adjustments to the appraised value for estimated selling costs, information from comparable sales, and marketability of the property. As such, other real estate owned is recorded with subsequent write downs after transfer as level 3, using a sales comparison valuation technique with a discount of 10% to 25% for the difference between comparable sales and/or selling costs.
The following tables present for each of the fair value hierarchy levels the Company’s financial assets that are measured at fair value (in thousands) on a nonrecurring basis.
Collateral dependent impaired loans
Other real estate owned
Total nonrecurring fair value measurements
9
Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.
Cash, Short-Term Investments and Federal Funds Sold—For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities—The fair value measurement for securities available for sale was discussed earlier. The same measurement techniques were applied to the valuation of securities held to maturity.
Loans, Net—The fair value measurement for certain impaired loans was discussed earlier. Cost recovery loans are based on appraisals. For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows by discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality.
Accrued Interest Receivable and Accrued Interest Payable—The carrying amounts are a reasonable estimate of fair value.
Deposits—The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold under Agreements to Repurchase and Federal Funds Purchased—For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Long-Term Debt—The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained.
Derivative Financial Instruments—The fair value measurement for derivative financial instruments was discussed earlier.
10
The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amount at March 31, 2013 and December 31, 2012 (in thousands):
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold
Available for sale securities
Held to maturity securities
Derivative financial instruments
Financial liabilities:
Federal funds purchased
Securities sold under agreements to repurchase
11
12
3. Securities
The amortized cost and fair value of securities classified as available for sale and held to maturity follow (in thousands):
U.S. Treasury
U.S. government agencies
CMOs
Other equity securities
The following table presents the amortized cost and fair value of debt securities at March 31, 2013 by contractual maturity (in thousands). Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties.
Debt Securities Available for Sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total available for sale debt securities
Debt Securities Held to Maturity
Total held to maturity securities
13
3. Securities (continued)
The Company held no securities classified as trading at March 31, 2013 or December 31, 2012.
The details for securities classified as available for sale with unrealized losses as of March 31, 2013 follow (in thousands):
The details for securities classified as available for sale with unrealized losses as of December 31, 2012 follows (in thousands):
The details for securities classified as held to maturity with unrealized losses as of March 31, 2013 follows (in thousands):
Municpal obligations
14
The details for securities classified as held to maturity with unrealized losses as of December 31, 2012 follows (in thousands):
Substantially all of the unrealized losses relate to changes in market rates on fixed-rate debt securities since the respective purchase dates. In all cases, the indicated impairment would be recovered no later than the security’s maturity date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. None of the unrealized losses relate to the marketability of the securities or the obligor’s ability to meet contractual obligations. The Company has adequate liquidity and, therefore, does not plan to and, more likely than not, will not be required to sell these securities before full recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary.
Securities with carrying values totaling approximately $2.6 billion at both March 31, 2013 and at December 31, 2012 were pledged primarily to secure public deposits or securities sold under agreements to repurchase.
15
4. Loans and Allowance for Loan Losses
Loans, net of unearned income, consisted of the following:
Originated loans:
Commerical non-real estate
Construction and land development
Commercial real estate
Residential mortgages
Consumer
Total originated loans
Acquired loans:
Total acquired loans
Covered loans:
Total covered loans
Total loans:
Total loans
16
4. Loans and Allowance for Loan Losses (continued)
The following briefly describes the distinction between originated, acquired and covered loans and certain significant accounting policies relevant to each category.
Originated loans
Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recorded as income as earned. The accrual of interest on an originated loan is discontinued when it is probable that the borrower will not be able to meet payment obligations as they become due. The Company maintains an allowance for loan losses on originated loans that represents management’s estimate of probable losses inherent in this portfolio category. The methodology for estimating the allowance is described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. As actual losses are incurred, they are charged against the allowance. Subsequent recoveries are added back to the allowance when collected.
Acquired loans
Acquired loans are those purchased in the Whitney Holding Corporation acquisition on June 4, 2011. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration (“acquired impaired”), and then further segregated into loan pools designed to facilitate the development of expected cash flows. The factors considered in segregating the acquired portfolio are detailed in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The fair value estimate for each pool of acquired performing and acquired impaired loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at prevailing market interest rates.
The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. Management estimates an allowance for loan losses for acquired performing loans using a methodology similar to that used for originated loans. The allowance determined for each loan pool is compared to the remaining fair value discount for that pool. If the allowance is greater, the excess is added to the reported allowance through a provision for loan losses. If the allowance is less, no additional allowance or provision is recognized. Actual losses first reduce any remaining fair value discount for the loan pool. Once the discount is fully depleted, losses are applied against the allowance established for that pool. Acquired performing loans are placed on nonaccrual status and considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
17
The excess of cash flows expected to be collected from an acquired impaired loan pool over the pool’s estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the pool. Each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Acquired impaired loans in pools with an accretable yield and expected cash flows that are reasonably estimable are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting. Management recasts the estimate of cash flows expected to be collected on each acquired impaired loan pool at each reporting date. If the present value of expected cash flows for a pool is less than its carrying value, an impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.
Covered loans and the related loss share receivable
The loans purchased in the 2009 acquisition of Peoples First Community Bank (Peoples First) are covered by two loss share agreements between the FDIC and the Company that afford the Company significant loss protection. These covered loans are accounted for as acquired impaired loans as described above. The loss share receivable is measured separately from the related covered loans as it is not contractually embedded in the loans and is not transferable should the loans be sold. The fair value of the loss share receivable at acquisition was estimated by discounting projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages, including appropriate consideration of possible true-up payments to the FDIC at the expiration of the agreements. The discounted amount is accreted into non-interest income over the remaining life of the covered loan pool or the life of the loss share agreement.
The loss share receivable is reviewed and updated prospectively as loss estimates related to the covered loans change. Increases in expected reimbursements from a covered loan pool will lead to an increase in the loss share receivable. A decrease in expected reimbursements is reflected first as a reversal of any previously recorded increase in the loss share receivable on the covered loan pool with the remainder reflected as a reduction in the loss share receivable’s accretion rate. Increases and decreases in the loss share receivable can result in reductions in or additions to the provision for loan losses, which serve to offset the impact on the provision from impairment recognized on the underlying covered loan pool and reversals of previously recognized impairment. The impact on operations of a reduction in the loss share receivable’s accretion rate is associated with an increase in the accretable yield on the underlying loan pool.
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The following schedule shows activity in the loss share receivable for the three months ended March 31, 2013 and 2012 (in thousands):
Balance, January 1
Discount accretion
Charge-offs, write-downs and other losses
External expenses qualifying under loss share agreement
Payments received from the FDIC
Ending balance
In the following discussion and tables, commercial loans include the commercial non-real estate, construction and land development and commercial real estate loans categories shown in the previous table.
The following schedule shows activity in the allowance for loan losses, by portfolio segment for the three months ended March 31, 2013 and March 31, 2012 as well as the corresponding recorded investment in loans at the end of each period.
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Net provision for loan losses
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans:
19
Net provision for loan losses (a)
Increase in FDIC loss share receivable (a)
20
Acquired loans (b)
21
The following table shows the composition of non-accrual loans by portfolio segment and class. Acquired impaired and certain covered loans are considered to be performing due to the application of the accretion method and are excluded from the table. Covered loans accounted for using the cost recovery method do not have an accretable yield and are disclosed below as non-accrual loans. Acquired performing loans that have subsequently been placed on non-accrual status are also disclosed below.
Commercial
The amount of interest that would have been recorded on nonaccrual loans and taken into income for the three months ended March 31, 2013 was approximately $1.9 million. Interest actually received on nonaccrual loans during the three months ended March 31, 2013 was $0.6 million.
22
Included in nonaccrual loans at March 31, 2013 is $19.8 million in restructured commercial loans. Total troubled debt restructurings (TDRs) as of March 31, 2013 were $34.4 million and $32.2 million at December 31, 2012. Acquired and covered impaired loans modified post-acquisition are not removed from their accounting pool and accounted for as TDRs, even if those loans would otherwise be deemed TDRs.
The table below details TDRs that occurred during the three months ended March 31, 2013 and March 31, 2012 by portfolio segment (dollar amounts in thousands). During these periods, no loan modified as a TDR defaulted within twelve months of its modification date. All troubled debt restructurings are rated substandard and are considered impaired in calculating the allowance for loan losses.
Troubled Debt Restructurings:
Aquired loans:
23
The Banks’ loans that are risk rated Substandard and Doubtful are reviewed for impairment. However, for ASC 310-10 analysis used in the ALLL methodology, only loans greater than $1 million are included in the impairment review. This information is the source for the following impaired table. For the credit quality indicator tables presented later in this note, all loans are included. The tables below present impaired loans disaggregated by class at March 31, 2013 and December 31, 2012:
March 31, 2013
With no related allowance recorded:
With an allowance recorded:
Total:
24
December 31, 2012
25
Covered loans and loans acquired with existing credit impairment with an accretable yield are considered to be current in the following delinquency table. Certain covered loans accounted for using the cost recovery method are disclosed according to their contractual payment status below. The following table presents the age analysis of past due loans at March 31, 2013 and December 31, 2012:
Total
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The following table presents the credit quality indicators of the Company’s various classes of loans at March 31, 2013 and December 31, 2012.
Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Loss
Residential Mortgage Credit Exposure
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Performing
Nonperforming
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Loan review uses a risk-focused continuous monitoring program that provides for an independent, objective and timely review of credit risk within the company.
Below are the definitions of the Company’s internally assigned grades:
Commercial:
Pass - loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Pass - Watch - Credits in this category are of sufficient risk to cause concern. This category is reserved for credits that display negative performance trends. The “Watch” grade should be regarded as a transition category.
Special Mention - These credits exhibit some signs of “Watch,” but to a greater magnitude. These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard.” They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the bank.
Substandard - These credits constitute an unacceptable risk to the bank. They have recognized credit weaknesses that jeopardize the repayment of the debt. Repayment sources are marginal or unclear.
Doubtful - A Doubtful credit has all of the weaknesses inherent in one classified “Substandard” with the added characteristic that weaknesses make collection in full highly questionable or improbable.
Loss - Credits classified as Loss are considered uncollectable and are charged off promptly once so classified.
Consumer:
Performing – Loans on which payments of principal and interest are less than 90 days past due.
Non-performing – Loans on which payments of principal and interest are more than 90 days past due. All loans rated on non-accrual status are also reported as non-performing.
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Changes in the carrying amount of acquired impaired loans and accretable yield are presented in the following table for the three months ended March 31, 2013 and the year ended December 31, 2012:
Balance at beginning of period
Additions
Payments received, net
Accretion
Increase (decrease) in expected cash flows based on actual cash flow and changes in cash flow assumptions
Net transfers from (to) nonaccretable difference to accretable yield
Balance at end of period
5. Derivatives
Risk Management Objective of Using Derivatives
The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments, currently related to our variable rate borrowing. The Banks have also entered into interest rate derivative agreements as a service to certain qualifying customers. The Banks manage a matched book with respect to these customer derivatives in order to minimize the net risk exposure resulting from such agreements. The Banks also enter into risk participation agreements under which they may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional amounts and fair values (in thousands) of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2013 and December 31, 2012.
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5. Derivatives (continued)
Derivatives designated as hedging instruments:
Interest rate swaps
Derivatives not designated as hedging instruments:
Forward commitments to sell residential mortgage loans
Interest rate-lock commitments on residential mortgage loans
Risk participation agreements
Cash Flow Hedges of Interest Rate Risk
At both March 31, 2013 and December 31, 2012, the Company was party to an interest rate swap agreement with a notional amount of $140 million that was designated as a cash flow hedge of the Company’s forecasted variable cash flows under a variable-rate term borrowing agreement. The swap agreement expires in June 2013. Under the swap agreement, the Company receives interest on the notional amount at a variable rate and pays interest at a fixed rate.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The impact on AOCI was insignificant during 2012, and the impact of reclassifications on earnings during 2013 has been and is expected to continue to be insignificant. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three months ended March 31, 2013. Amounts reported in AOCI related to these derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0.1 million will be reclassified as a decrease to interest expense.
Derivatives Not Designated as Hedges
Customer interest rate derivatives
The Banks enter into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Banks simultaneously enter into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions. Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
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The Banks also enter into risk participation agreements under which they may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Banks have assumed credit risk, they are not a direct counterparty to the derivative contract with the borrower and have entered into the risk participation agreement because they are also a party to the related loan agreement with the borrower. In those instances in which the Banks have sold credit risk, they are the sole counterparty to the derivative contract with the borrower and have entered into the risk participation agreement because they sold a portion of the related loan. The Banks manage their credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on their normal credit review process.
Mortgage banking derivatives
The Banks also enter into certain derivative agreements as part of their mortgage banking activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis.
Effect of Derivative Instruments on the Income Statement
The effect of the Company’s derivative financial instruments on the income statement was immaterial for the three months ended March 31, 2013 and 2012.
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Credit-risk-related Contingent Features
Certain of the Banks’ derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as the downgrade of the Banks’ credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of a Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. As of March 31, 2013, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $18.6 million, for which the Banks had posted collateral of $15.0 million.
Offsetting Assets and Liabilities
Offsetting information in regards to derivative assets and liabilities subject to master netting agreements at March 31, 2013 and December 31, 2012 is presented in the following tables:
Description
Derivative Assets
Derivative Liabilities
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6. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) is reported as a component of stockholders’ equity. AOCI can include, among other items, unrealized holding gains and losses on securities available for sale (AFS), gains and losses associated with pension or other post retirement benefits that are not recognized immediately as a component of net periodic benefit cost, and gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges. The net unrealized gain on AFS securities reclassified as securities held to maturity during 2012 also continue to be reported as a component of AOCI and will be amortized over the estimated remaining life of the security as an adjustment to interest income. The components of AOCI are reported net of related tax effects.
The components of AOCI and changes in those components are presented in the following table (in thousands).
Other comprehensive income before income taxes:
Net change in unrealized gain (loss)
Transfer of net unrealized gain from AFS to HTM, net of cummulative tax effect
Reclassification adjustment for net (gains) losses realized and included in earnings
Income tax expense (benefit)
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7. Earnings Per Share
Hancock calculates earnings per share using the two-class method. The two-class method allocates net income to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings. Participating securities consist of unvested stock-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents.
Following is a summary of the information used in the computation of earnings per common share using the two-class method (in thousands, except per share amounts):
Numerator:
Net income to common shareholders
Net income allocated to participating securities—basic and diluted
Net income allocated to common shareholders—basic and diluted
Denominator:
Weighted-average common shares—basic
Dilutive potential common shares
Weighted average common shares—diluted
Earnings per common share:
Basic
Diluted
Potential common shares consist of employee and director stock options. These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share. Weighted-average anti-dilutive potential common shares totaled 1,107,790 for the three months ended March 31, 2013 and 973,331 for the three months ended March 31, 2012.
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8. Share-Based Payment Arrangements
Stock Option Plans
Hancock maintains incentive compensation plans that provide for awards of share-based compensation to employees and directors. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in Note 13 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2012.
A summary of option activity for the three months ended March 31, 2013 is presented below:
Options
Outstanding at January 1, 2013
Exercised
Forfeited or expired
Outstanding at March 31, 2013
Exercisable at March 31, 2013
The total intrinsic value of options exercised during the three months ended March 31, 2013 and 2012 was $0.1 million and $0.4 million, respectively.
A summary of the status of the Company’s nonvested restricted and performance shares as of March 31, 2013 and changes during the three months ended March 31, 2013, is presented below. These restricted and performance shares are subject to service requirements.
Nonvested at January 1, 2013
Granted
Vested
Forfeited
Nonvested at March 31, 2013
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8. Share-Based Payment Arrangements (continued)
As of March 31, 2013, there was $36.4 million of total unrecognized compensation expense related to nonvested restricted and performance shares expected to vest. This compensation is expected to be recognized in expense over a weighted-average period of 3.5 years. The total fair value of shares which vested during the three months ended March 31, 2013 and 2012 was $0.5 million and $0.7 million, respectively.
During the three months ended March 31, 2013, the Company granted 67,533 performance shares with an average fair value of $32.84 per share to key members of executive and senior management. The number of 2013 performance shares that ultimately vest at the end of the three-year required service period will be based on the relative rank of Hancock’s three-year total shareholder return (TSR) among the TSRs of a peer group of fifty regional banks. The maximum number of performance shares that could vest is 200% of the target award. The fair value of the performance awards at the grant date was determined using a Monte Carlo simulation method. Compensation expense for these performance shares will be recognized on a straight-line basis over the service period.
9. Retirement Plans
Effective January 1, 2013, the Company adopted one qualified defined benefit pension plan covering all eligible employees. Eligible employees are those who have completed one year of service, worked a minimum of 1,000 hours and have reached age 21. The consolidated plan replaced the separate qualified plans covering legacy Hancock employees (Hancock Plan) and legacy Whitney employees (Whitney Plan). The new qualified plan terms are substantially the same for legacy Hancock employees as those in effect at December 31, 2012 under the Hancock Plan. Retirement benefits for eligible legacy Whitney employees under the new plan will be based on the employee’s accrued benefit under the Whitney Plan as of December 31, 2012 and any benefit accrued under the new plan based on years of service and compensation beginning in 2013. The Whitney Plan had been closed to new participants since 2008, and benefit accruals had been frozen for all participants other than those meeting certain vesting, age and years of service criteria as of December 31, 2008. Accrued benefits under the nonqualified plan covering certain legacy Whitney employees were frozen as of December 31, 2012 and no future benefits will be accrued under this plan.
The Company also sponsors defined benefit postretirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits. Benefits under the Hancock plan are not available to employees hired on or after January 1, 2000. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007.
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9. Retirement Plans (continued)
The following table shows the components of net periodic benefits cost included in expense for the plans.
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Amortization of transition obligation
Net periodic benefit cost
Effective January 1, 2013, the Company also combined the Hancock and Whitney defined contribution retirement benefit plans (401(k) plans). Under the combined plan, the Company matches 100% of the first 1% of compensation saved by a participant, and 50% of the next 5% of compensation saved. Under the prior Hancock 401(k) plan, the Company matched 50% of a participant’s savings up to 6% of compensation, while under the prior Whitney 401(k) plan, the Company matched 100% of a participant’s savings up to 4% of compensation. The Company could also make a discretionary profit sharing contribution under the Whitney plan on behalf of participants who were either ineligible to participate in the Whitney qualified defined-benefit pension plan or subject to the freeze in benefit accruals under that plan. With the adoption of the new qualified pension plan discussed above and the combined 401(k) plan, the discretionary profit-sharing contribution is no longer available for plan years beginning in 2013.
10. Other Noninterest Income
Components of other noninterest income are as follows:
Income from bank owned life insurance
Credit related fees
Income from derivatives
Safety deposit box income
Gain on sale of assets
Other miscellaneous
Total other noninterest income
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11. Other Noninterest Expense
Components of other noninterest expense are as follows:
Insurance expense
Ad valorem and franchise taxes
Printing and supplies
Public relations and contributions
Travel expense
Other real estate owned expense, net
Tax credit investment amortization
Total other noninterest expense
Other noninterest expense for the first quarter of 2012 includes $5.9 million of costs associated with the integration of Whitney’s operations into Hancock.
12. Segment Reporting
The Company’s reportable operating segments consist of the Hancock segment, which coincides generally with the Company’s Hancock Bank subsidiary, and the Whitney segment, which coincides generally with its Whitney Bank subsidiary. Each of the bank segments offers commercial, consumer and mortgage loans and deposit services as well as certain other services, such as trust and treasury management services. Although the bank segments offer the same products and services, they are managed separately due to different pricing, product demand, and consumer markets. On March 15, 2012, Whitney Bank transferred the assets and liabilities of its operations in Florida, Alabama and Mississippi to Hancock Bank and retained its operations in Louisiana and Texas. In addition, the “Other” column includes activities of other consolidated subsidiaries which do not constitute reportable segments under the quantitative and aggregation accounting guidelines. These subsidiaries provide investment services, insurance agency services, insurance underwriting and various other services to third parties.
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12. Segment Reporting (continued)
Interest income
Interest expense
Noninterest income
Other noninterest expense
Income tax expense
Total interest income from affiliates
Total interest income from external customers
Securitites transactions
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13. New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to improve the reporting of amounts reclassified out of accumulated other comprehensive income. The updated guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity must cross-reference to other required disclosures that provide additional details about those. This ASU is effective for interim and annual reporting periods beginning after December 15, 2012. Because this updated guidance impacts only disclosures in financial statements and does not change the current requirements for reporting net income or other comprehensive income in financial statements, its implementation did not impact the Company’s financial condition or results of operations.
In October 2012, the FASB issued an ASU for entities that recognize an indemnification asset as a result of a government-assisted acquisition of a financial institution. When a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The updated guidance will be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Company’s current accounting policy complies with the guidance in this update.
In July 2012, FASB issued an ASU that specifies that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The guidance in this ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
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In December 2011, the FASB issued an ASU to address the differences between international financial reporting standards (IFRS) and U.S. GAAP regarding the offsetting of assets and liabilities. Instead of proposing new criteria for netting assets and liabilities the FASB and International Accounting Standards Board (IASB) jointly issued common disclosure requirements related to offsetting arrangements that call for the disclosure of both net and gross information for these assets and liabilities, irrespective of whether they are offset on the statement of financial position. In January 2013, the FASB clarified that these disclosure requirements apply only to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with existing accounting guidance or subject to a master netting arrangement or similar agreement. An entity is required to provide the new disclosures for annual and interim reporting periods beginning on or after January 1, 2013. This guidance impacts only the disclosures in financial statements and did not impact the Company’s financial condition or results of operations.
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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 modest expansion 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 generally positive prospects for the remainder of 2013. Travel and tourism, which is important to several of the Company’s market areas, also remained strong and is expected to remain above prior year levels, despite concerns over the impact of gas prices on summer vacation travel. Retail sales activity is generally improved from prior year levels and auto sales continue at a strong pace. The Texas market in particular continues to perform well, but overall retail activity is mixed, with signs that the expiration of the payroll tax cut, increased fuel and healthcare costs, and tepid employment growth have had some impact on consumer spending and confidence. Reports on manufacturing activity were generally positive, with increased optimism in some sectors.
The markets for both residential and commercial properties continue to show some improvement in our market areas. Home sales are growing modestly year-over-year, and prices are trending higher for some markets and product categories, especially in Florida and Texas. New home construction activity is also showing some continued improvement.
The commercial real estate market saw gains in occupancy and rental rate, with continued strong demand in the apartment sector. The office and industrial sector appears poised for growth over the next 12 to 18 months in response to improved business activity, but the retail sector remains soft. Investor interest in commercial real estate appears to have spread to secondary and tertiary markets, especially for multifamily housing.
The recovery of the overall U.S. economy continues, but the rate of growth is slow and erratic. Competition among financial services firms remains intense for high quality customers, with downward pressure on loan pricing. The Federal Reserve has responded to the slow and tenuous recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate.
Highlights of First Quarter 2013 Financial Results
Net income for the first quarter of 2013 was $48.6 million, or $0.56 per diluted common share, compared to $47.0 million, or $0.54 in the fourth quarter of 2012. Net income was $18.5 million, or $0.21, in the first quarter of 2012. There were no merger-related costs in the first quarter of 2013 or the fourth quarter of 2012. The first quarter of 2012 included $33.9 million of pre-tax merger-related expenses.
Included in the Company’s first quarter of 2013 results are:
Approximately $7.5 million pre-tax, or $.06 per diluted common share, of higher than expected loan accretion related to cash collected on zero carrying value acquired loan pools.
Approximately $6.6 million pre-tax, or $.05 per diluted common share, of net loan loss provision taken on the FDIC covered portfolio.
Approximately $1.1 million, or $.01 per diluted common share, of one-time tax benefits related to specific tax credits.
Due to continued rate pressure on earning assets and other economic headwinds impacting overall revenue, management expects near term earnings to remain flat to slightly down from current levels.
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Management expects these pressures and headwinds will continue into the foreseeable future. Therefore, as part of its ongoing planning process, management reviewed its long-term strategic plan to determine the most effective and efficient way of operating the consolidated organization. As part of this review, it was determined that certain areas of the Company needed to be right-sized or retooled, and as a result management announced an efficiency and process improvement initiative designed to reduce overall annual expense levels by $50 million over the next seven quarters. Certain one-time costs, such as severance, professional fees and lease buyouts, are expected to be incurred to implement the efficiency initiative, although the scale of such costs cannot currently be estimated with certainty.
Operating income for the first quarter of 2013 was $48.6 million or $0.56 per diluted common share, compared to $46.6 million, or $0.54 in the fourth quarter of 2012. Operating income was $40.5 million, or $0.47, in the first quarter of 2012. We define operating income as net income excluding tax-effected merger-related expenses and securities transaction gains or losses. The Selected Financial Data below includes a reconciliation of net income to operating income.
Hancock’s return on average assets (ROA) was 1.03% for the first quarter of 2013, compared to 0.99% in the fourth quarter of 2012. Operating ROA was 1.03% in the first quarter of 2013 compared to 0.98% and 0.85% in the fourth quarter and first quarters of 2012, respectively.
Total assets at March 31, 2013 were $19.1 billion, a decrease of $400 million from December 31, 2012. The decrease is partly related to the seasonal and short-term nature of certain balance sheet items, as is discussed below in the “Balance Sheet Analysis” section. Average total assets for the first quarter of 2013 were $19.2 billion, up slightly from the fourth quarter of 2012 and flat compared to the same period in 2012.
Common shareholders’ equity totaled $2.5 billion at March 31, 2013, up almost $24 million from year-end 2012. The Company continued to build its strong capital base, and the tangible common equity (TCE) ratio improved 37 basis points to 9.14% at March 31, 2013. On April 30, the company’s board of directors authorized the repurchase of up to 5% of the company’s outstanding common stock. The shares may be repurchased through privately negotiated transactions and in the open-market from time to time, depending on market conditions and other factors.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (taxable equivalent or TE) for the first quarter of 2013 totaled $176.7 million, a $6.1 million (3%) decline from the fourth quarter of 2012. Approximately $3.0 million of the decline was related to having two fewer days in the first quarter of 2013 compared to the fourth quarter of 2012. Net interest income was down $2.6 million (1%) compared to the first quarter of 2012, which had one more day than the current quarter. Average earning assets for the first quarter of 2013 were $16.5 billion, up approximately $0.3 billion compared to both the fourth quarter of 2012 and the same quarter a year ago. 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 reported net interest margin (TE) for the first quarter of 2013 was 4.32%, down 16 basis points (bps) from the fourth quarter of 2012 and down 11 bps from the first quarter of 2012. The current quarter’s core margin (net interest margin (TE) calculated excluding total net purchase accounting adjustments) of 3.41% compressed approximately 20 bps compared to the fourth quarter of 2012 and approximately 40 bps compared to the first quarter of 2012, mainly from a decline in the core yields on the loan and securities portfolios.
The reported and core margins were favorably impacted during the first quarter of 2013 by the investment of approximately $1 billion of year-end excess liquidity earning 25 basis points into mortgage-back securities earning approximately 1.65%. Because the majority of the transactions were completed in late February 2013, the full quarter’s impact from the change in mix will be reflected in second quarter results.
The reported margin for the first quarter of 2013 was also favorably impacted by approximately $7.5 million of higher than expected loan accretion related to significant cash collections on certain acquired loan pools with zero carrying value. Changes in activity related to prepayments and payoffs in the acquired portfolio can cause quarterly accretion levels to be volatile.
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The overall reported yield on earning assets was 4.60% in the first quarter of 2013, a decrease of 16 bps from the fourth quarter of 2012 and 21 bps from the first quarter of 2012. The reported loan portfolio yield of 5.83% for the current quarter was down 12 bps from the fourth quarter of 2012 and 21 bps from the first quarter of 2012. Recent activity in commercial lending has been in very competitively priced segments. Rates on all new loans booked in the first quarter were in the range of 3.00 and 3.50%. The yield on the investment portfolio continues to decline as proceeds from maturities and paydowns are reinvested at the current lower market rates.
The overall cost of funding earning assets was 0.28% in the first quarter of 2013, unchanged from the fourth quarter of 2012 and down 10 bps from the first 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 0.27% in the current quarter, down slightly from the fourth quarter of 2012 and 14 bps below the first 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.
As earning assets continue to reprice at lower rates, and with little opportunity to further lower funding costs, management expects 5-10 bps of compression in the core margin in the near term. All else equal, and adjusting for the volatility noted above related to loan accretion, management also anticipates compression in the reported margin of 10-20 bps in the near term, with most resulting from lower expected accretion levels.
The following table details the components of our net interest income and net interest margin.
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(dollars in millions)
Average earning assets
Commercial & real estateloans (te) (a) (b)
Mortgage loans
Consumer loans
Loan fees & late charges
Total loans (te)
US Treasury securities
US agency securities
Mortgage backed securities
Municipals (te)
Other securities
Total securities (te) (c)
Total short-term investments
Average earning assets (te)
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits
Time deposits
Public funds
Total interest-bearing deposits
Total interest-bearing liabilities
Net interest-free funding sources
Total Cost of Funds
Net Interest Spread (te)
Net Interest Margin (te)
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Provision for Loan Losses
Hancock recorded a total provision for loan losses for the first quarter of 2013 of $9.6 million, down from $28.1 million in the fourth quarter of 2012 and $10.0 million in the first quarter of 2012. Excluding the impact of the fourth quarter bulk sale described later in the discussion of “Allowance for Loan Losses and Asset Quality,” provision expense for the fourth quarter of 2012 was $14.4 million. The provision for non-covered loans was $3.0 million in the first quarter of 2013, compared to $14.2 million in the fourth quarter of 2012, excluding the impact of the bulk sale. In the first quarter of 2012, the provision for non-covered loans was $8.4 million. The decrease from the prior quarters mainly reflects the lower level of non-covered net charge-offs and the impact from a slowdown in newly identified impaired loans. Management does not expect to maintain this lower level of non-covered provision in the near term.
The net provision from the covered portfolio was $6.6 million in the first quarter of 2013 compared to $0.2 million for the fourth quarter of 2012 and $1.6 million in the first quarter of 2012. During the first quarter of 2013 the Company recorded an $8.5 million impairment on certain pools of covered loans, with a related increase of $1.9 million in the Company’s FDIC loss share receivable. Approximately $6.5 million of the impairment relates to changes in the estimated timing of cash flows. The remaining $2.0 million reflects increased credit losses and is largely offset by additional expected FDIC loss share claims.
The section below on the “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.
Noninterest Income
Noninterest income totaled $60.2 million for the first quarter of 2013, down $4.7 million (7%) from the fourth quarter of 2012, and down $1.3 million (2%) from the first quarter of 2012. The first quarters of both years included virtually no securities gains, while the fourth quarter of 2012 included $0.6 million in securities gains.
Service charges on deposits totaled $19.0 million for the first quarter of 2013, compared to $20.2 million in the fourth quarter of 2012, and $16.3 million in the first quarter of 2012. The decline in the current quarter compared to the fourth quarter of 2012 reflects the impact of one less business day and higher average personal deposit account balances in the first quarter, with higher seasonal holiday activity in the fourth quarter of 2012. The $2.7 million (17%) increase from the first quarter of 2012 was primarily the result of new and standardized products and services the Company began offering across its footprint in conjunction with the core systems integration in March 2012.
Bank card fees in the first quarter of 2013 were flat linked quarter, and down $1.0 million (12%) from the first quarter of 2012. Restrictions on debit card interchange rates that arose 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 approximately $2.0 million per quarter. This decline was partially offset by a $1.1 million increase in merchant processing revenue from the year-earlier period. The increase in merchant fees starting in the third quarter of 2012 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. The Durbin interchange restrictions also negatively impacted ATM fees beginning in the third quarter of 2012.
Fees from secondary mortgage operations in the first quarter of 2013 were down $0.8 million (15%) compared to the fourth quarter of 2012, but up $0.4 million (10%) from the year-earlier period. Mortgage loan sales slowed during the first quarter of 2013, partly due to seasonal trends in demand. Overall, home mortgage origination volumes have benefited as consumers take advantage of historically low rates to refinance or purchase their homes in an improving economic environment. Future production levels will depend on, among other factors, the movement of market interest rates, continued strengthening in the home purchase market, and the level of demand for refinancing.
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Other miscellaneous income decreased $3.2 million from the first quarter of 2012. There was no accretion recognized on the FDIC loss share receivable in the first quarter of 2013 or the fourth quarter of 2012, compared to $3.0 million in the first quarter of 2012.
The components of noninterest income for the three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012 are presented in the following table:
Securities transactions gain/(loss), net
Noninterest Expense
Noninterest expense for the first quarter of 2013 totaled $159.6 million, up $1.7 million (1%) from the fourth quarter of 2012. The current quarter’s total is down $11.9 million (7%) from the first quarter of 2012, excluding $33.9 million of merger-related expenses in the earlier period. This decrease is primarily related to cost savings realized as Whitney’s acquired operations were successfully integrated into Hancock, including the impact of branch consolidations and the core systems conversion. The operating expense level for the fourth quarter of 2012 reflects realization of 100% of the cost savings initially targeted for the Whitney acquisition.
Noninterest expense for the first quarter of 2013 included the impact of expected seasonal fluctuations in certain expense categories such as personnel expense. Overall, there were no significant trends underlying the changes in noninterest expense categories in the current period compared to the fourth quarter of 2012.
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The following table presents the components of noninterest expense for the three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012.
Merger-related expenses
Other miscellaneous expense
Noninterest expense, excluding debt repurchase and merger-related expenses
Income Taxes
The effective income tax rate for the first quarter of 2013 was approximately 25%, compared to 20% in the fourth quarter of 2012 and 17% in the first quarter of 2012. The increase from the prior quarter is mainly related to additional new market tax credits and historical rehabilitation tax credits that lowered the rate for the fourth quarter of 2012. As noted earlier, an additional tax credit also impacted the first quarter of 2013. Management expects the effective tax rate to fall in the range between 26% and 28% in 2013. The effective tax rate of 17% in the first quarter of 2012 included the impact of certain discrete items related mainly to the transfers of branches from Whitney Bank to Hancock Bank in that period. As a result of the transfers, the Company’s state tax profile changed, and deferred taxes were re-measured accordingly.
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 2013 and 2012 has been investments that generate new market tax credits, low-income housing credits and qualified bond credits.
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Selected Financial Data
The following tables contain selected financial data as of and for the three-month periods ended March 31, 2013, December 31, 2012 and March 31, 2012.
Per Common Share Data
Earnings per share:
Operating earnings per share: (a)
Cash dividends per share
Book value per share (period-end)
Tangible book value per share (period-end)
Weighted average number of shares (000s):
Period-end number of shares (000s)
Market data:
High price
Low price
Period-end closing price
Trading volume (000s) (b)
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(in thousands)
Income Statement:
Interest income (TE)
Net interest income (TE)
Noninterest income excluding securities transactions
Securities transactions gains/(losses)
Noninterest expense
Debt repurchase expense
Taxes on adjustments
Operating income (a)
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Performance Ratios
Return on average assets
Return on average assets (operating) (a)
Return on average common equity
Return on average common equity (operating) (a)
Tangible common equity ratio
Earning asset yield (TE)
Total cost of funds
Net interest margin (TE)
Efficiency ratio (b)
Allowance for loan losses to period-end loans
Allowance for loan losses to non-performing loans + accruing loans 90 days past due
Average loan/deposit ratio
Noninterest income excluding securities transactions to total revenue (TE)
Asset Quality Information
Non-accrual loans (a)
Restructured loans (b)
Total non-performing loans
Other real estate (ORE) and foreclosed assets
Total non-performing assets
Non-performing assets to loans, ORE and foreclosed assets
Accruing loans 90 days past due (a)
Accruing loans 90 days past due to loans
Non-performing assets + accruing loans 90 days past due to loans, ORE and foreclosed assets
Net charge-offs - non-covered (c)
Net charge-offs - covered
Net charge-offs - non-covered to average loans
Allowance for loan losses
Provision for loan losses ( c )
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Supplemental Asset Quality Information
(excluding covered assets and acquired loans) (a)
Non-accrual loans (b) (c)
Restructured loans (d)
ORE and foreclosed assets (e)
Non-performing assets to loans and foreclosed assets
Accruing loans 90 days past due
Non-performing assets + accruing loans 90 days past due to loans and ORE + foreclosed assets
Allowance for loan losses (f) (g)
Allowance for loan losses to nonperforming loans + accruing loans 90 days past due
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Period-end Balance Sheet
Total loans, net of unearned income
Securities
Short-term investments
Earning assets
Noninterest bearing deposits
Interest bearing transaction and savings deposits
Interest bearing public funds deposits
Total interest bearing deposits
Other borrowed funds
Total liabilities & stockholders’ equity
Average Balance Sheet
Total loans, net of unearned income (a)
Securities (b)
Interest bearing public fund deposits
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LIQUIDITY
Liquidity management is focused on ensuring that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Banks and other subsidiaries. Hancock develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. As shown in the table below, our ratios of free securities to total securities were 41% and 27%, respectively, at March 31, 2013 and December 31, 2012. Free securities represent securities that are not pledged for any purpose, and include unpledged securities assigned to short-term dealer repo agreements or to the Federal Reserve Bank discount window. As discussed later, the Company redeployed approximately $1.0 billion of excess short-term liquidity investments at the end of 2012 into the securities portfolio during the latter part of the first quarter of 2013.
Liquidity Metrics
Free securities / total securities
Noncore deposits / total deposits
Wholesale funds / core deposits
The liability portion of the balance sheet provides liquidity mainly through various customers’ interest-bearing and non-interest-bearing deposit and sweep accounts. Core deposits consist of total deposits less certificates of deposits of $100,000 or more, brokered deposits, and foreign branch deposits. Toward the end of 2012, Hancock Bank issued $200 million of brokered CDs as a precautionary measure in anticipation of possible deposit outflows associated with the expiration of the FDIC TAG Program at December 31, 2012. Noncore deposits were 8.47% of total deposits at March 31, 2013, compared to 9.20% at December 31, 2012. Most of the decrease in the ratio of noncore deposits to total deposits was due to the maturity of $100 million of the brokered certificates of deposits in the first quarter of 2013.
Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity to meet short-term funding requirements. Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 8.00% of core deposits at March 31, 2013 and 7.39% at December 31, 2012. The increase in this ratio from year end is due to both the increase in customer repos in the current quarter and the seasonally higher levels of certain core deposit levels at December 31, 2012, as discussed in the section on “Deposits.” Our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $1.7 billion and borrowing capacity at the Federal Reserve’s discount window in excess of $1 billion at March 31, 2013. No amounts had been borrowed under these lines at March 31, 2013 or year-end 2012.
Cash generated from operations is another important source of funds to meet liquidity needs. The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for the three months ended March 31, 2013 and 2012.
Dividends received from the Banks have been the primary source of funds available to the Company for the payment of dividends to our stockholders and for servicing any debt issued by the holding company. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends that the Banks can distribute to the Company. It is the Company’s policy to maintain assets at the holding company to provide liquidity sufficient to fund five quarters of anticipated stockholder dividends, debt service and operations.
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On April 30, the company’s board of directors authorized the repurchase of up to 5% of the company’s outstanding common stock. The shares may be repurchased through privately negotiated transactions and in the open-market from time to time, depending on market conditions and other factors. The source of funds for the stock buyback program is expected to be upstream dividends from the banks.
CAPITAL RESOURCES
Stockholders’ equity totaled $2.5 billion at March 31, 2013, up $24 million from December 31, 2012. The tangible common equity ratio increased to 9.14% at March 31, 2013 from 8.77% at December 31, 2012. The primary quantitative measures that regulators use to gauge capital adequacy are the ratios of total and Tier 1 regulatory capital to risk-weighted assets (risk-based capital ratios) and the ratio of Tier 1 capital to average total assets (leverage ratio). Both the Company and its bank subsidiaries are required to maintain minimum risk-based capital ratios of 8.0% total regulatory capital and 4.0% Tier 1 capital. The minimum leverage ratio is 3.0% for bank holding companies and banks that meet certain specified criteria, including having the highest supervisory rating. All others are required to maintain a leverage ratio of at least 4.0%.
At March 31, 2013, our regulatory capital ratios and those of the Banks were well in excess of current regulatory minimum requirements, as indicated in the table below. The Company and the Banks have been categorized as “well capitalized” in the most recent notices received from our regulators. The stock repurchase plan is not expected to have a significant impact on the capital ratios of the Company or the Banks.
Regulatory ratios:
Total capital (to risk weighted assets)
Company
Hancock Bank
Whitney Bank
Tier 1 capital (to risk weighted assets)
Tier 1 leverage capital
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BALANCE SHEET ANALYSIS
Investment in securities totaled $4.7 billion at March 31, 2013, up $946 million from the end of 2012. Toward the end of 2012, management had decided to increase the Banks’ level of liquidity investments as a precautionary measure against the potential for some run-off of deposits in early 2013 due to the expiration of the FDIC Transaction Account Guarantee (TAG) Program which had provided for unlimited deposit insurance on noninterest-bearing transaction accounts. The Banks did not experience any material deposit outflows as a result of the TAG Program expiration, and management redeployed the excess liquidity to the securities portfolio toward the latter part of the first quarter of 2013.
At March 31, 2013 securities available for sale totaled $2.9 billion and securities held to maturity totaled $1.8 billion. These balances compare to December 31, 2012 totals of $2.0 billion and $1.7 billion, respectively. Our securities portfolio consists mainly of residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies. The portfolio is designed to enhance liquidity while providing acceptable rates of return. We invest only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two to five years. At March 31, 2013, the average maturity of the portfolio was 3.78 years with an effective duration of 3.07 and a weighted-average yield of 2.22%. At year end, the average maturity of the portfolio was 3.16 years with an effective duration of 2.19 and a weighted-average yield of 2.71%. The changes in these metrics from December 31, 2012 reflect the effect of the redeployment of over $1 billion of excess liquidity into investment securities.
Total loans at March 31, 2013 were $11.5 billion, a decrease of $95 million (1%) from December 31, 2012. Compared to March 31, 2012 total loans increased $352 million (3%). Excluding the FDIC-covered portfolio, total loans at March 31, 2013 were down $56 million compared to year-end 2012, and up $509 million (5%) from a year ago.
See Note 4 to the consolidated financial statements for the composition of originated, acquired and covered loans at March 31, 2013 and December 31, 2012. Originated loans include all loans not included in the acquired and covered loan portfolios described below. Acquired loans are those purchased in the Whitney acquisition on June 4, 2011, including loans that were performing satisfactorily at the date (acquired performing) and loans acquired with evidence of credit deterioration (acquired impaired). Covered loans are those purchased in the December 2009 acquisition of Peoples First, which are covered by loss share agreements between the FDIC and the Company that afford significant loss protection. Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without carryover of any allowance for loan losses. Certain differences in the accounting for originated loans and for acquired performing and acquired impaired loans (which include all covered loans) are described in Note 4 to the consolidated financial statements.
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Originated commercial non-real estate (C&I) loans were up $187 million since year-end 2012. The net increase reflected activity with both existing and new customers, including activity with relationships acquired in the Whitney acquisition. New C&I loan activity was solid across many markets in the Company’s footprint, especially Texas, Louisiana and Florida, with another strong contribution this period from customers in the oil and gas energy sector. Considered together, originated and acquired C&I loans were essentially stable during the first quarter of 2013, as new activity was offset by expected reductions in balances owed by some larger seasonal borrowers and other normal activity in the customer base.
The Company’s commercial customer base is diversified over a range of industries, including oil and gas (O&G), wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, financial and professional services, and agricultural production. Loans outstanding to O&G industry customers totaled approximately $960 million at March 31, 2013, up $55 million from December 31, 2012. The majority of the O&G portfolio is with customers who provide transportation and other services and products to support exploration and production activities. The Banks lend mainly to middle-market and smaller commercial entities, although they do occasionally participate in larger shared-credit loan facilities with familiar businesses operating in the Company’s market areas. Shared credits funded at March 31, 2013 totaled approximately $1.1 billion, up approximately $100 million from year end. Approximately $595 million of shared national credits were with O&G customers at March 31, 2013.
Construction and land development loans (C&D) loans and commercial real estate (CRE) loans in the originated and acquired portfolios decreased a combined $32 million in the first three months of 2013. CRE loans include loans on both income-producing properties as well as properties used by borrowers in commercial operations. The largest component of new lending activity was on properties used by smaller C&I customers. Overall, opportunities for funding new quality projects in the current environment, while improving, remain limited.
Residential mortgages in the originated and acquired portfolios were up a net $21 million over the first three months of 2013, while consumer loans decreased a combined $43 million over this period.
Total covered loans at March 31, 2013 were down $39 million from December 31, 2012 reflecting normal repayments, charge-offs and foreclosures. The covered portfolio will continue to decline over the terms of the loss share agreements.
Allowance for Loan Losses and Asset Quality
The Company’s total allowance for loan losses was $137.8 million at March 31, 2013, compared to $136.2 million at December 31, 2012. The ratio of the allowance to period-end loans was 1.20% at March 31, 2013, up slightly from 1.18% at year-end 2012. The allowance maintained on the originated portion of the loan portfolio totaled $75.5 million, or 1.02% of related loans, at March 31, 2013, down from $78.8 million, or 1.11%, at December 31, 2012. The allowance on originated loans decreased $3.3 million, primarily due to charge-offs taken against impaired loan reserves. Additionally, the movement of problem credits into impaired status slowed during the first quarter reflecting in part, the impact of the bulk sale strategy executed in the fourth quarter of 2012.
As discussed last quarter, at the end of 2012, the Company completed a bulk sale of loans with a net book value of approximately $40 million. Approximately $36 million of the loans sold had been reported previously as nonperforming loans. The sale added approximately $13.7 million to the provision for loan losses and approximately $16.2 million to net charge-offs in the fourth quarter of 2012.
The Company recorded a total provision for loan losses in the first quarter of 2013 of $9.6 million, compared to $28.1 million in the fourth quarter of 2012 and $10.0 million in the first quarter of 2012. Excluding the impact of the bulk sale, provision expense for the fourth quarter of 2012 was $14.4 million. The provision for noncovered loans was $3.0 million in the first quarter of 2013, compared to $14.2 million in the fourth quarter of 2012, excluding the impact of the bulk sale. In the first quarter of 2012, the provision for non-covered loans was $8.4 million. The net provision from the covered portfolio was $6.6 million in the first quarter of 2013 compared to $0.2 million for the fourth quarter of 2012 and $1.6 million in the first quarter of 2012. Additional discussion of the Company’s provisions and the changes between periods is included in the earlier section on “Provision for Loan Losses.”
Net charge-offs from the non-covered loan portfolio in the first quarter of 2013 were $6.6 million, or 0.23% of average total loans on an annualized basis. This compares to net non-covered charge-offs of $28.0 million or 0.97% of average total loans, for the fourth quarter of 2012, and $7.1 million, or 0.25%, for the first quarter of 2012. Excluding the impact of
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the bulk sale, noncovered net charge-offs in the fourth quarter of 2012 were $11.8 million, or 0.41% of average total loans. The $5.2 million reduction in net charge-offs (excluding the impact of the bulk loan sale) compared to the fourth quarter of 2012 reflects both a lower level of gross charge-offs and a higher than normal volume of recoveries. Management does not expect the higher level of recoveries to continue.
The following table sets forth activity in the allowance for loan losses for the periods indicated. In the following tables, commercial loans encompass commercial non-real estate loans, construction and land development loans and commercial real estate loans.
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Allowance for loan losses at beginning of period
Loans charged-off:
Non-covered loans:
Total non-covered charge-offs
Total covered charge-offs
Total charge-offs
Recoveries of loans previously charged-off:
Total non-covered recoveries
Total covered recoveries
Total recoveries
Net charge-offs—non-covered
Net charge-offs—covered
Total net charge-offs
Provision for loan losses before FDIC benefit—covered loans
Benefit attributable to FDIC loss share agreement
Provision for loan losses non-covered loans
Provision for loan losses, net
Allowance for loan losses at end of period
Ratios:
Gross charge-offs—non-covered to average loans
Recoveries—non-covered to average loans
Net charge-offs—non-covered to average loans
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The following table sets forth non-performing assets by type for the periods indicated, consisting of non-accrual loans, troubled debt restructurings and foreclosed and surplus real estate owned (ORE) and other foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed.
Loans accounted for on a non-accrual basis:
Commercial loans
Commercial loans—restructured
Total commercial loans
Residential mortgage loans
Residential mortgage loans—restructured
Total residential mortgage loans
Total non-accrual loans
Restructured loans:
Commercial loans—non-accrual
Residential mortgage loans—non-accrual
Total restructured loans—non-accrual
Commercial loans—still accruing
Residential mortgage loans—still accruing
Total restructured loans—still accruing
Total restructured loans
ORE and foreclosed assets
Total non-performing assets*
Loans 90 days past due still accruing
Non-performing assets to loans plus ORE and foreclosed assets
Allowance for loan losses to non-performing loans and accruing loans 90 days past due
Loans 90 days past due still accruing to loans
Non-performing assets (NPAs), which exclude loans that were credit impaired at the time of the Whitney and People’s First acquisitions, totaled $229 million at March 31, 2013, down $27 million from December 31, 2012. Non-performing assets as a percent of total loans, ORE and other foreclosed assets was 1.98% at March 31, 2013, compared to 2.19% at December 31, 2012. The decrease in overall NPAs during the first quarter reflects a net reduction of $22.4 million in ORE properties during the first quarter and a $4.4 million reduction in nonperforming loans.
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Short-Term Investments
Short-term liquidity investments, including interest-bearing bank deposits and Federal funds sold, declined $1.0 billion from December 31, 2012 to a total of $476 million at March 31, 2013. Average short-term investments increased $89 million (9%) in the first quarter of 2013 to $1.1 billion. As discussed earlier in the section on “Securities,” during the latter part of the first quarter of 2013, management redeployed the excess short-term investments it had accumulated toward the end of 2012 in anticipation of possible increased demands on liquidity from the expiration of the TAG Program.
Total deposits were $15.3 billion at March 31, 2013, down $491 million (3%) from December 31, 2012, and down $179 million (1%) from March 31, 2012. Average deposits for the first quarter of 2013 compared to the prior quarter were up $181 million (1%) to $15.3 billion. Average deposits were unchanged from the first quarter of 2012.
Noninterest-bearing and public fund deposits typically reflect higher balances at year-end with subsequent reductions beginning in the first quarter. Noninterest-bearing demand deposits (DDAs) totaled $5.4 billion at March 31, 2013, down $206 million (4%) from December 31, 2012, but up $175 million (3%) compared to the prior year. Noninterest-bearing demand deposits comprised 36% of total period-end deposits at both March 31, 2013 and at year-end 2012 compared to 34% at March 31, 2012. Interest-bearing public fund deposits totaled $1.5 billion at March 31, 2013, down $51 million (3%) from year end and unchanged compared to March 31, 2012.
Time deposits (CDs) totaled $2.3 billion at March 31, 2013, down $213 million (9%) compared to December 31, 2012 and $362 million (14%) compared to March 31, 2012. During the first quarter of 2013, approximately $600 million of CDs matured at an average rate of 0.37%, of which almost $343 million renewed at an average rate of 0.14%. Included in the first quarter maturities are $100 million of brokered certificates of deposits with a cost of 0.50%. As noted earlier, Hancock Bank issued $200 million of brokered certificates of deposits as a temporary liquidity source related to the year-end expiration of the FDIC’s TAG program. The remaining $100 million of brokered certificates of deposits are scheduled to mature in May. The opportunity to re-price CDs at significantly lower rates over the near term has become very limited.
Short-Term Borrowings
At March 31, 2013, short-term borrowings totaled $723 million, up $83 million (14%) from December 31, 2012. Short-term borrowings totaled $850 million at March 31, 2012. Securities sold under agreements to repurchase are the main source of short-term borrowings. These agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Banks, the amounts available over time can be volatile. Customer repos are $571 million at the end of the current quarter, compared to $488 million at year end and $674 million at March 31, 2012.
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OFF-BALANCE SHEET ARRANGEMENTS
Loan Commitments and Letters of Credit
In the normal course of business, the Banks enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of their customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Banks to varying degrees of credit risk and interest rate risk in much the same way as funded loans.
Commitments to extend credit include revolving commercial credit lines, nonrevolving loan commitments issued mainly to finance the acquisition and development or construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent future cash requirements of the Company.
A substantial majority of the letters of credit are standby agreements that obligate the Banks to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Banks issue standby letters of credit primarily to provide credit enhancement to their customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.
The contract amounts of these instruments reflect the Company’s exposure to credit risk. The Company undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support.
The following table shows the commitments to extend credit and letters of credit at March 31, 2013 according to expiration date.
Commitments to extend credit
Letters of credit
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry which requires management to make estimates and assumptions about future events. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.
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NEW ACCOUNTING PRONOUNCEMENTS
See Note 13 to our Consolidated Financial Statements included elsewhere in this report.
SEGMENT REPORTING
Note 12 to the consolidated financial statements provides information about the Company’s reportable operating segments and presents comparative financial information for these operating segments for the three month periods ended March 31, 2013 and March 31, 2012.
Net income in the first quarter of 2013 for the Hancock segment totaled approximately $11.5 million, down $0.5 million from the same period in 2012. The decrease in operating income for the Hancock segment from the prior year was primarily due to increases in the provision for loan losses, depreciation and amortization, and other noninterest expense, partially offset by an increase in net interest income.
Net income for the Whitney segment in the first quarter of 2013 totaled approximately $36.7 million. Excluding tax-effected merger-related expenses, this amount is up $9.5 million from the first quarter of 2012. Decreases in noninterest expense and the provision for loan losses were offset by decreases in net interest income and noninterest income.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and we intend such forward-looking statements to be covered by the safe harbor provisions therein and are including this statement for purposes of invoking these safe-harbor provisions. Forward-looking statements provide projections of results of operations or of financial condition or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future. Forward-looking statements that we may make include, but may not be limited to, comments with respect to loan growth, deposit trends, credit quality trends, net interest margin trends, future expense levels (including merger costs and cost synergies), projected tax rates, economic conditions in our markets, future profitability, purchase accounting impacts such as accretion levels, and the financial impact of regulatory requirements such as the Durbin amendment. Hancock’s ability to accurately project results or predict the effects of future plans or strategies is inherently limited. Although Hancock believes that the expectations reflected in its forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results to differ from those expressed in Hancock’s forward-looking statements include, but are not limited to, those risk factors outlined in Hancock’s public filings with the Securities and Exchange Commission, which are available at the SEC’s internet site (http://www.sec.gov). You are cautioned not to place undue reliance on these forward-looking statements. Hancock does not intend, and undertakes no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our net income is materially dependent on our net interest income. Hancock’s primary market risk is interest rate risk that stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect our financial products and services. In an attempt to manage our exposure to interest rate risk, management measures the sensitivity of our net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying rate environments.
Hancock measures its interest rate sensitivity primarily by running net interest income simulations. The model measures annual net interest income sensitivity relative to a base case scenario and incorporates assumptions regarding balance sheet growth and the mix of earning assets and funding sources as well as pricing, re-pricing and maturity characteristics of the existing and projected balance sheet. The table below presents the results of simulations run as of March 31, 2013 assuming the indicated instantaneous and sustained parallel shift in the yield curve at the measurement date. These results indicate that we are slightly asset sensitive as compared to the stable rate environment assumed for the base case.
Note: Decrease in interest rates discontinued in the current rate environment
The foregoing disclosures related to our market risk should be read in conjunction with our audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2012 included in our 2012 Annual Report on Form 10-K.
Item 4. Controls and Procedures
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officers and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to timely alert them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act filings.
Our management, including the Chief Executive Officers and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are party to various legal proceedings arising in the ordinary course of business. We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2012. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the three months ended March 31, 2013.
Item 6. Exhibits.
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Exhibit
Number
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ Carl J. Chaney
/s/ John M. Hairston
/s/ Michael M. Achary
Date: May 8, 2013
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Index to Exhibits