UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2014
OR
For the transition period from to
Commission File Number 0-13089
HANCOCK HOLDING COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
One Hancock Plaza,
P.O. Box 4019, Gulfport, Mississippi
(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.
82,283,744 common shares were outstanding as of May 1, 2014.
Hancock Holding Company
Index
Financial Statements
Consolidated Balance Sheets — March 31, 2014 (unaudited) and December 31, 2013
Consolidated Statements of Income (unaudited) — Three months ended March 31, 2014 and 2013
Consolidated Statements of Comprehensive Income (unaudited) — Three months ended March 31, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) — Three months ended March 31, 2014 and 2013
Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2014 and 2013
Notes to Consolidated Financial Statements (unaudited) — March 31, 2014
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Default on Senior Securities
Mine Safety Disclosures
Other Information
Exhibits
Part I. Financial Information
Item 1. Financial Statements
Hancock Holding Company and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(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 $1,353,442 and $1,408,780)
Securities held to maturity (fair value of $2,417,879 and $2,576,584)
Loans held for sale
Loans
Less: allowance for loan losses
Loans, net
Property and equipment, net of accumulated depreciation of $178,271 and $172,798
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:
Noninterest-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, 82,282,057 and 82,237,162 issued and outstanding, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to condensed consolidated financial statements.
1
Consolidated Statements of Income
(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 and ATM fees
Investment and annuity fees
Secondary mortgage market operations
Insurance commissions and fees
Amortization of FDIC loss share receivable
Other income
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
Other real estate expense, net
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 before income taxes
Net change in unrealized gain (loss)
Reclassification adjustment for net losses realized and included in earnings
Amortization of unrealized net gain (loss) on securities transferred to held-to-maturity
Other comprehensive income (loss) before income taxes
Income tax expense (benefit)
Other comprehensive income (loss) net of income taxes
Comprehensive income
3
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share and per share data)
Accumulated
Other
Comprehensive
Balance, January 1, 2013
Other comprehensive income
Cash dividends declared ($0.24 per common share)
Common stock activity, long-term incentive plan
Balance, March 31, 2013
Balance, January 1, 2014
Balance, March 31, 2014
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
Losses (gains) on other real estate owned
Deferred tax expense
Increase in cash surrender value of life insurance contracts
Net decrease in loans originated for sale
(Gains) Losses on disposals of other assets
Net amortization of securities premium/discount
Amortization of intangible assets
Amortization of FDIC Indemnification Asset
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 (increase) decrease in interest-bearing bank deposits
Net decrease (increase) in federal funds sold and short-term investments
Net (increase) 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 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 INCREASE (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
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 2013 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 to 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, 2013.
6
2. Securities
The amortized cost and fair value of securities classified as available for sale and held to maturity follow (in thousands):
Securitites Available for Sale
US Treasury and government agency securities
Municipal obligations
Mortgage-backed securities
CMOs
Corporate debt securities
Equity securities
Securitites Held to Maturity
The following table presents the amortized cost and fair value of debt securities at March 31, 2014 by contractual maturity (in thousands). Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and CMOs.
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
7
2. Securities (continued)
The Company held no securities classified as trading at March 31, 2014 or December 31, 2013.
The details for securities classified as available for sale with unrealized losses for the periods indicated follow (in thousands):
March 31, 2014
December 31, 2013
8
The details for securities classified as held to maturity with unrealized losses for the periods indicated follow (in thousands):
Municpal obligations
The unrealized losses relate to changes in market rates on fixed-rate debt securities since the respective purchase date. In all cases, the indicated impairment would be recovered by 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 issuer’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 recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary.
Securities with carrying values totaling $2.9 billion at March 31, 2014 and $3.1 billion at December 31, 2013 were pledged primarily to secure public deposits or securities sold under agreements to repurchase.
9
3. Loans and Allowance for Loan Losses
Loans, net of unearned income, consisted of the following:
Originated loans:
Commercial 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
10
3. 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, including deferred loan fees, are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recognized in income as earned.
The accrual of interest on an originated loan is discontinued when, in management’s opinion, it is probable that the borrower will be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. When accrual of interest is discontinued on a loan, all unpaid accrued interest is reversed and payments subsequently received are applied first to recover principal. Interest income is recognized for payments received after contractual principal has been satisfied. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payment performance is reasonably assured.
Acquired loans
Acquired loans are those loans that were 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”) based on such factors as past due status, nonaccrual status and credit risk ratings (rated substandard or worse). The acquired loans were further segregated into loan pools designed to facilitate the development of expected cash flows to be used in estimating fair value.
Acquired-performing loans were segregated into pools based on characteristics such as loan type, credit risk ratings, and contractual interest rate and repayment terms. The major loan types included commercial and industrial loans not secured by real estate, real estate construction and land development loans, commercial real estate loans, residential mortgage loans, and consumer loans, with further segregation within certain loan types as needed. Expected cash flows, both principal and interest, from each pool were estimated based on key assumptions covering such factors as prepayments, default rates, and severity of loss given a default. These assumptions were developed using both Whitney Holding Corporation’s historical experience and the portfolio characteristics at acquisition as well as available market research.
The difference at the acquisition date between the fair value and the contractual amounts due of an acquired-performing loan pool (the “fair value discount”) is accreted into income over the estimated life of the pool. Acquired-performing loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
In addition to those factors considered for acquired-performing loans, the acquired-impaired loans were segregated into pools by identifying loans with similar credit risk profiles and were based primarily on characteristics such as loan type and market area in which originated. Loan types included most of the major types used for the acquired-performing portfolio. The acquired-impaired loans that had been originated in Louisiana and Texas were further disaggregated from loans originated in Mississippi, Alabama and Florida, in recognition of the differences in general economic conditions affecting borrowers in these market areas. The fair value estimate for each pool of acquired performing and acquired-impaired loans was based on the estimate of expected cash flows from the pool discounted at prevailing market rates.
11
The excess of estimated cash flows expected to be collected from an acquired-impaired loan pool over the pool’s carrying value is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan 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, 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 which afford the Company significant loss protection. These covered loans are accounted for as acquired-impaired loans as described above in the section on acquired loans. The Company treated all loans for the Peoples First acquisition under ASC 310-30 based on the significant amount of deteriorating and nonperforming loans comprised mainly of adjustable rate mortgages and home equity loans located in Florida. The loss share receivable is measured separately from the related covered loans as it is not contractually embedded in the loans and is not transferrable should the loans be sold. The fair value of the loss share receivable at acquisition was estimated by discounting expected reimbursements for losses from the loans covered by the loss share agreements, including appropriate consideration of possible true-up payments to the FDIC at the expiration of the agreements.
The loss share receivable is reviewed and updated prospectively as loss estimates related to covered loan pools change. Increases in expected reimbursements under the loss sharing agreements 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 related to changes in loss estimates result in reductions in or additions to the provision for loan losses, which serves to offset the impact on the provision from impairments or impairment reversals recognized on the underlying covered loan pool. The excess (or shortfall) of expected claims as compared to the carrying value of the loss share receivable is accreted (amortized) into noninterest income over the shorter of the remaining life of the covered loan pool or the life of the loss share agreement. 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. The indemnification asset is reduced as cash is received from the FDIC related to losses incurred on covered assets.
12
The following schedule shows activity in the FDIC loss share receivable for the three months ended March 31, 2014 and 2013 (in thousands):
Balance, January 1
Accretion (amortization)
(Charge-offs, write-downs and other losses) recoveries
External expenses qualifying under loss share agreement
Payments received from the FDIC
Ending balance
In the following discussion and tables, certain disaggregated information was not available for the commercial non-real estate, construction and land development and commercial real estate loan categories for March 31, 2013. In these instances, combined information for these categories is provided under the caption “commercial loans.”
The following schedule shows activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014 and March 31, 2013 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:
Amounts related to acquired-impaired loans
Acquired-impaired loans
13
Covered loans
Decrease in FDIC loss share receivable
Acquired-impaired
14
15
16
The following table shows the composition of nonaccrual 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 of accounting and are excluded from the table. Covered loans accounted for using the cost recovery method do not have an accretable yield and are included below as nonaccrual loans. Acquired-performing loans that have subsequently been placed on nonaccrual status are also included below.
Nonaccrual Loans
17
The amount of interest that would have been recognized on nonaccrual loans for the three months ended March 31, 2014 was approximately $1.2 million. Interest actually received and taken into income on nonaccrual loans during the three months ended March 31, 2014 was $1.1 million.
Included in nonaccrual loans at March 31, 2014 is $11.3 million in restructured commercial loans. Total troubled debt restructurings (TDRs) were $24.5 million as of March 31, 2014 and $24.9 million at December 31, 2013. Individual 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, 2014 and March 31, 2013 by portfolio segment and TDRs that subsequently defaulted within twelve months of modification (dollar amounts in thousands). All troubled debt restructurings are rated substandard and individually evaluated for impairment.
Troubled Debt Restructurings:
Aquired loans:
18
Troubled Debt Restructurings That
Subsequently Defaulted:
19
Those loans that are determined to be impaired and have balances of $1 million or more are individually evaluated for impairment. The tables below present loans that are individually evaluated for impairment disaggregated by class at March 31, 2014 and December 31, 2013:
With no related allowance recorded:
With an allowance recorded:
Total:
20
21
22
23
Covered loans and acquired credit impaired loans 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, 2014 and December 31, 2013:
Total
24
25
The following tables present the credit quality indicators of the Company’s various classes of loans at March 31, 2014 and December 31, 2013.
Commercial Non-Real Estate Credit Exposure
Credit Risk Profile Based on Payment Activity
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Loss
Construction Credit Exposure
Commercial Real Estate Credit Exposure
Credit Risk Profile by Internally Assigned Grade
26
Residential Mortgage Credit Exposure
Performing
Nonperforming
Consumer Credit Exposure
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:
27
Residential Mortgage and Consumer:
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, 2014 and the year ended December 31, 2013:
Balance at beginning of period
Additions
Payments received, net
Accretion
(Decrease)/Increase in expected cash flows based on actual cash flows and changes in cash flow assumptions
Net transfers from nonaccretable differerence to accretable yield
Balance at end of period
4. 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.
28
4. 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
Collateralized mortgage obligations
Total available-for-sale securities
Derivative assets (1)
Total recurring fair value measurements - assets
Liabilities
Derivative liabilities (1)
Total recurring fair value measurements - liabilities
29
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 were 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 customer interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, LIBOR swap curves and Overnight Index swap rate 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, including those subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.
The Company also has certain derivative instruments associated with the Bank’s 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 is classified as a level 2 measurement.
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 level 2 assets measured at the fair value of the underlying collateral based on third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.
Other real estate owned, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer 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 appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the property.
30
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
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 those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities Available for Sale -The fair value measurement for securities available for sale was discussed earlier in the note. 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 in the note. For the remaining portfolio, fair values were generally estimated by discounting scheduled cash flows using discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers with similar credit quality.
Accrued Interest Receivable and Accrued Interest Payable - The carrying amounts are a reasonable estimate of fair values.
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, Federal Funds Purchased, and FHLB Borrowings - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
31
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.
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, 2014 and December 31, 2013 (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
32
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 Bank has also entered into interest rate derivative agreements as a service to certain qualifying customers. The Bank manages a matched book with respect to these customer derivatives in order to minimize the net risk exposure resulting from such agreements. The Bank also enters into risk participation agreements under which it 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, 2014 and December 31, 2013.
33
5. Derivatives (continued)
Fair and Notional Values of Derivative Instruments
Derivatives not designated as hedging instruments:
Interest rate swaps (2)
Risk participation agreements
Forward commitments to sell residential mortgage loans
Interest rate-lock commitments on residential mortgage loans
Foreign exchange forward contracts
Derivatives Not Designated as Hedges
Customer interest rate derivatives
The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Bank simultaneously enters 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 as part of other income.
The Bank also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on its normal credit review process.
Mortgage banking derivatives
The Bank also enters into certain derivative agreements as part of its 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.
34
Customer foreign exchange forward contract derivatives
The Bank enters into foreign exchange forward derivative agreements, primarily forward currency contracts, with commercial banking customers to facilitate its risk management strategies. The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions. Because the foreign exchange forward contract 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 as part of other income.
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 month periods ended March 31, 2014 and 2013.
Credit-risk-related Contingent Features
Certain of the Bank’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as the downgrade of the Bank’s 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, 2014, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $6.5 million, for which the Bank had posted collateral of $13.4 million.
35
Offsetting Assets and Liabilities
Offsetting information in regards to derivative assets and liabilities subject to master netting agreements at March 31, 2014 and December 31, 2013 is presented in the following tables (in thousands):
Gross
Amounts
Offset in the
Net Amounts
Presented inthe
Description
As of March 31, 2014
Derivative Assets
Derivative Liabilities
As of December 31, 2013
6. Stockholders’ Equity
Stock Repurchase Program
The Company’s board of directors approved a stock repurchase program on April 30, 2013 that authorizes the repurchase of up to 5% of the Company’s outstanding common stock.
On May 8, 2013 Hancock entered into an accelerated share repurchase (ASR) transaction with Morgan Stanley & Co. LLC (Morgan Stanley). In the ASR transaction, the Company paid $115 million to Morgan Stanley and received from them approximately 2.8 million shares of Hancock common stock, representing approximately 76% of the estimated total number of shares to be repurchased. On May 5, 2014, final settlement of the ASR agreement occurred at which time the Company received approximately 0.6 million shares from Morgan Stanley.
The number of shares delivered to the Company in this ASR transaction was based generally on the volume-weighted average price per share of the Hancock common stock during the term of the ASR agreement less a specified discount and on the amount paid at inception to Morgan Stanley, subject to certain adjustments in accordance with the terms of the ASR agreement. The ASR transaction was treated as two separate transactions: (i) the acquisition of treasury shares on the date the shares were received; and (ii) a forward contract indexed to the Company’s common stock that is classified as equity.
36
6. Stockholders’ Equity (continued)
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 (HTM) during 2012 and the net unrealized loss on AFS securities reclassified as securities held to maturity (HTM) during 2013 continue to be reported as a component of AOCI and will be amortized or accreted over the estimated remaining life of the securities 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 (loss) gain
Transfer of net unrealized loss from AFS to HTM, net of cumulative tax effect
Reclassification of net (gains) losses realized and included in earnings
Amortization/accretion of unrealized net gain/loss on securities transferred to HTM
Income tax (benefit) expense
Transfer of net unrealized gain from AFS to HTM, net of cumulative tax effect
Amortization of unrealized net gain on securities transferred to HTM
Income tax expense
37
The following table shows the line items in the consolidated income statements affected by amounts reclassified from accumulated other comprehensive income:
(in thousands)
on the income statement
Gains and losses on sale of AFS securities
Tax effect
Net of tax
Amortization/accretion of unrealized net gain/(loss) on securities transferred to HTM
Amortization of defined benefit pension and post-retirement items
Gains and losses on cash flow hedges
Total reclassifications, net of tax
38
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.
A summary of the information used in the computation of earnings per common share follows (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 689,958 for the three months ended March 31, 2014 and 1,107,790 for the three months ended March 31, 2013.
39
8. Share-Based Payment Arrangements
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, 2013.
A summary of option activity for the three months ended March 31, 2014 is presented below:
Options
Outstanding at January 1, 2014
Exercised
Forfeited or expired
Outstanding at March 31, 2014
Exercisable at March 31, 2014
The total intrinsic value of options exercised during the three months ended March 31, 2014 and 2013 was $0.2 million and $0.1 million, respectively.
A summary of the status of the Company’s nonvested restricted and performance shares as of March 31, 2014 and changes during the three months ended March 31, 2014, is presented below. These restricted and performance shares are subject to service requirements.
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at March 31, 2014
40
8. Share-Based Payment Arrangements (continued)
As of March 31, 2014, there was $38.3 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, 2014 and 2013 was $0.8 million and $0.5 million, respectively.
During the three months ended March 31, 2014, the Company granted 71,382 performance shares with a weighted average fair value of $38.11 per share to key members of executive and senior management. The number of 2014 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
The Company has a qualified defined benefit pension plan covering all eligible employees. Eligibility is based on minimum age and service-related requirements as well as job classification. Accrued benefits under a 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.
41
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
Based on currently available information, Hancock does not anticipate making a contribution to the pension plan during 2014.
The Company also provides a defined contribution retirement benefit plan (401(k) plan). Under the plan, the Company matches 100% of the first 1% of compensation saved by a participant, and 50% of the next 5% of compensation saved.
10. Other Noninterest Income
Components of other noninterest income are as follows:
Income from bank owned life insurance
Credit related fees
Income from derivatives
Gain on sale of assets
Safety deposit box income
Other miscellaneous
42
11. Other Noninterest Expense
Components of other noninterest expense are as follows:
Advertising
Ad valorem and franchise taxes
Printing and supplies
Insurance expense
Travel expense
Entertainment and contributions
Tax credit investment amortization
Total other noninterest expense
43
12. Segment Reporting
Prior to the close of business on March 31, 2014, Whitney Bank (headquartered in New Orleans, Louisiana) was merged into Hancock Bank (headquartered in Gulfport, Mississippi). The consolidated entity was renamed Whitney Bank. Whitney Bank does business under the brand names “Hancock Bank” in Mississippi, Alabama and Florida, and “Whitney Bank” in Louisiana and Texas. The Company’s reportable operating segments consist of the Hancock segment and the Whitney segment. Each segment offers commercial, consumer and mortgage loans and deposit services as well as certain other services, such as trust and treasury management services. Although the segments offer the same products and services, they are managed separately due to different pricing, product demand, and consumer markets. In addition, the “Other” column in the following tables 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, consumer finance and various other services to third parties.
Interest income
Interest expense
Noninterest income
Other noninterest expense
Total interest income from affiliates
Total interest income from external customers
44
12. Segment Reporting (continued)
Securitites transactions
45
13. New Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) on reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The new ASU clarifies when an in substance repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In July 2013, the (FASB) issued an ASU that applies to companies that have unrecognized tax benefits when net operating loss (NOL) or similar tax loss carryforwards or tax credit carryforwards exist at the reporting date. Under the updated guidance, an entity should present its unrecognized tax benefits net against the deferred tax assets for all same jurisdiction NOL or similar tax loss carryforwards, or tax credit carryforwards that are available to and would be used by the entity to settle additional income taxes resulting from disallowance of the uncertain tax position. The ASU was effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In July 2013, the FASB issued an ASU to allow entities to use the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a U.S. benchmark interest rate for hedge accounting purposes. Previously, only the interest rates on direct Treasury obligations of the United States and the London Interbank Offered Rate swap rate were considered benchmark rates. The amendment also removed the restriction requiring entities to use the same benchmark rate for similar hedges. This ASU was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
14. Subsequent Event
In April 2014, the Company sold its property and casualty and group benefits insurance intermediary business. The lines of business being divested represent approximately half of the Company’s 2013 insurance commissions and fees. An approximate $9.4 million gain was recorded on the sale based on a $15.5 million sales price less the related tangible and intangible assets.
46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Recent Economic and Industry Developments
Recent reports from the Federal Reserve point to continued improvement of economic activity throughout most of Hancock’s market area. Activity among energy-related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas market areas remained strong with expectations of some further improvement over the coming months. The travel and tourism industry, which is important within several of the Company’s market areas, saw an increase in activity after a sluggish January. The outlook is positive over the next six months and the industry is expected to increase year-over-year. Retailers are showing improved sales over prior-year levels, but continue to express concern over increased healthcare premiums having an impact on personal discretionary income. Reports on manufacturing activity were generally positive, although the severe winter weather suppressed production earlier this year.
The real estate markets for residential properties were mixed. Sales of existing homes were soft, mainly due to higher home prices, limited inventory, and somewhat higher mortgage rates. Although the outlook for home sales has weakened since the last quarter, most brokers have indicated that they expect to see continued improvement over prior-year levels. New home sales and construction activity are ahead of prior-year levels and growing.
The commercial real estate market continues to improve, with growing demand for office and industrial space in certain market areas and continued high occupancy and rising rental rates for apartments throughout the region. Commercial construction activity has increased in these sectors. Continued improvement in the commercial real estate market is expected over the next several months.
The recovery of the overall U.S. economy continues; however, the rate of growth is not consistent across all regions, leading to slow and erratic overall improvement. National unemployment rates continue to decrease, but are still well above desired levels. Competition among financial services firms remains intense for high quality customers, continuing to exert downward pressure on loan pricing.
The Federal Reserve has responded to the slow and tenuous recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate.
Highlights of First Quarter 2014 Financial Results
Net income in the first quarter of 2014 was $49.1 million, or $0.58 per diluted common share, compared to $34.7 million, or $0.41, in the fourth quarter of 2013. Net income was $48.6 million, or $0.56 per diluted common share, in the first quarter of 2013. Operating income for the first quarter of 2014 and the first quarter of 2013 was the same as net income, while operating income for the fourth quarter of 2013 was $45.8 million, or $0.55 per diluted share. The Company defines its operating income as net income excluding tax-effected securities transactions and one-time noninterest expense items. A reconciliation of net income to operating income is included in the later section on “Selected Financial Data.” Management believes that operating income provides a useful measure of financial performance that helps investors compare the Company’s fundamental operations over time.
As part of its ongoing planning process, management determined that certain areas of the Company needed to be right-sized or retooled in order to achieve our long-term profitability and efficiency targets. As a result, management announced an expense and efficiency initiative in early 2013 that is designed to reduce overall annual expense levels by $50 million as compared to annualized expenses for the first quarter of 2013. Management set a target for one-half of the expense reduction to be achieved by the first quarter of 2014 and the remainder by the fourth quarter of 2014. In addition to the expense reduction target, the Company also set a
47
longer-term sustainable efficiency ratio target of 57% - 59% for 2016. The Company achieved its first quarter 2014 expense target primarily as a result of the branch consolidation and sales, and is on track to achieve its remaining targets. In 2013, the Company completed the previously announced consolidation of 28 branch locations across its five-state footprint. The sales of 10 additional branches, which were also announced previously, were completed in the fourth quarter of 2013 and the first quarter of 2014. The branches sold were small retail locations with approximately $11 million in loans and $32 million in deposits. Certain one-time costs associated with the branch closures and other activities related to the expense and efficiency initiative were recognized in noninterest expense during the third and fourth quarters of 2013.
Prior to the close of business on March 31, 2014, Whitney Bank (headquartered in New Orleans, Louisiana) was merged into Hancock Bank (headquartered in Gulfport, Mississippi). The consolidated entity was renamed Whitney Bank. Whitney Bank does business under the brand names “Hancock Bank” in Mississippi, Alabama and Florida, and “Whitney Bank” in Louisiana and Texas.
Highlights of the Company’s first quarter of 2014 results:
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (taxable equivalent or “te”) for the first quarter of 2014 was $168.2 million, virtually unchanged from the fourth quarter of 2013. Average earnings assets were $16.7 billion in the first quarter of 2014, a $364 million (2%) increase from the fourth quarter of 2013, as average loans were up $476 million (4%). Net interest income (te) for the first quarter of 2014 was down $8.5 million (5%) compared to the first quarter of 2013, primarily due to a reduced level of total purchase-accounting loan accretion in the first quarter of 2014. For internal analytical purposes, management adjusts net interest income to a taxable equivalent basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans).
48
The net interest margin was 4.06% for the first quarter of 2014, down 3 bps from the fourth quarter of 2013, and down 26 bps from the first quarter of 2013. The current quarter’s core margin of 3.37% (reported net interest income (te) excluding total net purchase accounting adjustments, annualized, as a percent of average earning assets) compressed 3 bps compared to the fourth quarter of 2013 and 4 bps compared to the first quarter of 2013. The continued decline in the core loan yield was partially offset by the favorable impact of net loan growth on the earning asset mix and an improvement in the yield on investment securities. A reconciliation of the reported and core margins is presented below.
The overall reported yield on earning assets was 4.29% in the first quarter of 2014, a decrease of 3 bps from the fourth quarter of 2013 and a decrease of 31 bps from the first quarter of 2013. The reported loan portfolio yield of 5.00% for the current quarter was down 10 bps from the fourth quarter of 2013 and 83 bps from the first quarter of 2013. Excluding purchase-accounting accretion, the core loan yield of 4.02% in the current quarter was down 7 bps from the fourth quarter of 2013 and 38 bps from a year earlier. Partially offsetting the decrease in loan yields, the yield on the security portfolio yield was 2.47% for the first quarter of 2014, an increase of 4 bps from the fourth quarter of 2013 and 30 bps over the first quarter of 2013. This increase primarily resulted from decreased discount amortization primarily due to a reduced level of security prepayments.
The overall cost of funding earning assets was 0.23% in the first quarter of 2014, unchanged from the fourth quarter of 2013 and down 5 bps from the first quarter of 2013. The mix of funding sources improved in the first quarter of 2014 compared to the first quarter of 2013. Interest-free sources, including noninterest-bearing demand deposits, funded 34.6% of earning assets in the current period, up from 32.4% a year ago. The overall rate paid on interest-bearing deposits was 0.22% in the current quarter, down slightly from the fourth quarter of 2013 and 5 bps below the first quarter of 2013. The decreases were primarily due to the impact of the sustained low rate environment on overall deposit rates including the re-pricing of time deposits.
The following tables detail the components of our net interest income and net interest margin and provide a reconciliation of the Company’s core net interest margin to its reported margin.
49
(dollars in millions)
Average earning assets
Commercial & real estate loans (te) (a) (b)
Mortgage loans
Consumer loans
Loan fees & late charges
Total loans (te)
US Treasury and agency securities
Mortgage-backed securities and CMOs
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
50
Reconciliation of Reported Net Interest Margin to Core Margin
Net interest income (te)
Purchase accounting adjustments
Loan accretion
Whitney premium bond amortization
Whitney and Peoples First CD accretion
Total net purchase accounting adjustments
Net interest income (te) - core
Net interest margin - reported
Net purchase accounting adjustments (%)
Net interest margin - core
Provision for Loan Losses
During the first quarter of 2014, Hancock recorded a total provision for loan losses of $8.0 million, up from $7.3 million in the fourth quarter of 2013. The provision for non-covered loans was $8.3 million in the first quarter of 2014, compared to $7.9 million in the fourth quarter of 2013. The net provision for the covered portfolio was a credit of $0.3 million for the first quarter of 2014 compared to a credit of $0.5 million for the fourth quarter of 2013. The net provision for the covered portfolio was $6.6 million for the first quarter of 2013. The decrease in the provision year-over-year was caused by reductions in the estimates on future losses within the covered portfolio.
The section below on “Allowance for Loan Losses and Asset Quality” provides additional information on changes in the allowance for loans losses and general credit quality. Certain differences in the determination of the allowance for loan losses for originated loans and for acquired-performing loans and acquired-impaired loans (which includes all covered loans) are described in Note 4 to the consolidated financial statements in the Form 10-K.
Noninterest Income
Noninterest income totaled $56.7 million for the first quarter of 2014, down $2.3 million (4%) from the fourth quarter of 2013, and down $3.5 million (6%) from the first quarter of 2013. Excluding the effect of the amortization of the FDIC loss share receivable, noninterest income was virtually flat compared to the prior quarter and up $0.4 million compared to the first quarter of 2013.
Service charges on deposits totaled $18.7 million for the first quarter of 2014, down $0.9 million (5%) from the fourth quarter of 2014, and down $0.3 million (2%) from the first quarter of 2013. Bank card and ATM fees totaled $10.6 million in the first quarter of 2014, down $0.7 million (6%) from the fourth quarter of 2013. Compared to the first quarter of 2013, bank card and ATM fees were down $0.5 million (4%) in the current year. A portion of these decreases compared to the prior quarter is due to two fewer business days in the current quarter.
51
Trust, investment and annuity and insurance fees totaled $18.9 million, up $0.8 million (4%) from the fourth quarter of 2013 and up $1.7 million (10%) from the first quarter of 2013. Improving stock market values and new business were primary factors in the increases. Included in this total was $3.7 million of insurance revenue. Hancock announced on April 1, 2014 the divestiture of selected insurance business lines, which contributed approximately half of first quarter insurance revenues.
Fees from secondary mortgage operations totaled $2.0 million for the first quarter of 2014, a $0.4 million (27%) increase over the fourth quarter of 2013, but down $2.4 million (55%) from first quarter of 2013. The increase compared to the prior quarter reflects a higher level of loans sold during the quarter. The decline compared to the same quarter in 2013 reflects reduced loan sales as a result of an overall slowing of mortgage refinancing.
Gains on the sale of assets increased over $1.0 million compared both to the prior quarter and to the first quarter of 2013. Included in this increase was the deposit premium related to the sale of three branches in the first quarter of 2014.
Amortization on the FDIC loss share receivable totaled $3.9 million in the first quarter of 2014 compared to $1.6 million in the fourth quarter of 2013 year. These amounts reflect a reduction in the amount of expected reimbursements under the loss sharing agreements due to lower loss projections for the related covered loan pools. Higher levels of amortization of the loss share receivable are anticipated in 2014 as projected losses from the covered portfolio have decreased.
The components of noninterest income are presented in the following table for the indicated periods:
Securities transactions
52
Noninterest Expense
Noninterest expense for the first quarter of 2014 totaled $147.0 million. Noninterest expense totaled $174.2 million in the fourth quarter of 2013, including $17.1 million of one-time expenses related to the expense and efficiency initiative. Excluding these costs, noninterest expense totaled $157.1 million in the fourth quarter of 2013, $10.1 million (6%) more than the current quarter. Noninterest expense in the first quarter of 2013 totaled $159.6 million. The decreases are primarily related to cost savings related to Hancock’s expense and efficiency initiative.
Total personnel expense was $81.4 million in the first quarter of 2014, down $3.5 million (4%) from the fourth quarter of 2013 excluding one-time expenses, and down $6.5 million (7%) compared to the first quarter of 2013. Occupancy and equipment expenses totaled $15.5 million in the first quarter of 2014. This total is down $0.8 million (5%) from the fourth quarter of 2013 and down $2.1 million (12%) from the first quarter of 2013. The reductions in personnel, occupancy and equipment expenses reflect the effect of the closure or sales of several branches during 2013 and the first quarter of 2014 and other expense and efficiency initiatives as management continually looks to rationalize the branch network.
All other expenses, excluding amortization of intangibles, totaled $43.0 million in the first quarter of 2014, $5.7 million (12%) less than the fourth quarter of 2013 (excluding one-time expenses), and $3.5 million (8%) less than the first quarter of 2013. Major components of these decreases were reductions in advertising and professional services.
The components of noninterest expense are presented in the following table for the indicated periods:
Three Months Ended
Other real estate owned expense, net
Travel
One-time expenses
One-time expenses in the fourth quarter of 2013 included $6.7 million in personnel expenses, $3.1 million in professional services and $7.3 million in other miscellaneous expenses related to branch closures.
53
Income Taxes
The effective income tax rate for the first quarter of 2014 was approximately 27%, compared to 20% for the fourth quarter of 2013, and 25% for the first quarter of 2013. Management expects the annual effective tax rate to approximate 26% to 27% in 2014.
The Company’s effective tax rates have varied from the 35% federal statutory rate primarily because of tax-exempt income and the availability of tax credits. Interest income from the financing of state and local governments and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The source of the tax credits for 2014 and 2013 has been investments that generate new market tax credits, low-income housing credits and qualified bond credits.
Selected Financial Data
The following tables contain selected financial data as of the dates and for the periods indicated.
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)
54
Income Statement:
Interest income (TE)
Net interest income (TE)
Noninterest income excluding securities transactions
Securities transactions gains
Noninterest expense
One-time noninterest expense items:
Costs associated with efficiency initiative and other items
Total one-time noninterest expense items
Taxes on adjustments
Total adjustments, net of tax
Operating income (a)
55
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
Net charge-offs - covered
Net charge-offs - non-covered to average loans
Allowance for loan losses
56
Supplemental Asset Quality Information
Non-accrual loans
Restructured loans
ORE and foreclosed assets (c)
Accruing loans 90 days past due
ORE and foreclosed assets
Loans Outstanding
Commercial non-real estate loans
Construction and land development loans
Commercial real estate loans
Residential mortgage loans
Change in loan balance from previous quarter
57
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
Total liabilities & stockholders’ equity
Average Balance Sheet
Securities (a)
Goodwill and other intangible assets
Interest bearing public fund deposits
58
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 Bank 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 and repayments 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 ratio of free securities to total securities was 21% at March 31, 2014, compared to 22% at December 31, 2013 and 41% at March 31, 2013. 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 from the end of 2012 into the securities portfolio during the latter part of the first quarter of 2013. Beginning in the last half of 2013, the Company has been funding loan growth from maturities and payoffs of the investment securities portfolio.
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 noninterest-bearing deposit and sweep accounts. Core deposits consist of total deposits less certificates of deposits (CDs) of $100,000 or more, brokered CDs, and balances in sweep time deposit products used by commercial customers. Periodically, as part of its contingency funding plan, the Company issues brokered CDs through third-party intermediaries. Brokered CDs outstanding at March 31, 2014 totaled $98 million, compared to $60 million at December 31, 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 7.83% of core deposits at March 31, 2014. See the discussion of “Deposits” for more information. Besides funding from customer sources, our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $2.8 billion and borrowing capacity at the Federal Reserve’s discount window in excess of $0.5 billion at March 31, 2014. No amounts had been borrowed under these lines at March 31, 2014 or year-end 2013.
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, 2014 and 2013.
59
Dividends received from the Bank has been the primary source of funds available to the Company for the payment of dividends to our stockholders and for servicing debt issued by the holding company. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank 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.
CAPITAL RESOURCES
Stockholders’ equity totaled $2.5 billion at March 31, 2014, up $37 million from December 31, 2013. The tangible common equity ratio increased to 9.24% at March 31, 2014 from 9.00% at December 31, 2013.
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 subsidiary are currently 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%.
On July 2, 2013 the Federal Reserve Board finalized its rule implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The interim final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, and makes selected changes to the calculation of risk-weighted assets. The rule sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier 1 ratio of 4.5% of risk-weighted assets, raises the minimum Tier 1 capital ratio from 4% to 6% of risk-weighted assets and sets a new conservation buffer of 2.5% of risk-weighted assets. The final rule is effective for the Company on January 1, 2015; however, the rule allows for transition periods for certain changes, including the conservation buffer. Based on estimated capital ratios using Basel III definitions, the Company and the Bank currently exceed all capital requirements of the new rule, including the fully phased-in conservation buffer.
At March 31, 2014, the regulatory capital ratios of the Company and the Bank were well in excess of current regulatory minimum requirements, as indicated in the table below. The Company and the Bank have been categorized as “well capitalized” in the most recent notices received from our regulators. Regulatory capital ratios for the Company and the Bank increased from December 31, 2013 to March 31, 2014 as the Company’s net income exceeded dividends.
60
Regulatory ratios:
Total capital (to risk weighted assets)
Whitney Bank
Tier 1 capital (to risk weighted assets)
Tier 1 leverage capital
BALANCE SHEET ANALYSIS
Investment in securities totaled $3.8 billion at March 31, 2014, down $235 million (6%) from the end of December 2013, and down $864 million (19%) from March 31, 2013. During the first quarter of 2014, funds from repayments and maturities in the securities portfolio were used primarily to support loan growth. At March 31, 2014, securities available for sale totaled $1.4 billion and securities held to maturity totaled $2.4 billion.
Our securities portfolio consists mainly of residential mortgage-backed securities and collateralized mortgage obligations issued or guaranteed by U.S. government agencies. The portfolio is designed to enhance liquidity while providing an acceptable rate 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. At March 31, 2014, the average maturity of the portfolio was 4.63 years with an effective duration of 3.81 and a weighted-average yield of 2.31%. The effective duration increases to 4.16 with a 100 basis point increase in the yield curve and to 4.45 with a 200 basis point increase. At year-end 2013, the average maturity of the portfolio was 3.97 years with an effective duration of 3.93 and a weighted-average yield of 2.28%.
61
Total loans at March 31, 2014 were $12.5 billion, up $203 million from December 31, 2013 and up $1 billion (9%) from March 31, 2013. Excluding the FDIC-covered portfolio, which has declined almost $28 million during the first three months of 2014, total loans increased $231 million (2%) compared to year-end 2013. The non-covered loan portfolio was up $1.2 billion (11%) from March 31, 2013.
See Note 3 to the consolidated financial statements for the composition of originated, acquired and covered loans at March 31, 2014 and December 31, 2013. Originated loans include all loans not included in the acquired and covered loan portfolios described as follows. Acquired loans are those purchased in the Whitney acquisition on June 4, 2011 and that continue to be subject to purchase accounting considerations. Acquired loans include those that were performing satisfactorily at the acquisition 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 3 to the consolidated financial statements.
The largest component of linked-quarter net growth (excluding the FDIC-covered portfolio) was in the commercial and industrial (C&I) portfolio, with additional growth in the construction, commercial real estate (CRE) and residential mortgage portfolios. Many of the markets across the Company’s footprint reported net period-end loan growth during the quarter, with the majority of the growth in the Houston, southwest Louisiana, Mississippi, and central Florida regions. For the full year of 2014 management expects period-end loan growth in the upper single digit range.
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 increased approximately $80 million at March 31, 2014, compared to December 31, 2013. The majority of the O&G portfolio is with customers providing transportation and other services and products to support exploration and production activities. The Bank lends mainly to middle-market and smaller commercial entities, although it also participates in larger shared-credit loan facilities with familiar businesses operating in the Company’s market areas. Shared credits funded at March 31, 2014 totaled approximately $1.5 billion, up about 1% from December 31, 2013. Approximately $884 million of shared national credits were with O&G customers at March 31, 2014, an increase of about 1% from year-end.
Construction and land development loans (C&D) loans and commercial real estate (CRE) loans in the originated and acquired portfolios increased a net $92 million over the first three months of 2014. 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 during 2014 has been 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 $10 million over the first three months of 2014. Consumer loans decreased by a net $14 million over the first three months of 2014.
Total covered loans at March 31, 2014 were down $146 million from March 31, 2013 and $28 million from December 31, 2013, reflecting normal repayments, charge-offs and foreclosures. The covered portfolio will continue to decline over the terms of the loss share agreements.
62
Allowance for Loan Losses and Asset Quality
The Company’s total allowance for loan losses was $128.2 million at March 31, 2014, down from $133.6 million at December 31, 2013. The ratio of the allowance to period-end loans was 1.02%, compared to 1.08% at December 31, 2013. The allowance maintained on the originated portion of the loan portfolio totaled $79.6 million, or 0.80% of related loans, at March 31, 2014, compared to $78.9 million, or 0.83% of related loans, at December 31, 2013.
During the first quarter of 2014, Hancock recorded a total provision for loan losses of $8.0 million, down from $9.6 million in the first quarter of 2013. The provision for non-covered loans was $8.3 million in the first quarter of 2014, compared to $3.0 million in the first quarter of 2013. The net provision from the covered portfolio was a credit of $0.3 million for the first quarter of 2014 compared to $6.6 million provision for the first quarter of 2013. The decrease in the provision year-over-year was caused by reductions in the estimates on future losses.
Net charge-offs from the non-covered loan portfolio were $4.0 million, or 0.13% of average total loans on an annualized basis, in the first quarter of 2014, down from $6.6 million, or 0.23% in the first quarter of 2013. The decrease is mainly in commercial and real estate loans.
In the following tables, certain disaggregated information was not available for the commercial non-real estate, construction and land development and commercial real estate loans categories for March 31, 2013. In these instances, combined information for these categories is provided under the caption “commercial loans.”
The following table sets forth activity in the allowance for loan losses for the periods indicated.
63
Allowance for loan losses at beginning of period
Loans charged-off:
Non-covered loans:
Commercial
Commercial non real estate
Commercial and land development
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
Total net charge-offs
Provision for loan losses before FDIC benefit - covered
(Benefit) attributable to FDIC loss share agreement
Provision for loan losses non-covered loans
Provision for loan losses, net
Increase (decrease) in FDIC loss share receivable
Allowance for loan losses at end of period
Ratios:
Gross charge-offs - non-covered to average loans
Recoveries - non-covered to average loans
64
The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual 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 non-real estate loans - restructured
Total commercial non-real estate loans
Construction and land development loans - restructured
Total construction and land development loans
Commercial real estate loans - restructured
Total commercial real estate loans
Residential mortgage loans - restructured
Total residential mortgage loans
Total non-accrual loans
Restructured loans:
Commercial non-real estate loans - non-accrual
Construction and land development loans - non-accrual
Commercial real estate loans - non-accrual
Residential mortgage loans - non-accrual
Consumer loans - non-accrual
Total restructured loans - non-accrual
Commercial non-real estate loans - still accruing
Construction and land development loans - still accruing
Commercial real estate loans - still accruing
Residential mortgage loans - still accruing
Consumer loans - still accruing
Total restructured loans - still accruing
Total restructured loans
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
65
Non-performing assets (NPAs) totaled $179.7 million at March 31, 2014, down from $185.9 million at December 31, 2013, and down from $229.3 million at March 31, 2013. During the first quarter, total non-performing loans increased less than 1%, while foreclosed and surplus real estate (ORE) and other foreclosed assets decreased over $7 million. Non-performing assets as a percent of total loans, ORE and other foreclosed assets were 1.02% at March 31, 2014, compared to 1.08% at December 31, 2013, and 1.20% at March 31, 2013.
Short-Term Investments
Short-term liquidity investments, including interest-bearing bank deposits and Federal funds sold, increased $11.5 million from December 31, 2013 to a total of $280 million at March 31, 2014. Short-term investments were relatively stable for the first quarter of 2014. 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 at March 31, 2014 were $15.3 billion, up $21 million (1%) from March 31, 2013, and down $86 million (1%) from December 31, 2013. Average deposits for the first quarter of 2014 were $15.3 billion, virtually flat with the first quarter of 2013.
Noninterest-bearing demand deposits (DDAs) totaled $5.6 billion at March 31, 2014, up $195 million (4%) compared to March 31, 2013 and up $84 million (2%) from year-end 2013. DDAs comprised 37% of total period-end deposits at March 31, 2014 compared to 36% at March 31, 2013 and 36% at year-end 2013.
Interest-bearing public fund deposits totaled $1.5 billion at March 31, 2014, down $77 million (5%) from March 31, 2013 and $120 million (8%) from year-end 2013. Typically public fund balances increase toward year-end with subsequent reductions beginning in the first quarter.
Time deposits totaled $2.1 billion at March 31, 2014, down slightly from December 31, 2013. Balances in sweep time deposit products increased $34 million from the end of 2013. Movement of excess funds from DDAs by some commercial customers, provided most of this increase. Certificates of deposits (CDs) were down $38 million (2%) compared to December 31, 2013 as low yields available to customers on maturing CDs continue to drive reductions in CD balances.
Short-Term Borrowings
At March 31, 2014, short-term borrowings totaled $713 million, up $55 million (8%) from December 31, 2013. 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 Bank, the amounts available over time can be volatile.
66
OFF-BALANCE SHEET ARRANGEMENTS
Loan Commitments and Letters of Credit
In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank 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 Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its 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, 2014 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 those generally practiced within the banking industry which require 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, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.
67
During the second quarter of 2013, in order to better refine the process and reflect the activity in the Bank’s loan portfolios at a more granular level, management revised the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses for the originated portfolio. The change in methodology was implemented as of April 1, 2013 and resulted in no material change in the total amount of allowance for loan losses.
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, 2014 and March 31, 2013.
Net income in the first quarter of 2014 for the Hancock segment totaled $13.3 million, up $1.8 million from the same period in 2013. Net interest income increased $3.7 million mainly due to an increase in purchased loan accretion. Noninterest income decreased $4.0 million primarily related to the amortization to the FDIC loss share receivable. Noninterest expense decreased $5.1 million between these periods, mainly attributable to savings associated with the Company’s current expense reduction and efficiency initiative discussed in the “Overview” section under “Highlights of First Quarter 2014 Financial Results”.
Net income for the Whitney segment in the first quarter of 2014 totaled $35.8 million, down almost $1 million from the same period in 2013. Net interest income decreased by $12.5 million mainly due to lower core loan yields. Noninterest income increased $1.9 million primarily due to the deposit premium related to the first quarter sale of branches. Noninterest expense decreased $7.5 million primarily related to savings associated with the efficiency initiative.
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 future levels of economic activity in our markets, loan growth, deposit trends, credit quality trends, future sales of nonperforming assets, net interest margin trends, future expense levels and the ability to achieve reductions in non-interest expense or other cost savings, projected tax rates, future profitability, improvements in expense to revenue (efficiency) ratio, purchase accounting impacts such as accretion levels, the impact of the branch rationalization process, and the financial impact of regulatory requirements. 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.
68
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, 2014, 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, 2013 included in our 2013 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, 2014, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
69
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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, 2013. 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.
The following table provides information with respect to purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the three months ended March 31, 2014.
Jan. 1, 2014 - Jan. 31, 2014
Feb. 1, 2014 - Feb. 28, 2014
Mar. 1, 2014 - Mar. 31, 2014
70
Item 6. Exhibits.
(a) Exhibits:
ExhibitNumber
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.
/s/ Carl J. Chaney
/s/ John M. Hairston
/s/ Michael M. Achary
71
Index to Exhibits
Exhibit
Number