UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2015
OR
For the transition period from to
Commission File Number 001-36872
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)
(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. 78,082,903 common shares were outstanding as of August 3, 2015.
Hancock Holding Company
Index
Financial Statements
Consolidated Balance Sheets — June 30, 2015 (unaudited) and December 31, 2014
Consolidated Statements of Income (unaudited) — Three and six months ended June 30, 2015 and 2014
Consolidated Statements of Comprehensive Income (unaudited) — Three and six months ended June 30, 2015 and 2014
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Three and six months ended June 30, 2015 and 2014
Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2015 and 2014
Notes to Consolidated Financial Statements (unaudited) — June 30, 2015
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
(in thousands, except share data)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Federal funds sold
Securities available for sale, at fair value (amortized cost of $2,136,856 and $1,631,761)
Securities held to maturity (fair value of $2,310,103 and $2,186,340)
Loans held for sale
Loans
Less: allowance for loan losses
Loans, net
Property and equipment, net of accumulated depreciation of $198,595 and $193,527
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
Interest-bearing
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, 78,093,729 and 80,426,485 shares outstanding
Capital surplus
Treasury shares at cost — 8,721,782 and 7,053,028
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited consolidated financial statements.
1
Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
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
Securities transactions gains, net
Total noninterest income
Noninterest expense:
Compensation expense
Employee benefits
Personnel expense
Net occupancy expense
Equipment expense
Data processing expense
Professional services expense
Amortization of intangibles
Telecommunications and postage
Deposit insurance and regulatory fees
Other real estate expense, net
Other expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Earnings per common share-basic
Earnings per common share-diluted
Dividends paid per share
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
2
Consolidated Statements of Comprehensive Income
(in thousands)
Other comprehensive income:
Net change in unrealized (loss) gain
Reclassification adjustment for net losses (gains) realized and included in earnings
Valuation adjustment for employee benefit plans
Amortization of unrealized net gain on securities transferred to held to maturity
Other comprehensive income, before income taxes
Income tax (benefit) expense
Other comprehensive (losses) income net of income taxes
Comprehensive income
3
Consolidated Statements of Changes in Stockholders’ Equity
Common Stock
Balance, January 1, 2014
Other comprehensive income
Cash dividends declared ($0.48 per common share)
Common stock activity, long-term incentive plan
Purchase of common stock under stock buyback program
Balance, June 30, 2014
Balance, January 1, 2015
Balance, June 30, 2015
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
(Gain) loss on other real estate owned
Deferred tax expense
Increase in cash surrender value of life insurance contracts
Loss (gain) on disposal of other assets
Net (increase) decrease in loans held for sale
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
Net payments from FDIC for loss share claims
Decrease in FDIC loss share receivable
(Increase) decrease in other assets
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of securities held to maturity
Purchases of securities held to maturity
Net decrease (increase) in interest-bearing bank deposits
Net (increase) decrease in federal funds sold and short-term investments
Net increase in loans
Purchases of property and equipment
Proceeds from sales of property and equipment
Proceeds from sales of other real estate
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
Net (decrease) increase in short-term borrowings
Repayments of long-term debt
Net proceeds from issuance of long-term debt
Dividends paid
Proceeds from exercise of stock options
Net cash provided by financing activities
NET (DECREASE) INCREASE 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
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. (“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 Annual Report on Form 10-K for the year ended December 31, 2014. 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 GAAP and with those generally practiced within the banking industry. These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Critical Accounting Policies and Estimates
There were no material changes or developments with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
6
The amortized cost and fair value of securities classified as available for sale and held to maturity follow.
Securities Available for Sale
US Treasury and government agency securities
Municipal obligations
Mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
Equity securities
Securities Held to Maturity
7
The following table presents the amortized cost and fair value of debt securities at June 30, 2015 by contractual maturity. 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 collateralized mortgage obligations.
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
The Company held no securities classified as trading at June 30, 2015 or December 31, 2014.
The details for securities classified as available for sale with unrealized losses for the periods indicated follow.
June 30, 2015
8
December 31, 2014
The details for securities classified as held to maturity with unrealized losses for the periods indicated follow.
9
The unrealized losses relate to changes in market rates on fixed-rate debt securities since the respective purchase dates. In all cases, the indicated impairment would be recovered no later than the security’s maturity date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to meet contractual obligations. The Company believes it 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 $3.2 billion at June 30, 2015 and December 31, 2014 were pledged as collateral primarily to secure public deposits or securities sold under agreements to repurchase.
10
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
FDIC acquired loans:
Total FDIC acquired loans
Total loans:
Total loans
11
The following briefly describes the distinction among originated, acquired and FDIC acquired loans and certain significant accounting policies relevant to each category.
Originated loans
Loans reported as “originated” include both loans and leases originated for investment and acquired-performing loans where the discount (premium) has been fully accreted (amortized). Originated loans 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
Loans reported as “acquired” are those loans that were purchased in the 2011 Whitney Holding Corporation acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The Whitney 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 for purchase accounting. Acquired-performing loans are accounted for under ASC 310-20 and acquired-impaired loans are accounted for under ASC 310-30.
Acquired-performing loans were segregated into pools based on common risk 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 historical experience and the portfolio characteristics at acquisition as well as available market research. The fair value for each acquired-performing pool was based on the estimate of expected cash flows from the pool discounted at prevailing market rates.
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.
The acquired-impaired loans were segregated into pools by identifying loans with common credit risk profiles and were based primarily on characteristics such as loan type and market area in which originated. The major loan types included commercial
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and industrial loans not secured by real estate, real estate construction and land development loans, commercial real estate loans, and residential mortgage loans, with further segregation within certain loan types as needed. The acquired-impaired loans were further disaggregated by geographic region in recognition of the differences in general economic conditions affecting borrowers in certain states. The fair value estimate for each pool of acquired-impaired loans was based on the estimate of expected cash flows from the pool discounted at prevailing market rates.
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 expected 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. 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.
FDIC acquired loans and the related loss share receivable
Loans reported as “FDIC acquired” are loans purchased in the 2009 acquisition of Peoples First Community Bank (“Peoples First”) that were covered by two loss share agreements between the FDIC and the Company. These 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 as impaired 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 agreement 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 an increase in the loss share receivable’s amortization 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 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 an increase in the loss share receivable’s amortization rate is associated with an increase in the accretable yield on the underlying loan pool. The loss share receivable is reduced as cash is received from the FDIC related to losses incurred on covered assets.
13
The following schedule shows activity in the loss share receivable for the six months ended June 30, 2015 and 2014.
Balance, January 1
Amortization
Charge-offs, write-downs and other recoveries
External expenses qualifying under loss share agreement
Changes due to changes in cash flow projections
Settlement of disallowed loss claims
Net payments from FDIC
Ending balance
The loss share agreement covering the non-single family FDIC acquired portfolio expired in December 2014. The loss share agreement covering the single family portfolio expires in December 2019.
14
The following schedule shows activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2015 and 2014 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
15
FDIC acquired loans
Increase (decrease) in FDIC loss share receivable
16
(In thousands)
17
(Decrease) increase in FDIC loss share receivable
18
The following table shows the composition of nonaccrual loans by portfolio segment and class. Acquired-impaired and certain FDIC acquired loans are considered to be performing due to the application of the accretion method and are excluded from the table. FDIC acquired 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.
The estimated amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual in the six months ended June 30, 2015 was approximately $1.8 million. Interest actually received and recorded as income on nonaccrual loans during that period was approximately $0.6 million.
Nonaccrual loans include loans modified in troubled debt restructurings (“TDRs”) of $4.9 million and $7.0 million at June 30, 2015 and December 31, 2014, respectively. Total TDRs, both accruing and nonaccruing, were $12.8 million as of June 30, 2015 and $16.0 million at December 31, 2014.
19
The table below details TDRs that were modified during the six months ended June 30, 2015 and June 30, 2014 by portfolio segment.
Troubled Debt Restructurings:
20
The table below details TDRs that subsequently defaulted within twelve months of modification.
21
The tables below present loans that are individually evaluated for impairment disaggregated by class at June 30, 2015 and December 31, 2014. Loans individually evaluated for impairment include TDRs and loans that are determined to be impaired and have aggregate relationship balances of $1 million or more.
With no related allowance recorded:
With an allowance recorded:
Total:
22
23
24
25
The tables below present the age analysis of past due loans at June 30, 2015 and December 31, 2014. FDIC acquired and acquired-impaired loans accounted for in pools with an accretable yield are considered to be current.
Total
26
27
The following tables present the credit quality indicators of the Company’s various classes of loans at June 30, 2015 and December 31, 2014.
Commercial Non-Real Estate Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Construction Credit Exposure
Commercial Real Estate Credit Exposure
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Residential Mortgage Credit Exposure
Credit Risk Profile Based on Payment Activity and Accrual Status
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:
29
Residential and Consumer:
Changes in the carrying amount of acquired-impaired loans and accretable yield are presented in the following table for the six months ended June 30, 2015 and the year ended December 31, 2014.
Balance at beginning of period
Payments received, net
Accretion
(Decrease) in expected cash flows based on actual cash flows and changes in cash flow assumptions
Net transfers from nonaccretable difference to accretable yield
Balance at end of period
Included in loans are $7.0 million and $13.7 million of consumer loans secured by single family residential mortgage real estate that are in process of foreclosure as of June 30, 2015 and December 31, 2014, respectively. Of these loans, $6.2 million and $8.1 million, respectively, are covered by an FDIC loss share agreement that provides significant protection against losses. Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. In addition to the single family residential real estate loans in process of foreclosure, the Company also held $9.9 million and $12.7 million of foreclosed single family residential properties in other real estate owned as of June 30, 2015 and December 31, 2014, respectively. Of these foreclosed properties, $4.2 million and $8.2 million as of June 30, 2015 and December 31, 2014, respectively, are also covered by the FDIC loss share agreement.
30
Included in short term borrowings at June 30, 2015 was $466.3 million of customer securities sold under agreements to repurchase (“repurchase agreements”) that mature daily and were secured by agency securities. The Company borrows funds on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury-management services offered to its deposit customers. As the Company maintains effective control over assets sold under agreements to repurchase, the securities continue to be carried on the consolidated statements of financial condition. Repurchase agreements mature daily and the Company acts as a borrower transferring assets to the counterparty. As such, the Company’s risk is very limited.
Long-term debt consisted of the following.
Subordinated notes payable, maturing June 2045
Subordinated notes payable, maturing April 2017
Term note payable, maturing December 2015
Other long-term debt
Total long-term debt
On March 9, 2015, the Company completed the issuance of subordinated notes payable with an aggregate principal amount of $150 million. The notes mature on June 15, 2045 and accrue interest at a rate of 5.95% per annum. Quarterly interest payments began in June. Subject to prior approval by the Federal Reserve, the Company may redeem the notes in whole or in part on any interest payment date on or after June 15, 2020. This debt qualifies as Tier 2 capital in the calculation of certain regulatory capital ratios.
The 5.875% fixed-rate subordinated notes maturing April 2017 had been issued by Whitney National Bank and were assumed by Hancock in the Whitney acquisition. As of June 30, 2015, 20% of the balance of these notes qualifies as capital in the calculation of certain regulatory capital ratios. The notes will no longer qualify as capital as of April 1, 2016.
On December 21, 2012, the Company entered into a three-year term loan agreement that provides for a $220 million term loan facility, all of which was borrowed on the closing date. The agreement also provides for up to $50 million in additional borrowings under the loan facility, subject to obtaining additional commitments from existing or new lenders and satisfaction of certain other conditions. Amounts borrowed under the loan facility bear interest at a variable rate based on LIBOR plus 1.875% per annum. The loan agreement requires quarterly principal payments of $8.8 million, and outstanding borrowings may be prepaid in whole or in part at any time prior to the December 21, 2015 maturity date without premium or penalty.
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The Company and the Bank must satisfy certain financial covenants in the term loan agreement and are subject to other restrictions customary in financings of this nature, none of which are expected to adversely impact our operations. The financial covenants cover, among other things, the maintenance of minimum levels for regulatory capital ratios, consolidated net worth, consolidated return on assets, and holding company liquidity and dividend capacity, and specify a maximum ratio of consolidated nonperforming assets to consolidated total loans and other real estate, calculated without FDIC acquired assets. The Company was in compliance with all covenants as of June 30, 2015 and December 31, 2014.
Substantially all of the other long-term debt consists of borrowings associated with tax credit fund activities. Although these borrowings have indicated maturities through 2052, they are expected to be paid off at the end of their seven-year compliance period.
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.
32
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 on a recurring basis in the consolidated balance sheets.
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities
Total available for sale securities
Derivative assets (1)
Total recurring fair value measurements - assets
Liabilities
Derivative liabilities (1)
Total recurring fair value measurements - liabilities
33
Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities and certain other debt and equity securities. Level 2 classified securities include obligations of U.S. Government agencies and U.S. Government-sponsored agencies, residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data.
The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five. Company policies generally limit investments to agency securities and municipal securities determined to be investment grade according to an internally generated score which generally includes 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 independent third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.
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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.
The fair value information presented below is not as of the period-end, rather it was as of the date the fair value adjustment was recorded during the twelve months ended June 30, 2015, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet.
The following tables present the Company’s financial assets that are measured at fair value on a nonrecurring basis for each of the fair value hierarchy levels.
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 these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – The fair value measurement for securities available for sale was discussed earlier 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 determined 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 of similar credit quality.
Loans Held for Sale – These loans are recorded at fair value and carried at the lower of cost or market. The carrying amount is considered a reasonable estimate of fair value.
Deposits - The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (“carrying amounts”). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
35
Securities Sold under Agreements to Repurchase, Federal Funds Purchased, and Federal Home Loan Bank (“FHLB”) Borrowings - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Long-Term Debt - The fair value is estimated by discounting the future contractual cash flows using current market rates at which debt with similar terms could be obtained.
Derivative Financial Instruments – The fair value measurement for derivative financial instruments was discussed earlier in the note.
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 June 30, 2015 and December 31, 2014.
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
FHLB borrowings
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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 their net risk exposure resulting from such agreements. The Bank also enters into risk participation agreements under which they may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.
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Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional amounts and fair values of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2015 and December 31, 2014.
Derivatives designated as hedging instruments:
Interest rate swaps
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
Cash Flow Hedges of Interest Rate Risk
The Company is party to two interest rate swap agreements – one with a notional amount of $300 million and the second with a notional amount of $200 million. For both agreements, the Company receives interest at a fixed rate and pays at a variable rate. The derivative instrument represented by these swap agreements was designated as and qualifies as cash flow hedges of the Company’s forecasted variable cash flows for a pool of variable rate loans. The $300 million swap agreement expires in January, 2017 and the $200 million swap agreement expires in June, 2017.
During the terms of the swap agreements, the effective portion of changes in the fair value of the derivative instruments are recorded in accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings in the periods that the hedged forecasted variable-rate interest payments affects earnings. The impact on AOCI was insignificant in the second quarter and for the six months ended 2015. There was no ineffective portion of the change in fair value of the derivative recognized directly in earnings.
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Derivatives Not Designated as Hedges
Customer interest rate derivative program
The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Bank 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.
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 their 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.
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.
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 andsix-month periods ended June 30, 2015 and 2014.
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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 the 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 June 30, 2015, the aggregate fair value of derivative instruments with credit risk-related contingent features that were in a net liability position was $7.9 million, for which the Bank had posted collateral of $20.6 million.
Offsetting Assets and Liabilities
Offsetting information in regards to derivative assets and liabilities subject to master netting agreements at June 30, 2015 and December 31, 2014 is presented in the following tables.
As of June 30, 2015
Derivative Assets
Derivative Liabilities
Description
As of December 31, 2014
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Stock Repurchase Program
In March 2015, the Company completed the stock repurchase program approved by the Company’s board of directors on July 16, 2014 which authorized the repurchase of up to 5%, or approximately 4.1 million shares, of its outstanding common stock. The approved plan allowed the Company to repurchase its common shares either in the open market in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions with non-affiliated sellers or as otherwise determined by the Company. Under this plan, the Company repurchased a total of 4.1 million shares of our common stock at an average price of $30.02 per share.
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. Net unrealized gains/losses on AFS securities reclassified as securities held to maturity (“HTM”) also continue to be reported as a component of AOCI and will be amortized 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.
Balance, December 31, 2013
Other comprehensive income before income taxes:
Net change in unrealized gain
Reclassification of net losses realized and included in earnings
Amortization of unrealized net loss on securities transferred to HTM
Income tax expense
Balance, December 31, 2014
Reclassification of net (gain) losses realized and included in earnings
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The following table shows the line items in the consolidated income statements affected by amounts reclassified from accumulated other comprehensive income.
Affected line item onthe income statement
Gain on sale of AFS securities
Tax effect
Net of tax
Amortization of defined benefit pension and post-retirement items
Total reclassifications, net of tax
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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.
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 574,037 and 843,544, respectively, for the three and six months ended June 30, 2015 and 660,778 and 675,108, respectively, for the three and six months ended June 30, 2014.
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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 12 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
A summary of option activity for the six months ended June 30, 2014 is presented below.
Options
Outstanding at January 1, 2015
Exercised
Cancelled/Forfeited
Expired
Outstanding at June 30, 2015
Exercisable at June 30, 2015
The total intrinsic value of options exercised was $0.2 million for both the six months ended June 30, 2015 and 2014.
The restricted and performance shares in the table below are subject to service requirements. A summary of the status of the Company’s nonvested restricted and performance shares as of June 30, 2015 and changes during the six months ended June 30, 2015, is presented in the following table.
Nonvested at January 1, 2015
Granted
Vested
Forfeited
Nonvested at June 30, 2015
As of June 30, 2015, there were $35.6 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 3.3 years. The total fair value of shares which vested during the six months ended June 30, 2015 and 2014 was $7.5 million and $8.9 million, respectively.
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During the six months ended June 30, 2015, the Company granted 59,312 performance shares with a grant date fair value of $25.77 per share to key members of executive and senior management. The number of 2015 performance shares that ultimately vest at the end of the three-year required service period, if any, 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 is recognized on a straight-line basis over the service period.
The Company has a qualified defined benefit pension plan covering all eligible employees. Eligibility is based on minimum age-related 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.
The following tables show the components of net periodic benefits cost included in expense for the plans for the periods indicated.
Three Months Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost
Six Months Ended June 30,
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Hancock contributed $10 million to the pension plan during the first quarter of 2015. Based on currently available information, the Company does not anticipate making any further contribution during the remainder of 2015.
The Company also provides a defined contribution 401(k) retirement benefit 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.
Components of other noninterest income are as follows.
Income from bank-owned life insurance
Credit related fees
Income from derivatives
Net (loss) gain on sale of assets
Safety deposit box income
Other miscellaneous
Total other noninterest income
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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
Included in other miscellaneous expense in the table above were nonoperating expenses totaling $5.0 million in the second quarter of 2015 and $7.3 million in the second quarter of 2014. For the first half of 2015 and 2014, respectively, included in other miscellaneous expense were nonoperating expenses of $2.7 million and $7.3 million. In 2015, these nonoperating expenses primarily include the net impact from branch sales and closings and the resolution of FDIC denied claims. Other nonoperating expenses in 2014 included expenses related to the FDIC settlement, sale of certain insurance business lines, branch closures and fees related to the early termination of reverse purchase obligations.
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In May 2015, the FASB issued an Accounting Standard Update (“ASU”) to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In April 2015, the FASB issued an ASU to provide guidance to customers about how to account for a cloud computing arrangement depending on whether or not it includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In April 2015, the FASB issued an ASU to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2015. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In February 2015, the FASB issued an ASU to change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this ASU (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In January 2015, the FASB issued an ASU to address the elimination of the concept of extraordinary items. The standard is the first in the FASB’s simplification initiative that is aimed at reducing the cost and complexity of financial reporting while improving or maintaining the usefulness of information reported to investors. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted but adoption must occur at the beginning of the year. The Company adopted this guidance in January 2015 and it did not have a material impact on the Company’s financial condition or results of operations.
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In August 2014, the FASB issued an ASU to address the diversity in practice regarding the classification and measurement of foreclosed loans which were part of a government-sponsored loan guarantee program. The ASU outlines certain criteria that, if met, the loan (residential or commercial) should be derecognized and a separate other receivable should be recorded upon foreclosure at the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This ASU was effective for annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. The Company adopted this guidance in January 2015 and it did not have a material impact on the Company’s financial condition or results of operations.
In June 2014, the FASB issued an ASU regarding repurchase-to-maturity transactions, repurchase financings, and disclosures. Under the new standard, repurchase-to-maturity transactions will be reported as secured borrowings, and transferors will no longer apply the current “linked” accounting model to repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty. Public business entities are generally required to apply the accounting changes and comply with the enhanced disclosure requirements for periods beginning after December 15, 2014 and interim periods beginning after March 15, 2015. A public business entity may not early adopt the standard’s provisions. The Company adopted the accounting guidance in January 2015 and it did not have a material impact on the Company’s financial condition or results of operations. The new disclosure requirements are included in Note 4 – Securities Sold Under Agreements to Repurchase.
In May 2014, the FASB issued an ASU regarding revenue from contracts with customers affecting any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of this standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will be effective for the Company for annual reporting periods beginning after December 15, 2017. The Company is currently assessing this pronouncement and adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In January 2014, the FASB issued an 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 Company adopted this guidance in January 2015 and it did not have a material impact on the Company’s financial condition or results of operations. The new disclosure requirements are included at the end of Note 3 – Loans and Allowance for Loan Losses.
In January 2014, the FASB issued an ASU in order to provide guidance on accounting for investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credit (“LIHTC”). Through the Company’s investments in these entities, the Company receives tax credits and/or tax deductions from operating losses, which are allowable on the Company’s filed income tax returns over the life of the project beginning with the first year the tax credits are earned. The Company adopted this guidance in January 2015 and it did not have a material impact on the Company’s financial condition or results of operations.
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OVERVIEW
NON-GAAP FINANCIAL MEASURES
Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, management uses several non-GAAP financial measures including Operating Income, Core Net Interest Income and Core Net Interest Margin. These measures are provided to assist the reader with better understanding the Company’s financial condition and results of operations.
We define Operating Income as net income less tax-effected nonoperating expense items and securities gains/losses. Management believes this is a useful financial measure as it enables investors to assess ongoing operations and compare the Company’s fundamental operational performance from period to period. A reconciliation of Net Income to Operating Income is included in Selected Financial Data. The components of nonoperating expense are further discussed in the Noninterest Expense section of this item.
We define Core Net Interest Income as reported taxable equivalent (te) net interest income excluding net purchase accounting adjustments. We define Core Net Interest Margin as Core Net Interest Income expressed as a percentage of average earning assets. A reconciliation of Reported Net Interest Income to Core Net Interest Income and Reported Net Interest Margin to Core Net Interest Margin is included in the Net Interest Income section of this item. Management believes that Core Net Interest Income and Core Net Interest Margin provide a useful measure to investors regarding the Company’s performance period over period as well as providing investors with assistance in understanding the success management has experienced in executing its strategic initiatives.
Recent Economic and Industry Developments
The Federal Reserve publishes its Summary of Commentary on Current Economic Conditions (the “Beige Book”) eight times a year, most recently on July 15, 2015. The Beige Book includes summaries from all 12 Banks in the Federal Reserve System. Reports from the Atlanta Bank and the Dallas Bank indicate continued improvement of economic activity throughout most of Hancock’s market area. However, activity among energy-related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas market areas continued to decline. The travel and tourism industry, which is important within several of the Company’s market areas, saw an increase in activity with many hotels and resorts reporting high occupancy levels and an increase in consumer spending compared to prior year. Outlooks for the next three months were optimistic. Auto sales continued to experience increases in sales activity. Reports on manufacturing activity were mixed; however, they were generally positive, with almost half of purchasing managers polled expecting higher production over the next three to six months.
The real estate markets for residential properties were mostly positive, with most brokers indicating that sales met their expectations; however, the Texas market noted some decrease in activity due to severe weather conditions. Most of Hancock’s market areas reported growth in activity. Inventory levels remained stable or declined slightly year-over-year. The demand for apartments increased, keeping occupancy rates at high levels. The outlook for home sales is positive, with brokers expecting to see an increase in sales over the next three months. New home sales and construction activity are flat to slightly ahead of prior-year levels and expected to improve modestly.
The commercial real estate market continues to improve, with growing demand for office and industrial space in certain market areas. Commercial construction activity has increased in these sectors. Continued improvement is expected in the commercial real estate market.
Loan demand across most of the markets that Hancock serves has increased slightly since the last Beige Book report, but competition for quality borrowers remains stiff. Consumer lending and business outside the oil and gas industry increased, while commercial real estate held steady. The outlook for increased growth improved slightly since the last report.
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The overall U.S. economy continued to expand, with almost all regions showing modest to moderate growth rates. Confidence in the prospect of a higher rate of sustained growth is improving for businesses and consumers alike, although uncertainties remain about such matters as the health of the international economy and the implications of pending or proposed changes in U.S. fiscal and tax policies and regulations.
Highlights of Second Quarter 2015 Financial Results
Net income in the second quarter of 2015 was $34.8 million, or $0.44 per diluted common share, compared to $40.2 million, or $0.49 per diluted common share, in the first quarter of 2015. Net income was $40.0 million, or $0.48 per diluted common share, in the second quarter of 2014. Net income for the second quarter of 2015 and first quarter of 2015 reflect the negative impact of nonoperating items totaling $8.9 million and $7.3 million, respectively. The second quarter of 2014 impact of nonoperating items was $12.1 million. Net income for the six months ended June 30, 2015 was $75.0 million, or $0.93 per diluted common share, compared to $89.1 million, or $1.06 per diluted common share, for the six months ended June 30, 2014. Included in net income for the six months ended June 30, 2015 and 2014 was the negative impact from nonoperating items totaling $16.2 and $12.1 million, respectively.
Operating income for the second quarter of 2015 was $40.6 million or $0.51 per diluted common share, compared to $44.7 million, or $0.55 per diluted common share in the first quarter of 2015. Operating income was $49.6 million, or $0.59 per diluted common share, in the second quarter of 2014. For the six months ended June 30, 2015, operating income was $85.3 million, or $1.06 per diluted common share, down $13.4 million from the same period in 2014. As discussed further in the Results of Operations section below, the primary driver for the decrease in operating income for both the quarter and six-month period ended June 30, 2015, compared to similar prior periods, was the reduction in income from purchase accounting adjustments.
Over the past several quarters the Company has disclosed its focus on strategic initiatives that are designed to replace declining levels of purchase accounting income from acquisitions with improvement in core income, which the Company defines as operating income excluding tax-effected purchase accounting adjustments. As of this quarter, the impact to the Company’s bottom line from net purchase accounting items has substantially diminished, and core results are now substantially equal to operating results.
Highlights of the Company’s second quarter of 2015 results:
The total allowance for loan losses was $131 million at June 30, 2015, up $2.7 million from March 31, 2015. The ratio of the allowance for loan losses to period-end loans was 0.91% at June 30, 2015, virtually unchanged from March 31, 2015. The allowance maintained on the non-FDIC acquired portion of the loan portfolio increased $6.3 million linked-quarter, totaling $107 million, and the impaired reserve on the FDIC acquired loan portfolio declined $3.6 million linked-quarter.
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The increase in the non-FDIC portion allowance was primarily driven by a $10.6 million increase in the reserve related to the energy portfolio. This increase resulted from downward pressure on energy related loan risk ratings as pricing pressure on oil continued during the second quarter plus updates to the qualitative factors related to energy. During the second quarter, the Company’s balance of commercial criticized loans increased $207 million, or 50%, primarily from risk rating downgrades in the energy portfolio. Management believes that if further risk rating downgrades occur in the energy portfolio, they could lead to additional loan loss provisions, but not translate to significant losses. The impact and severity of risk rating migration, associated provision and net charge-offs will depend on the overall oil price reduction and the duration of the cycle.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income (te) for the second quarter of 2015 was $154.9 million, down $6.2 million from the first quarter of 2015. During the second quarter, net interest income from purchase accounting adjustments declined $7.6 million compared to the first quarter. This was partially offset by the impact of one additional day of interest accruals in the second quarter of 2015 compared to the first quarter of 2015. Excluding the impact of purchase accounting adjustments and the number of days in the quarter, net interest income (te) was virtually flat as additional interest income generated from a $465 million linked quarter increase in average earning assets was offset by additional interest expense related to the full quarter impact of the $150 million, 5.95% subordinated debt issued March 9, 2015. For analytical purposes, management adjusts net interest income to a taxable equivalent basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans).
Net interest income (te) for the second quarter of 2015 was down $12.4 million, or 7%, compared to the second quarter of 2014. This decrease is primarily the result of a $19 million reduction in total purchase accounting accretion partially offset by net interest earned on a $2.0 billion increase in average earning assets.
Net interest income (te) for the first six months of 2015 totaled $316.0 million, a $19.5 million, or 6%, decrease from the first half of 2014. Excluding a $31.9 million decrease in purchase accounting accretion, net interest income was down $12.4 million for the first six months of 2015 compared to the same period of 2014. A 15 bps decrease in the core loan yield and a 4 bps increase in the cost of funds were partially offset by a $1.8 billion, or 11%, increase in average earning assets. The increase in the cost of funds was attributable to the 2015 subordinated debt issuance and the impact from several deposit initiatives implemented during the second half of 2014 and early 2015 designed to generate deposit growth in an amount sufficient to fund loan growth.
The reported net interest margin was 3.30% for the second quarter of 2015, down 25 bps from the first quarter of 2015, and down 69 bps from the second quarter of 2014. Approximately 18 bps of the linked quarter decline was related to the decline in purchase accounting adjustments noted above. The current quarter’s core net interest margin of 3.14% declined 7 bps compared to the first quarter of 2015 and 21 bps compared to the second quarter of 2014. The primary driver for the reduction in the net interest margin in both periods was the decline in the loan yield. Additionally contributing to the linked quarter decline in the core net interest margin was a 13 bps decrease in the investment portfolio yield and a 40 bps increase in borrowing costs related to the subordinated debt previously discussed. The linked-quarter decrease in the investment portfolio yield is primarily attributable to purchasing new securities at current market rates to replace normal monthly repayments and maturities of higher-yielding securities.
The reported net interest margin for the first six months of 2015 was 3.43% compared to 4.03% in 2014, while the core margin declined to 3.17% in 2015 compared to 3.36% in 2014. Changes in net interest income (te) and the net interest margin between the year-to-date periods reflected, for the most part, the same factors that affected the quarterly comparisons.
The overall reported yield on earning assets was 3.58% in the second quarter of 2015, declining 21 bps from the first quarter of 2015 and 63 bps from the second quarter of 2014. This decrease was primarily a result of the lower yields on the loan portfolio due to the impact of the decline in purchase accounting adjustments, as well as lower yields in the investment securities portfolio noted above. The reported loan portfolio yield of 4.10% for the current quarter was
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down 26 bps from the first quarter of 2015 and 76 bps from the second quarter of 2014. Excluding purchase-accounting accretion, the loan yield of 3.85% in the current quarter was down 3 bps from the first quarter of 2015 and 12 bps from a year earlier.
The cost of funding earning assets was 0.28% in the second quarter of 2015, up 4 bps from the first quarter of 2015. This increase was attributable to the issuance of $150 million in subordinated debt and a slight increase in deposit rates related to the Company’s deposit initiatives.
The cost of funding earning assets increased 6 bps from the second quarter of 2014. The 82 bps increase in the rate paid on long-term debt and a 6 bps increase in overall rate paid on interest-bearing deposits were offset by the effect of the early redemption in the second quarter of 2014 of $115 million in fixed rate reverse repurchase obligations with an average rate of 3.43%. This early redemption resulted in a 26 bps reduction in the average rate paid on short-term borrowings compared to the second quarter of 2014. The increase in deposit rates reflects the initiatives implemented during the second quarter of 2014 to increase deposits in an effort to support the funding for loan growth.
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The following tables detail the components of our net interest income and net interest margin.
(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) (a)
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 borrowings
Total interest-bearing liabilities
Net interest-free funding sources
Total cost of funds
Net interest spread (te)
Net interest margin
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Due to the significant, unsustainable contribution from purchase accounting accretion, management believes that core net interest income and core net interest margin provide meaningful financial measures to investors of the Company’s performance over time. The following table provides a reconciliation of reported and core net interest income and reported and core net interest margin.
Reconciliation of Reported Net Interest Income and Margin to Core Net interest Income and Margin
Net interest income (te) (a)
Purchase accounting adjustments
Loan discount accretion
Bond premium amortization
CD premium accretion
Total net purchase accounting accretion
Net interest income (te) - core
Net interest margin - reported
Net purchase accounting adjustments
Net interest margin - core
Provision for Loan Losses
During the second quarter of 2015, Hancock recorded a total provision for loan losses of $6.6 million, up $0.4 million from the first quarter of 2015 and virtually flat with the second quarter of 2014. The linked-quarter increase reflects additional build for the energy portfolio as discussed more fully in the “Allowance for Loan Losses and Asset Quality” section of this document. The provision for the FDIC acquired portfolio was a credit of $0.9 million for the three months ended June 30, 2015 and a small credit for each of the three-month periods ended March 31, 2015 and June 30, 2014. For the first six months of 2015, the total provision for loans losses was $12.8 million, down from $14.7 million for the same period in 2014.
The section on “Allowance for Loan Losses and Asset Quality” provides additional information on changes in the allowance for loan 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 FDIC acquired loans) are described in Note 3 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Noninterest Income
Noninterest income totaled $60.9 million for the second quarter of 2015, a $4.3 million, or 8%, increase compared to the first quarter of 2015, and up $4.5 million, or 8%, from the second quarter of 2014. Seasonal trust fees related to tax preparation, increased fees from secondary mortgage market operations resulting from higher mortgage production and an increase in income from derivatives were the primary factors for this increase. In addition, fee income from several other noninterest income segments also increased. Noninterest income totaled $117.4 million for the first six months of 2015, up $4.3 million, or 4%, from the first six months of 2014.
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Service charges on deposits totaled $17.9 million for the second quarter of 2015, up $0.6 million, or 3%, from the first quarter of 2015, and down $1.4 million, or 7%, from the second quarter of 2014. The linked quarter increase is primarily due to the impact of three additional working days in the current quarter compared to the first quarter of 2015. The year-over-year decrease in service charges is primarily related to a decrease in charges resulting from a decline in overdraft/nonsufficient funds occurrences. This decline is attributable, in part, to an increase in average balances per account in the consumer noninterest-bearing checking portfolio, a reduction in the number of consumer accounts, mostly attributable to branch closings and sales, and higher customer usage of our overdraft protection product.
Trust fees totaled $11.8 million for the quarter ended June 30, 2015, up $0.6 million, or 5%, from the first quarter of 2015, primarily due to the $0.4 million of seasonal fees as mentioned above. Trust fees increased $0.3 million, or 3%, compared to the second quarter of 2014, as a result of increased retirement services and corporate trust business.
Bank card and ATM fees totaled $11.9 million in the second quarter of 2015, up $0.7 million, or 6%, from the first quarter of 2015, and up $0.3 million, or 2%, compared to the second quarter of 2014. Included in bank card and ATM fees are fees from credit card, debit card and ATM transactions, and merchant service fees. The increase in credit card fees resulted from various strategic initiatives during 2014 to increase card usage, including specific commercial card enhancements. ATM fee income in the second quarter of 2015 compared to the second quarter of 2014 was down $0.1 million, or 5%, due in part to the closing and sale of branches during 2014 and 2015 as part of the Company’s branch rationalization program.
Fees from the secondary mortgage operations totaling $3.6 million in the second quarter of 2015 were up $1.0 million, or 36%, compared to the first quarter of 2015. These fees more than doubled compared to the second quarter of 2014. The Company typically sells its longer-term fixed-rate loans in the secondary market while retaining in the portfolio the majority of its adjustable rate loans. We also retain loans generated through certain programs to support customer relationships including programs for high net worth individuals and non-builder construction loans. The increase in fee income during the second quarter of 2015 compared to the first quarter of 2015 was primarily due to seasonality. Through the first six months of 2015, fees from secondary mortgage operations increased $2.6 million, or 69%, compared to the first six months of 2014 as the Company has originated a higher percentage of loans for sale in the secondary market. Management expects this trend to continue through 2015.
Amortization of the FDIC loss share receivable totaled $1.3 million in the second quarter of 2015 compared to $1.2 million in the first quarter of 2015 and $3.3 million in the second quarter of 2014. For the first six months of 2015, amortization of the FDIC loss share receivable totaled $2.5 million, compared to $7.2 million for the same period in 2014. The amortization reflects a reduction in the amount of expected reimbursements under the loss share agreements due to lower loss projections for the related FDIC acquired loan pools. The non-single family loss share agreement expired in December of 2014, which is the primary reason for the decrease in the amortization in the first six months of 2015 compared to 2014. Beginning in 2015, the FDIC loss share receivable and the related amortization relates to the single family loss share agreement which will expire in December of 2019.
Income from derivatives totaled $1.5 million for the quarter ended June 30, 2015 compared to a negative $0.1 million for the three months ended March 31, 2015 and $0.5 million for the three months ended June 30, 2014. This income is volatile in nature and is primarily related to our customer interest rate derivative program as describe fully in Note 5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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The components of noninterest income are presented in the following table for the indicated periods.
Gain (loss) on sale of assets
Noninterest Expense
Noninterest expense for the second quarter of 2015 was $158.9 million, a $5.4 million, or 4%, increase from the first quarter of 2015, and a $2.1 million, or 1%, increase from the second quarter of 2014. Excluding nonoperating expense items, operating expense for the second quarter of 2015 totaled $150.0 million, which was up $3.8 million, or 3%, from the first quarter of 2015 and $5.3 million, or 4%, from the same period in 2014. Operating expense for the first six months of 2015 totaled $296.2 million, up $4.5 million, or 2%, compared to the first six months of 2014.
Nonoperating expense totaled $8.9 million in the second quarter of 2015, $7.3 million in the first quarter of 2015 and $12.1 million in the second quarter of 2014. Nonoperating expense for the second quarter of 2015 included approximately $4.7 million related to branch closings and asset dispositions as part of the Company’s ongoing branch rationalization process, $1.9 million related to the resolution of FDIC denied loss share claims and $2.3 million of consulting and professional fees related to investments in technology to enhance the Company’s risk management processes. The first quarter of 2015 primarily consisted of consulting and professional fees related to technology enhancements for the Company’s risk management process as well as a net premium related to the sale of four Houston branches.
Nonoperating expense in the second quarter of 2014 included $10.3 million for the settlement of an assessment by the FDIC related to a targeted review of certain previously paid claims under the loss share agreements, $7.5 million related to the Company’s expense and efficiency initiative including $3.5 million for the closure of certain branch locations as part of the ongoing branch rationalization process, and $3.5 million related to the early termination of reverse repurchase obligations. These expenses were partially offset by the $9.1 million gain from the divestiture of certain insurance business lines, net of costs related to discontinuing the operations.
Total personnel expense, excluding $0.9 million in nonoperating expense, totaled $82.5 million for the second quarter of 2015, up $2.4 million, or 3%, from the first quarter of 2015. The increase reflects additional incentive pay in the second quarter, partially offset by a seasonal decrease in benefits. Total personnel expense was up $3.0 million, or 4%, compared to the second quarter of 2014. Total personnel expense for the first six months of 2015 was up $1.7 million, or 1%, compared to the first six months of 2014.
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Occupancy and equipment expenses totaled $15.8 million for the second quarter of 2015, up $0.7 million, or 5%, from the first quarter of 2015 and $0.9 million, or 6%, from the second quarter of 2014. Occupancy and equipment expenses totaled $30.9 million for the first six months of 2015, compared to $30.4 million in the first six months in 2014. The second quarter of 2015 included an increase of $0.4 million in equipment maintenance and $0.3 million in general facilities maintenance.
Other real estate (“ORE”) expense in the second quarter of 2015 was $0.5 million, virtually unchanged from the first quarter of 2015, and up $0.4 million from the second quarter of 2014. ORE expense for the first six months of 2015 totaled $1.0 million compared to $1.9 million in the first half of 2014.
All other expenses, excluding amortization of intangibles and nonoperating expense items, totaled $45.0 million for the second quarter of 2015, up $0.7 million, or 2%, from the first quarter of 2015 and up $1.4 million, or 3%, from the second quarter of 2014. For the first six months of 2015 compared to the first six months of 2014, all other expenses increased $4.5 million, or 5%. The primary factors in the increases from prior periods are increased data processing expense from the implementation of various strategic initiatives and increased deposit insurance and regulatory fees primarily as a result of asset growth.
The components of noninterest expense are presented in the following table for the indicated periods.
Operating expense
Total operating expense
Nonoperating expense items
Impact of insurance business line divestiture
FDIC resolution of denied claims
Expense and efficiency initiatives and other items
Total nonoperating expense items
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Income Taxes
The effective income tax rate for the second quarter of 2015 was approximately 26% compared to 27% in the first quarter of 2015 and 31% in the second quarter of 2014. Management expects the effective tax rate for the remainder of 2015 will approximate 25% to 27%. Hancock’s effective tax rates have varied from the 35% federal statutory rate primarily because of tax-exempt income and the use of tax credits. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets the Company serves and are directed at tax credits issued under the Qualified Zone Academy Bonds (“QZAB”), Qualified School Construction Bonds (“QSCB”), Federal and State New Market Tax Credit (“NMTC”) and Low-Income Housing Tax Credit (“LIHTC”) programs. The investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes.
The Company invests in Federal and State NMTC projects related to tax credit allocations that have been awarded to its wholly-owned Community Development Entity (“CDE”) as well as projects that utilize credits awarded to unrelated CDEs. From 2008 through 2014, the Company’s CDE was awarded three allocations totaling $148 million. These awards are expected to generate tax credits totaling $57.7 million over their respective seven-year compliance periods.
The Company intends to continue making investments in tax credit projects, though its ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits. Based on tax credit investments that have been made, the Company expects to realize tax credits over the next three years of $10.0 million, $8.8 million and $7.4 million for 2016, 2017 and 2018, respectively.
The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the periods indicated.
Taxes computed at statutory rate
Tax credits:
QZAB/QSCB
NMTC - Federal and State
LIHTC
Total tax credits
State income taxes, net of federal income tax benefit
Tax-exempt interest
Bank owned life insurance
Goodwill - writeoff
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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 paid
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 sales price
Low sales price
Period-end closing price
Trading volume (000s) (b)
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Income Statement:
Interest income
Interest income (te) (a)
Interest expense
Net interest income (te)
Noninterest income excluding securities transactions
Noninterest expense (excluding amortization of intangibles)
Taxes on adjustments at marginal tax rate
Total adjustments, net of taxes
Operating income (b)
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Performance Ratios
Return on average assets
Return on average assets — operating (a)
Return on average common equity
Return on average common equity — operating (a)
Return on average tangible common equity
Return on average tangible common equity — operating (a)
Earning asset yield (te)
Net interest margin (te)
Noninterest income excluding securities transactions to total revenue (te)
Efficiency ratio (b)
Average loan/deposit ratio
FTE employees (period-end)
Capital Ratios
Common stockholders’ equity to total assets
Tangible common equity ratio
Asset Quality Information
Nonaccrual loans (a)
Restructured loans - still accruing
Total nonperforming loans
Other real estate (ORE) and foreclosed assets
Total nonperforming assets
Accruing loans 90 days past due (a)
Net charge-offs - non-FDIC acquired
Net charge-offs - FDIC acquired
Allowance for loan losses
Nonperforming assets to loans, ORE and foreclosed assets
Accruing loans 90 days past due to loans
Nonperforming assets + accruing loans 90 days past due to loans, ORE and foreclosed assets
Net charge-offs - non-FDIC acquired to average loans
Allowance for loan losses to period-end loans
Allowance for loan losses to nonperforming loans + accruing loans 90 days past due
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Supplemental Asset Quality Information
Nonaccrual loans (c)
ORE and foreclosed assets (d)
Accruing loans 90 days past due
Nonaccrual loans
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
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Period-End Balance Sheet
Total loans, net of unearned income (a)
Securities
Short-term investments
Earning assets
Noninterest-bearing deposits
Interest-bearing public funds deposits
Total liabilities & stockholders’ equity
Average Balance Sheet
Securities (b)
Goodwill and other intangible assets
Interest-bearing public fund deposits
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LIQUIDITY
Liquidity management is focused on ensuring that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the 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, as well as maturities and repayments of investment securities. 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. Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window. Management has established a 15% minimum target for the ratio of free securities to total securities although management will allow the ratio to be less than 15% on a temporary basis if it believes there are sufficient securities available to meet the Company’s projected funding needs. As shown in the table below, our ratio of free securities to total securities was 27.37% at June 30, 2015, compared to 27.06% at March 31, 2015 and 20.00% at June 30, 2014. The increase compared to year-end was due in part to the reduction in securities required to collateralize public funds deposits as discussed below in the section on “Deposits.”
Liquidity Metrics
Free securities / total securities
Core deposits / total deposits
Wholesale funds / core deposits
Quarter-to-date average loans /quarter-to-date average deposits
The liability portion of the balance sheet provides liquidity mainly through the Company’s ability to use cash sourced from various customers’ interest-bearing and noninterest-bearing deposit and sweep accounts. Core deposits consist of total deposits less certificates of deposits (“CDs”) of $250,000 or more, brokered CDs, and balances in sweep time deposit products used by commercial customers. The ratio of core deposits to total deposits was a healthy 93.56% at June 30, 2015, up 48 bps from March 31, 2015 and down 80 bps from June 30, 2014. Brokered CDs totaled $217 million as of June 30, 2015, as $45 million of brokered CDs outstanding at March 31, 2015 matured during the second quarter. There were no brokered CDs outstanding at December 31, 2014 or June 30, 2014. The Company will occasionally use brokered deposits as a funding source, subject to very strict parameters regarding the maturity and interest rate.
Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, our short-term borrowing capacity includes an approved line of credit with the FHLB of $3.4 billion and borrowing capacity at the Federal Reserve’s discount window of $1.8 billion at June 30, 2015. Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 9.80% of core deposits at June 30, 2015, compared to 8.10% at March 31, 2015 and 10.00% at June 30, 2014. The increase from March 31, 2015 reflects the greater utilization of the FHLB line as a source for funding loans and investment securities. At June 30, 2015, the Company had borrowings from the FHLB totaling $600 million compared to $200 million at March 31, 2015, and $415 million a year earlier. No amounts had been borrowed at the Federal Reserve’s discount window in any period. See the discussion on “Deposits” for more information.
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Another key measure the Company uses to monitor its liquidity position is the loan to deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding). The loan to deposit ratio measures the amount of funds the Company lends out for each dollar of deposits on hand. The Company’s loan to deposit ratio for the second quarter of 2015 was 83.85%, a slight decrease from both for the first quarter of 2015, and the second quarter of 2014. The Company has established an internal loan to deposit ratio target of 85.00%.
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 six months ended June 30, 2015 and 2014.
Dividends received from the Bank have been the primary source of funds available to the Company for the payment of dividends to our stockholders, stock buybacks, and for servicing debt issued by the parent 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. The Company maintains cash and other liquid assets at the parent company to provide liquidity sufficient to fund six quarters of anticipated common stockholder dividends.
CAPITAL RESOURCES
Stockholders’ equity totaled $2.4 billion at June 30, 2015, up $4.9 million from March 31, 2015. The tangible common equity ratio decreased to 8.12% at June 30, 2015 from 8.40% at March 31, 2015. This decline mainly reflects $814 million in asset growth.
The Board of Directors authorized a common stock buyback program in July 2014 for up to 5%, or approximately 4.1 million shares, of the Company’s common stock issued and outstanding. Under the program, the shares could be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission. During the first quarter of 2015, the Company completed this buyback authorization by repurchasing 2,563,607 shares of its common stock at an average price of $29.36 per share. The Company repurchased a total of 4,093,149 shares at an average price of $30.02 per share.
On March 9, 2015, the Company issued $150 million aggregate principal amount of subordinated debt at an annual interest rate of 5.95% maturing on June 15, 2045. Subject to prior approval by the Federal Reserve, the Company may redeem the notes in whole or in part on any interest payment date on or after June 15, 2020. The debt qualifies as Tier 2 Capital under regulatory guidelines. A portion of the proceeds from the subordinated debt issuance was used to repurchase the Company’s common stock as noted above with the remainder available for general corporate purposes.
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 final rule became effective January 1, 2015 with transition periods for certain changes. The 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. Under the final rule, the primary quantitative measures that regulators use to gauge capital adequacy are the ratios of Total, Tier 1 and Common Equity 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, 6.0% Tier 1 capital and 4.5% Common Equity Tier 1 capital. Additionally the final rule establishes a new conservation buffer of 2.5% of risk-weighted assets when fully phased in on January 1, 2019.
At June 30, 2015, 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 and both currently exceed all capital requirements of the new rule, including the fully phased-in conservation buffer.
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The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods.
Total capital (to risk weighted assets)
Whitney Bank
Tier 1 common equity capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Tier 1 leverage capital
Regulatory definitions:
BALANCE SHEET ANALYSIS
Investment in securities totaled $4.4 billion at June 30, 2015, up $338 million from March 31, 2015 and $768 million from June 30, 2014. The quarterly increase in securities was funded by a similar increase in short-term borrowings. During the second quarter, the Company purchased approximately $500 million of mortgage-backed securities at an average yield of 2.13%. At June 30, 2015, securities available for sale totaled $2.2 billion and securities held to maturity totaled $2.3 billion.
The 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. The Company invests only in high quality securities of investment grade quality with a targeted duration for the overall portfolio of
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between two and five. At June 30, 2015, the average maturity of the portfolio was 4.51 years with an effective duration of 3.96 and a weighted-average yield of 2.22%. The effective duration increases, under management scenarios, to 4.34 with a 100 basis point increase in the yield curve and to 4.44 with a 200 basis point increase. At year-end 2014, the average maturity of the portfolio was 4.38 years with an effective duration of 3.51 and a weighted-average yield of 2.36%. The 14 bps decrease in the weighted average security portfolio yield between December 31, 2014 and June 30, 2015 is primarily the result of replacing the normal monthly repayments of higher yielding securities with new securities at current interest rates.
Total loans at June 30, 2015 were $14.3 billion, up $420 million, or 3%, compared to March 31, 2015, and up $449 million, or 3%, compared to December 31, 2014. Net loan growth during the quarter was well-diversified by geography and loan type. See Note 3 to the consolidated financial statements for the composition of originated, acquired and FDIC acquired loans at June 30, 2015 and December 31, 2014.
The Company’s commercial customer base is diversified over a range of industries, including energy, 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.
At June 30, 2015, loans in the energy segment, which is comprised of credits to both the exploration and production segment and the support services segment, totaled $1.7 billion, or 12% of total loans. The energy portfolio declined approximately $5 million linked-quarter. In light of expected headwinds related to the current energy cycle, no growth or a slight decline is expected for the remainder of 2015. See Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for a further discussion regarding the Company’s energy portfolio.
The Bank lends mainly to middle-market and smaller commercial entities, although it participates in larger shared-credit loan facilities with familiar businesses operating in the Company’s market areas. Shared national credits funded at June 30, 2015 totaled approximately $1.9 billion, up approximately $88 million from March 31, 2015 and $90 million from December 31, 2014. Approximately $1.0 billion of shared national credits were with energy-related customers at June 30, 2015, up $26 million from year-end and $46 million from March 31, 2015.
Commercial non-real estate loans, construction and land development loans, and commercial real estate loans increased $225 million over the first six months of 2015. Commercial real estate loans include loans on both income-producing properties as well as properties used by borrowers in commercial operations.
Residential mortgages were up $42 million during the second quarter and $62 million over the first six months of 2015. Consumer loans increased by $163 million over the first six months of 2015, as a result of a number of initiatives implemented by management during 2014.
Total FDIC acquired loans at June 30, 2015 were down $14 million from March 31, 2015 and down $28 million from December 31, 2014, reflecting normal repayments, charge-offs and foreclosures.
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Allowance for Loan Losses and Asset Quality
The Company’s total allowance for loan losses was $131.1 million at June 30, 2015, compared to $128.4 million at March 31, 2015. The allowance maintained on the non-FDIC acquired portion of the loan portfolio totaled $107 million, a $6.3 million linked-quarter increase, and the impaired reserve on the FDIC acquired loan portfolio declined $3.6 million linked-quarter.
Pricing pressures on oil continued during the second quarter and led to additional downward pressure on risk ratings. The Company’s balance of criticized commercial loans increased $207 million, or approximately 50%, from March 31, 2015, to $626 million at June 30, 2015. Approximately $187 million, or 90%, of the increase was from energy related credits. Based on those changes, plus updates to the qualitative factors related to energy, the reserve for the energy portfolio increased $10.6 million linked-quarter.
The Company has been lending to the energy sector for over 60 years using disciplined underwriting standards. The majority of the Company’s portfolio consists of long-term relationships with customers that have experienced management in place and that have demonstrated the ability to successfully manage through previous economic downturns. The Company’s reserve based lending practices are generally limited to “proved reserves” and our customers are diversified across a number of basins in the United States and Gulf of Mexico. Borrowing base redeterminations are completed twice a year and all borrowing bases were reviewed in the second quarter of 2015. The Company’s loans to the energy support sector are typically made to customers with low to moderate leverage, strong balance sheets and experienced management.
Management continues to closely monitor the potential impact that the decrease in oil prices over the past twelve months will have on the ability of the Company’s energy loan portfolio customers’ to service their debt. Part of the ongoing monitoring includes a review of customers’ balance sheets, leverage ratios, collateral values and other critical lending metrics. As new information becomes available, the Company could have additional risk rating downgrades. Management believes that if further risk rating downgrades occur, they could lead to additional loan loss provisions and allowance for loan losses. The impact and severity will depend on the overall oil price reduction and the duration of the cycle. See Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for further discussion of the company’s energy portfolio and its potential impact on the allowance for loan losses.
The $3.6 million linked quarter decline in the allowance related to the FDIC acquired loan portfolio is a direct result of a lower level of expected losses in the portfolio.
The ratio of the allowance to period-end loans was 0.91% at June 30, 2015, virtually unchanged from March 31, 2015. The allowance maintained on the originated portion of the loan portfolio totaled $106.8 million, or 0.80% of related loans, at June 30, 2015, compared to $100.5 million, or 0.78%, at March 31, 2015.
During the second quarter of 2015, Hancock recorded a total provision for loan losses of $6.6 million, up $0.4 million from the first quarter of 2015, and slightly down from $6.7 million for June 30, 2014. See the Provision for Loan Losses section above for further discussion of the provision for loan losses.
Net charge-offs for the three months ended June 30, 2015 from the non-FDIC acquired loan portfolio were $1.2 million, or 0.03% of average total loans on an annualized basis, compared to $3.7 million, or 0.11%, for the three-month period ended March 31, 2015.
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The following table sets forth activity in the allowance for loan losses for the periods indicated.
Allowance for loan losses at beginning of period
Loans charged-off:
Non-FDIC acquired loans:
Commercial non real estate
Total non-FDIC acquired charge-offs
Total FDIC acquired charge-offs
Total charge-offs
Recoveries of loans previously charged-off:
Total non-FDIC acquired recoveries
Total FDIC acquired recoveries
Total recoveries
Total net charge-offs
Provision for loan losses before FDIC benefit - FDIC acquired loans
Benefit attributable to FDIC loss share agreement
Provision for loan losses non-FDIC acquired loans
Provision for loan losses, net
(Decrease) Increase in FDIC loss share receivable
Allowance for loan losses at end of period
Ratios:
Gross charge-offs - non-FDIC acquired to average loans
Recoveries - non-FDIC acquired to average loans
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The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and foreclosed and surplus ORE and other foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed.
Loans accounted for on a nonaccrual basis: (a)
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 nonaccrual loans
Restructured loans - still accruing:
Total restructured loans - still accruing
Total nonperforming assets (b)
Loans 90 days past due still accruing
Nonperforming assets to loans plus ORE and foreclosed assets
Allowance for loan losses to nonperforming loans and accruing loans 90 days past due
Loans 90 days past due still accruing to loans
Nonperforming assets totaled $165.0 million at June 30, 2015, up $17.0 million from December 31, 2014. During the first half of 2015, total nonperforming loans increased approximately $38.9 million while ORE and other foreclosed assets decreased approximately $20.9 million. The net increase in nonperforming loans was mainly related to one nondrilling support energy loan which was downgraded during the second quarter of 2015. Nonperforming assets as a percent of total loans, ORE, and other foreclosed assets was 1.15% at June 30, 2015, compared to 1.06% at December 31, 2014.
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Short-Term Investments
Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, increased $83 million from March 31, 2015, but decreased $204 million from December 31, 2014, to a total of $598 million at June 30, 2015. Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. Average short-term investments for the second quarter of 2015 were down $182 million, or 28%, compared to the first quarter of 2015, and $5 million, or 1%, compared to the fourth quarter of 2014.
Total deposits were $17.3 billion at June 30, 2015, up $441 million, or 3%, from March 31, 2015, and $729 million, or 4%, from December 31, 2014. Average deposits for the second quarter of 2015 were $16.9 billion, up $377 million, or 2% from the first quarter of 2015. The deposit growth is due, in part, to a number of strategic initiatives implemented during 2014 that are aimed at growing deposits.
Noninterest-bearing demand deposits were $6.2 billion, virtually flat with the first quarter, and were up $457 million, or 8%, from June 30, 2014. Noninterest-bearing demand deposits comprised 36% of total period-end deposits at June 30, 2015, slightly down from March 31, 2015 and flat with year-end 2014.
Interest-bearing public fund deposits totaled $2.0 billion at June 30, 2015, up $134 million, or 7%, from March 31, 2015, but down $20 million, or 1%, from December 31, 2014.
Time deposits, other than public funds, totaled $2.2 billion at June 30, 2015, down $90 million, or 4%, from March 31, 2015, but up $50 million, or 2%, from December 31, 2014. CDs decreased $40 million, or 2%, from March 31, 2015, and increased $193 million from December 31, 2014. Both variances are due to changes in the balances of brokered CDs. As discussed in the Liquidity section, the Company will occasionally use brokered deposits, subject to strict parameters regarding maturity and rates, as a short-term funding source. Balances in sweep deposit products decreased $50 million, or 13%, from March 31, 2015 and $143 million, or 30%, from December 31, 2014.
Short-Term Borrowings
At June 30, 2015, short-term borrowings totaled $1.1 billion, down $72 million, or 6%, from December 31, 2014. Securities sold under agreements to repurchase decreased $158 million, or 25%, while FHLB borrowings increased $85 million, or 17%. Securities sold under agreements to repurchase are a major source of short-term borrowings that 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.
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 their 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. Under regulatory capital guidelines, the Company must include unfunded commitments meeting certain criteria in its risk-weighted capital calculation.
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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 June 30, 2015 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.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 14 to our Consolidated Financial Statements included elsewhere in this report.
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FORWARD-LOOKING STATEMENTS
This report 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, including the impact of volatile or continuing depressed oil and gas prices on our energy portfolio and associated loan loss reserves and the downstream impact on businesses that support the energy sector, especially in the Gulf Coast region, loan growth expectations, deposit trends, credit quality trends, net interest margin trends, future expense levels, success of revenue-generating initiatives, 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, predict the effects of future plans or strategies, or predict market or economic developments 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.
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. Hancock’s balance sheet is asset sensitive over a 2 year period to rising interest rates under various shock scenarios. 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.
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The table below presents the results of simulations run as of June 30, 2015 for year 1 and year 2, 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 compared to the stable rate environment assumed for the base case.
Change in
interest rate(basis points)
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, 2014 included in our Annual Report on Form 10-K for the year ended December 31, 2014.
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 Officer 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 Officer 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 Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three-month period ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
The Company, including subsidiaries, 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.
There were no changes to the risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition to the risk of vulnerability to certain sectors of the economy related to the real estate portfolio, recent trends in the energy sector point to possible vulnerability.
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.
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No shares of common stock or other equity securities were repurchased during the period of this report. In March 2015, the Company completed the stock repurchase program approved by the Company’s board of directors on July 16, 2014 which authorized the repurchase of up to 5%, or approximately 4.1 million shares, of its outstanding common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ John M. Hairston
/s/ Michael M. Achary
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ExhibitNumber