UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2014
OR
For the transition period from to
Commission File Number 0-13089
HANCOCK HOLDING COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
(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. 81,568,836 common shares were outstanding as of November 1, 2014.
Hancock Holding Company
Index
ITEM 1. Financial Statements
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
ITEM 4. Controls and Procedures
ITEM 1. Legal Proceedings
ITEM1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Default on Senior Securities
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
ITEM 6. Exhibits
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 $1,640,299 and $1,408,780)
Securities held to maturity (fair value of $2,253,219 and $2,576,584)
Loans held for sale
Loans
Less: allowance for loan losses
Loans, net
Property and equipment, net of accumulated depreciation of $187,692 and $172,798
Prepaid expenses
Other real estate, net
Accrued interest receivable
Goodwill
Other intangible assets, net
Life insurance contracts
FDIC loss share receivable
Deferred tax asset, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand
Interest-bearing transaction, savings, money market and time
Total deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 81,566,640 and 82,237,162 shares outstanding
Capital surplus
Retained earnings
Accumulated other comprehensive (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
1
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Interest income:
Loans, including fees
Securities-taxable
Securities-tax exempt
Federal funds sold and other short term investments
Total interest income
Interest expense:
Deposits
Long-term debt and other interest expense
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Trust fees
Bank card and ATM fees
Investment and annuity fees
Secondary mortgage market operations
Insurance commissions and fees
Amortization of FDIC loss share receivable
Other income
Total noninterest income
Noninterest expense:
Compensation expense
Employee benefits
Personnel expense
Net occupancy expense
Equipment expense
Data processing expense
Professional services expense
Amortization of intangibles
Telecommunications and postage
Deposit insurance and regulatory fees
Other real estate expense, net
Other expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
Dividends paid per share
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
See notes to unaudited consolidated financial statements.
2
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income:
Net change in unrealized (losses) gains
Reclassification adjustment for net (gains) losses realized and included in earnings
Amortization of unrealized net gain (loss) on securities transferred to held to maturity
Other comprehensive (expense) income, before income taxes
Income tax (benefit) expense
Other comprehensive (loss) income net of income taxes
Comprehensive income
3
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share and per share data)
Balance, January 1, 2013
Other comprehensive income
Cash dividends declared ($0.72 per common share)
Common stock activity, long-term incentive plan
Purchase of common stock
Balance, September 30, 2013
Balance, January 1, 2014
Balance, September 30, 2014
4
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
(Gain) loss on other real estate owned
Deferred tax expense
Increase in cash surrender value of life insurance contracts
Gain on disposal of other assets
Write-downs on closed branch transfers to other real estate owned
Net decrease in loans originated for sale
Net amortization of securities premium/discount
Amortization of intangible assets
Amortization of FDIC indemnification asset
Stock-based compensation expense
(Decrease ) increase in interest payable and other liabilities
Net payments (to) from FDIC
Decrease (increase) in FDIC loss share receivable
Decrease in other assets
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of securities held to maturity
Purchases of securities held to maturity
Net (increase) decrease in interest-bearing bank deposits
Net increase in federal funds sold and short-term investments
Net increase in loans
Purchase of life insurance contracts
Purchases of property and equipment
Proceeds from sales of property and equipment
Proceeds from sales of other real estate
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
Net increase in short-term borrowings
Repayments of long-term debt
Issuance of long-term debt
Dividends paid
Repurchase of common stock
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
NET DECREASE IN CASH AND DUE FROM BANKS
CASH AND DUE FROM BANKS, BEGINNING
CASH AND DUE FROM BANKS, ENDING
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans
Transfers from available for sale securities to held to maturity securities
5
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the accounts of Hancock Holding Company and all other entities in which it has a controlling interest (the “Company”). The financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. Some financial information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations, or cash flows for any other interim or annual period.
Use of Estimates
The accounting principles the Company follows and the methods for applying these principles conform with U.S. GAAP and with those generally practiced within the banking industry. These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Critical Accounting Policies and Estimates
Income Taxes
Income taxes are accounted for using the asset and liability method. Current tax liabilities or assets are recognized for the estimated income taxes payable or refundable on tax returns to be filed with respect to the current year. Deferred tax assets and liabilities are based on temporary differences between the financial statement carrying amounts and the tax bases of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. Valuation allowances are established against deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the assets will not be realized. The benefit of a position taken or expected to be taken in a tax return is recognized when it is more likely than not that the position will be sustained on its technical merits.
The Company invests in projects that yield 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. Returns on these investments are generated through the receipt of federal and state tax credits. The tax credits are recorded as a reduction to the income tax provision in the year that they are earned. Tax credits from QZAB and QSCB bonds are generally earned over the life of the bonds in lieu of interest income. Credits on Federal NMTC investments are earned over the seven-year compliance period beginning with the year of investment. Credits on State NMTC investments are generally earned over a three- to five- year period depending upon the specific state program. Tax Credits for Low-Income Housing investments are earned over a ten-year period beginning with the year in which rental activity begins. These tax credits, if not used in the tax return for the year when the credits are first available for use, can be carried forward for 20 years. For those investments where the return of the principal is not expected, the equity investment is amortized over the life of the tax compliance period as a component of noninterest expense.
6
1. Basis of Presentation (continued)
Reportable Segment Disclosures
Accounting standards require that information be reported about a company’s operating segments using a “management approach.” Reportable segments are identified in these standards as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. On March 31, 2014, the Company combined its two state bank charters into one charter. Due to the charter change and consistent with its stated strategy that is focused on providing a consistent package of community banking products and services across all markets, the Company has identified its overall banking operations as its only reportable segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented.
There were no other 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, 2013.
2. Securities
The amortized cost and fair value of securities classified as available for sale and held to maturity follow (in thousands):
Securities Available for Sale
US Treasury and government agency securities
Municipal obligations
Mortgage-backed securities
CMOs
Corporate debt securities
Equity securities
Securities Held to Maturity
7
2. Securities (continued)
The following table presents the amortized cost and fair value of debt securities at September 30, 2014 by contractual maturity (in thousands). Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and CMOs.
Debt Securities Available for Sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total available for sale debt securities
Debt Securities Held to Maturity
Total held to maturity securities
The Company held no securities classified as trading at September 30, 2014 or December 31, 2013.
The details for securities classified as available for sale with unrealized losses for the periods indicated follow (in thousands):
September 30, 2014
8
December 31, 2013
The details for securities classified as held to maturity with unrealized losses for the periods indicated follow (in thousands):
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 $3.0 billion at September 30, 2014 and $3.1 billion at December 31, 2013 were pledged as collateral primarily to secure public deposits or securities sold under agreements to repurchase.
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3. Loans and Allowance for Loan Losses
Loans, net of unearned income, consisted of the following:
Originated loans:
Commercial non-real estate
Construction and land development
Commercial real estate
Residential mortgages
Consumer
Total originated loans
Acquired loans:
Total acquired loans
Covered loans:
Total covered loans
Total loans:
Total loans
11
3. Loans and Allowance for Loan Losses (continued)
The following briefly describes the distinction between originated, acquired and covered loans and certain significant accounting policies relevant to each category.
Originated loans
Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income, including deferred loan fees, are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recognized as 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 reduce principal, and interest income is recognized only for payments received after contractual principal has been satisfied. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future payment performance is reasonably assured.
Acquired loans
Acquired loans are those purchased in the Whitney Holding Corporation acquisition on June 4, 2011. These loans were recorded at their estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing (“acquired-performing”) and those with evidence of credit deterioration (“acquired-impaired”), based on such factors as past due status, nonaccrual status and credit risk ratings (rated substandard or worse). The acquired loans were further segregated into loan pools designed to facilitate the development of expected cash flows to be used in estimating their fair value.
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 appropriate. Aggregate cash flows, both principal and interest, expected to be generated by each loan pool were estimated based on key assumptions covering such factors as prepayments, default rates, and severity of loss given a default. These assumptions were developed using both Whitney Holding Corporation’s historical experience and the portfolio characteristics at acquisition as well as available market research.
The difference at the acquisition date between the fair value and the contractual amounts due of an acquired-performing loan pool (the “fair value discount”) is accreted into income over the estimated life of the pool. Acquired-performing loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
Acquired-impaired loans were segregated into pools by identifying loans with common credit risk profiles based primarily on characteristics such as loan type and market area in which originated. Loan types included most of the major types used for the acquired-performing portfolio. The acquired-impaired loans that had been originated in Louisiana and Texas were further disaggregated from loans originated in Mississippi, Alabama and Florida, in recognition of the differences in general economic conditions affecting borrowers in these market areas. The fair value estimate for each pool of acquired performing and acquired-impaired loans was based on the estimate of expected cash flows from the pool discounted at prevailing market rates.
12
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 estimated remaining life of the loan pool. Each pool of acquired-impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Acquired-impaired loans in pools with an accretable yield and expected cash flows that are reasonably estimable are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting. Management recasts the estimate of cash flows expected to be collected on each acquired-impaired loan pool at each reporting date. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. Acquired-impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings even if they would otherwise qualify for such treatment.
Covered loans and the related loss share receivable
The loans purchased in the 2009 acquisition of Peoples First Community Bank (Peoples First) are covered by two loss share agreements between the FDIC and the Company which afford the Company significant loss protection. These covered loans are accounted for as acquired-impaired loans as described above in the section on acquired loans. The Company treated all loans for the Peoples First acquisition as acquired-impaired loans 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 if the loans are 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 at each reporting period and updated prospectively as loss estimates related to covered loan pools change. Increases in expected reimbursements under the loss sharing agreements will lead to an increase in the loss share receivable. A decrease in expected reimbursements is reflected first as a reversal of any previously recorded increase in the loss share receivable on the covered loan pool with the remainder reflected as a reduction in the loss share receivable’s accretion rate. Increases and decreases in the loss share receivable related to changes in loss estimates result in reductions in or additions to the provision for loan losses, which serves to offset the impact on the provision from impairments or impairment reversals recognized on the underlying covered loan pool. The excess (or shortfall) of expected claims as compared to the carrying value of the loss share receivable is accreted (amortized) into noninterest income over the shorter of the remaining life of the covered loan pool or the life of the loss share agreement. The impact on operations of a reduction in the loss share receivable’s accretion rate is associated with an increase in the accretable yield on the underlying loan pool. The indemnification asset is reduced as cash is received from the FDIC related to losses incurred on covered assets.
13
The following schedule shows activity in the loss share receivable for the nine months ended September 30, 2014 and 2013 (in thousands):
Balance, January 1
Amortization
Charge-offs, write-downs and other losses (recoveries)
External expenses qualifying under loss share agreement
Changes due to changes in cash flow projections
Settlement of disallowed loss claims
Net payments to (from) FDIC
Ending balance
The loss share agreements contain specific terms and conditions regarding the management of the covered assets that the Company must follow in order to receive reimbursement for losses from the FDIC. During the second quarter of 2014, the Company reached a settlement agreement to reimburse the FDIC $10.3 million for certain claims previously received under the agreements. The disagreement arose from a targeted review of the Company’s compliance with the terms of the agreements and related to the matter in which certain assets were administered and losses were calculated. The FDIC had suspended processing the Company’s claims as of September 2013 pending settlement of these issues and outstanding claims. During the third quarter, the settlement was paid and the FDIC began payment of claims. The total due from the FDIC for the period December 2013 through August 2014 is $21.1 million.
14
The following schedule shows activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 and 2013 as well as the corresponding recorded investment in loans at the end of each period.
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Net provision for loan losses
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans:
Amounts related to acquired-impaired loans
Acquired-impaired loans
15
Covered loans
Decrease in FDIC loss share receivable
16
17
Increase (Decrease) in FDIC loss share receivable
18
The following tables show the composition of nonaccrual loans by portfolio segment and class. Acquired-impaired and certain covered loans are considered to be performing due to the application of the accretion method and are excluded from the table. Covered loans accounted for using the cost recovery method do not have an accretable yield and are included below as nonaccrual loans. Acquired-performing loans that have subsequently been placed on nonaccrual status are also included below.
Nonaccrual Loans
The estimated amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual in the nine months ended September 30, 2014 was approximately $1 million. Interest actually received and recorded as income on nonaccrual loans during the nine months ended September 30, 2014 was approximately $1 million.
Nonaccrual loans include loans modified in troubled debt restructurings (TDRs) of $10 million. Total TDRs were $18 million as of September 30, 2014 and $25 million at December 31, 2013. Modified acquired-impaired loans are not removed from their accounting pool and accounted for as TDRs, even if those loans would otherwise be deemed TDRs.
19
The tables below detail TDRs that were modified during the nine months ended September 30, 2014 and September 30, 2013 by portfolio segment and TDRs that subsequently defaulted within twelve months of modification (dollar amounts in thousands). All TDRs are rated substandard and individually evaluated for impairment.
Troubled Debt Restructurings:
20
Troubled Debt Restructurings That Subsequently Defaulted:
21
Those loans that are determined to be impaired and have balances of $1 million or more are individually evaluated for impairment. The tables below present loans that are individually evaluated for impairment disaggregated by class at September 30, 2014 and December 31, 2013:
With no related allowance recorded:
With an allowance recorded:
Total:
22
23
24
25
Covered loans and acquired-impaired loans with an accretable yield are considered to be current in the following delinquency table. Certain covered loans accounted for using the cost recovery method are disclosed according to their contractual payment status below. The following tables present the age analysis of past due loans at September 30, 2014 and December 31, 2013:
Total
26
27
The following tables present the credit quality indicators of the Company’s various classes of loans at September 30, 2014 and December 31, 2013.
Commercial Non-Real Estate Credit Exposure
Credit Risk Profile Based on Payment Activity
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Loss
Construction Credit Exposure
Commercial Real Estate Credit Exposure
Credit Risk Profile by Internally Assigned Grade
28
Residential Mortgage Credit Exposure
Performing
Nonperforming
Consumer Credit Exposure
Loan review uses a risk-focused continuous monitoring program that provides for an independent, objective and timely review of credit risk within the company’s loan portfolio. 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 nine months ended September 30, 2014 and the year ended December 31, 2013:
Balance at beginning of period
Additions
Payments received, net
Accretion
Increase (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
4. Fair Value
The Financial Accounting Standards Board (FASB) defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB’s guidance also established a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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4. Fair Value (continued)
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present for each of the fair value hierarchy levels the Company’s assets and liabilities that are measured at fair value (in thousands) on a recurring basis in the consolidated balance sheets.
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities
Collateralized mortgage obligations
Total available for sale securities
Derivative assets (1)
Total recurring fair value measurements - assets
Liabilities
Derivative liabilities (1)
Total recurring fair value measurements - liabilities
31
Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and certain other debt and equity securities. Level 2 classified securities include residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data. The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five. Company policies limit investments to securities having a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency. There were no transfers between valuation hierarchy levels during the periods shown.
The fair value of derivative financial instruments, which are predominantly customer interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, LIBOR swap curves and Overnight Index swap rate curves, observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value the derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations in their entirety in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments, including those subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.
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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.
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 following tables present the Company’s financial assets that are measured at fair value (in thousands) 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.
33
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 – Residential mortgage loans originated for sale are classified as loans held for sale and carried at the lower of cost or market. These loans are generally sold within 90 days. For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.
Accrued Interest Receivable and Accrued Interest Payable – For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.
Deposits - The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities Sold under Agreements to Repurchase, Federal Funds Purchased, and FHLB Borrowings - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
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.
34
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 September 30, 2014 and December 31, 2013 (in thousands):
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold
Available for sale securities
Held to maturity securities
Derivative financial instruments
Financial liabilities:
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
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5. Derivatives
Risk Management Objective of Using Derivatives
The Bank has entered into interest rate derivative agreements as a service to certain qualifying customers. The Bank manages a matched book with respect to these customer derivatives in order to minimize the net risk exposure resulting from such agreements. The 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. The Bank also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.
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5. Derivatives (continued)
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional amounts and fair values (in thousands) of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2014 and December 31, 2013.
Derivatives not designated as hedging instruments:
Interest rate swaps (2)
Risk participation agreements
Forward commitments to sell residential mortgage loans
Interest rate-lock commitments on residential mortgage loans
Foreign exchange forward contracts
Derivatives Not Designated as Hedges
Customer interest rate derivatives
The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. The Bank simultaneously enters into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions. Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as part of other income.
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The Bank enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on its normal credit review process.
Mortgage banking derivatives
The Bank also enters into certain derivative agreements as part of its mortgage banking activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis.
Customer foreign exchange forward contract derivatives
The Bank enters into foreign exchange forward derivative agreements, primarily forward currency contracts, with commercial banking customers to facilitate its risk management strategies. The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions. Because the foreign exchange forward contract derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as part of other income.
Effect of Derivative Instruments on the Income Statement
The effect of the Company’s derivative financial instruments on the income statement was immaterial for the three-month and nine-month periods ended September 30, 2014 and 2013.
Credit risk-related Contingent Features
Certain of the Bank’s derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as the downgrade of the Bank’s credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of 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 September 30, 2014, the aggregate fair value of derivative instruments with credit risk-related contingent features that were in a net liability position was $6 million, for which the Bank had posted collateral of $17 million.
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Offsetting Assets and Liabilities
Offsetting information in regards to derivative assets and liabilities subject to master netting agreements at September 30, 2014 and December 31, 2013 is presented in the following tables (in thousands):
Description
As of September 30, 2014
Derivative Assets
Derivative Liabilities
As of December 31, 2013
6. Stockholders’ Equity
Stock Repurchase Program
On July 16, 2014, the Company’s board of directors approved a stock repurchase plan that authorizes the repurchase of up to 5%, or approximately 4 million shares, of its currently outstanding common stock. The approved plan allows 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 in one or more transactions, from time to time until December 31, 2015. Under this plan, we have repurchased 305,263 shares of our common stock at an average price of $32.65 per share.
The Company’s board of directors approved a stock repurchase program on April 30, 2013 that authorized the repurchase of up to 5% of the Company’s outstanding common stock. On May 8, 2013 Hancock entered into an accelerated share repurchase (ASR) transaction with Morgan Stanley & Co. LLC (Morgan Stanley). In the ASR transaction, the Company paid $115 million to Morgan Stanley and received from them approximately 3 million shares of Hancock common stock, representing approximately 76% of the estimated total number of shares to be repurchased. On May 5, 2014, final settlement of the ASR agreement occurred at which time the Company received approximately 0.6 million shares from Morgan Stanley. The number of shares delivered to the Company in this
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6. Stockholders’ Equity (continued)
ASR transaction was based generally on the volume-weighted average price per share of the Hancock common stock during the term of the ASR agreement less a specified discount and on the amount paid at inception to Morgan Stanley, subject to certain adjustments in accordance with the terms of the ASR agreement. The ASR transaction was treated as two separate transactions: (i) the acquisition of treasury shares on the dates the shares were received; and (ii) a forward contract indexed to the Company’s common stock that was classified as equity. The 2013 program was superseded by the 2014 program.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) is reported as a component of stockholders’ equity. AOCI can include, among other items, unrealized holding gains and losses on securities available for sale (AFS), gains and losses associated with pension or other post retirement benefits that are not recognized immediately as a component of net periodic benefit cost, and gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges. 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 (in thousands).
Other comprehensive income before income taxes:
Net change in unrealized (loss) gain
Transfer of net unrealized gain from AFS to HTM, net of cumulative tax effect
Reclassification of net losses realized and included in earnings
Amortization of unrealized net gain on securities transferred to HTM
Net change in unrealized gain
Income tax expense
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The following table shows the line item affected by amounts reclassified from accumulated other comprehensive income:
(in thousands)
Amortization/accretion of unrealized net gain/(loss) on securities transferred to HTM
Tax effect
Net of tax
Amortization of defined benefit pension and post-retirement items
Gains and losses on cash flow hedges
Total reclassifications, net of tax
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7. Earnings Per Share
Hancock calculates earnings per share using the two-class method. The two-class method allocates net income to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings. Participating securities consist of unvested stock-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents.
A summary of the information used in the computation of earnings per common share follows (in thousands, except per share amounts):
Numerator:
Net income to common shareholders
Net income allocated to participating securities - basic and diluted
Net income allocated to common shareholders - basic and diluted
Denominator:
Weighted average common shares - basic
Dilutive potential common shares
Weighted average common shares - diluted
Earnings per common share:
Basic
Diluted
Potential common shares consist of employee and director stock options. These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share. Weighted average anti-dilutive potential common shares totaled 569,404 and 639,486 respectively for the three and nine months ended September 30, 2014 and 721,863 and 1,076,894, respectively, for the three and nine months ended September 30, 2013.
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8. Share-Based Payment Arrangements
Hancock maintains incentive compensation plans that provide for awards of share-based compensation to employees and directors. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in Note 13 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
A summary of option activity for the nine months ended September 30, 2014 is presented below:
Options
Outstanding at January 1, 2014
Exercised
Cancelled/Forfeited
Expired
Outstanding at September 30, 2014
Exercisable at September 30, 2014
The total intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was $0.2 million and $0.1 million, respectively.
A summary of the status of the Company’s nonvested restricted and performance shares as of September 30, 2014 and changes during the nine months ended September 30, 2014, is presented below. These restricted and performance shares are subject to service requirements.
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at September 30, 2014
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8. Share-Based Payment Arrangements (continued)
As of September 30, 2014, there were $31.7 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 3.1 years. The total fair value of shares which vested during the nine months ended September 30, 2014 and 2013 was $10 million and $1 million, respectively.
During the nine months ended September 30, 2014, the Company granted 69,857 performance shares with a grant date fair value of $38.14 per share to key members of executive and senior management. The number of 2014 performance shares that ultimately vest at the end of the three-year required service period, 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 will be recognized on a straight-line basis over the service period.
9. Retirement Plans
The Company has a qualified defined benefit pension plan covering all eligible employees. Eligibility is based on minimum age- and service-related requirements as well as job classification. Accrued benefits under a nonqualified plan covering certain legacy Whitney employees were frozen as of December 31, 2012 and no future benefits will be accrued under this plan.
The Company also sponsors defined benefit postretirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits. Benefits under the Hancock plan are not available to employees hired on or after January 1, 2000. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007.
The following table shows the components of net periodic benefits cost included in expense for the plans for the periods indicated (in thousands).
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost
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9. Retirement Plans (continued)
Based on currently available information, Hancock does not anticipate making a contribution to the pension plan during 2014.
The Company also provides a defined contribution retirement benefit plan (401(k) plan). Under the plan, the Company matches 100% of the first 1% of compensation saved by a participant, and 50% of the next 5% of compensation saved.
10. Other Noninterest Income
Components of other noninterest income are as follows:
Income from bank owned life insurance
Credit related fees
Income from derivatives
Net (loss) gain on sale of assets
Safety deposit box income
Other miscellaneous
Total other noninterest income
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11. Other Noninterest Expense
Components of other noninterest expense are as follows:
Advertising
Ad valorem and franchise taxes
Printing and supplies
Insurance expense
Travel expense
Entertainment and contributions
Tax credit investment amortization
Total other noninterest expense
Other miscellaneous expense for the nine months ended September 30, 2014 as shown in the table above includes nonoperating items totaling $1.1 million in the third quarter of 2014, $7.3 million in the second quarter of 2014 and $12.6 million in the third quarter of 2013. These items are further discussed below:
FDIC Settlement
During the second quarter of 2014, the Company recorded a $10.3 million expense for the settlement of an assessment by the FDIC related to its targeted review of certain previously paid loss claim reimbursement amounts. The assessment demanded repayment of these amounts due to the FDIC’s disagreement with the manner in which certain assets were administered and losses were calculated. During the third quarter, the settlement was paid and the FDIC began payment of claims.
Sale of Insurance Business
In April 2014, the Company sold its property and casualty and group benefits insurance intermediary business. The lines of business being divested represent approximately half of the Company’s 2013 insurance commissions and fees. A gain of $9.4 million was recorded on the sale based on a $15.5 million sales price less the related tangible and intangible assets.
Branch Closures
During the second and third quarters of 2014, the Company recorded $3.5 million and $1.1 million, respectively, in write-downs related to the 2014 closure of 15 branch locations in Mississippi, Florida and Louisiana as part of its ongoing branch rationalization process. Of the $3.5 million, $2.9 million is included in other miscellaneous expense.
Reverse Repurchase Obligations Early Termination Fee
During the second quarter of 2014, the Company recorded $3.5 million in fees related to the early termination of reverse repurchase obligations.
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12. New Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) that requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other 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 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 adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
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 periods beginning after December 15, 2016. 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 April 2014, the FASB issued a new standard changing the threshold for reporting discontinued operations and adding new disclosures for disposals. The new guidance defines a discontinued operation as a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” New disclosure and presentation requirements apply to discontinued operations and to disposals of individually significant components that do not qualify as discontinued operations. The guidance applies prospectively to new disposals of components and new classifications as held for sale beginning in 2015 for most entities, with early adoption allowed. The Company early adopted this pronouncement in the second quarter of 2014. The adoption of this guidance did not 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 adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Recent Economic and Industry Developments
October reports from the Federal Reserve point to continued improvement of economic activity throughout most of Hancock’s market area. Activity among energy-related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas market areas remained strong, although some concern was expressed that the strength of the dollar has made U.S. exports more expensive internationally. The travel and tourism industry, which is important within several of the Company’s market areas, saw an increase in activity with many local hotels and resorts reporting high occupancy levels. Companies reported several tourism-related capital projects in progress that are anticipated to encourage travel to the areas in which we operate. Retailers are showing improved sales over prior-year levels, and the outlook for the remainder of the year is positive. Auto sales were especially strong, although an increase in interest rates could drastically change the landscape of that industry. Reports on manufacturing activity were generally positive, with purchasing managers expecting higher production over the next three to six months.
The real estate markets for residential properties were mixed. Some of Hancock’s market areas reported growth in activity, while others were slightly down to flat. Inventory levels remained flat or declined year-over-year. The demand for apartments increased, keeping occupancy rates at high levels. Although the outlook for home sales has weakened since the last quarter, this was generally attributed to seasonality and the future outlook remains positive. New home sales and construction activity are ahead of prior-year levels and expected to steadily improve.
The commercial real estate market continues to improve, with growing demand for office and industrial space in certain market areas and continued high occupancy for apartments throughout the region. Commercial construction activity has increased in these sectors. Continued improvement is expected in the commercial real estate market.
The recovery of the overall U.S. economy continues. However, the rate of growth is not consistent across all regions, leading to slow and erratic overall improvement. National unemployment rates continue to decrease, but are still well above full employment levels and labor force participation rates remain near historic lows. Competition among financial services firms remains intense for high quality customers, continuing to exert downward pressure on loan pricing.
The Federal Reserve has responded to the slow and tenuous recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate and low inflation rate. In addition, in July, the Federal Reserve began gradually curtailing the expansion of their portfolio of Treasuries and mortgage bonds. On October 29, 2014, the Federal Reserve announced the conclusion of its bond-buying initiative. The Federal Reserve anticipates that it likely will be appropriate to maintain the current federal funds rate for a considerable time after the asset purchase program ends, especially if inflation continues to run below the long-term goal.
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Highlights of Third Quarter 2014 Financial Results
Net income in the third quarter of 2014 was $46.6 million, or $0.56 per diluted common share, compared to $40.0 million, or $0.48, in the second quarter of 2014. Net income was $33.2 million, or $0.40 per diluted common share, in the third quarter of 2013. Net income for the third quarter of 2014 reflects the impact of certain nonoperating items totaling $3.9 million. The second quarter of 2014 and third quarter of 2013 included nonoperating items of $12.1 million and $20.9 million, respectively. Net income for the nine months ended September 30, 2014 was $135.6 million, or $1.62 per diluted common share, compared to $128.6 million, or $1.51 per diluted common share, for the nine months ended September 30, 2013.
Operating income for the third quarter of 2014 was $49.1 million or $0.59 per diluted common share, compared to $49.6 million, or $0.59 in the second quarter of 2014. Operating income was $46.8 million, or $0.56, in the third quarter of 2013. For the nine months ended September 30, 2014, operating income was $147.8 million, an increase of $5.6 million, or 4% from the same period of 2013. We define operating income as net income excluding tax-effected securities transactions gains or losses and nonoperating expense items. Management believes that operating income provides a useful measure of financial performance that helps investors compare the Company’s fundamental operations over time. A reconciliation of net income to operating income is included in the later section on “Selected Financial Data.”
Highlights of the Company’s third quarter of 2014 results:
RESULTS OF OPERATIONS
Net Interest Income
Net interest income taxable equivalent (te) for the third quarter of 2014 was $166.2 million, down $1.1 million from the second quarter of 2014 due to the $5.2 million decline in purchase accounting accretion. Excluding this impact, net interest income increased $4.1 million. The positive impact from a $533 million increase in average earning assets, a better earning asset mix and one more day of interest accruals was partially offset by declining loan and investment securities yields. The increase in average earning assets was primarily due to a $421.2 million, or 3%, growth in loans. 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 third quarter of 2014 was down $7.9 million, or 5%, compared to the third quarter of 2013, primarily due to a $14.1 million reduction in total purchase accounting accretion. A $1.3 billion increase in average loans and a more favorable earning asset mix offset an 18 bps decrease in the loan yield, excluding the net impact of purchase accounting adjustments.
The net interest margin was 3.81% for the third quarter of 2014, down 18 bps from the second quarter of 2014, and down 42 bps from the third quarter of 2013. The current quarter’s core margin of 3.32% (reported net interest income (te) excluding purchase accounting accretion, annualized, as a percent of average earning assets) compressed 3 bps compared to the second quarter of 2014 and 5 bps compared to the third quarter of 2013. The continued decline in the core loan yield (reported interest income (te) on loans, excluding purchase accounting accretion, annualized, as a percent of average total loans) was partially offset by the favorable impact of net loan growth.
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The overall reported yield on earning assets was 4.02% in the third quarter of 2014, a decrease of 19 bps from the second quarter of 2014 and 45 bps from the third quarter of 2013. The reported loan portfolio yield of 4.63% for the current quarter was down 23 bps from the second quarter of 2014 and 78 bps from the third quarter of 2013. The core loan yield of 3.94% in the current quarter was down 3 bps from the second quarter of 2014 and 18 bps from a year earlier.
The overall cost of funding earning assets was 0.21% in the third quarter of 2014, down 1 bp from the second quarter of 2014. The linked quarter decrease in the cost of funds was mainly attributable to the June 2014 early redemption 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 and offset a 2 bps increase in the overall rate paid on interest-bearing deposits. This increase reflects the initiatives implemented during the second quarter of 2014 to increase deposits in an effort to support the funding for loan growth.
The overall cost of funding earning assets decreased 3 bps from the third quarter of 2013. The mix of funding sources improved in the third quarter of 2014 compared to the third quarter of 2013. Interest-free sources, including noninterest-bearing demand deposits, funded 35.5% of earning assets in the current period, up from 34.0% a year ago.
Net interest income (te) for the first nine months of 2014 totaled $501.9 million, a $20.8 million, or 4%, decrease from the first nine months of 2013. Excluding a $28.8 million decrease in purchase accounting accretion, net interest income was up approximately $8.0 million for the first nine months of 2014 as compared to the same period of 2013. A $487 million, or 3%, increase in average earning assets, a more favorable earning asset mix, a 25 bp increase in investment yields and a 4 bp decrease in the costs of funds offset a 28 bp decrease in the core loan yield.
The reported net interest margin for the first nine months of 2014 was 3.95% compared to 4.24% in 2013, while the core margin declined to 3.35% in 2014 compared to 3.38% in 2013. Changes in net interest income (te) and the net interest margin between the year-to-date periods reflected for the most part the same factors that affected the quarterly comparisons.
The following tables detail the components of our net interest income and net interest margin.
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(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 margin provide meaningful financial measures to investors of the Company’s performance over time. The following table provides a reconciliation of reported and core net interest income and reported and core net interest margin.
Reconciliation of Reported Net Interest Margin to Core Margin
Net interest income (te) (a)
Purchase accounting accretion
Loan accretion
Whitney premium bond amortization
Whitney and Peoples First CD accretion
Total net purchase accounting accretion
Net interest income (te) - core
Net interest margin - reported
Net purchase accounting accretion (%)
Net interest margin - core
Provision for Loan Losses
During the third quarter of 2014, Hancock recorded a total provision for loan losses of $9.5 million, up $2.8 million from the second quarter of 2014. The provision for noncovered loans was $9.9 million in the third quarter of 2014, compared to $6.8 million in the second quarter of 2014 and $6.5 million in the third quarter of 2013. The provision for the covered portfolio was a small net credit in each of the three-month periods ended September 30, 2014 and June 30, 2014 and $1.0 million expense for the quarter ended September 30, 2013. For the first nine months of 2014, the total provision for loans losses was $24.1 million, down slightly from $25.4 million for the same period in 2013.
The section below 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 covered loans) are described in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Noninterest Income
Noninterest income totaled $57.9 million for the third quarter of 2014, up $1.5 million, or 3%, compared to the second quarter of 2014, but down $5.1 million, or 8% from the third quarter of 2013. Excluding the impact of lost revenue from the sale of certain insurance business lines during the second quarter of 2014 and the impact from the amortization of the FDIC loss share receivable discussed further below, third quarter 2014 noninterest income increased approximately $1.0 million from second quarter 2014, but was down $1.1 million from the third quarter of 2013. Noninterest income totaled $171.0 million for the first nine months of 2014, down $16.1 million, or 9%, from the first nine months of 2013. Excluding the impact of the lost revenues describe above, total noninterest income declined $3.1 million, or 2%.
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The components of noninterest income are presented in the following table for the indicated periods:
(Loss) gain on sale of assets
Service charges on deposits totaled $20.0 million for the third quarter of 2014, up $0.7 million, or 4%, from the second quarter of 2014, but down $0.5 million, or 3%, from the third quarter of 2013. The increase from the second quarter of 2014 to the third quarter of 2014 reflects a $0.4 million increase in service charges from both business and consumer accounts, partially as a result of a number of initiatives implemented during 2014 to enhance growth in deposit balances and fee income.
Trust fees totaled $11.5 million for the quarter ended September 30, 2014. Excluding $0.5 million in seasonal tax preparation fees in the second quarter of 2014, linked-quarter trust fees increased $0.5 million, or 5%, with approximately half of the increase related to an increase in investment management and advisory service revenue. Trust fees increased $2.1 million, or 22%, compared to the third quarter of 2013 with growth in virtually all products and services. Investment management and advisory service revenue accounted for $1.6 million of the increase. For the first nine months of 2014 compared to 2013, trust fees increased $5.3 million, or 19%, with growth in all products and services, but primarily due to a $4.7 million, or 41% increase in investment management and advisory service revenue resulting from growth in the value of assets managed. Managed assets were $6.4 billion as of September 30, 2014, slightly down from $6.6 billion at June 30, 2014, but up 12% from $5.7 billion as of September 30, 2013.
Bank card fees and ATM fees totaled $11.6 million in the third quarter of 2014 virtually unchanged from the second quarter of 2014, but down $0.6 million, or 5%, compared to the third quarter of 2013. Included in bank card and ATM fees are fees from credit card, debit card and ATM transactions, and merchant service fees. For the third quarter of 2014, a $0.4 million, or 12% linked-quarter increase in credit card-related interchange fee income offset a slight decrease in debit card and ATM interchange fees as well as a decrease in 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. The decrease in ATM fee income was due in part to the closing of 16 branches in July 2014 as part of the Company’s branch rationalization program. For the nine months ended 2014, bank card and ATM fees decreased $0.9 million, or 3%, compared to the same period in 2013.
Insurance fees remained relatively flat for the third quarter of 2014 compared to the second quarter of 2014. Insurance fees decreased $1.7 million, or 46%, from third quarter of 2013 and decreased $4.9 million, or 39%, for the first nine months of 2014 compared to the first nine months of 2013. These decreases resulted from the Company selling its property and casualty and group benefits insurance intermediary business in April 2014.
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Fees from the secondary mortgage operations in the third quarter of 2014 were up $0.6 million, or 32%, compared to the second quarter of 2014 and down $0.2 million, or 6%, compared to the third quarter of 2013. Secondary mortgage operations fee income is generated from selling certain types of originated single family mortgage loans into the secondary market in an effort to manage interest rate risk and liquidity. The Company typically sells its longer-term fixed-rate loans while retaining in the portfolio the majority of its adjustable rate loans as well as 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 third quarter of 2014 compared to the second quarter of 2014 was due to a slightly higher percentage of mortgage loans originated during the quarter being sold in the secondary market. Through the first nine months of 2014, fees from the secondary mortgage operations decreased $5.0 million, or 45%, compared to the first nine months of 2013. The decline reflects reduced loan sales in the secondary market due to a 30% reduction in loan originations, primarily from refinancing activities, for the nine months ended September 30, 2014 as compared to the same period in 2013.
Amortization of the FDIC loss share receivable totaled $2.8 million in the third quarter of 2014 compared to $3.3 million in the second quarter of 2014. For the first nine months of 2014, amortization of the FDIC loss share receivable totaled $10.0 million compared to less than $1 million for the first nine months of 2013. The amortization reflects a reduction in the amount of expected reimbursements under the loss share agreements due to lower loss projections for the related covered loan pools. Elevated levels of amortization of the loss share receivable are anticipated throughout 2014 as projected losses from the covered portfolio have decreased.
Noninterest Expense
Noninterest expense for the third quarter of 2014 was $149.1 million, down $7.8 million, or 5%, compared to the second quarter of 2014, and down $33.1 million, or 18%, from the third quarter of 2013. Noninterest expense for the nine months ended September 30, 2014 was $452.9 million, down $51.1 million, or 10%, from the same period of 2013. Excluding nonoperating expense items, operating expense for the third quarter of 2014 totaled $145.2 million, which was up $0.5 million from the second quarter of 2014 and down $16.1 million, or 10%, from the same period in 2013. Operating expense for the first nine months of 2014 totaled $436.9 million, down $46.3 million, or 10%, compared to the first nine months of 2013. The decreases are primarily related to cost savings realized from the divestiture of certain insurance business lines and the Company’s expense and efficiency initiatives that has included either selling or closing approximately 60 branches and reducing headcount by almost 450 full-time-equivalent employees since January 1, 2013.
Total personnel expense (excluding $1.1 million in nonoperating expense) totaled $80.0 million for the third quarter of 2014, up slightly compared to the second quarter of 2014 and down $6.8 million, or 8%, from the third quarter of 2013. Total personnel expense (excluding $2.7 million in nonoperating expense) for the first nine months of 2014 decreased $21.4 million, or 8%, compared to the first nine months of 2013. The Company has reduced its work force by over 11% during the past 21 months. In addition, the Company’s benefit costs declined by over 20% for both the quarter and nine months compared to 2013 primarily due to reduced pension costs resulting from a better overall performance of our pension plan assets.
Occupancy and equipment expenses totaled $15.3 million for the third quarter of 2014, up $0.4 million, or 3%, from the second quarter of 2014 and down $2.1 million, or 12%, from the third quarter of 2013. Occupancy and equipment expenses totaled $45.8 million for the first nine months of 2014, down $6.7 million, or 13%, from the first nine months of 2013. The reduction in occupancy and equipment expenses reflects the impact of the closures or sales mentioned above and other expense and efficiency initiatives.
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All other expenses, excluding amortization of intangibles and $2.6 million of nonoperating expense items, totaled $43.2 million for the third quarter of 2014, down slightly from the second quarter of 2014 and down $6.4 million, or 13%, from third quarter of 2013. For the first nine months of 2014, all other expenses decreased $16.3 million, or 11%, primarily due to decreases in professional services, deposit insurance, telecommunications and postage and other real estate (ORE) expense. Net gains on ORE dispositions exceeded ORE expense in the third quarter of 2014 by $0.1 million compared to $0.1 million expense in the second quarter of 2014 and $2.4 million in the third quarter of 2013. For the first nine months of 2014, ORE expense totaled $1.8 million compared to $6.5 million in 2013.
Tax credit investment amortization totaling $2.2 million in each of the first three quarters of 2014 reflects amortization of equity investments in entities that undertake projects that qualify under a variety of state or federal laws for tax credits against federal and state income taxes. The Company amortizes equity investments over the tax credit compliance period for those investments where return of the capital invested is not expected. The increase in year-over-year amortization expense reflects increases in the amount invested in projects throughout the period. The financial return from these investments is provided through tax credits earned and received, all of which are accounted for as a reduction of the provision for income taxes.
All of the current quarter nonoperating expense relates to the Company’s expense and efficiency initiative. Included in this total for the first nine months of 2014 were expenses of $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 sharing agreements, $11.4 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.
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The components of noninterest expense are presented in the following table for the indicated periods:
Operating expense
Other real estate owned expense, net
Travel
Total operating expense
Nonoperating expense items
Impact of insurance business line divestiture
FDIC settlement
Expense and efficiency initiatives and other items
Early debt redemption
Total nonoperating expense items
The effective income tax rate for the third quarter of 2014 was approximately 26% compared to 31% in the second quarter of 2014 and 26% in the third quarter of 2013. The increase in the tax rate for the 2014 second quarter was due in part to the tax impact of the gain on the divestiture of selected insurance business lines. Management expects the effective tax rate for the remainder of 2014 to be approximately 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.
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The Company invests in Federal 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 2013, 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 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 $12.9 million, $10.1 million and $9.0 million for 2015, 2016 and 2017, respectively.
The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for both the year-to-date and quarter-ended September 30, 2014 and 2013.
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 per share
Book value per share (period-end)
Tangible book value per share (period-end)
Weighted average number of shares (000s):
Period-end number of shares (000s)
Market data:
High price
Low price
Period-end closing price
Trading volume (000s) (b)
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Income Statement:
Interest income
Interest income (te) (a)
Interest expense
Net interest income (te)
Noninterest income excluding securities transactions
Securities transactions gains
Noninterest expense
Taxes on adjustments at marginal tax rate
Operating income (b)
Purchase accounting adjustments, net of tax
Core income (c)
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Performance Ratios
Return on average assets
Return on average assets (operating) (a)
Return on average common equity
Return on average common equity (operating) (a)
Tangible common equity ratio
Earning asset yield (te)
Net interest margin (te)
Efficiency ratio (b)
Allowance for loan losses to period-end loans
Allowance for loan losses to nonperforming loans+ accruing loans 90 days past due
Average loan/deposit ratio
Noninterest income excluding securities transactions to total revenue (te)
Asset Quality Information
Nonaccrual loans (a)
Restructured loans - still accruing
Total nonperforming loans
Other real estate (ORE) and foreclosed assets
Total nonperforming assets
Nonperforming assets to loans, ORE and foreclosed assets
Accruing loans 90 days past due (a)
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 - noncovered
Net charge-offs - covered
Net charge-offs - noncovered to average loans
Allowance for loan losses
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Supplemental Asset Quality Information
Nonaccrual loans
ORE and foreclosed assets (c)
Accruing loans 90 days past due
ORE and foreclosed assets
Loans Outstanding
Commercial non-real estate loans
Construction and land development loans
Commercial real estate loans
Residential mortgage loans
Change in loan balance from previous quarter
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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, maturities and repayments of investment securities, and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. As shown in the table below, our ratio of free securities to total securities was 23% at September 30, 2014, compared to 20% at June 30, 2014 and 22% at December 31, 2013. 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.
Liquidity Metrics
Free securities / total securities
Noncore deposits / total deposits
Wholesale funds / core deposits
The liability portion of the balance sheet provides liquidity mainly through various customers’ interest-bearing and 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 noncore deposits to total deposits was 5.43% at September 30, 2014, down 21 bps from June 30, 2014 and unchanged from December 31, 2013. There were no brokered CDs outstanding as of September 30, 2014 or June 30, 2014 and $60.2 million outstanding at December 31, 2013.
Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, our short-term borrowing capacity includes an approved line of credit with the FHLB of $3.3 billion and borrowing capacity at the Federal Reserve’s discount window in excess of $1.8 billion at September 30, 2014. Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 10.40% of core deposits at September 30, 2014, up from 10.00% at June 30, 2014 and 7.19% at December 31, 2013. The increases from December 31, 2013 reflect utilization of the FHLB line to help fund asset growth. At September 30, 2014, the Company had borrowings from the FHLB totaling $565 million compared to $415 million at June 30, 2014. There were no borrowings from the FHLB at the end of any prior periods. Loan growth of $1 billion since year-end has outpaced a $376 million increase in deposits. No amounts had been borrowed at the Federal Reserve’s discount window in any period. See the discussion on “Deposits” for more information.
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 nine months ended September 30, 2014 and 2013.
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 holding company. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Company. The Company maintains cash and other liquid assets at the holding company to provide liquidity sufficient to fund six quarters of anticipated common stockholder dividends.
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CAPITAL RESOURCES
Stockholders’ equity totaled $2.5 billion at September 30, 2014, up $84 million from December 31, 2013. The tangible common equity ratio increased to 9.10% at September 30, 2014 from 9.00% at December 31, 2013.
The Board of Directors authorized a new common stock buyback program in July for up to 5%, or approximately 4 million shares, of the Company’s common stock issued and outstanding. The shares may 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. The buyback authorization will expire December 31, 2015. During the third quarter of 2014, the Company repurchased 305,263 shares at an average price of $32.65 per share under the buyback program. See Item 2 in Part II of this document for additional discussion of the Company’s common stock buyback program.
The primary quantitative measures that regulators use to gauge capital adequacy are the ratios of total and Tier 1 regulatory capital to risk-weighted assets (risk-based capital ratios) and the ratio of Tier 1 capital to average total assets (leverage ratio). Both the Company and its bank subsidiary are currently required to maintain minimum risk-based capital ratios of 8.0% total regulatory capital and 4.0% Tier 1 capital.
On July 2, 2013 the Federal Reserve Board finalized its rule implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The interim final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, and makes selected changes to the calculation of risk-weighted assets. The rule sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier 1 ratio of 4.5% of risk-weighted assets, raises the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets and sets a new conservation buffer of 2.5% of risk-weighted assets. The final rule is effective for the Company on January 1, 2015; however, the rule allows for transition periods for certain changes, including the conservation buffer. Based on estimated capital ratios using Basel III definitions, the Company and the Bank currently exceed all capital requirements of the new rule, including the fully phased-in conservation buffer.
At September 30, 2014, the regulatory capital ratios of the Company and the Bank were well in excess of current regulatory minimum requirements, as indicated in the table below. The Company and the Bank have been categorized as “well capitalized” in the most recent notices received from our regulators. As of September 30, 2014, risk-based ratios decreased compared to both June 30, 2014 and December 31, 2013, primarily as a result of asset growth.
The following table shows the regulatory capital ratios for the Company and the Bank for the indicated periods.
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Regulatory ratios:
Total capital (to risk weighted assets)
Whitney Bank
Tier 1 capital (to risk weighted assets)
Tier 1 leverage capital
* Restated to give effect to merger of Hancock Bank and Whitney Bank
Regulatory definitions:
BALANCE SHEET ANALYSIS
Investment in securities totaled $3.9 billion at September 30, 2014, up $236 million from June 30, 2014 and down $120 million from December 2013. The quarterly increase in securities was necessary to support anticipated public fund collateralization and was funded with FHLB advances. The decrease in securities compared to year-end reflects the Company’s use of funds from repayments and maturities in the securities portfolio to support loan growth. At September 30, 2014, securities available for sale totaled $1.6 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 between two and five. At September 30, 2014, the average maturity of the portfolio was 4.45 years with an effective duration of 3.89 and a weighted-average yield of 2.36%. The effective duration increases, under management scenarios, to 4.32 with a 100 basis point increase in the yield curve and to 4.43 with a 200 basis point increase. At year-end 2013, the average maturity of the portfolio was 3.97 years with an effective duration of 3.93 and a weighted-average yield of 2.28%.
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Total loans at September 30, 2014 were $13.3 billion, up $465 million, or 4%, compared to June 30, 2014 and up $1.0 billion, or 8%, from December 31, 2013. Excluding the FDIC-covered portfolio, total loans increased $488 million, or 4%, from June 30, 2014 and $1.1 billion from year-end 2013. The noncovered loan portfolio was up $1.7 billion, or 15%, from September 30, 2013.
See Note 3 to the consolidated financial statements for the composition of originated, acquired and covered loans at September 30, 2014 and December 31, 2013. Originated loans include all loans not included in the acquired and covered loan portfolios described as follows. Acquired loans are those purchased in the Whitney acquisition on June 4, 2011 and that continue to be subject to purchase accounting considerations. Acquired loans include those that were performing satisfactorily at the acquisition date (acquired-performing) and loans acquired with evidence of credit deterioration (acquired-impaired). Covered loans are those purchased in the December 2009 acquisition of Peoples First, which are covered by loss share agreements between the FDIC and the Company that afford significant loss protection. Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without carryover of any allowance for loan losses. Certain differences in the accounting for originated loans and for acquired-performing and acquired-impaired loans (which include all covered loans) are described in Note 3 to the consolidated financial statements.
All markets across the franchise reported net loan growth during the quarter, with south Louisiana, Houston and central Florida generating over half of the increase. Lending areas such as mortgage and indirect generated approximately 30% of the quarter’s net loan growth. For the quarter ended September 30, 2014, indirect loans grew $56 million, or 15%, to $427 million, while mortgage loans increased $87 million, or 5%, to $1.9 billion.
The Company’s commercial customer base is diversified over a range of industries, including oil and gas (O&G), wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, financial and professional services, and agricultural production. Loans outstanding to O&G industry customers totaled approximately $1.7 billion at September 30, 2014, up approximately $113 million from June 30, 2014. The majority of the O&G portfolio is with customers providing transportation and other services and products to support exploration and production activities. The Bank lends mainly to middle-market and smaller commercial entities, although it participates in larger shared-credit loan facilities with familiar businesses operating in the Company’s market areas. Shared credits funded at September 30, 2014 totaled approximately $1.7 billion, up approximately $97 million from the last quarter and $297 million from December 31, 2013. Approximately $1.0 billion of shared national credits were with O&G customers at September 30, 2014, up $81 million from June 30, 2014, and up $244 million from year-end.
Commercial non-real estate loans, construction and land development loans (C&D) loans, and commercial real estate (CRE) loans in the originated and acquired portfolios increased a net $794 million over the first nine months of 2014. CRE loans include loans on both income-producing properties as well as properties used by borrowers in commercial operations.
Residential mortgages in the originated and acquired portfolios were up a net $92 million during the third quarter and $162 million over the first nine months of 2014. Consumer loans increased by a net $89 million and $146 million over these periods.
Total covered loans at September 30, 2014 were down $23 million from June 30, 2014 and $78 million from December 31, 2013, reflecting normal repayments, charge-offs and foreclosures. The covered portfolio will continue to decline over the terms of the loss share agreements.
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Allowance for Loan Losses and Asset Quality
The Company’s total allowance for loan losses was $126 million at September 30, 2014, compared to $129 million at June 30, 2014. The decrease is a result of a $6.5 million reduction in the allowance on the covered portfolio as estimated losses in the covered portfolio have decreased from June 30, 2014.
The ratio of the allowance to period-end loans was 0.94% at September 30, 2014, down slightly from 1.00% at June 30, 2014. The allowance maintained on the originated portion of the loan portfolio totaled $82 million, or 0.73%, of related loans, at September 30, 2014, as compared to $79 million, or 0.74%, at June 30, 2014.
During the third quarter of 2014, Hancock recorded a total provision for loan losses of $9 million, up from $7 million in the second quarter of 2014. The total provision for loan losses for the first nine months of 2014 was $24 million, compared to $25 million provision for the same period in 2013.
Net charge-offs from the noncovered loan portfolio were $6 million, or 0.19% of average total loans on an annualized basis in the third quarter of 2014, compared to $4 million, or 0.13%, in the second quarter of 2014. Commercial net charge-offs increased $1.3 million. Charge-offs were up primarily due to a $1.5 million charge-off related to a single customer and a decline of $0.7 million in recoveries of previously charged-off loans. Consumer net charge-offs were up $1.1 million as charge-offs rose by $0.7 million and recoveries declined by $0.4 million.
The following table sets forth activity in the allowance for loan losses for the periods indicated.
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Allowance for loan losses at beginning of period
Loans charged-off:
Noncovered loans:
Commercial non real estate
Total noncovered charge-offs
Total covered charge-offs
Total charge-offs
Recoveries of loans previously charged-off:
Total noncovered recoveries
Total covered recoveries
Total recoveries
Total net charge-offs
Provision for loan losses before FDIC benefit - covered loans
Benefit attributable to FDIC loss share agreement
Provision for loan losses noncovered 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 - noncovered to average loans
Recoveries - noncovered 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 restructured loans
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 $147 million at September 30, 2014, down $10 million from June 30, 2014 and $39 million from December 31, 2013. Nonperforming assets as a percent of total loans, ORE, and other foreclosed assets was 1.10% at September 30, 2014, compared to 1.22% at June 30, 2014 and 1.50% at December 31, 2013.
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Short-Term Investments
Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, increased $31 million from June 30, 2014 and $203 million from December 31, 2013, to a total of $472 million at September 30, 2014. 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 third quarter of 2014 were up $46 million, or 12%, compared to the second quarter of 2014.
Total deposits were $15.7 billion at September 30, 2014, up $491 million, or 3%, from June 30, 2014 and up $376 million, or 2% from December 31, 2013. Average deposits for the third quarter of 2014 were $15.4 billion, up $311 million, or 2% from the second quarter of 2014.
Noninterest-bearing demand deposits (DDAs) increased by $143 million, or 2%, during the third quarter to $5.9 billion at September 30, 2014, and were up $336 million, or 6%, from December 31, 2013. DDAs comprised 37% of total period-end deposits at September 30, 2014, up slightly from September 30, 2013 and year-end 2013.
Interest-bearing public fund deposits totaled $1.5 billion at September 30, 2014, up $50 million, or 3%, from June 30, 2014 and down $37 million, or 2%, from December 31, 2013. The increase compared to the prior quarter was primarily due to balances attracted to the Bank as a result of the Company’s deposit growth initiative that commenced in the second quarter of 2014. These balances helped to lessen the decline in public funds compared to year end when public entities typically carry higher balances with subsequent reductions throughout the first nine months of the year.
Time deposits totaled $2.0 billion at September 30, 2014, up $53 million, or 3%, from June 30, 2014, but down $86 million, or 4%, from December 31, 2013. CDs increased $79 million, or 5%, from June 30, 2014, but declined $102 million, or 6%, from December 31, 2013. Balances in sweep deposit products decreased $27 million, or 7%, from the prior quarter, but still $16 million, or 4%, over the balances at December 31, 2013. These increases also reflect the deposit growth initiative mentioned above.
Short-Term Borrowings
At September 30, 2014, short-term borrowings totaled $1.2 billion, up $514 million, or 78%, from December 31, 2013. The Company borrowed $565 million on the $3.3 billion line of credit with the FHLB to fund loan growth and to replace the $115 million in fixed rate reverse repurchase obligations that were redeemed during June. Securities sold under agreements to repurchase are the main source of short-term borrowings. These agreements are offered mainly to commercial customers to assist them with their cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, the amounts available over time can be volatile.
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.
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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 September 30, 2014 according to expiration date.
Commitments to extend credit
Letters of credit
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company invests in projects that yield tax credits issued under the QZAB, QSCB, NMTC, and LIHTC programs. Returns on these investments are generated through the receipt of federal and state tax credits. The tax credits are recorded as a reduction to the income tax provision in the year that they are earned. Tax credits from QZAB and QSCB bonds are generally earned over the life of the bonds in lieu of interest income. Credits on Federal NMTC investments are earned over the seven-year compliance period beginning with the year of investment. Credits on State NMTC investments are generally earned over a three- to five- year period
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depending upon the specific state program. Tax Credits for Low-Income Housing investments are earned over a ten-year period beginning with the year in which rental activity begins. These tax credits, if not used in the tax return for the year when the credits are first available for use, can be carried forward for 20 years. For those investments where the return of the principal is not expected, the equity investment is amortized over the life of the tax compliance period as a component of noninterest expense.
Accounting standards require that information be reported about a company’s operating segments using a “management approach.” Reportable segments are identified in these standards as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. On March 31, 2014, the Company combined its two state bank charters into one charter. Due to the charter change and consistent with its stated strategy that is focused on providing a consistent package of community banking products and services throughout a coherent market area, the Company has identified its overall banking operations as its only reportable segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented.
There were no other 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 Form 10-K for the year ended December 31, 2013.
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 12 to our Consolidated Financial Statements included elsewhere in this report.
FORWARD-LOOKING STATEMENTS
This news release contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and we intend such forward-looking statements to be covered by the safe harbor provisions therein and are including this statement for purposes of invoking these safe-harbor provisions. Forward-looking statements provide projections of results of operations or of financial condition or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future.
Forward-looking statements that we may make include, but may not be limited to, comments with respect to future levels of economic activity in our markets, loan growth, deposit trends, credit quality trends, 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, details of the common stock buyback, possible repurchases of shares under stock buyback programs, and the financial impact of regulatory requirements. Hancock’s ability to accurately project results or predict the effects of future plans or strategies is inherently limited. Although Hancock believes that the expectations reflected in its forward-looking statements are based on
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our net income is materially dependent on our net interest income. Hancock’s primary market risk is interest rate risk that stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect our financial products and services. In an attempt to manage our exposure to interest rate risk, management measures the sensitivity of our net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying rate environments.
Hancock measures its interest rate sensitivity primarily by running net interest income simulations. The model measures annual net interest income sensitivity relative to a base case scenario and incorporates assumptions regarding balance sheet growth and the mix of earning assets and funding sources as well as pricing, re-pricing and maturity characteristics of the existing and projected balance sheet. The table below presents the results of simulations run as of September 30, 2014 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 as compared to the stable rate environment assumed for the base case.
Note: Decrease in interest rates discontinued in the current rate environment
The foregoing disclosures related to our market risk should be read in conjunction with our audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2013 included in our 2013 Annual Report on Form 10-K.
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Item 4. Controls and Procedures
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officers and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to timely alert them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act filings.
Our management, including the Chief Executive Officers and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three-month period ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
There were no changes to the risk factors that were previously disclosed in our Form 10-K for the year ended December 31, 2013. 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 oil and gas industry constitutes a significant component of the economy in several of our core markets. The oil and gas industry is particularly sensitive to certain industry specific economic factors, the most important of which is worldwide demand for oil and gas. When demand is soft, commodity prices decline and overall levels of activity in the sector, including capital expenditures, weaken. Moreover, given the importance of the energy industry to the economies of Louisiana and Texas, when the energy sector is weak, other business segments of the economy may be impaired. Although the Company mitigates risk by diversifying its borrower base, approximately 13% of the Company’s portfolio is comprised of loans to borrowers in the energy industry.
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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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the three months ended September 30, 2014.
Jul. 1, 2014 - Jul. 31, 2014
Aug 1, 2014 - Aug 31, 2014
Sep. 1, 2014 - Sep. 30, 2014
Item 6. Exhibits.
(a) Exhibits:
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Number
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Carl J. Chaney
/s/ John M. Hairston
/s/ Michael M. Achary
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Index to Exhibits
ExhibitNumber