Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-13089

 

 

HANCOCK HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi		64-0693170
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
One Hancock Plaza, P.O. Box 4019, Gulfport, Mississippi		39502
(Address of principal executive offices)		(Zip Code)

(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):

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		¨

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.

81,861,999 common shares were outstanding as of August 1, 2014.

 

 

 

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Table of Contents

Hancock Holding Company

Index

 

				Page Number
Part I. Financial Information
ITEM 1.		Financial Statements
		Consolidated Balance Sheets — June 30, 2014 (unaudited) and December 31, 2013			1
		Consolidated Statements of Income (unaudited) — Three and six months ended June 30, 2014 and 2013			2
		Consolidated Statements of Comprehensive Income (unaudited) — Three and six months ended June 30, 2014 and 2013			3
		Consolidated Statements of Changes in Stockholders’ Equity (unaudited) – Six months ended June 30, 2014 and 2013			4
		Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2014 and 2013			5
		Notes to Consolidated Financial Statements (unaudited) — June 30, 2014			6-46
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			47-70
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk			71
ITEM 4.		Controls and Procedures			72
Part II. Other Information
ITEM 1.		Legal Proceedings			72
ITEM 1A.		Risk Factors			72
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			72
ITEM 3.		Default on Senior Securities			N/A
ITEM 4.		Mine Safety Disclosures			N/A
ITEM 5.		Other Information			N/A
ITEM 6.		Exhibits			73
Signatures					74

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Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Hancock Holding Company and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

 

		June 30				December 31,
		2014				2013
		unaudited
ASSETS
Cash and due from banks		$	424,609			$	348,440
Interest-bearing bank deposits			439,342				267,236
Federal funds sold			1,346				1,604
Securities available for sale, at fair value (amortized cost of $1,304,997 and $1,408,780)			1,333,401				1,421,772
Securities held to maturity (fair value of $2,355,413 and $2,576,584)			2,343,828				2,611,352
Loans held for sale			22,017				24,515
Loans			12,884,056				12,324,817
Less: allowance for loan losses			(128,672	)			(133,626	)
Loans, net			12,755,384				12,191,191
Property and equipment, net of accumulated depreciation of $183,842 and $172,798			414,783				432,346
Prepaid expenses			65,331				65,220
Other real estate, net			59,537				76,668
Accrued interest receivable			44,259				42,977
Goodwill			621,193				625,675
Other intangible assets, net			145,825				159,773
Life insurance contracts			389,398				381,437
FDIC loss share receivable			90,255				113,834
Deferred tax asset, net			61,116				89,708
Other assets			137,807				155,503
Total assets		$	19,349,431			$	19,009,251
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand		$	5,723,663			$	5,530,253
Interest-bearing transaction, savings, money market and time			9,521,564				9,830,263
Total deposits			15,245,227				15,360,516
Short-term borrowings			1,063,664				657,960
Long-term debt			374,991				385,826
Accrued interest payable			4,090				4,353
Other liabilities			168,877				175,527
Total liabilities			16,856,849				16,584,182
Stockholders’ equity
Common stock—$3.33 par value per share; 350,000,000 shares authorized, 81,860,299 and 82,237,162 issued and outstanding, respectively			272,595				273,850
Capital surplus			1,566,336				1,558,432
Retained earnings			676,942				628,166
Accumulated other comprehensive (loss), net			(23,291	)			(35,379	)
Total stockholders’ equity			2,492,582				2,425,069
Total liabilities and stockholders’ equity		$	19,349,431			$	19,009,251

See notes to consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Interest income:
Loans, including fees		$	151,755			$	156,651			$	302,932			$	320,633
Securities-taxable			21,069				21,520				43,777				40,924
Securities-tax exempt			965				1,198				1,992				2,439
Federal funds sold and other short term investments			212				280				440				925
Total interest income			174,001				179,649				349,141				364,921
Interest expense:
Deposits			5,251				6,189				10,603				12,934
Short-term borrowings			822				1,055				1,871				2,374
Long-term debt and other interest expense			3,150				3,226				6,327				6,419
Total interest expense			9,223				10,470				18,801				21,727
Net interest income			164,778				169,179				330,340				343,194
Provision for loan losses			6,691				8,257				14,654				17,835
Net interest income after provision for loan losses			158,087				160,922				315,686				325,359
Noninterest income:
Service charges on deposit accounts			19,269				19,864				37,981				38,879
Trust fees			11,499				9,803				21,737				18,495
Bank card and ATM fees			11,596				11,399				22,165				22,457
Investment and annuity fees			5,097				5,192				10,049				9,769
Secondary mortgage market operations			1,758				4,139				3,723				8,522
Insurance commissions and fees			1,888				4,845				5,632				8,839
Amortization of FDIC loss share receivable			(3,321	)			—				(7,229	)			—
Other income			8,612				8,655				19,039				17,123
Total noninterest income			56,398				63,897				113,097				124,084
Noninterest expense:
Compensation expense			68,528				71,327				135,693				142,678
Employee benefits			12,588				16,268				26,855				32,844
Personnel expense			81,116				87,595				162,548				175,522
Net occupancy expense			10,869				12,404				22,135				24,730
Equipment expense			4,065				4,919				8,339				10,220
Data processing expense			12,887				12,781				25,306				24,315
Professional services expense			9,179				8,726				15,588				16,672
Amortization of intangibles			6,744				7,431				13,782				14,986
Telecommunications and postage			3,863				5,059				7,446				9,087
Deposit insurance and regulatory fees			2,743				4,200				5,710				7,846
Other real estate expense, net			84				3,355				1,861				4,063
Other expense			25,308				15,780				41,125				34,411
Total noninterest expense			156,858				162,250				303,840				321,852
Income before income taxes			57,627				62,569				124,943				127,591
Income taxes			17,665				15,707				35,866				32,153
Net income		$	39,962			$	46,862			$	89,077			$	95,438
Basic earnings per common share		$	0.48			$	0.55			$	1.06			$	1.11
Diluted earnings per common share		$	0.48			$	0.55			$	1.06			$	1.11
Dividends paid per share		$	0.24			$	0.24			$	0.48			$	0.48
Weighted average shares outstanding-basic			81,933				83,279				82,099				84,071
Weighted average shares outstanding-diluted			82,174				83,357				82,348				84,153

See notes to unaudited consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Net income		$	39,962			$	46,862			$	89,077			$	95,438
Other comprehensive income:
Net change in unrealized gains and losses			10,898				(73,951	)			15,412				(86,389	)
Reclassification adjustment for net losses realized and included in earnings			2,148				2,353				2,201				4,282
Amortization of unrealized net gain on securities transferred to held to maturity			906				(2,659	)			1,571				(5,643	)
Other comprehensive income (loss), before income taxes			13,952				(74,257	)			19,184				(87,750	)
Income tax (benefit) expense			5,254				(27,040	)			7,096				(31,980	)
Other comprehensive income (loss) net of income taxes			8,698				(47,217	)			12,088				(55,770	)
Comprehensive income (loss)		$	48,660			$	(355	)		$	101,165			$	39,668

See notes to unaudited consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(In thousands, except share and per share data)

 

																		Accumulated
																		Other
																		Comprehensive
		Common Stock								Capital				Retained				Income (Loss),
		Shares				Amount				Surplus				Earnings				net				Total
Balance, January 1, 2013			84,847,796			$	282,543			$	1,647,638			$	546,022			$	(22,925	)		$	2,453,278
Net income			—				—				—				95,438				—				95,438
Other comprehensive income			—				—				—				—				(55,770	)			(55,770	)
Comprehensive income			—				—				—				95,438				(55,770	)			39,668
Cash dividends declared ($0.48 per common share)			—				—				—				(40,894	)			—				(40,894	)
Common stock activity, long-term incentive plan			47,621				159				8,129				—				—				8,288
Purchase of common stock			(2,817,640	)			(9,383	)			(105,617	)			—				—				(115,000	)
Balance, June 30, 2013			82,077,777			$	273,319			$	1,550,150			$	600,566			$	(78,695	)		$	2,345,340
Balance, January 1, 2014			82,237,162			$	273,850			$	1,558,432			$	628,166			$	(35,379	)		$	2,425,069
Net income			—				—				—				89,077				—				89,077
Other comprehensive income			—				—				—				—				12,088				12,088
Comprehensive income			—				—				—				89,077				12,088				101,165
Cash dividends declared ($0.48 per common share)			—				—				—				(40,301	)			—				(40,301	)
Common stock activity, long-term incentive plan			213,359				710				5,939				—				—				6,649
Purchase of common stock			(590,222	)			(1,965	)			1,965				—				—				—
Balance, June 30, 2014			81,860,299			$	272,595			$	1,566,336			$	676,942			$	(23,291	)		$	2,492,582

See notes to unaudited consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Six Months Ended June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	89,077			$	95,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			15,666				16,021
Provision for loan losses			14,654				17,835
Losses on other real estate owned			2,133				1,846
Deferred tax expense			21,495				13,134
Increase in cash surrender value of life insurance contracts			(4,601	)			(6,364	)
(Gain) loss on disposal of other assets			(265	)			189
Net decrease in loans originated for sale			338				29,350
Net amortization of securities premium/discount			8,543				19,842
Amortization of intangible assets			13,782				14,986
Amortization of FDIC indemnification asset			7,229				—
Stock-based compensation expense			7,120				7,026
Decrease in interest payable and other liabilities			(10,085	)			(5,021	)
Funds collected under FDIC loss share agreements			—				33,919
(Increase) decrease in FDIC loss share receivable			8,730				(5,499	)
Decrease in other assets			6,260				40,522
Other, net			4,010				(230	)
Net cash provided by operating activities			184,086				272,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale			1,301				—
Proceeds from maturities of securities available for sale			145,812				368,016
Purchases of securities available for sale			(48,404	)			(1,017,619	)
Proceeds from maturities of securities held to maturity			266,657				295,922
Purchases of securities held to maturity			(1,031	)			(345,644	)
Net (increase) decrease in interest-bearing bank deposits			(172,106	)			1,058,901
Net decrease (increase) in federal funds sold and short-term investments			258				(1,630	)
Net increase in loans			(581,169	)			(147,380	)
Purchases of property and equipment			(10,881	)			(18,601	)
Proceeds from sales of property and equipment			6,946				250
Proceeds from sales of other real estate			29,688				56,826
Other, net			14,873				(3,726	)
Net cash provided by (used in) investing activities			(348,056	)			245,315
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits			(115,289	)			(588,250	)
Net increase in short-term borrowings			405,704				188,974
Repayments of long-term debt			(17,756	)			(17,645	)
Issuance of long-term debt			6,921				6,178
Dividends paid			(40,301	)			(40,894	)
Repurchase of common stock			—				(115,000	)
Proceeds from exercise of stock options			860				399
Net cash provided by (used in) financing activities			240,139				(566,238	)
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			76,169				(47,929	)
CASH AND DUE FROM BANKS, BEGINNING			348,440				448,491
CASH AND DUE FROM BANKS, ENDING		$	424,609			$	400,562
SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired in settlement of loans		$	15,299			$	27,048

See notes to unaudited consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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.

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

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):

Securitites Available for Sale

 

		June 30, 2014																December 31, 2013
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
US Treasury and government agency securities		$	283			$	—			$	1			$	282			$	504			$	2			$	1			$	505
Municipal obligations			20,539				298				—				20,837				35,809				177				25				35,961
Mortgage-backed securities			1,179,186				33,044				4,105				1,208,125				1,262,633				24,402				10,077				1,276,958
CMOs			92,669				—				1,721				90,948				96,369				—				2,244				94,125
Corporate debt securities			3,500				—				—				3,500				3,500				—				—				3,500
Equity securities			8,820				890				1				9,709				9,965				785				27				10,723
		$	1,304,997			$	34,232			$	5,828			$	1,333,401			$	1,408,780			$	25,366			$	12,374			$	1,421,772
Securitites Held to Maturity
		June 30, 2014																December 31, 2013
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
US Treasury and government agency securities		$	—			$	—			$	—			$	—			$	100,000			$	316			$	—			$	100,316
Municipal obligations			185,132				2,631				1,922				185,841				193,189				919				6,436				187,672
Mortgage-backed securities			954,070				19,481				693				972,858				1,003,327				296				4,671				998,952
CMOs			1,204,626				5,405				13,317				1,196,714				1,314,836				1,062				26,254				1,289,644
		$	2,343,828			$	27,517			$	15,932			$	2,355,413			$	2,611,352			$	2,593			$	37,361			$	2,576,584

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2. Securities (continued)

 

The following table presents the amortized cost and fair value of debt securities at June 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.

 

		Amortized Cost				Fair Value
Debt Securities Available for Sale
Due in one year or less		$	12,872			$	12,906
Due after one year through five years			162,474				162,602
Due after five years through ten years			171,206				178,164
Due after ten years			949,625				970,020
Total available for sale debt securities		$	1,296,177			$	1,323,692
		Amortized Cost				Fair Value
Debt Securities Held to Maturity
Due in one year or less		$	5,940			$	5,969
Due after one year through five years			655,817				646,032
Due after five years through ten years			106,088				104,789
Due after ten years			1,575,983				1,598,623
Total held to maturity securities		$	2,343,828			$	2,355,413

The Company held no securities classified as trading at June 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):

 

		Losses < 12 months								Losses 12 months or >								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
June 30, 2014		Value				Losses				Value				Losses				Value				Losses
US Treasury and government agency securities		$	144			$	1			$	35			$	—			$	179			$	1
Municipal obligations			—				—				—				—				—				—
Mortgage-backed securities			19,753				70				130,591				4,035				150,344				4,105
CMOs			49,381				522				41,567				1,199				90,948				1,721
Equity securities			—				—				3				1				3				1
		$	69,278			$	593			$	172,196			$	5,235			$	241,474			$	5,828

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2. Securities (continued)

 

 

		Losses < 12 months								Losses 12 months or >								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2013		Value				Losses				Value				Losses				Value				Losses
US Treasury and government agency securities		$	205			$	1			$	—			$	—			$	205			$	1
Municipal obligations			7,975				25				—				—				7,975				25
Mortgage-backed securities			376,350				7,164				49,061				2,913				425,411				10,077
CMOs			94,125				2,244				—				—				94,125				2,244
Corporate debt securities			—				—				—				—				—
Equity securities			3,282				26				3				1				3,285				27
		$	481,937			$	9,460			$	49,064			$	2,914			$	531,001			$	12,374

The details for securities classified as held to maturity with unrealized losses for the periods indicated follow (in thousands):

 

		Losses < 12 months								Losses 12 months or >								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
June 30, 2014		Value				Losses				Value				Losses				Value				Losses
Municpal obligations		$	495			$	5			$	60,099			$	1,917			$	60,594			$	1,922
Mortgage-backed securities			—				—				134,550				693				134,550				693
CMOs			206,634				2,452				649,544				10,865				856,178				13,317
		$	207,129			$	2,457			$	844,193			$	13,475			$	1,051,322			$	15,932

 

		Losses < 12 months								Losses 12 months or >								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2013		Value				Losses				Value				Losses				Value				Losses
Municpal obligations		$	131,499			$	6,311			$	2,878			$	125			$	134,377			$	6,436
Mortgage-backed securities			950,288				4,671				—				—				950,288				4,671
CMOs			947,061				25,088				175,633				1,166				1,122,694				26,254
		$	2,028,848			$	36,070			$	178,511			$	1,291			$	2,207,359			$	37,361

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2. Securities (continued)

 

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 $2.9 billion at June 30, 2014 and $3.1 billion at December 31, 2013 were pledged primarily to secure public deposits or securities sold under agreements to repurchase.

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses

Loans, net of unearned income, consisted of the following:

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Originated loans:
Commercial non-real estate		$	4,610,696			$	4,113,837
Construction and land development			903,610				752,381
Commercial real estate			2,173,006				2,022,528
Residential mortgages			1,469,977				1,196,256
Consumer			1,501,163				1,409,130
Total originated loans		$	10,658,452			$	9,494,132
Acquired loans:
Commercial non-real estate		$	769,159			$	926,997
Construction and land development			119,847				142,931
Commercial real estate			836,646				967,148
Residential mortgages			111,724				315,340
Consumer			84,403				119,603
Total acquired loans		$	1,921,779			$	2,472,019
Covered loans:
Commercial non-real estate		$	13,836			$	23,390
Construction and land development			17,199				20,229
Commercial real estate			46,611				53,165
Residential mortgages			189,570				209,018
Consumer			36,609				52,864
Total covered loans		$	303,825			$	358,666
Total loans:
Commercial non-real estate		$	5,393,691			$	5,064,224
Construction and land development			1,040,656				915,541
Commercial real estate			3,056,263				3,042,841
Residential mortgages			1,771,271				1,720,614
Consumer			1,622,175				1,581,597
Total loans		$	12,884,056			$	12,324,817

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

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 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 similar 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.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

The excess of estimated cash flows expected to be collected from an acquired-impaired loan pool over the pool’s carrying value is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan pool. Each pool of acquired-impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Acquired-impaired loans in pools with an accretable yield and expected cash flows that are reasonably estimable are considered to be accruing and performing even though collection of contractual payments on loans within the pool may be in doubt, because the pool is the unit of accounting. Management recasts the estimate of cash flows expected to be collected on each acquired-impaired loan pool at each reporting date. If the present value of expected cash flows for a pool is less than its carrying value, impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. Acquired-impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings even if they would otherwise qualify for such treatment.

Covered loans and the related loss share receivable

The loans purchased in the 2009 acquisition of Peoples First Community Bank (Peoples First) are covered by two loss share agreements between the FDIC and the Company which afford the Company significant loss protection. These covered loans are accounted for as acquired-impaired loans as described above in the section on acquired loans. The Company treated all loans for the Peoples First acquisition 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.

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

The following schedule shows activity in the loss share receivable for the six months ended June 30, 2014 and 2013 (in thousands):

 

		Six Months Ended
		June 30,				June 30,
		2014				2013
Balance, January 1		$	113,834			$	177,844
Amortization			(7,229	)			—
Charge-offs, write-downs and other losses (recoveries)			(1,048	)			(1,209	)
External expenses qualifying under loss share agreement			2,841				6,307
Changes due to changes in cash flow projections			(7,875	)			2,877
Settlement of disallowed loss claims			(10,268	)			—
Payments received from the FDIC			—				(33,919	)
Ending balance		$	90,255			$	151,900

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. The total due from the FDIC for the period September 2013 through May 2014 is $25 million. The Company will submit its claims for that period, net of the $10.3 million reimbursement.

The following schedule shows activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2014 and June 30, 2013 as well as the corresponding recorded investment in loans at the end of each period.

 

						Construction
		Commercial				and land				Commercial				Residential
		non-real estate				development				real estate				mortgages				Consumer				Total
(In thousands)		Six Months Ended June 30, 2014
Originated loans
Allowance for loan losses:
Beginning balance		$	33,091			$	6,180			$	20,649			$	6,892			$	12,073			$	78,885
Charge-offs			(3,658	)			(1,041	)			(1,373	)			(1,097	)			(7,622	)			(14,791	)
Recoveries			1,411				1,064				1,057				363				2,854				6,749
Net provision for loan losses			5,937				699				(5,060	)			772				5,381				7,729
Ending balance		$	36,781			$	6,902			$	15,273			$	6,930			$	12,686			$	78,572
Ending balance:
Individually evaluated for impairment		$	640			$	259			$	116			$	532			$	—			$	1,547
Collectively evaluated for impairment			36,141				6,643				15,157				6,398				12,686				77,025
Loans:
Ending balance:		$	4,610,696			$	903,610			$	2,173,006			$	1,469,977			$	1,501,163			$	10,658,452
Individually evaluated for impairment			6,765				6,702				11,198				2,532				—				27,197
Collectively evaluated for impairment			4,603,931				896,908				2,161,808				1,467,445				1,501,163				10,631,255
Acquired loans
Allowance for loan losses:
Beginning balance		$	1,603			$	10			$	34			$	—			$	—			$	1,647
Charge-offs			—				—				—				—				—				—
Recoveries			—				—				—				—				—				—
Net provision for loan losses			6,135				210				630				14				311				7,300
Ending balance		$	7,738			$	220			$	664			$	14			$	311			$	8,947
Ending balance:
Individually evaluated for impairment		$	65			$	24			$	188			$	—			$	—			$	277
Amounts related to acquired-impaired loans			—				—				—				—				—				—
Collectively evaluated for impairment			7,673				196				476				14				311				8,670
Loans:
Ending balance:		$	769,159			$	119,847			$	836,646			$	111,724			$	84,403			$	1,921,779
Individually evaluated for impairment			1,957				739				2,280				—				—				4,976
Acquired-impaired loans			17,410				18,976				27,993				4,547				1,057				69,983
Collectively evaluated for impairment			749,792				100,132				806,373				107,177				83,346				1,846,820

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

						Construction
		Commercial				and land				Commercial				Residential
		non-real estate				development				real estate				mortgages				Consumer				Total
(In thousands)		Six Months Ended June 30, 2014
Covered loans
Allowance for loan losses:
Beginning balance		$	2,323			$	2,655			$	10,929			$	27,989			$	9,198			$	53,094
Charge-offs			(70	)			(624	)			(4,022	)			(730	)			(1,130	)			(6,576	)
Recoveries			451				896				1,371				19				148				2,885
Net provision for loan losses			(57	)			(73	)			30				(173	)			(102	)			(375	)
Increase (Decrease) in FDIC loss share receivable			(1,099	)			(1,302	)			225				(3,442	)			(2,257	)			(7,875	)
Ending balance		$	1,548			$	1,552			$	8,533			$	23,663			$	5,857			$	41,153
Ending balance:
Individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—
Amounts related to acquired-impaired loans			1,548				1,552				8,533				23,663				5,857				41,153
Collectively evaluated for impairment			—				—				—				—				—				—
Loans:
Ending balance:		$	13,836			$	17,199			$	46,611			$	189,570			$	36,609			$	303,825
Individually evaluated for impairment			—				—				—				—				—				—
Acquired-impaired loans			13,836				17,199				46,611				189,570				36,609				303,825
Collectively evaluated for impairment			—				—				—				—				—				—
Total loans
Allowance for loan losses:
Beginning balance		$	37,017			$	8,845			$	31,612			$	34,881			$	21,271			$	133,626
Charge-offs			(3,728	)			(1,665	)			(5,395	)			(1,827	)			(8,752	)			(21,367	)
Recoveries			1,862				1,960				2,428				382				3,002				9,634
Net provision for loan losses			12,015				836				(4,400	)			613				5,590				14,654
Increased (Decrease) in FDIC loss share receivable			(1,099	)			(1,302	)			225				(3,442	)			(2,257	)			(7,875	)
Ending balance		$	46,067			$	8,674			$	24,470			$	30,607			$	18,854			$	128,672
Ending balance:
Individually evaluated for impairment		$	705			$	283			$	304			$	532			$	—			$	1,824
Amounts related to acquired-impaired loans			1,548				1,552				8,533				23,663				5,857				41,153
Collectively evaluated for impairment			43,814				6,839				15,633				6,412				12,997				85,695
Loans:
Ending balance:		$	5,393,691			$	1,040,656			$	3,056,263			$	1,771,271			$	1,622,175			$	12,884,056
Individually evaluated for impairment			8,722				7,441				13,478				2,532				—				32,173
Acquired-impaired loans			31,246				36,175				74,604				194,117				37,666				373,808
Collectively evaluated for impairment			5,353,723				997,040				2,968,181				1,574,622				1,584,509				12,478,075

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

		Commercial non-real estate				Construction and land development				Commercial real estate				Residential mortgages				Consumer				Total
(In thousands)		Six Months Ended June 30, 2013
Originated loans
Allowance for loan losses:
Beginning balance		$	20,775			$	11,415			$	26,959			$	6,406			$	13,219			$	78,774
Charge-offs			(4,200	)			(6,365	)			(2,871	)			(902	)			(8,350	)			(22,688	)
Recoveries			2,338				1,037				1,512				895				3,241				9,023
Net provision for loan losses			11,514				1,644				(6,596	)			319				4,409				11,290
Ending balance		$	30,427			$	7,731			$	19,004			$	6,718			$	12,519			$	76,399
Ending balance:
Individually evaluated for impairment		$	574			$	—			$	1,428			$	2			$	10			$	2,014
Collectively evaluated for impairment			29,853				7,731				17,576				6,716				12,509				74,385
Loans:
Ending balance:		$	3,564,008			$	722,649			$	1,638,409			$	988,595			$	1,340,094			$	8,253,755
Individually evaluated for impairment			9,986				—				39,694				864				4,153				54,697
Collectively evaluated for impairment			3,554,022				722,649				1,598,715				987,731				1,335,941				8,199,058
Acquired loans
Allowance for loan losses:
Beginning balance		$	788			$	—			$	—			$	—			$	—			$	788
Charge-offs			—				—				—				—				—				—
Recoveries			—				—				—				—				—				—
Net provision for loan losses			(743	)			8				317				—				—				(418	)
Ending balance		$	45			$	8			$	317			$	—			$	—			$	370
Ending balance:
Individually evaluated for impairment		$	45			$	8			$	317			$	—			$	—			$	370
Amounts related to acquired-impaired loans			—				—				—				—				—				—
Collectively evaluated for impairment			—				—				—				—				—				—
Loans:
Ending balance:		$	1,062,916			$	217,611			$	1,161,500			$	392,282			$	162,722			$	2,997,031
Individually evaluated for impairment			6,484				787				2,727				511				—				10,509
Acquired-impaired loans			20,828				15,530				49,218				9,193				387				95,156
Collectively evaluated for impairment			1,035,604				201,294				1,109,555				382,578				162,335				2,891,366

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

		Commercial non-real estate				Construction and land development				Commercial real estate				Residential mortgages				Consumer				Total
(In thousands)		Six Months Ended June 30, 2013
Covered loans
Allowance for loan losses:
Beginning balance		$	2,162			$	5,623			$	9,433			$	30,471			$	8,920			$	56,609
Charge-offs			(681	)			(2,321	)			(2,121	)			(516	)			(1,091	)			(6,730	)
Recoveries			90				484				878				2				28				1,482
Net provision for loan losses			404				(367	)			1,707				635				4,584				6,963
Increase in FDIC loss share receivable			233				37				752				625				1,229				2,876
Ending balance		$	2,208			$	3,456			$	10,649			$	31,217			$	13,670			$	61,200
Ending balance:
Individually evaluated for impairment		$	—			$	—			$	—			$	—			$	—			$	—
Amounts related to acquired-impaired loans			2,208				3,456				10,649				31,217				13,670				61,200
Collectively evaluated for impairment			—				—				—				—				—				—
Loans:
Ending balance:		$	26,418			$	26,239			$	72,345			$	235,216			$	70,493			$	430,711
Individually evaluated for impairment			—				—				—				—				—				—
Acquired-impaired loans			26,418				26,239				72,345				235,216				70,493				430,711
Collectively evaluated for impairment			—				—				—				—				—				—
Total loans
Allowance for loan losses:
Beginning balance		$	23,725			$	17,038			$	36,392			$	36,877			$	22,139			$	136,171
Charge-offs			(4,881	)			(8,686	)			(4,992	)			(1,418	)			(9,441	)			(29,418	)
Recoveries			2,428				1,521				2,390				897				3,269				10,505
Net provision for loan losses			11,175				1,285				(4,572	)			954				8,993				17,835
Increase in FDIC loss share receivable			233				37				752				625				1,229				2,876
Ending balance		$	32,680			$	11,195			$	29,970			$	37,935			$	26,189			$	137,969
Ending balance:
Individually evaluated for impairment		$	619			$	8			$	1,745			$	2			$	10			$	2,384
Amounts related to acquired-impaired loans			2,208				3,456				10,649				31,217				13,670				61,200
Collectively evaluated for impairment			29,853				7,731				17,576				6,716				12,509				74,385
Loans:
Ending balance:		$	4,653,342			$	966,499			$	2,872,254			$	1,616,093			$	1,573,309			$	11,681,497
Individually evaluated for impairment			16,470				787				42,421				1,375				4,153				65,206
Acquired-impaired loans			47,246				41,769				121,563				244,409				70,880				525,867
Collectively evaluated for impairment			4,589,626				923,943				2,708,270				1,370,309				1,498,276				11,090,424

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

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.

 

		June 30,				December 31,
Nonaccrual Loans		2014				2013
		(In thousands)
Originated loans:
Commercial non-real estate		$	12,150			$	10,119
Construction and land development			7,749				13,171
Commercial real estate			27,753				32,772
Residential mortgages			19,157				13,449
Consumer			4,679				4,802
Total originated loans		$	71,488			$	74,313
Acquired loans:
Commercial non-real estate		$	2,983			$	3,209
Construction and land development			1,763				1,990
Commercial real estate			5,737				6,525
Residential mortgages			2,946				8,262
Consumer			1,664				1,814
Total acquired loans		$	15,093			$	21,800
Covered loans:
Commercial non-real estate		$	—			$	2
Construction and land development			1,539				1,539
Commercial real estate			1,107				1,163
Residential mortgages			396				544
Consumer			278				296
Total covered loans		$	3,320			$	3,544
Total loans:
Commercial non-real estate		$	15,133			$	13,330
Construction and land development			11,051				16,700
Commercial real estate			34,597				40,460
Residential mortgages			22,499				22,255
Consumer			6,621				6,912
Total loans		$	89,901			$	99,657

The estimated amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual in the six months ended June 30, 2014 was approximately $1.9 million. Interest actually received and recorded as income on nonaccrual loans during the six months ended June 30, 2014 was $1.1 million.

Nonaccrual loans include loans modified in troubled debt restructurings (TDRs) of $7.7 million. Total TDRs were $19.4 million as of June 30, 2014 and $24.9 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.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

The tables below detail TDRs that were modified during the six months ended June 30, 2014 and June 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.

 

		Six Months Ended
		June 30, 2014												June 30, 2013
Troubled Debt Restructurings:		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Originated loans:
Commercial non-real estate			—			$	—			$	—				1			$	926			$	921
Construction and land development			—				—				—				—				—				—
Commercial real estate			1				963				918				5				1,844				1,789
Residential mortgages			2				773				507				2				971				854
Consumer			—				—				—				—				—				—
Total originated loans			3			$	1,736			$	1,425				8			$	3,741			$	3,564
Aquired loans:
Commercial non-real estate			—			$	—			$	—				—			$	—			$	—
Construction and land development			—				—				—				—				—				—
Commercial real estate			—				—				—				1				512				501
Residential mortgages			—				—				—				1				515				493
Consumer			—				—				—				—				—				—
Total acquired loans			—			$	—			$	—				2			$	1,027			$	994
Covered loans:
Commercial non-real estate			—			$	—			$	—				—			$	—			$	—
Construction and land development			—				—				—				—				—				—
Commercial real estate			—				—				—				—				—				—
Residential mortgages			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total covered loans			—			$	—			$	—				—			$	—			$	—
Total loans:
Commercial non-real estate			—			$	—			$	—				1			$	926			$	921
Construction and land development			—				—				—				—				—				—
Commercial real estate			1				963				918				6				2,356				2,290
Residential mortgages			2				773				507				3				1,486				1,347
Consumer			—				—				—				—				—				—
Total loans			3			$	1,736			$	1,425				10			$	4,768			$	4,558

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

		Six Months Ended
		June 30, 2014								June 30, 2013
Troubled Debt Restructurings That Subsequently Defaulted:		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
Originated loans:
Commercial non-real estate			1			$	909				—			$	—
Construction and land development			—				—				—				—
Commercial real estate			2				1,025				—				—
Residential mortgages			—				—				—				—
Consumer			—				—				—				—
Total originated loans			3			$	1,934				—			$	—
Aquired loans:
Commercial non-real estate			—			$	—				—			$	—
Construction and land development			—				—				—				—
Commercial real estate			—				—				—				—
Residential mortgages			—				—				—				—
Consumer			—				—				—				—
Total acquired loans			—			$	—				—			$	—
Covered loans:
Commercial non-real estate			—			$	—				—			$	—
Construction and land development			—				—				—				—
Commercial real estate			—				—				—				—
Residential mortgages			—				—				—				—
Consumer			—				—				—				—
Total covered loans			—			$	—				—			$	—
Total loans:
Commercial non-real estate			1			$	909				—			$	—
Construction and land development			—				—				—				—
Commercial real estate			2				1,025				—				—
Residential mortgages			—				—				—				—
Consumer			—				—				—				—
Total loans			3			$	1,934				—			$	—

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

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 June 30, 2014 and December 31, 2013:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
June 30, 2014		Investment				Balance				Allowance				Investment				Recognized
		(In thousands)
Originated loans:
With no related allowance recorded:
Commercial non-real estate		$	2,587			$	2,791			$	—			$	987			$	13
Construction and land development			2,453				2,774				—				3,168				60
Commercial real estate			8,207				10,438				—				7,392				124
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			13,247				16,003				—				11,547				197
With an allowance recorded:
Commercial non-real estate		$	4,178			$	4,248			$	640			$	6,840				40
Construction and land development			4,249				4,767				259				8,219				32
Commercial real estate			2,991				3,279				116				9,134				29
Residential mortgages			2,532				2,696				532				2,059				—
Consumer			—				—				—				—				—
			13,950				14,990				1,547				26,252				101
Total:
Commercial non-real estate			6,765				7,039				640				7,827				53
Construction and land development			6,702				7,541				259				11,386				92
Commercial real estate			11,198				13,717				116				16,525				153
Residential mortgages			2,532				2,696				532				2,059				—
Consumer			—				—				—				—				—
Total originated loans		$	27,197			$	30,993			$	1,547			$	37,797			$	298
Acquired loans:
With no related allowance recorded:
Commercial non-real estate		$	—			$	—			$	—			$	535			$	—
Construction and land development			—				—				—				182				—
Commercial real estate			—				—				—				466				—
Residential mortgages			—				—				—				118				—
Consumer			—				—				—				—				—
			—				—				—				1,301				—
With an allowance recorded:
Commercial non-real estate			1,957				3,800				65				1,490				105
Construction and land development			739				781				24				552				18
Commercial real estate			2,280				2,339				188				1,729				43
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			4,976				6,920				277				3,771				166
Total:
Commercial non-real estate			1,957				3,800				65				2,026				105
Construction and land development			739				781				24				734				18
Commercial real estate			2,280				2,339				188				2,195				43
Residential mortgages			—				—				—				118				—
Consumer			—				—				—				—				—
Total acquired loans		$	4,976			$	6,920			$	277			$	5,073			$	166

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
June 30, 2014		Investment				Balance				Allowance				Investment				Recognized
Covered loans:
With no related allowance recorded:
Commercial non-real estate		$	—			$	—			$	—			$	—			$	—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			—				—				—				—				—
With an allowance recorded:
Commercial non-real estate			—				—				—				—				—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			—				—				—				—				—
Total:
Commercial non-real estate			—				—				—				—				—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
Total covered loans		$	—			$	—			$	—			$	—			$	—
Total loans:
With no related allowance recorded:
Commercial non-real estate		$	2,587			$	2,791			$	—			$	1,522			$	13
Construction and land development			2,453				2,774				—				3,350				60
Commercial real estate			8,207				10,438				—				7,858				124
Residential mortgages			—				—				—				118				—
Consumer			—				—				—				—				—
			13,247				16,003				—				12,848				197
With an allowance recorded:
Commercial non-real estate			6,135				8,048				705				8,331				145
Construction and land development			4,988				5,548				283				8,771				50
Commercial real estate			5,271				5,618				304				10,863				72
Residential mortgages			2,532				2,696				532				2,059				—
Consumer			—				—				—				—				—
			18,926				21,910				1,824				30,024				267
Total:
Commercial non-real estate			8,722				10,839				705				9,853				158
Construction and land development			7,441				8,322				283				12,121				110
Commercial real estate			13,478				16,056				304				18,721				196
Residential mortgages			2,532				2,696				532				2,177				—
Consumer			—				—				—				—				—
Total loans		$	32,173			$	37,913			$	1,824			$	42,872			$	464

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
December 31, 2013		Investment				Balance				Allowance				Investment				Recognized
		(In thousands)
Originated loans:
With no related allowance recorded:
Commercial non-real estate		$	329			$	442			$	—			$	235			$	18
Construction and land development			4,101				5,131				—				2,780				82
Commercial real estate			5,321				7,458				—				15,886				374
Residential mortgages			—				—				—				262				—
Consumer			—				—				—				1,013				—
			9,751				13,031				—				20,176				474
With an allowance recorded:
Commercial non-real estate			4,965				5,303				477				8,936				180
Construction and land development			6,498				8,343				22				2,549				—
Commercial real estate			8,708				9,090				268				19,683				460
Residential mortgages			605				620				1				228				—
Consumer			—				—				—				1,025				—
			20,776				23,356				768				32,421				640
Total:
Commercial non-real estate			5,294				5,745				477				9,171				198
Construction and land development			10,599				13,474				22				5,329				82
Commercial real estate			14,029				16,548				268				35,569				834
Residential mortgages			605				620				1				490				—
Consumer			—				—				—				2,038				—
Total originated loans		$	30,527			$	36,387			$	768			$	52,597			$	1,114
Acquired loans:
With no related allowance recorded:
Commercial non-real estate		$	2,141			$	3,275			$	—			$	865			$	8
Construction and land development			728				1,142				—				296				3
Commercial real estate			1,865				2,634				—				1,339				49
Residential mortgages			473				507				—				407				—
Consumer			—				—				—				—				—
			5,207				7,558				—				2,907				60
With an allowance recorded:
Commercial non-real estate			—				—				—				2,747				63
Construction and land development			—				—				—				157				—
Commercial real estate			—				—				—				2,663				—
Residential mortgages			—				—				—				845				—
Consumer			—				—				—				—				—
			—				—				—				6,412				63
Total:
Commercial non-real estate			2,141				3,275				—				3,612				71
Construction and land development			728				1,142				—				453				3
Commercial real estate			1,865				2,634				—				4,002				49
Residential mortgages			473				507				—				1,252				—
Consumer			—				—				—				—				—
Total acquired loans		$	5,207			$	7,558			$	—			$	9,319			$	123

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
December 31, 2013		Investment				Balance				Allowance				Investment				Recognized
Covered loans:
With no related allowance recorded:
Commercial non-real estate		$	—			$	—			$	—			$	—			$	—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			—				—				—				—				—
With an allowance recorded:
Commercial non-real estate			—				—				—				—				—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
			—				—				—				—				—
Total:
Commercial non-real estate			—				—				—				—				—
Construction and land development			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Residential mortgages			—				—				—				—				—
Consumer			—				—				—				—				—
Total covered loans		$	—			$	—			$	—			$	—			$	—
Total loans:
With no related allowance recorded:
Commercial non-real estate		$	2,470			$	3,717			$	—			$	1,100			$	26
Construction and land development			4,829				6,273				—				3,076				85
Commercial real estate			7,186				10,092				—				17,225				423
Residential mortgages			473				507				—				669				—
Consumer			—				—				—				1,013				—
			14,958				20,589				—				23,083				534
With an allowance recorded:
Commercial non-real estate			4,965				5,303				477				11,683				243
Construction and land development			6,498				8,343				22				2,706				—
Commercial real estate			8,708				9,090				268				22,346				460
Residential mortgages			605				620				1				1,073				—
Consumer			—				—				—				1,025				—
			20,776				23,356				768				38,833				703
Total:
Commercial non-real estate			7,435				9,020				477				12,783				269
Construction and land development			11,327				14,616				22				5,782				85
Commercial real estate			15,894				19,182				268				39,571				883
Residential mortgages			1,078				1,127				1				1,742				—
Consumer			—				—				—				2,038				—
Total loans		$	35,734			$	43,945			$	768			$	61,916			$	1,237

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

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 June 30, 2014 and December 31, 2013:

 

																										Recorded
										Greater than																investment
		30-59 days				60-89 days				90 days				Total								Total				> 90 days
June 30, 2014		past due				past due				past due				past due				Current				Loans				and accruing
		(In thousands)
Originated loans:
Commercial non-real estate		$	3,426			$	1,013			$	5,674			$	10,113			$	4,600,583			$	4,610,696			$	42
Construction and land development			282				434				4,162				4,878				898,732				903,610				685
Commercial real estate			4,217				3,098				13,276				20,591				2,152,415				2,173,006				444
Residential mortgages			303				4,565				6,646				11,514				1,458,463				1,469,977				—
Consumer			4,133				2,148				3,683				9,964				1,491,199				1,501,163				2,246
Total		$	12,361			$	11,258			$	33,441			$	57,060			$	10,601,392			$	10,658,452			$	3,417
Acquired loans:
Commercial non-real estate		$	448			$	210			$	2,807			$	3,465			$	765,694			$	769,159			$	3
Construction and land development			—				314				1,624				1,938				117,909				119,847				—
Commercial real estate			1,162				3,805				2,368				7,335				829,311				836,646				610
Residential mortgages			815				248				1,457				2,520				109,204				111,724				92
Consumer			339				5				774				1,118				83,285				84,403				21
Total		$	2,764			$	4,582			$	9,030			$	16,376			$	1,905,403			$	1,921,779			$	726
Covered loans:
Commercial non-real estate		$	—			$	—			$	—			$	—				13,836			$	13,836			$	—
Construction and land development			—				—				1,539				1,539				15,660				17,199				—
Commercial real estate			—				—				675				675				45,936				46,611				—
Residential mortgages			—				—				—				—				189,570				189,570				—
Consumer			—				—				—				—				36,609				36,609				—
Total		$	—			$	—			$	2,214			$	2,214			$	301,611			$	303,825			$	—
Total loans:
Commercial non-real estate		$	3,874			$	1,223			$	8,481			$	13,578			$	5,380,113			$	5,393,691			$	45
Construction and land development			282				748				7,325				8,355				1,032,301				1,040,656				685
Commercial real estate			5,379				6,903				16,319				28,601				3,027,662				3,056,263				1,054
Residential mortgages			1,118				4,813				8,103				14,034				1,757,237				1,771,271				92
Consumer			4,472				2,153				4,457				11,082				1,611,093				1,622,175				2,267
Total		$	15,125			$	15,840			$	44,685			$	75,650			$	12,808,406			$	12,884,056			$	4,143

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

																										Recorded
										Greater than																investment
		30-59 days				60-89 days				90 days				Total								Total				> 90 days
December 31, 2013		past due				past due				past due				past due				Current				Loans				and accruing
		(In thousands)
Originated loans:
Commercial non-real estate		$	11,645			$	1,203			$	4,803			$	17,651			$	4,096,186			$	4,113,837			$	521
Construction and land development			5,877				1,264				5,970				13,111				739,270				752,381				—
Commercial real estate			8,178				5,744				14,620				28,542				1,993,986				2,022,528				420
Residential mortgages			12,410				3,870				3,540				19,820				1,176,436				1,196,256				—
Consumer			8,798				1,913				3,823				14,534				1,394,596				1,409,130				2,344
Total		$	46,908			$	13,994			$	32,756			$	93,658			$	9,400,474			$	9,494,132			$	3,285
Acquired loans:
Commercial non-real estate		$	1,982			$	2,332			$	1,467			$	5,781			$	921,216			$	926,997			$	541
Construction and land development			862				1,529				1,161				3,552				139,379				142,931				541
Commercial real estate			3,742				1,345				9,026				14,113				953,035				967,148				5,853
Residential mortgages			5,632				2,698				5,503				13,833				301,507				315,340				72
Consumer			1,029				120				1,013				2,162				117,441				119,603				82
Total		$	13,247			$	8,024			$	18,170			$	39,441			$	2,432,578			$	2,472,019			$	7,089
Covered loans:
Commercial non-real estate		$	—			$	—			$	—			$	—			$	23,390			$	23,390			$	—
Construction and land development			—				—				1,539				1,539				18,690				20,229				—
Commercial real estate			—				—				675				675				52,490				53,165				—
Residential mortgages			—				—				3				3				209,015				209,018				—
Consumer			—				—				—				—				52,864				52,864				—
Total		$	—			$	—			$	2,217			$	2,217			$	356,449			$	358,666			$	—
Total loans:
Commercial non-real estate		$	13,627			$	3,535			$	6,270			$	23,432			$	5,040,792			$	5,064,224			$	1,062
Construction and land development			6,739				2,793				8,670				18,202				897,339				915,541				541
Commercial real estate			11,920				7,089				24,321				43,330				2,999,511				3,042,841				6,273
Residential mortgages			18,042				6,568				9,046				33,656				1,686,958				1,720,614				72
Consumer			9,827				2,033				4,836				16,696				1,564,901				1,581,597				2,426
Total		$	60,155			$	22,018			$	53,143			$	135,316			$	12,189,501			$	12,324,817			$	10,374

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

The following tables present the credit quality indicators of the Company’s various classes of loans at June 30, 2014 and December 31, 2013.

Commercial Non-Real Estate Credit Exposure

Credit Risk Profile Based on Payment Activity

 

		June 30, 2014																December 31, 2013
		Originated				Acquired				Covered				Total				Originated				Acquired				Covered				Total
		(In thousands)																(In thousands)
Grade:
Pass		$	4,481,163			$	701,528			$	2,922			$	5,185,613			$	3,990,320			$	846,134			$	10,477			$	4,846,931
Pass-Watch			61,443				35,433				2				96,878				46,734				44,105				9				90,848
Special Mention			19,747				15,787				338				35,872				41,812				19,915				2,897				64,624
Substandard			47,648				16,411				10,574				74,633				34,276				16,125				9,662				60,063
Doubtful			695				—				—				695				695				718				345				1,758
Loss			—				—				—				—				—				—				—				—
Total		$	4,610,696			$	769,159			$	13,836			$	5,393,691			$	4,113,837			$	926,997			$	23,390			$	5,064,224

Construction Credit Exposure

Credit Risk Profile Based on Payment Activity

 

		June 30, 2014																December 31, 2013
		Originated				Acquired				Covered				Total				Originated				Acquired				Covered				Total
		(In thousands)																(In thousands)
Grade:
Pass		$	852,093			$	87,666			$	2,470			$	942,229			$	709,261			$	112,773			$	1			$	822,035
Pass-Watch			20,909				3,007				1,011				24,927				7,817				1,907				1,226				10,950
Special Mention			4,973				5,940				99				11,012				3,926				9,409				276				13,611
Substandard			25,635				23,224				13,397				62,256				31,377				18,842				11,498				61,717
Doubtful			—				10				222				232				—				—				7,228				7,228
Loss			—				—				—				—				—				—				—				—
Total		$	903,610			$	119,847			$	17,199			$	1,040,656			$	752,381			$	142,931			$	20,229			$	915,541

Commercial Real Estate Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

		June 30, 2014																December 31, 2013
		Originated				Acquired				Covered				Total				Originated				Acquired				Covered				Total
		(In thousands)																(In thousands)
Grade:
Pass		$	2,009,323			$	775,400			$	5,630			$	2,790,353			$	1,864,115			$	896,578			$	1,678			$	2,762,371
Pass-Watch			61,884				13,629				6,641				82,154				49,578				9,530				10,266				69,374
Special Mention			19,411				8,740				1,303				29,454				15,785				19,798				1,999				37,582
Substandard			82,355				38,877				33,003				154,235				93,034				41,242				31,350				165,626
Doubtful			33				—				34				67				16				—				7,872				7,888
Loss			—				—				—				—				—				—				—				—
Total		$	2,173,006			$	836,646			$	46,611			$	3,056,263			$	2,022,528			$	967,148			$	53,165			$	3,042,841

 

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Hancock Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

Residential Mortgage Credit Exposure

Credit Risk Profile Based on Payment Activity

 

		June 30, 2014																December 31, 2013
		Originated				Acquired				Covered				Total				Originated				Acquired				Covered				Total
						(In thousands)																(In thousands)
Performing		$	1,463,331			$	110,267			$	189,570			$	1,763,168			$	1,182,266			$	307,078			$	209,015			$	1,698,359
Nonperforming			6,646				1,457				—				8,103				13,990				8,262				3				22,255
Total		$	1,469,977			$	111,724			$	189,570			$	1,771,271			$	1,196,256			$	315,340			$	209,018			$	1,720,614

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

		June 30, 2014																December 31, 2013
		Originated				Acquired				Covered				Total				Originated				Acquired				Covered				Total
						(In thousands)																(In thousands)
Performing		$	1,497,480			$	83,629			$	36,609			$	1,617,718			$	1,404,032			$	117,789			$	52,864			$	1,574,685
Nonperforming			3,683				774				—				4,457				5,098				1,814				—				6,912
Total		$	1,501,163			$	84,403			$	36,609			$	1,622,175			$	1,409,130			$	119,603			$	52,864			$	1,581,597

Loan review uses a risk-focused continuous monitoring program that provides for an independent, objective and timely review of credit risk within the company. Below are the definitions of the Company’s internally assigned grades:

Commercial:

 

•

Pass - Loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.

 

•

Pass - Watch - Credits in this category are of sufficient risk to cause concern. This category is reserved for credits that display negative performance trends. The “Watch” grade should be regarded as a transition category.

 

•

Special Mention - These credits exhibit some signs of “Watch,” but to a greater magnitude. These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard.” They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the bank.

 

•

Substandard - These credits constitute an unacceptable risk to the bank. They have recognized credit weaknesses that jeopardize the repayment of the debt. Repayment sources are marginal or unclear.

 

•

Doubtful - A doubtful credit has all of the weaknesses inherent in one classified “Substandard” with the added characteristic that weaknesses make collection in full highly questionable or improbable.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

3. Loans and Allowance for Loan Losses (continued)

 

•

Loss - Credits classified as Loss are considered uncollectable and are charged off promptly once so classified.

Residential and Consumer:

 

•

Performing – Loans on which payments of principal and interest are less than 90 days past due.

 

•

Nonperforming – A nonperforming loan is a loan that is in default or close to being in default and there are good reasons to doubt that payments will be made in full. All loans rated as nonaccrual loans are also classified as nonperforming.

Changes in the carrying amount of acquired-impaired loans and accretable yield are presented in the following table for the six months ended June 30, 2014 and the year ended December 31, 2013:

 

		June 30, 2014																December 31, 2013
		Covered								Noncovered								Covered								Noncovered
		Carrying								Carrying								Carrying								Carrying
		Amount				Accretable				Amount				Accretable				Amount				Accretable				Amount				Accretable
		of Loans				Yield				of Loans				Yield				of Loans				Yield				of Loans				Yield
(In thousands)
Balance at beginning of period		$	358,666			$	122,715			$	68,075			$	131,370			$	515,823			$	115,594			$	141,201			$	203,186
Additions			—				—				—				—				—				—				—				—
Payments received, net			(65,314	)			(936	)			(28,167	)			(15,493	)			(189,987	)			(1,298	)			(116,187	)			(47,330	)
Accretion			10,473				(10,473	)			26,353				(26,353	)			32,830				(32,830	)			43,061				(43,061	)
Increase (Decrease) in expected cash flows based on actual cash flows and changes in cash flow assumptions			—				3,691				—				(401	)			—				(17,433	)			—				3,894
Net transfers from nonaccretable difference to accretable yield			—				14,152				—				15,151				—				58,682				—				14,681
Balance at end of period		$	303,825			$	129,149			$	66,261			$	104,274			$	358,666			$	122,715			$	68,075			$	131,370

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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Notes to Consolidated Financial Statements

(Unaudited)

 

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.

 

		June 30, 2014
		Level 1				Level 2				Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities		$	282			$	—			$	282
Municipal obligations			—				20,837				20,837
Corporate debt securities			3,500				—				3,500
Mortgage-backed securities			—				1,208,125				1,208,125
Collateralized mortgage obligations			—				90,948				90,948
Equity securities			9,709				—				9,709
Total available for sale securities			13,491				1,319,910				1,333,401
Derivative assets (1)			—				17,700				17,700
Total recurring fair value measurements - assets		$	13,491			$	1,337,610			$	1,351,101
Liabilities
Derivative liabilities (1)		$	—			$	18,458			$	18,458
Total recurring fair value measurements - liabilities		$	—			$	18,458			$	18,458

 

(1)	For further disaggregation of derivative assets and liabilities, see Note 5 - Derivatives.

 

		December 31, 2013
		Level 1				Level 2				Total
Assets
Available for sale debt securities:
U.S. Treasury and government agency securities		$	505			$	—			$	505
Municipal obligations			—				35,961				35,961
Corporate debt securities			3,500				—				3,500
Mortgage-backed securities			—				1,276,958				1,276,958
Collateralized mortgage obligations			—				94,125				94,125
Equity securities			10,723				—				10,723
Total available for sale securities			14,728				1,407,044				1,421,772
Derivative assets (1)			—				15,579				15,579
Total recurring fair value measurements - assets		$	14,728			$	1,422,623			$	1,437,351
Liabilities
Derivative liabilities (1)		$	—			$	15,006			$	15,006
Total recurring fair value measurements - liabilities		$	—			$	15,006			$	15,006

 

(1)	For further disaggregation of derivative assets and liabilities, see Note 5 - Derivatives.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

4. Fair Value (continued)

 

Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and certain other debt and equity securities. Level 2 classified securities include residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities are obtained quarterly from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs are observable in the marketplace or can be supported by observable data. The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two to five years. Company policies limit investments to securities having a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency. There were no transfers between valuation hierarchy levels during the periods shown.

The fair value of derivative financial instruments, which are predominantly customer interest rate swaps, is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, LIBOR swap curves and Overnight Index swap rate curves, observable in the marketplace. To comply with the accounting guidance, credit valuation adjustments are incorporated in the fair values to appropriately reflect nonperformance risk for both the Company and the counterparties. Although the Company has determined that the majority of the inputs used to value the derivative instruments fall within level 2 of the fair value hierarchy, the credit value adjustments utilize level 3 inputs, such as estimates of current credit spreads. The Company has determined that the impact of the credit valuation adjustments is not significant to the overall valuation of these derivatives. As a result, the Company has classified its derivative valuations in their entirety in level 2 of the fair value hierarchy. The Company’s policy is to measure counterparty credit risk quarterly for all derivative instruments, including those subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.

The Company also has certain derivative instruments associated with the Bank’s mortgage-banking activities. These derivative instruments include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis. The fair value of these derivative instruments is measured using observable market prices for similar instruments and is classified as a level 2 measurement.

Fair Value of Assets Measured on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent impaired loans are level 2 assets measured at the fair value of the underlying collateral based on third-party appraisals that take into consideration market-based information such as recent sales activity for similar assets in the property’s market.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

4. Fair Value (continued)

 

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.

 

		June 30, 2014
		Level 1				Level 2				Level 3				Total
Collateral-dependent impaired loans		$	—			$	32,996			$	—			$	32,996
Other real estate owned			—				—				21,393				21,393
Total nonrecurring fair value measurements		$	—			$	32,996			$	21,393			$	54,389
		December 31, 2013
		Level 1				Level 2				Level 3				Total
Collateral-dependent impaired loans		$	—			$	24,392			$	—			$	24,392
Other real estate owned			—				—				25,525				25,525
Total nonrecurring fair value measurements		$	—			$	24,392			$	25,525			$	49,917

Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off-balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below.

Cash, Short-Term Investments and Federal Funds Sold - For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities Available for Sale – The fair value measurement for securities available for sale was discussed earlier in the note. The same measurement techniques were applied to the valuation of securities held to maturity.

Loans, Net – The fair value measurement for certain impaired loans was discussed earlier in the note. For the remaining portfolio, fair values were generally 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.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

4. Fair Value (continued)

 

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.

The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amount at June 30, 2014 and December 31, 2013 (in thousands):

 

						June 30, 2014
														Total				Carrying
		Level 1				Level 2				Level 3				Fair Value				Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold		$	865,297			$	—			$	—			$	865,297			$	865,297
Available for sale securities			13,491				1,319,910				—				1,333,401				1,333,401
Held to maturity securities			—				2,355,413				—				2,355,413				2,343,828
Loans, net			—				32,996				12,635,212				12,668,208				12,755,384
Loans held for sale			—				22,017				—				22,017				22,017
Accrued interest receivable			44,259				—				—				44,259				44,259
Derivative financial instruments			—				17,700				—				17,700				17,700
Financial liabilities:
Deposits		$	—			$	—			$	14,938,111			$	14,938,111			$	15,245,227
Federal funds purchased			4,225				—				—				4,225				4,225
Securities sold under agreements to repurchase			644,439				—				—				644,439				644,439
FHLB borrowings			415,000				—				—				415,000				415,000
Long-term debt			—				372,037				—				372,037				374,991
Accrued interest payable			4,090				—				—				4,090				4,090
Derivative financial instruments			—				18,458				—				18,458				18,458

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

4. Fair Value (continued)

 

		December 31, 2013
														Total				Carrying
		Level 1				Level 2				Level 3				Fair Value				Amount
Financial assets:
Cash, interest-bearing bank deposits, and federal funds sold		$	617,280			$	—			$	—			$	617,280			$	617,280
Available for sale securities			14,728				1,407,044				—				1,421,772				1,421,772
Held to maturity securities			100,316				2,476,268				—				2,576,584				2,611,352
Loans, net			—				24,392				12,023,330				12,047,722				12,191,191
Loans held for sale			—				24,515				—				24,515				24,515
Accrued interest receivable			42,977				—				—				42,977				42,977
Derivative financial instruments			—				15,579				—				15,579				15,579
Financial liabilities:
Deposits		$	—			$	—			$	15,352,024			$	15,352,024			$	15,360,516
Federal funds purchased			7,725				—				—				7,725				7,725
Securities sold under agreements to repurchase			650,235				—				—				650,235				650,235
Long-term debt			—				385,557				—				385,557				385,826
Accrued interest payable			4,353				—				—				4,353				4,353
Derivative financial instruments			—				15,006				—				15,006				15,006

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, currently related to our variable rate borrowing. The Bank also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts and fair values (in thousands) of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2014 and December 31, 2013.

 

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5. Derivatives (continued)

 

														Fair Values (1)
						Notional Amounts								Assets								Liabilities
		Type of Hedge				June 30, 2014				December 31, 2013				June 30, 2014				December 31, 2013				June 30, 2014				December 31, 2013
Derivatives not designated as hedging instruments:
Interest rate swaps (2)			N/A			$	756,356			$	650,667			$	16,895			$	14,147			$	17,361			$	13,777
Risk participation agreements			N/A				81,540				19,736				113				2				156				2
Forward commitments to sell residential mortgage loans			N/A				47,063				45,910				43				326				530				115
Interest rate-lock commitments on residential mortgage loans N/A							30,443				25,956				255				56				35				107
Foreign exchange forward contracts			N/A				21,964				21,299				394				1,048				376				1,005
						$	937,366			$	763,568			$	17,700			$	15,579			$	18,458			$	15,006

 

(1)	Derivative assets and liabilities are reported with other assets or other liabilities, respectively, in the consolidated balance sheets.

(2)	The notional amount represents both the customer accommodation agreements and offsetting agreements with unrelated financial institutions.

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.

Risk participation agreements

The Bank also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Bank has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Bank has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Bank manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on its normal credit review process.

Mortgage banking derivatives

The Bank also enters into certain derivative agreements as part of its mortgage banking activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a best efforts delivery basis.

 

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5. Derivatives (continued)

 

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 six-month periods ended June 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 June 30, 2014, the aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $8.8 million, for which the Bank had posted collateral of $19.3 million.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

5. Derivatives (continued)

 

Offsetting Assets and Liabilities

Offsetting information in regards to derivative assets and liabilities subject to master netting agreements at June 30, 2014 and December 31, 2013 is presented in the following tables (in thousands):

 

		Gross Amounts Recognized				Gross Amounts Offset in the Statement of Financial Position				Net Amounts Presented in the Statement of Financial Position				Gross Amounts Not Offset in the Statement of Financial Position
Description														Financial Instruments				Cash Collateral				Net Amount
As of June 30, 2014
Derivative Assets		$	17,008			$	—			$	17,008			$	1,386			$	—			$	15,622
Total		$	17,008			$	—			$	17,008			$	1,386			$	—			$	15,622
Derivative Liabilities		$	17,517			$	—			$	17,517			$	1,386			$	17,895			$	(1,764	)
Total		$	17,517			$	—			$	17,517			$	1,386			$	17,895			$	(1,764	)
As of December 31, 2013
Derivative Assets		$	14,149			$	—			$	14,149			$	3,462			$	—			$	10,687
Total		$	14,149			$	—			$	14,149			$	3,462			$	—			$	10,687
Derivative Liabilities		$	13,779			$	—			$	13,779			$	3,462			$	7,406			$	2,911
Total		$	13,779			$	—			$	13,779			$	3,462			$	7,406			$	2,911

6. Stockholders’ Equity

Stock Repurchase Program

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 2.8 million shares of Hancock common stock, representing approximately 76% of the estimated total number of shares to be repurchased. On May 5, 2014, final settlement of the ASR agreement occurred at which time the Company received approximately 0.6 million shares from Morgan Stanley. The number of shares delivered to the Company in

 

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6. Stockholders’ Equity (continued)

 

this ASR transaction was based generally on the volume-weighted average price per share of the Hancock common stock during the term of the ASR agreement less a specified discount and on the amount paid at inception to Morgan Stanley, subject to certain adjustments in accordance with the terms of the ASR agreement. The ASR transaction was treated as two separate transactions: (i) the acquisition of treasury shares on the 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. See Note 13 for further details.

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).

 

		Available				HTM Securities								Loss on
		for Sale				Transferred				Employee				Effective Cash
		Securities				from AFS				Benefit Plans				Flow Hedges				Total
Balance, January 1, 2013		$	38,854			$	19,090			$	(80,688	)		$	(181	)		$	(22,925	)
Other comprehensive income before income taxes:
Net change in unrealized gain (loss)			(86,385	)			—				—				(4	)			(86,389	)
Reclassification of net (gains) losses realized and included in earnings			—				—				3,981				301				4,282
Amortization of unrealized net gain on securities transferred to HTM			—				(5,643	)			—				—				(5,643	)
Income tax expense (benefit)			(31,544	)			(2,038	)			1,486				116				(31,980	)
Balance, June 30, 2013		$	(15,987	)		$	15,485			$	(78,193	)		$	—			$	(78,695	)
Balance, January 1, 2014		$	8,263			$	(21,189	)		$	(22,453	)		$	—			$	(35,379	)
Other comprehensive income before income taxes:
Net change in unrealized gain (loss)			15,412				—				—				—				15,412
Reclassification of net (gains) losses realized and included in earnings			—				—				2,201				—				2,201
Amortization of unrealized net gain on securities transferred to HTM			—				1,571				—				—				1,571
Income tax expense (benefit)			5,637				554				905				—				7,096
Balance, June 30, 2014		$	18,038			$	(20,172	)		$	(21,157	)		$	—			$	(23,291	)

 

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6. Stockholders’ Equity (continued)

 

The following table shows the line item affected by amounts reclassified from accumulated other comprehensive income:

 

Amount reclassified from AOCI		Six Months Ended June 30,								Increase (decrease) in affected line item
(in thousands)		2014				2013				on the income statement
Amortization/accretion of unrealized net gain/(loss) on securities transferred to HTM		$	1,571			$	(5,643	)		Interest income
Tax effect			554				(2,038	)		Income taxes
Net of tax			1,017				(3,605	)		Net income
Amortization of defined benefit pension and post-retirement items		$	195			$	3,981			(a) Employee benefits expense
Tax effect			68				1,486			Income taxes
Net of tax			127				2,495			Net income
Gains and losses on cash flow hedges		$	—			$	301			Interest expense
Tax effect			—				105			Income taxes
Net of tax			—				196			Net income
Total reclassifications, net of tax		$	1,144			$	(914	)		Net income

 

(a)	These accumulated other comprehensive income components are included in the computation of net periodic pension and post-retirement cost that is reported with employee benefits expense (see Note 9 for additional details).

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

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):

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Numerator:
Net income to common shareholders		$	39,962			$	46,862			$	89,077			$	95,438
Net income allocated to participating securities—basic and diluted			819				880				1,900				1,782
Net income allocated to common shareholders—basic and diluted		$	39,143			$	45,982			$	87,177			$	93,656
Denominator:
Weighted average common shares—basic			81,933				83,279				82,099				84,071
Dilutive potential common shares			241				78				249				82
Weighted average common shares—diluted			82,174				83,357				82,348				84,153
Earnings per common share:
Basic		$	0.48			$	0.55			$	1.06			$	1.11
Diluted		$	0.48			$	0.55			$	1.06			$	1.11

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 660,778 and 675,108 respectively for the three and six months ended June 30, 2014 and 1,433,249 and 1,298,940 respectively for the three and six months ended June 30, 2013.

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

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 six months ended June 30, 2014 is presented below:

 

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Aggregate
		Number of				Exercise				Term				Intrinsic
Options		Shares				Price				(Years)				Value ($000)
Outstanding at January 1, 2014			1,332,656			$	38.85
Exercised			(29,281	)			29.35
Cancelled/Forfeited			(13,680	)			38.27
Expired			(113,447	)			63.41
Outstanding at June 30, 2014			1,176,248			$	36.72				4.7			$	2,770
Exercisable at June 30, 2014			891,217			$	38.52				3.9			$	1,494

The total intrinsic value of options exercised during the six months ended June 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 June 30, 2014 and changes during the six months ended June 30, 2014, is presented below. These restricted and performance shares are subject to service requirements.

 

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value
Nonvested at January 1, 2014			1,981,820			$	31.75
Granted			113,101				36.40
Vested			(259,291	)			32.10
Forfeited			(73,202	)			31.77
Nonvested at June 30, 2014			1,762,428			$	31.99

 

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Notes to Consolidated Financial Statements

(Unaudited)

 

8. Share-Based Payment Arrangements (continued)

 

As of June 30, 2014, there were $35.0 million of total unrecognized compensation expense related to nonvested restricted and performance shares expected to vest. This compensation is expected to be recognized in expense over a weighted average period of 3.3 years. The total fair value of shares which vested during the six months ended June 30, 2014 and 2013 was $8.9 million and $0.7 million, respectively.

During the six months ended June 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).

 

		Three Months Ended June 30,
		2014				2013				2014				2013
										Other Post-
		Pension benefits								retirement Benefits
Service cost		$	3,035			$	4,007			$	26			$	55
Interest cost			4,817				4,362				232				330
Expected return on plan assets			(8,050	)			(7,701	)			—				—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			5				1,463				25				823
Net periodic benefit cost		$	(193	)		$	2,131			$	283			$	1,208

 

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9. Retirement Plans (continued)

 

		Six Months Ended June 30,
		2014				2013				2014				2013
										Other Post-
		Pension benefits								retirement Benefits
Service cost		$	6,460			$	7,936			$	63			$	110
Interest cost			9,626				8,306				570				660
Expected return on plan assets			(16,111	)			(13,964	)			—				—
Amortization of prior service cost			—				—				—				—
Amortization of net loss			13				3,208				182				861
Net periodic benefit cost		$	(12	)		$	5,486			$	815			$	1,631

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:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(In thousands)
Income from bank owned life insurance		$	2,357			$	2,809			$	4,671			$	6,108
Credit related fees			2,834				1,533				5,566				2,974
Income from derivatives			481				1,408				1,240				2,039
Gain/(loss) on sale of assets			(217	)			162				1,465				476
Safety deposit box income			443				462				956				1,013
Other miscellaneous			2,714				2,281				5,141				4,513
Total other noninterest income		$	8,612			$	8,655			$	19,039			$	17,123

 

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(Unaudited)

 

11. Other Noninterest Expense

Components of other noninterest expense are as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
		(In thousands)
Advertising		$	2,179			$	2,181			$	3,938			$	4,358
Ad valorem and franchise taxes			2,638				2,182				5,299				4,384
Printing and supplies			949				1,511				2,278				2,820
Insurance expense			1,018				1,065				2,058				2,131
Travel expense			1,061				1,288				1,957				2,401
Entertainment and contributions			1,529				1,269				2,941				2,991
Tax credit investment amortization			2,198				1,247				4,370				2,673
Other miscellaneous			13,736				5,037				18,284				12,653
Total other noninterest expense		$	25,308			$	15,780			$	41,125			$	34,411

Other miscellaneous expense for 2014 as shown in the table above includes $7.3 million of nonoperating items related to the FDIC settlement, sale of certain insurance business lines, branch closures and other items as 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.

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 quarter of 2014, the Company recorded $3.5 million in costs related to the July 2014 closure of 15 branch locations in Mississippi, Florida and Louisiana as part of its ongoing branch rationalization process. Of this total, $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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(Unaudited)

 

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 the 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.

 

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12. New Accounting Pronouncements (continued)

 

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.

13. Subsequent Event

On July 16, 2014, the Company’s board of directors approved a stock repurchase plan that authorizes the repurchase 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.

 

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

OVERVIEW

Recent Economic and Industry Developments

July reports from the Federal Reserve point to continued improvement of economic activity throughout most of Hancock’s market area. Activity among energy-related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas market areas remained strong with expectations of continued improvement over the coming months. The travel and tourism industry, which is important within several of the Company’s market areas, saw an increase in activity with many local hotels and resorts reporting high occupancy levels. Companies reported several tourism-related capital projects in progress that are anticipated to encourage travel to the areas in which we operate. However, some hospitality experts have concerns that rising gas prices could have a negative impact on travel and tourism. Retailers are showing improved sales over prior-year levels, and the outlook for the remainder of the year is positive. Auto sales were especially strong, with one industry contact stating that sales were back to pre-recession levels. Reports on manufacturing activity were generally positive, with purchasing managers expecting higher production over the next three to six months.

The real estate markets for residential properties were slightly down to flat. Sales of existing homes were soft, mainly due to higher home prices and limited inventory. Although the outlook for home sales has weakened since the last quarter, most brokers remained positive and have indicated that they expect to see continued improvement over prior-year levels. New home sales and construction activity are ahead of prior-year levels and expected to steadily improve.

The commercial real estate market continues to improve, with growing demand for office and industrial space in certain market areas and continued high occupancy and rising rental rates for apartments throughout the region. Commercial construction activity has increased in these sectors. Continued improvement in the commercial real estate market is expected over the next several months.

The recovery of the overall U.S. economy continues. However, the rate of growth is not consistent across all regions, leading to slow and erratic overall improvement. National unemployment rates continue to decrease, but are still well above full employment levels and labor force participation rates remain near historic lows. Competition among financial services firms remains intense for high quality customers, continuing to exert downward pressure on loan pricing.

The Federal Reserve has responded to the slow and tenuous recovery from the deep recession by taking steps to hold interest rates at unprecedented low levels and has expressed its intent to maintain rates at these levels pending further improvement in the unemployment rate and low inflation rate. In addition, in July, the Federal Reserve began gradually curtailing the expansion of their portfolio of Treasuries and mortgage bonds. The bond-buying initiative is expected to conclude by the end of the year.

Highlights of Second Quarter 2014 Financial Results

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

 

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

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

Continued improvement in asset quality metrics

 

•

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

 

•

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

 

•

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

RESULTS OF OPERATIONS

Net Interest Income

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

Net interest income (te) for the second quarter of 2014 was down $4.4 million, or 3%, compared to the second quarter of 2013, primarily due to a $6.0 million reduction in total purchase accounting accretion. A $291.5 million increase in average earning assets and a more favorable earning asset mix offset a 26 bps decrease in the core loan yield. For analytical purposes, management adjusts net interest income to a taxable equivalent basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans).

 

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The net interest margin was 3.99% for the second quarter of 2014, down 7 bps from the first quarter of 2014, and down 18 bps from the second quarter of 2013. The current quarter’s core margin of 3.35% (reported net interest income (te) excluding purchase accounting accretion, annualized, as a percent of average earning assets) compressed 2 bps compared to the first quarter of 2014 and 3 bps compared to the second quarter of 2013. The continued decline in the core loan yield was partially offset by the favorable impact of net loan growth and reduced investment securities on the earning asset mix.

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

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

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

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

The reported net interest margin for the first six months of 2014 was 4.03% compared to 4.24% in 2013, while the core margin declined to 3.36% in 2014 compared to 3.40% in 2013. Changes in net interest income (te) and the net interest margin between the year-to-date periods reflected for the most part the same factors that affected the quarterly comparisons.

The following tables detail the components of our net interest income and net interest margin.

 

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		Three Months Ended
		June 30, 2014												March 31, 2014												June 30, 2013
(dollars in millions)		Volume				Interest				Rate				Volume				Interest				Rate				Volume				Interest				Rate
Average earning assets
Commercial & real estate loans (te) (a) (b)		$	9,355.2			$	108.2				4.64	%		$	9,095.7			$	107.9				4.81	%		$	8,415.6			$	103.3				4.92	%
Mortgage loans			1,744.3				21.0				4.83				1,720.6				21.3				4.96				1,599.9				27.3				6.78
Consumer loans			1,581.4				23.6				5.99				1,563.1				23.1				6.00				1,579.4				26.5				6.74
Loan fees & late charges			—				0.8								—				0.8								—				1.2
Total loans (te)			12,680.9				153.6				4.86				12,379.4				153.1				5.00				11,594.9				158.3				5.47
Loans held for sale			14.7				0.1				4.14				19.2				0.2				4.06				28.3				0.3				3.53
US Treasury and agency securities			—				—				0.00				93.5				0.5				2.28				0.1				—				4.66
Mortgage-backed securities and CMOs			3,490.9				20.1				2.30				3,612.8				21.2				2.34				4,182.3				20.7				1.98
Municipals (te) (a)			205.8				2.4				4.63				217.0				2.5				4.56				233.0				2.6				4.51
Other securities			19.8				0.1				1.19				12.3				0.1				3.87				8.0				0.1				2.79
Total securities (te) (c)			3,716.5				22.6				2.43				3,935.6				24.3				2.47				4,423.4				23.4				2.11
Total short-term investments			379.6				0.2				0.22				406.2				0.2				0.23				453.6				0.3				0.25
Average earning assets (te)		$	16,791.7			$	176.5				4.21	%		$	16,740.4			$	177.8				4.29	%		$	16,500.2			$	182.3				4.42	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	6,078.1			$	1.5				0.10	%		$	6,072.1			$	1.5				0.10	%		$	5,965.8			$	1.5				0.10	%
Time deposits			2,026.4				3.0				0.60				2,170.4				3.1				0.58				2,415.4				3.8				0.63
Public funds			1,450.3				0.7				0.21				1,526.6				0.8				0.20				1,483.3				0.9				0.23
Total interest-bearing deposits			9,554.8				5.2				0.22				9,769.1				5.4				0.22				9,864.5				6.2				0.25
Short-term borrowings			957.4				0.9				0.34				785.1				1.0				0.54				790.1				1.1				0.54
Long-term debt			380.2				3.1				3.32				386.0				3.2				3.34				393.6				3.2				3.28
Total borrowings			1,337.6				4.0				1.19				1,171.1				4.2				1.46				1,183.7				4.3				1.45
Total interest-bearing liabilities			10,892.4				9.2				0.34	%			10,940.2				9.6				0.36	%			11,048.2				10.5				0.38	%
Net interest-free funding sources			5,899.3												5,800.2												5,452.0
Total cost of funds		$	16,791.7			$	9.2				0.22	%		$	16,740.4			$	9.6				0.23	%		$	16,500.2			$	10.5				0.25	%
Net interest spread (te)						$	167.3				3.87	%						$	168.2				3.93	%						$	171.8				4.04	%
Net interest margin		$	16,791.7			$	167.3				3.99	%		$	16,740.4			$	168.2				4.06	%		$	16,500.2			$	171.8				4.17	%

 

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

(b)	Includes nonaccrual loans

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

 

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		Six Months Ended
		June 30, 2014												June 30, 2013
(dollars in millions)		Volume				Interest				Rate				Volume				Interest				Rate
Average earning assets
Commercial & real estate loans (te) (a) (b)		$	9,226.1			$	216.1				4.72	%		$	8,348.8			$	216.7				5.23	%
Mortgage loans			1,732.5				42.4				4.89				1,596.3				52.6				6.60
Consumer loans			1,572.3				46.8				6.00				1,599.0				53.0				6.69
Loan fees & late charges			—				1.4								—				1.8
Total loans (te)			12,530.9				306.7				4.93				11,544.1				324.1				5.65
Loans held for sale			16.9				0.3				4.10				32.7				0.6				3.65
US Treasury and agency securities			46.5				0.5				2.26				2.8				—				1.29
Mortgage-backed securities and CMOs			3,551.5				41.3				2.32				3,941.7				39.4				2.00
Municipals (te) (a)			211.4				4.9				4.59				225.0				5.2				4.61
Other securities			16.1				0.2				2.22				8.2				0.1				2.37
Total securities (te) (c)			3,825.5				46.9				2.45				4,177.7				44.7				2.14
Total short-term investments			392.9				0.4				0.23				754.4				0.9				0.25
Average earning assets (te)		$	16,766.2			$	354.3				4.25	%		$	16,508.9			$	370.3				4.51	%
Average interest-bearing liabilities
Interest-bearing transaction and savings deposits		$	6,075.1			$	3.0				0.10	%		$	5,974.0			$	3.2				0.11	%
Time deposits			2,098.0				6.1				0.59				2,411.1				7.9				0.66
Public funds			1,488.3				1.5				0.20				1,545.8				1.8				0.24
Total interest-bearing deposits			9,661.4				10.6				0.22				9,930.9				12.9				0.26
Short-term borrowings			871.7				1.9				0.43				777.0				2.4				0.62
Long-term debt			383.1				6.3				3.33				395.0				6.4				3.28
Total borrowings			1,254.8				8.2				1.32				1,172.0				8.8				1.51
Total interest-bearing liabilities			10,916.2				18.8				0.35	%			11,102.9				21.7				0.39	%
Net interest-free funding sources			5,850.0												5,406.0
Total cost of funds		$	16,766.2			$	18.8				0.22	%		$	16,508.9			$	21.7				0.27	%
Net interest spread (te)						$	335.5				3.90	%						$	348.6				4.12	%
Net interest margin		$	16,766.2			$	335.5				4.03	%		$	16,508.9			$	348.6				4.24	%

 

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

(b)	Includes nonaccrual loans

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

 

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

Reconciliation of Reported Net Interest Margin to Core Margin

 

		Three Months Ended												Six Months Ended June 30,
		June 30,				March 31,				June 30,				June 30,				June 30,
(dollars in millions)		2014				2014				2013				2014				2013
Net interest income (te) (a)		$	167.3			$	168.2			$	171.8			$	335.5			$	348.6
Purchase accounting accretion
Loan accretion			28.0				29.7				35.9				57.8				76.2
Whitney premium bond amortization			(1.4	)			(1.5	)			(3.4	)			(3.0	)			(6.9	)
Whitney and Peoples First CD accretion			0.1				0.1				0.2				0.1				0.5
Total net purchase accounting accretion			26.7				28.3				32.7				54.9				69.8
Net interest income (te) - core		$	140.6			$	139.9			$	139.1			$	280.6			$	278.8
Average earning assets		$	16,791.7			$	16,740.4			$	16,500.2			$	16,766.2			$	16,508.9
Net interest margin - reported			3.99	%			4.06	%			4.17	%			4.03	%			4.24	%
Net purchase accounting accretion (%)			0.64	%			0.69	%			0.79	%			0.67	%			0.85	%
Net interest margin - core			3.35	%			3.37	%			3.38	%			3.36	%			3.40	%

 

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

Provision for Loan Losses

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

The section below on “Allowance for Loan Losses and Asset Quality” provides additional information on changes in the allowance for loans losses and general credit quality. Certain differences in the determination of the allowance for loan losses for originated loans and for acquired-performing loans and acquired-impaired loans (which includes all covered loans) are described in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Noninterest Income

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

 

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

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

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

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

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

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

 

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

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June, 30
		2014				2014				2013				2014				2013
(In thousands)
Service charges on deposit accounts		$	19,269			$	18,712			$	19,864			$	37,981			$	38,879
Trust fees			11,499				10,238				9,803				21,737				18,495
Bank card and ATM fees			11,596				10,569				11,399				22,165				22,457
Investment and annuity fees			5,097				4,952				5,192				10,049				9,769
Secondary mortgage market operations			1,758				1,965				4,139				3,723				8,522
Insurance commissions and fees			1,888				3,744				4,845				5,632				8,839
Amortization of FDIC loss share receivable			(3,321	)			(3,908	)			—				(7,229	)			—
Income from bank owned life insurance			2,357				2,314				2,809				4,671				6,108
Credit related fees			2,834				2,732				1,533				5,566				2,974
Income from derivatives			481				759				1,408				1,240				2,039
Gain on sale of assets			(217	)			1,682				162				1,465				476
Safety deposit box income			443				513				462				956				1,013
Other miscellaneous			2,714				2,427				2,281				5,141				4,513
Total noninterest income		$	56,398			$	56,699			$	63,897			$	113,097			$	124,084

Noninterest Expense

Noninterest expense increased $9.9 million for the second quarter of 2014 as compared to the first quarter, but was down $5.4 million from the second quarter of 2013. Included in second quarter 2014 noninterest expense were $12.1 million in nonoperating expense items discussed further below. Excluding these items, operating expense for the second quarter of 2014 totaled $144.7 million, which was down $2.3 million, or 2%, from the first quarter of 2014 and down $17.5 million, or 11%, from the same period in 2013. Operating expense for the first six months of 2014 totaled $291.7 million, down $30.1 million, or 9%, compared to the first six months of 2013. The decreases are primarily related to cost savings realized from the Company’s expense and efficiency initiatives and the divestiture of certain insurance business lines.

Total personnel expense (excluding $1.6 million in nonoperating expense) totaled $79.5 million for the second quarter of 2014, down $1.9 million, or 2%, compared to the first quarter of 2014 and down $8.1 million, or 9%, from the second quarter of 2013. Total personnel expense for the first six months of 2014 decreased $14.6 million, or 8%, compared to the first six months of 2013. Through a number of expense and efficiency initiatives, the Company has reduced its workforce during the past 18 months in excess of 350 FTEs, or 9%, resulting in an $8.6 million decrease in compensation expense and a $6.8 million decrease in benefit expense for the first six months of 2014 compared to the same period in 2013.

Occupancy and equipment expenses totaled $14.9 million for the second quarter of 2014, down $0.6 million, or 4%, from the first quarter of 2014 and down $2.4 million, or 14%, from the second quarter of 2013. Occupancy and equipment expenses totaled $30.4 million for the first six months of 2014, down $4.5 million, or 13%, from the first six months of 2013. The reductions in personnel, occupancy and equipment expenses reflect the effect of the closure or sales approximately 40 branches since June 30, 2013 and other expense and efficiency initiatives as management continually looks to rationalize the branch network.

All other expenses, excluding amortization of intangibles and $10.5 million in nonoperating expenses items, totaled $43.6 million for the second quarter of 2014, down $0.6 million, or 1%, from the first quarter of 2014 and down $6.3 million, or 13%, from second quarter of 2013. The effect of a decrease in ORE expense was partially offset by increases in other miscellaneous expenses. ORE expense in the second quarter included gains on the sale of some foreclosed properties and reductions in write-downs that reduced ORE expenses below the normal quarterly level of $0.5 to $1.0 million. For the first six months of 2014 compared to the first six months of 2013, all other expenses decreased $9.8 million, or 10%, primarily due to decreases in professional services, deposit insurance, telecommunications and postage and ORE expense.

 

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Tax credit investment amortization 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.

Nonoperating expense items totaled $12.1 million for the second quarter of 2014 and the first six months of 2014. Included in this total 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, $7.5 million related to the Company’s expense and efficiency initiative including $3.5 million for the closure of certain branch locations as part of the ongoing branch rationalization process, and $3.5 million related to the early termination of reverse repurchase obligations. These expenses were partially offset by the $9.1 million gain from the divestiture of certain insurance business lines, net of costs related to discontinuing the operations.

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

 

						Three Months Ended								Six Months Ended
		June 30,				March 31,				June 30,				June 30,
(In thousands)		2014				2014				2013				2014				2013
Operating expense
Compensation expense		$	66,948			$	67,165			$	71,327			$	134,113			$	142,678
Employee benefits			12,558				14,267				16,268				26,825				32,844
Personnel expense			79,506				81,432				87,595				160,938				175,522
Net occupancy expense			10,840				11,266				12,404				22,106				24,730
Equipment expense			4,059				4,274				4,919				8,333				10,220
Data processing expense			12,828				12,419				12,781				25,247				24,315
Professional services expense			6,421				6,409				8,726				12,830				16,672
Amortization of intangibles			6,744				7,038				7,431				13,782				14,986
Telecommunications and postage			3,835				3,583				5,059				7,418				9,087
Deposit insurance and regulatory fees			2,743				2,967				4,200				5,710				7,846
Other real estate owned expense, net			84				1,777				3,355				1,861				4,063
Advertising			2,006				1,759				2,181				3,765				4,358
Ad valorem and franchise taxes			2,638				2,661				2,182				5,299				4,384
Printing and supplies			792				1,329				1,511				2,121				2,820
Insurance expense			1,018				1,040				1,065				2,058				2,131
Travel			1,059				896				1,288				1,955				2,401
Entertainment and contributions			1,529				1,412				1,269				2,941				2,991
Tax credit investment amortization			2,198				2,172				1,247				4,370				2,673
Other expense			6,427				4,548				5,037				10,975				12,653
Total operating expense		$	144,727			$	146,982			$	162,250			$	291,709			$	321,852
Nonoperating expense items
Impact of insurance business line divestiture		$	(9,101	)		$	—			$	—			$	(9,101	)		$	—
FDIC settlement			10,268				—				—				10,268				—
Expense and efficiency initiatives and other items			7,503				—				—				7,503				—
Early debt redemption			3,461				—				—				3,461				—
Total nonoperating expense items		$	12,131			$	—			$	—			$	12,131			$	—
Total noninterest expense		$	156,858			$	146,982			$	162,250			$	303,840			$	321,852

 

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Income Taxes

The effective income tax rate for the second quarter of 2014 was approximately 31% compared to 27% in the first quarter of 2014 and 25% in the second 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. Table 5 reconciles reported income tax expense to that computed at the statutory federal tax rate for both the year-to-date and quarter-ended June 30, 2014 and 2013.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Taxes computed at statutory rate		$	20,170			$	21,899			$	43,730			$	44,657
Tax credits:
QZAB/QSCB			(769	)			(794	)			(1,538	)			(1,588	)
NMTC—Federal and State			(3,173	)			(2,152	)			(6,606	)			(4,304	)
LIHTC			(113	)			(231	)			(226	)			(462	)
Other tax credits			—				—				—				—
Total tax credits			(4,055	)			(3,177	)			(8,370	)			(6,354	)
State income taxes, net of federal income tax benefit			1,043				806				2,716				1,558
Tax-exempt interest			(1,530	)			(1,628	)			(3,114	)			(3,303	)
Bank owned life insurance			(825	)			(1,005	)			(1,635	)			(2,165	)
Goodwill—writeoff			1,112				—				1,112				—
Other, net			1,750				(1,188	)			1,427				(2,240	)
Income tax expense		$	17,665			$	15,707			$	35,866			$	32,153

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 only on tax credit investments that have been made, the Company expects to realize tax credits over the next three years totaling $12.9 million, $10.1 million and $9.0 million for 2015, 2016 and 2017, respectively.

 

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Selected Financial Data

The following tables contain selected financial data as of the dates and for the periods indicated.

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2014				2014				2013				2014				2013
Common Share Data
Earnings per share:
Basic		$	0.48			$	0.58			$	0.55			$	1.06			$	1.11
Diluted		$	0.48			$	0.58			$	0.55			$	1.06			$	1.11
Operating earnings per share: (a)
Basic		$	0.59			$	0.58			$	0.55			$	1.18			$	1.11
Diluted		$	0.59			$	0.58			$	0.55			$	1.17			$	1.11
Cash dividends per share		$	0.24			$	0.24			$	0.24			$	0.48			$	0.48
Book value per share (period-end)		$	30.45			$	29.93			$	28.57			$	30.45			$	28.57
Tangible book value per share (period-end)		$	21.08			$	20.47			$	18.83			$	21.08			$	18.83
Weighted average number of shares (000s):
Basic			81,933				82,277				83,279				82,099				84,071
Diluted			82,174				82,534				83,357				82,348				84,153
Period-end number of shares (000s)			81,860				82,282				82,078				81,860				82,078
Market data:
High price		$	37.86			$	38.50			$	30.93			$	38.50			$	33.59
Low price		$	32.02			$	32.66			$	25.00			$	32.02			$	25.00
Period-end closing price		$	35.32			$	36.65			$	30.07			$	35.32			$	30.07
Trading volume (000s) (b)			27,432				31,328				38,599				58,760				68,068

 

(a)	Excludes nonoperating expense items and securities transactions.

(b)	Trading volume is based on the total volume as determined by NASDAQ on the last day of the quarter.

 

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		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2014				2014				2013				2014				2013
(in thousands)
Income Statement:
Interest income		$	174,001			$	175,140			$	179,649			$	349,141			$	364,921
Interest income (te) (a)			176,555				177,776				182,292				354,331				370,290
Interest expense			9,223				9,578				10,470				18,801				21,727
Net interest income (te)			167,332				168,198				171,822				335,530				348,563
Provision for loan losses			6,691				7,963				8,257				14,654				17,835
Noninterest income excluding securities transactions			56,398				56,699				63,897				113,097				124,084
Securities transactions gains			—				—				—				—				—
Noninterest expense			156,858				146,982				162,250				303,840				321,852
Income before income taxes			57,627				67,316				62,569				124,943				127,591
Income tax expense			17,665				18,201				15,707				35,866				32,153
Net income		$	39,962			$	49,115			$	46,862			$	89,077			$	95,438
Total nonoperating expense items			12,131				—				—				12,131
Taxes on adjustments at marginal tax rate			2,518				—				—				2,518				—
Operating income (b)		$	49,575			$	49,115			$	46,862			$	98,690			$	95,438

 

(a)	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).

(b)	Net income less nonoperating expense items and securities gains/losses. Management believes that this is a useful financial measure because it enables investors to assess ongoing operations.

 

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		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2014				2014				2013				2014				2013
Performance Ratios
Return on average assets			0.84	%			1.05	%			0.99	%			0.94	%			1.01	%
Return on average assets (operating) (a)			1.04	%			1.05	%			0.99	%			1.04	%			1.01	%
Return on average common equity			6.51	%			8.18	%			7.82	%			7.33	%			7.93	%
Return on average common equity (operating) (a)			8.07	%			8.18	%			7.82	%			8.12	%			7.93	%
Tangible common equity ratio			9.29	%			9.24	%			8.52	%			9.29	%			8.52	%
Earning asset yield (te)			4.21	%			4.29	%			4.42	%			4.25	%			4.51	%
Total cost of funds			0.22	%			0.23	%			0.25	%			0.22	%			0.27	%
Net interest margin (te)			3.99	%			4.06	%			4.17	%			4.03	%			4.24	%
Efficiency ratio (b)			61.67	%			62.23	%			65.68	%			61.95	%			64.92	%
Allowance for loan losses to period-end loans			1.00	%			1.02	%			1.18	%			1.00	%			1.18	%
Allowance for loan losses to nonperforming loans + accruing loans 90 days past due			126.26	%			112.64	%			91.43	%			126.26	%			91.43	%
Average loan/deposit ratio			84.20	%			81.20	%			76.41	%			82.63	%			75.86	%
Noninterest income excluding securities transactions to total revenue (te)			25.21	%			25.21	%			27.11	%			25.21	%			26.25	%

 

(a)	Excludes tax-effected securities transactions and nonoperating expense items. Management believes that this is a useful financial measure that helps investors compare the Company’s fundamental operations over time.

(b)	Efficiency ratio is defined as noninterest expense as a percent of total revenue (TE) before amortization of purchased intangibles, merger expenses and securities transactions.

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2014				2014				2013				2014				2013
Asset Quality Information
Nonaccrual loans (a)		$	89,901			$	101,400			$	132,716			$	89,901			$	132,716
Restructured loans—still accruing			7,868				8,459				11,541				7,868				11,541
Total nonperforming loans			97,769				109,859				144,257				97,769				144,257
Other real estate (ORE) and foreclosed assets			59,732				69,813				72,235				59,732				72,235
Total nonperforming assets		$	157,501			$	179,672			$	216,492			$	157,501			$	216,492
Nonperforming assets to loans, ORE and foreclosed assets			1.22	%			1.43	%			1.84	%			1.22	%			1.84	%
Accruing loans 90 days past due (a)		$	4,142			$	3,998			$	6,647			$	4,142			$	6,647
Accruing loans 90 days past due to loans			0.03	%			0.03	%			0.06	%			0.03	%			0.06	%
Nonperforming assets + accruing loans 90 days past due to loans, ORE and foreclosed assets			1.25	%			1.46	%			1.90	%			1.25	%			1.90	%
Net charge-offs—noncovered		$	4,064			$	3,978			$	7,032			$	8,042			$	13,665
Net charge-offs—covered			1,181				2,510				2,026				3,691				5,248
Net charge-offs—noncovered to average loans			0.13	%			0.13	%			0.24	%			0.13	%			0.24	%
Allowance for loan losses		$	128,672			$	128,248			$	137,969			$	128,672			$	137,969
Allowance for loan losses to period-end loans			1.00	%			1.02	%			1.18	%			1.00	%			1.18	%
Allowance for loan losses to nonperforming loans + accruing loans 90 days past due			126.26	%			112.64	%			91.43	%			126.26	%			91.43	%
Provision for loan losses		$	6,691			$	7,963			$	8,257			$	14,654			$	17,835

 

(a)	Nonaccrual loans and accruing loans past due 90 days or more do not include acquired-impaired loans with an accretable yield. Included in nonaccrual loans are $11.5 million, $16.1 million, and $22.2 million in restructured loans at 6/30/14, 3/31/14, and 6/30/13, respectively.

 

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Supplemental Asset Quality Information		Originated				Acquired (a)				Covered (a) (b)				Total
		June 30, 2014
Nonaccrual loans		$	74,533			$	12,048			$	3,320			$	89,901
Restructured loans—still accruing			4,823				3,045				—				7,868
Total nonperforming loans			79,356				15,093				3,320				97,769
ORE and foreclosed assets (c)			40,158				—				19,574				59,732
Total nonperforming assets			119,514				15,093				22,894				157,501
Accruing loans 90 days past due			3,416				726				—				4,142
Allowance for loan losses			78,573				8,947				41,152				128,672
		March 31, 2014
Nonaccrual loans		$	79,400			$	18,626			$	3,374			$	101,400
Restructured loans—still accruing			4,538				3,921				—				8,459
Total nonperforming loans			83,938				22,547				3,374				109,859
ORE and foreclosed assets			45,386				—				24,427				69,813
Total nonperforming assets			129,324				22,547				27,801				179,672
Accruing loans 90 days past due			2,543				1,455				—				3,998
Allowance for loan losses			79,560				5,259				43,429				128,248
Loans Outstanding		Originated				Acquired (a)				Covered (a) (b)				Total
		June 30, 2014
Commercial non-real estate loans		$	4,610,696			$	769,159			$	13,836			$	5,393,691
Construction and land development loans			903,610				119,847				17,199				1,040,656
Commercial real estate loans			2,173,006				836,646				46,611				3,056,263
Residential mortgage loans			1,469,977				111,724				189,570				1,771,271
Consumer loans			1,501,163				84,403				36,609				1,622,175
Total loans			10,658,452				1,921,779				303,825				12,884,056
Change in loan balance from previous quarter			734,088				(350,657	)			(27,312	)			356,119
		March 31, 2014
Commercial non-real estate loans		$	4,353,549			$	830,211			$	14,269			$	5,198,029
Construction and land development loans			824,837				134,443				19,518				978,798
Commercial real estate loans			2,110,096				907,170				52,050				3,069,316
Residential mortgage loans			1,228,170				293,111				199,026				1,720,307
Consumer loans			1,407,712				107,501				46,274				1,561,487
Total loans			9,924,364				2,272,436				331,137				12,527,937
Change in loan balance from previous quarter			430,232				(199,583	)			(27,530	)			203,120

 

(a)	Acquired and covered loans are subject to purchase accounting guidance as described in note 4 to the condensed consolidated financial statements.

(b)	Acquired loans which are covered by loss sharing agreements with the FDIC providing considerable protection against credit risk.

(c)	ORE received in settlement of acquired loans is no longer subject to purchase accounting guidance and has been included with ORE from originated loans. ORE received in settlement of covered loans remains covered under the FDIC loss share agreements.

 

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		June 30,				March 31,				December 31,				September 30,				June 30,
		2014				2014				2013				2013				2013
Period-End Balance Sheet
Total loans, net of unearned income (a)		$	12,884,056			$	12,527,937			$	12,324,817			$	11,734,472			$	11,681,497
Loans held for sale			22,017				15,911				24,515				18,444				20,233
Securities			3,677,229				3,797,883				4,033,124				4,124,202				4,303,918
Short-term investments			440,688				280,373				268,839				462,313				442,917
Earning assets			17,023,990				16,622,104				16,651,295				16,339,431				16,448,565
Allowance for loan losses			(128,672	)			(128,248	)			(133,626	)			(138,223	)			(137,969	)
Goodwill			621,193				625,675				625,675				625,675				625,675
Other intangible assets, net			145,825				152,734				159,773				167,116				174,423
Other assets			1,687,095				1,731,905				1,706,134				1,807,847				1,823,607
Total assets		$	19,349,431			$	19,004,170			$	19,009,251			$	18,801,846			$	18,934,301
Noninterest-bearing deposits		$	5,723,663			$	5,613,872			$	5,530,253			$	5,479,696			$	5,340,177
Interest-bearing transaction and savings deposits			6,079,837				6,118,150				6,162,959				6,008,042				5,965,372
Interest-bearing public funds deposits			1,484,188				1,451,430				1,571,532				1,240,336				1,410,866
Time deposits			1,957,539				2,091,322				2,095,772				2,326,797				2,439,523
Total interest-bearing deposits			9,521,564				9,660,902				9,830,263				9,575,175				9,815,761
Total deposits			15,245,227				15,274,774				15,360,516				15,054,871				15,155,938
Short-term borrowings			1,063,664				712,634				657,960				782,779				828,107
Long-term debt			374,991				380,001				385,826				376,664				385,122
Other liabilities			172,967				174,227				179,880				231,090				219,794
Stockholders’ equity			2,492,582				2,462,534				2,425,069				2,356,442				2,345,340
Total liabilities & stockholders’ equity		$	19,349,431			$	19,004,170			$	19,009,251			$	18,801,846			$	18,934,301
		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2014				2014				2013				2014				2013
Average Balance Sheet
Total loans, net of unearned income (a)		$	12,680,861			$	12,379,316			$	11,594,920			$	12,530,922			$	11,544,150
Loans held for sale			14,681				19,207				28,289				16,932				32,676
Securities (b)			3,716,563				3,935,616				4,423,441				3,825,484				4,177,713
Short-term investments			379,639				406,214				453,565				392,853				754,371
Earning assets			16,791,744				16,740,353				16,500,215				16,766,191				16,508,910
Allowance for loan losses			(126,887	)			(134,670	)			(137,815	)			(130,757	)			(137,465	)
Goodwill and other intangible assets			770,294				781,434				803,679				775,833				807,425
Other assets			1,604,113				1,667,990				1,856,753				1,635,875				1,908,513
Total assets		$	19,039,264			$	19,055,107			$	19,022,832			$	19,047,142			$	19,087,383
Noninterest-bearing deposits		$	5,505,734			$	5,499,993			$	5,346,916			$	5,502,879			$	5,330,871
Interest-bearing transaction and savings deposits			6,078,115				6,072,113				5,965,769				6,075,131				5,974,011
Interest-bearing public fund deposits			1,450,312				1,526,611				1,483,267				1,488,251				1,545,749
Time deposits			2,026,419				2,170,426				2,415,411				2,098,025				2,411,115
Total interest-bearing deposits			9,554,846				9,769,150				9,864,447				9,661,407				9,930,875
Total deposits			15,060,581				15,269,143				15,211,363				15,164,285				15,261,746
Short-term borrowings			957,386				785,063				790,103				871,701				776,973
Long-term debt			380,151				386,026				393,641				383,073				395,020
Other liabilities			177,761				178,895				222,656				178,325				227,224
Stockholders’ equity			2,463,385				2,435,980				2,405,069				2,449,758				2,426,420
Total liabilities & stockholders’ equity		$	19,039,264			$	19,055,107			$	19,022,832			$	19,047,142			$	19,087,383

 

(a)	Includes nonaccrual loans

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

 

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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 20%, compared to 21% at March 31, 2014 and 22% at December 31, 2013. Free securities represent securities that are not pledged for any purpose, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window.

Liquidity Metrics

 

		June 30,				March 31,				December 31,				September 30,				June 30,
		2014				2014				2013				2013				2013
Free securities / total securities			20.00	%			21.00	%			22.00	%			37.00	%			35.00	%
Noncore deposits / total deposits			8.34	%			8.67	%			8.33	%			9.75	%			10.07	%
Wholesale funds / core deposits			10.29	%			7.83	%			7.41	%			8.56	%			8.91	%

The liability portion of the balance sheet provides liquidity mainly through various customers’ interest-bearing and noninterest-bearing deposit and sweep accounts. Core deposits consist of total deposits less certificates of deposits (CDs) of $100,000 or more, brokered CDs, and balances in sweep time deposit products used by commercial customers. The ratio of noncore deposits to total deposits was 8.34% at June 30, 2014, down 33 bps from March 31, 2014 and virtually unchanged from December 31, 2013. There were no brokered CDs outstanding as of June 30, 2014 compared to $98 million at March 31, 2014 and $60.2 million at December 31, 2013. The effect of the decrease in brokered CDs in the current quarter compared to the prior quarter and year-end 2013 was partially offset by an increase in public fund CDs.

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity to meet short-term funding requirements. Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 10.29% of core deposits at June 30, 2014, up from 7.83% at March 31, 2014 and 7.41% at December 31, 2013. Besides funding from customer sources, our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $2.7 billion and borrowing capacity at the Federal Reserve’s discount window in excess of $1.8 billion at June 30, 2014. At June 30, 2014, the Company had borrowings from the FHLB totaling $415 million which were primarily used to fund loan growth. There were no borrowings from the FHLB at the end of any prior periods. No amounts had been borrowed at the Federal Reserve’s discount window in any period. See the discussion of “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 six months ended June 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 and for servicing debt issued by the holding company. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Company. It is the Company’s policy to maintain 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 June 30, 2014, up $68 million from December 31, 2013. The tangible common equity ratio increased to 9.29% at June 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.

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 June 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 June 30, 2014, regulatory capital for the Company and the Bank increased compared to both March 31, 2014 and December 31, 2013 as the Company’s net income exceeded dividends. Leverage ratios increased due to the increase in Tier 1 capital. Risk-based ratios were down compared to the prior two quarter-ends due to the growth in loans (primarily at 100% risk-weight) funded by liquidity from payoffs and maturities of securities (0%-20% risk weight).

 

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		June 30,				March 31,				December 31,
		2014				2014				2013
Regulatory ratios:
Total capital (to risk weighted assets)
Hancock Holding Company			12.96	%			13.20	%			13.11	%
Whitney Bank			12.72	%			13.02	%			12.98	%
Tier 1 capital (to risk weighted assets)
Hancock Holding Company			11.83	%			11.90	%			11.76	%
Whitney Bank			11.58	%			11.72	%			11.64	%
Tier 1 leverage capital
Hancock Holding Company			9.61	%			9.43	%			9.34	%
Whitney Bank			9.44	%			9.32	%			9.29	%

 

(1)

Tier 1 capital generally includes common equity, retained earnings, non-controlling interest in equity of consolidated subsidiaries and a limited amount of qualifying perpetual preferred stock, reduced by goodwill and other disallowed intangibles and disallowed deferred tax assets and certain other assets. Total capital consists of Tier 1 capital plus perpetual preferred stock not qualifying as Tier 1 capital, mandatory convertible securities, certain types of subordinated debt and a limited amount of allowances for credit losses.

(2)	The risk-weighted asset base is equal to the sum of the aggregate value of assets and credit-converted off-balance sheet items in each risk category as specified in regulatory guidelines, multiplied by the weight assigned by the guidelines to that category.

(3)	The Tier 1 leverage capital ratio is Tier 1 capital divided by average total assets reduced by the deductions for Tier 1 capital noted above.

BALANCE SHEET ANALYSIS

Securities

Investment in securities totaled $3.7 billion at June 30, 2014, down $356 million from December 2013 and $121 million from March 31, 2014. During the second quarter of 2014, funds from repayments and maturities in the securities portfolio were used primarily to support loan growth. At June 30, 2014 securities available for sale totaled $1.3 billion and securities held to maturity totaled $2.4 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 June 30, 2014, the average maturity of the portfolio was 4.73 years with an effective duration of 4.12 and a weighted-average yield of 2.40%. The effective duration increases, under management scenarios, to 4.54 with a 100 basis point increase in the yield curve and to 4.67 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%.

Loans

Total loans at June 30, 2014 were $12.9 billion, up $356 million, or 3%, compared to March 31, 2014 and up $559 million, or 5%, from December 31, 2013. Excluding the FDIC-covered portfolio, total loans increased $383 million, or 3% from March 31, 2014 and $614 million from year-end 2013. The noncovered loan portfolio was up $1.3 billion, or 12% from June 30, 2013.

See Note 3 to the consolidated financial statements for the composition of originated, acquired and covered loans at June 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

 

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of credit deterioration (acquired-impaired). Covered loans are those purchased in the December 2009 acquisition of Peoples First, which are covered by loss share agreements between the FDIC and the Company that afford significant loss protection. Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without carryover of any allowance for loan losses. Certain differences in the accounting for originated loans and for acquired-performing and acquired-impaired loans (which include all covered loans) are described in Note 3 to the consolidated financial statements.

The largest component of linked-quarter net loan growth (excluding the FDIC-covered portfolio) was in the commercial and industrial portfolio, with additional growth and change in mix from the construction, residential mortgage and consumer portfolios. The majority of the growth during the second quarter came from the Houston and south Louisiana markets.

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 $1.6 billion at June 30, 2014, up approximately $75 million from March 31, 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 June 30, 2014 totaled approximately $1.6 billion, up approximately $125 million from the last quarter and $200 million from December 31, 2013. Approximately $976 million of shared national credits were with O&G customers at June 30, 2014, up $83 million from March 31, 2014, and up $163 million from year-end.

Construction and land development loans (C&D) loans and commercial real estate (CRE) loans in the originated and acquired portfolios increased a net $487 million over the first six 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 $60 million during the second quarter and $70 million over the first six months of 2014. Consumer loans decreased by a net $57 million over this period.

Total covered loans at June 30, 2014 were down $27 million from March 31, 2014 and $55 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.

Allowance for Loan Losses and Asset Quality

The Company’s total allowance for loan losses was $128.7 million at June 30, 2014, compared to $128.2 million at March 31, 2014. The ratio of the allowance to period-end loans was 1.00% at June 30, 2014, down slightly from 1.02% at March 31, 2014. The allowance maintained on the originated portion of the loan portfolio totaled $78.6 million, or 0.74%, of related loans, at June 30, 2014, as compared to $79.6 million, or 0.80%, at March 31, 2014.

During the second quarter of 2014, Hancock recorded a total provision for loan losses of $6.7 million, down from $8.0 million in the first quarter of 2014. The total provision for loan losses for the first six months of 2014 was $14.7 million, compared to $17.8 million for the same period in 2013. The decrease year-over-year was caused by reductions in expected losses on covered loans.

 

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Net charge-offs from the noncovered loan portfolio were $4.1 million, or 0.13% of average total loans on an annualized basis in the second quarter of 2014, both measures relatively flat compared to the first quarter of 2014.

The following table sets forth activity in the allowance for loan losses for the periods indicated (in thousands).

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2014				2014				2013				2014				2013
Allowance for loan losses at beginning of period		$	128,248			$	133,626			$	137,777			$	133,626			$	136,171
Loans charged-off:
Noncovered loans:
Commercial non real estate			1,272				2,386				121				3,658				4,200
Commercial and land development			950				91				5,348				1,041				6,365
Commercial real estate			650				723				750				1,373				2,871
Residential mortgages			856				241				856				1,097				902
Consumer			3,581				4,041				4,376				7,622				8,350
Total noncovered charge-offs			7,309				7,482				11,451				14,791				22,688
Covered loans:
Commercial non real estate			24				46				681				70				681
Commercial and land development			166				458				283				624				2,321
Commercial real estate			905				3,117				689				4,022				2,121
Residential mortgages			422				308				463				730				516
Consumer			1,049				81				483				1,130				1,091
Total covered charge-offs			2,566				4,010				2,599				6,576				6,730
Total charge-offs			9,875				11,492				14,050				21,367				29,418
Recoveries of loans previously charged-off:
Noncovered loans:
Commercial non real estate			585				826				1,358				1,411				2,338
Commercial and land development			413				651				372				1,064				1,037
Commercial real estate			726				331				729				1,057				1,512
Residential mortgages			269				94				526				363				895
Consumer			1,252				1,602				1,434				2,854				3,241
Total noncovered recoveries			3,245				3,504				4,419				6,749				9,023
Covered loans:
Commercial non real estate			6				445				90				451				90
Commercial and land development			39				857				142				896				484
Commercial real estate			1,235				136				322				1,371				878
Residential mortgages			13				6				2				19				2
Consumer			92				56				17				148				28
Total covered recoveries			1,385				1,500				573				2,885				1,482
Total recoveries			4,630				5,004				4,992				9,634				10,505
Net charge-offs—noncovered			4,064				3,978				7,032				8,042				13,665
Net charge-offs—covered			1,181				2,510				2,026				3,691				5,248
Total net charge-offs			5,245				6,488				9,058				11,733				18,913
Provision for loan losses before FDIC benefit—covered loans			(1,095	)			(7,155	)			1,355				(8,250	)			9,839
Benefit attributable to FDIC loss share agreement			1,022				6,853				(993	)			7,875				(2,876	)
Provision for loan losses noncovered loans			6,764				8,265				7,895				15,029				10,872
Provision for loan losses, net			6,691				7,963				8,257				14,654				17,835
(Decrease) Increase in FDIC loss share receivable			(1,022	)			(6,853	)			993				(7,875	)			2,876
Allowance for loan losses at end of period		$	128,672			$	128,248			$	137,969			$	128,672			$	137,969
Ratios:
Gross charge-offs—noncovered to average loans			0.23	%			0.24	%			0.40	%			0.24	%			0.40	%
Recoveries—noncovered to average loans			0.10	%			0.11	%			0.15	%			0.11	%			0.16	%
Net charge-offs—noncovered to average loans			0.13	%			0.13	%			0.24	%			0.13	%			0.24	%
Allowance for loan losses to period-end loans			1.00	%			1.02	%			1.18	%			1.00	%			1.18	%

 

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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 real estate owned (ORE) and other foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed.

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Loans accounted for on a nonaccrual basis:
Commercial non-real estate loans		$	11,766			$	8,705
Commercial non-real estate loans—restructured			3,368				4,654
Total commercial non-real estate loans			15,134				13,359
Construction and land development loans			7,350				8,770
Construction and land development loans—restructured			3,701				7,930
Total construction and land development loans			11,051				16,700
Commercial real estate loans			30,652				37,369
Commercial real estate loans—restructured			3,943				3,091
Total commercial real estate loans			34,595				40,460
Residential mortgage loans			21,996				22,255
Residential mortgage loans—restructured			504				—
Total residential mortgage loans			22,500				22,255
Consumer loans			6,621				6,912
Total nonaccrual loans			89,901				99,686
Restructured loans still accruing:
Commercial non-real estate loans			2,285				2,323
Construction and land development loans			3,236				3,298
Commercial real estate loans			2,347				3,144
Residential mortgage loans			—				507
Consumer loans			—				—
Total restructured loans			7,868				9,272
ORE and foreclosed assets			59,732				76,979
Total nonperforming assets*		$	157,501			$	185,937
Loans 90 days past due still accruing		$	4,143			$	10,387
Ratios:
Nonperforming assets to loans plus
ORE and foreclosed assets			1.22	%			1.50	%
Allowance for loan losses to nonperforming loans and accruing loans 90 days past due			126.26	%			111.97	%
Loans 90 days past due still accruing to loans			0.03	%			0.08	%

 

*	Includes total nonaccrual loans, total restructured loans—still accruing and ORE and foreclosed assets.

Nonperforming assets (NPAs) totaled $157.5 million at June 30, 2014, down $22.2 million from March 31, 2014 and $28.4 million from December 31, 2013. Nonperforming assets as a percent of total loans, ORE, and other foreclosed assets was 1.22% at June 30, 2014, compared to 1.43% at March 31, 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 $160 million from March 31, 2014 and $172 million from December 31, 2013, to a total of $441 million at June 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 second quarter of 2014 were down $27 million, or 7%, compared to the first quarter of 2014, and $4 million, or 1%, compared to the fourth quarter of 2013.

Deposits

Total deposits were $15.2 billion at June 30, 2014, down less than 1% from March 31, 2014 and December 31, 2013. Average deposits for the second quarter of 2014 were down 1% from the first quarter of 2014.

Noninterest-bearing demand deposits (DDAs) increased by $110 million, or 2%, during the second quarter to $5.7 billion at June 30, 2014, and were up $194 million, or 4%, from December 31, 2013. DDAs at the end of the second quarter of 2014 were up $400 million, or 8%, from a year earlier. Noninterest-bearing demand deposits comprised 38% of total period-end deposits at June 30, 2014 compared to 37% at March 31, 2014, 36% at year-end 2013 and 35% at June 30, 2013.

Interest-bearing public fund deposits totaled $1.5 billion at June 30, 2014, up $33 million, or 2%, from March 31, 2014 but down $87 million, or 6%, from December 31, 2013. Public funds typically carry higher balances at year-end with subsequent reductions throughout the first six months of the year.

Time deposits totaled $2 billion at June 30, 2014, down $134 million, or 6%, from March 30, 2013 and down $138 million, or 7%, from December 31, 2013. Balance in sweep deposit products increased $43 million, or 12%, from December 31, 2013 primarily during the first quarter of 2014. CDs were down $137 million, or 9%, from March 31, 2014 and down $165 million, or 11%, from December 31, 2013 as low yields available to customers on maturing CDs continue to drive reductions in CD balances.

Short-Term Borrowings

At June 30, 2013, short-term borrowings totaled $1.1 billion, up $406 million, or 62%, from December 31, 2013. The Company borrowed $415 million on the $2.7 billion line of credit with the Federal Home Loan Bank of Dallas (“FHLB”) to fund loan growth, and to replace the $115 million in fixed rate reverse repurchase obligations that were “unwound” 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 June 30, 2014 according to expiration date.

 

						Expiration Date
						Less than				1-3				3-5				More than
		Total				1 year				years				years				5 years
		(In thousands)
Commitments to extend credit		$	5,246,722			$	2,488,580			$	1,053,994			$	1,151,584			$	552,564
Letters of credit			450,670				300,868				86,973				59,436				3,393
Total		$	5,697,392			$	2,789,448			$	1,140,967			$	1,211,020			$	555,957

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 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 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.

 

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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 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 report contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and we intend such forward-looking statements to be covered by the safe harbor provisions therein and are including this statement for purposes of invoking these safe-harbor provisions. Forward-looking statements provide projections of results of operations or of financial condition or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “can,” or similar verbs.

Forward-looking statements that we may make include, but may not be limited to, comments with respect to future levels of economic activity in our markets, loan growth, deposit trends, credit quality trends, future sales of nonperforming assets, net interest margin trends, future expense levels and the ability to achieve reductions in non-interest expense or other cost savings, projected tax rates, future profitability, improvements in expense to revenue (efficiency) ratio, purchase accounting impacts such as accretion levels, the impact of the branch rationalization process, details of the common stock buyback, possible repurchases of shares under stock buyback

 

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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 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 most recent Annual Report on Form 10-K and other 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 as they are subject to risks and uncertainties. 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 June 30, 2014, assuming the indicated instantaneous and sustained parallel shift in the yield curve at the measurement date. These results indicate that we are slightly asset sensitive as compared to the stable rate environment assumed for the base case.

 

Net Interest Income (te) at Risk
Change in interest rate (basis points)		Estimated increase (decrease) in net interest income
+100			1.46	%
+200			3.43	%
+300			5.25	%

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 June 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 have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2013. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information with respect to purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the three months ended June 30, 2014.

 

		Total number of shares or units purchased				Average price paid per share				Total number of shares purchased as a part of publicly announced plans or programs (1)				Maximum number of shares that may yet be purchased under plans or programs
April 1, 2014 - April 30, 2014			—			$	—				—				1,426,458
May 1, 2014 - May 31, 2014			590,222				33.75				590,222				836,236
June 1, 2014 - June 30, 2014			—				—				—				836,236
Total			590,222			$	33.75				590,222

 

(1)	The Company publicly announced its 2014 stock buyback program on July 24, 2014.

 

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Item 6. Exhibits.

(a) Exhibits:

 

Exhibit Number		Description
*10.1		Hancock Holding Company 2014 Long Term Incentive Plan (filed as Exhibit 10.1 to Hancock’s Form 8-K filed with the Commission on April 21, 2014 and incorporated herein by reference).
*10.2		Form of Change in Control Employment Agreement between the Company and its executive officers (filed as Exhibit 10.2 to Hancock’s Form 8-K filed with the Commission on June 20, 2014 and incorporated herein by reference).
***10.3		Addemdum to Nonqualified Deferred Compensation Plan describing SERP benefit.
***10.4		Form of 2014 Restricted Stock Award Agreement.
**31.1		Certification of Chief Executive Officers pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
**31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**32.1		Certification of Chief Executive Officers pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
**32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101		XBRL Interactive Data.

 

*	Compensatory plan or arrangement

**	Filed herewith

 

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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.

 

 

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Index to Exhibits

 

Exhibit Number		Description
*10.1		Hancock Holding Company 2014 Long Term Incentive Plan (filed as Exhibit 10.1 to Hancock’s Form 8-K filed with the Commission on April 21, 2014 and incorporated herein by reference).
*10.2		Form of Change in Control Employment Agreement between the Company and its executive officers (filed as Exhibit 10.2 to Hancock’s Form 8-K filed with the Commission on June 20, 2014 and incorporated herein by reference).
***10.3		Addemdum to Nonqualified Deferred Compensation Plan describing SERP benefit.
***10.4		Form of 2014 Restricted Stock Award Agreement.
**31.1		Certification of Chief Executive Officers pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
**31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**32.1		Certification of Chief Executive Officers pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
**32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101		XBRL Interactive Data.

 

*	Compensatory plan or arrangement

**	Filed herewith