HANCOCK WHITNEY CORP - Quarter Report: 2017 June (Form 10-Q)





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

___________________________________________________________



(Mark one)



For the quarterly period ended June 30, 2017

OR





For the transition period from                      to                      

Commission file number: 001-36827



HANCOCK HOLDING COMPANY

(Exact name of registrant as specified in its charter)





(228) 868-4000

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, address and fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ☒  Yes    ☐  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    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 

84,742,940 common shares were outstanding as of August  1, 2017.  



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Hancock Holding Company

Index



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Hancock Holding Company

Glossary of Defined Terms



AFS – available for sale securities

AOCI – accumulated other comprehensive income

ALLL – allowance for loan and lease losses

ASC – Accounting Standards Codification

ASU – Accounting Standards Update

ATM - automatic teller machine

Bank – Whitney Bank

Basel II - Basel Committee's 2004 Regulatory Capital Framework (Second Accord)

Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord)

Basel Committee - Basel Committee on Banking Supervision

Beige Book - Federal Reserve’s Summary of Commentary on Current Economic Conditions    

bp(s) – basis point(s)

C&I – commercial and industrial loans

CD – certificate of deposit

CDE – Community Development Entity

CMO – Collateralized Mortgage Obligation

Company – Hancock Holding Company and its wholly-owned subsidiaries

CRE – commercial real estate

Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

Federal Reserve Bank – The 12 banks that are the operating arms of the U.S. central bank. They implement the

policies of the Federal Reserve Board and also conduct economic research.

Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes

monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed

by the President subject to Senate confirmation, and serve 14-year terms.

Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district.

This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the

credit structure.

FHLB – Federal Home Loan Bank

FNBC – First NBC Bank

FNBC I – acquired selected assets and liabilities from FNBC under agreement dated March 10, 2017

FNBC II – acquired selected assets and liabilities from the FDIC as receiver for FNBC under agreement dated April 28, 2017

GAAP – Generally Accepted Accounting Principles in the United States of America

Hancock – Hancock Holding Company

Hancock Bank – Whitney Bank does business as Hancock Bank in Mississippi, Alabama, and Florida

HTM – held to maturity securities

LIBOR – London Interbank Offered Rate

LIHTC – Low Income Housing Tax Credit

MD&A – management’s discussion and analysis of financial condition and results of operations

NAICS – North American Industry Classification System

n/m – not meaningful

OCI – other comprehensive income

OFI – Louisiana Office of Financial Institutions

ORE – other real estate defined as foreclosed and surplus real estate

Parent Company – Hancock Holding Company

PCI – purchased credit impaired loans

Repos – securities sold under agreements to repurchase

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SEC – U.S. Securities and Exchange Commission

Securities Act – Securities Act of 1933, as amended

te – taxable equivalent adjustment

TDR – troubled debt restructuring (as defined in ASC 310-40)

TSR – total shareholder return

U.S. Treasury – The United States Department of the Treasury

Whitney Bank – wholly-owned subsidiary of Hancock Holding Company, through which Hancock conducts its banking operations

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Part I. Financial Information

Item 1. Financial Statements

Hancock Holding Company and Subsidiaries

Consolidated Balance Sheets

(Unaudited)





See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Income

(Unaudited)







See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)







See notes to unaudited consolidated financial statements.

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)







See notes to unaudited consolidated financial statements.

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 Hancock Holding Company and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)







See notes to unaudited consolidated financial statements.

 

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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 the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented.  The Company has also evaluated all subsequent events for potential recognition and disclosure through the date of the filing of this Form 10-Q.  Some financial information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  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.

Certain prior period amounts have been reclassified to conform to the current period presentation.  Select Stockholders’ Equity line items in the Consolidated Balance Sheets and Statements of Changes in Stockholders’ Equity have been modified to simplify the presentation as discussed in Note 7 – Stockholders’ Equity.  Presentation of derivatives contracts cleared through a central clearing counterparty has been revised prospectively to reflect netting of variation margin as settlements to the derivative assets and liabilities rather than collateral, effective January 3, 2017, as discussed in Note 6 – Derivatives.  These changes in presentation did not have a material impact on the Company’s financial condition or operating results.

Use of Estimates

The accounting principles the Company follows and the methods for applying these principles conform with GAAP and with general practices followed by the banking industry.   These accounting principles require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying notes.  Actual results could differ from those estimates.    

Critical Accounting Policies and Estimates



There were no material changes or developments during the reporting period 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 its Annual Report on Form 10-K for the year ended December 31, 2016.   



 

2.  Acquisitions



On March 10, 2017, the Company, through its banking subsidiary, Whitney Bank (“Whitney”), completed the acquisition of certain assets and liabilities, including nine branches, from First NBC Bank (“FNBC”), referred to as the FNBC I transaction.  Whitney paid approximately $323 million in cash consideration ($326 million cash paid net of $3 million in branch cash acquired), including a $41.6 million transaction premium for the earnings stream acquired. 



On April 28, 2017, the Louisiana Office of Financial Institutions (“OFI”) closed FNBC and appointed the FDIC as receiver.  Whitney signed a purchase and assumption agreement with the FDIC to acquire certain additional assets and liabilities of FNBC, referred to as the FNBC II transaction.  Whitney continued operations of FNBC’s 29 branch locations (24 in Louisiana and five in Florida) and acquired select assets and assumed select liabilities, including substantially all of the transaction and savings deposits.  Whitney paid a premium of $35 million to the FDIC for the earnings stream acquired and received $798 million in cash ($640 million in preliminary settlements for the net liabilities assumed and $158 million in branch cash acquired).



Under the FNBC II purchase and assumption agreement, Whitney had an option to purchase (or assume the leases for) the branch and non-branch locations, including furniture, fixtures, and equipment subsequent to the date of the transaction, subject to FDIC approval.  This option was exercised for seven branches and will add additional acquired assets from this transaction in the third quarter of 2017.  A final cash settlement with the FDIC is expected to occur in the second half of 2017. 



The FNBC I and FNBC II transactions were accounted for as business combinations and therefore, assets acquired and liabilities assumed were recorded at estimated fair values on the acquisition dates. 

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The following table sets forth the acquisition date preliminary fair value of  the assets acquired and liabilities assumed, consideration, and the resulting goodwill recorded in each of the FNBC I and FNBC II transactions, and in the aggregate.









The loans acquired were recorded at estimated fair value at the acquisition dates with no carryover of the related allowance for loan losses.  The acquired loans were considered to be performing (“purchased credit performing”) based on such factors as past due status, nonaccrual status and are accounted for under Accounting Standards Codification (“ASC”) 310-20.  The unpaid principal balance of the loans acquired totaled $1.4 billion, of which approximately $47.6 million is not expected to be collected.  The difference at the acquisition dates between the fair value and the contractual amounts due (the “fair value discount”) of $57.5 million will be accreted into income over the estimated lives of the loan pools established in the valuation.



The Company assumed approximately $604 million of borrowings in the FNBC I transaction, consisting of both short-term and long-term Federal Home Loan Bank (“FHLB”) borrowings.  The short-term borrowings consist of $460 million in variable-rate term notes; $200 million matures in 2025 and $260 million matures in 2026.  These notes re-price quarterly and may be re-paid at the Company’s option, either in whole or in-part, on any quarterly re-pricing date.  Also included in short-term borrowings are $51 million in fixed-rate term notes that mature in 2017.  The long-term borrowings include $93.1 million in fixed-rate term notes; $88 million that mature in 2018,  $3.2 million that mature in 2019, and $1.9 million that mature in 2023.  Short-term borrowings in the FNBC II transaction consisted of securities sold under repurchase agreements.



Identifiable intangible assets consist of core deposit intangibles totaling $24.4 million that are being amortized using sum of years’ digits over the asset’s life of eight years for the FNBC I transaction and nine years for the FNBC II transaction.  Goodwill totaling $119 million represents the excess of the consideration paid over the fair value of the net assets acquired, or the excess of the fair value of the liabilities assumed over the net consideration received.  The tax basis of goodwill generated from these transactions is expected to be deductible for federal income tax purposes.







   

Goodwill for the FNBC I transaction was adjusted by $495,000 in the second quarter of 2017 related to changes to a property valuation.  The Company expects to adjust goodwill for the FNBC II transaction as we finalize purchase accounting and complete the final settlement with the FDIC.



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The operating results of the Company for the three and six months ended June 30, 2017 include the results from the operations acquired in the FNBC transactions since the respective acquisition dates.  Estimating reliable historical financial information is impracticable as only selected components of the businesses, as historically operated, were acquired. A number of post-acquisition events, including the consolidation of certain branch locations and the integration of operations, cash and investments acquired make quantifying discrete earnings contributions of the businesses acquired impracticable.  As such, neither supplemental pro forma financial information of the combined entity, nor revenue and earnings contributed by the businesses acquired since the dates of acquisition are presented.



The Company incurred merger-related costs in connection with the FNBC I and FNBC II transactions.  The following table reflects the merger-related costs for the three and six months ended June 30, 2017 for both the FNBC I and FNBC II transactions combined.    The Company expects to incur additional merger-related expense in the third quarter of 2017.







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3.  Securities

The amortized cost and estimated fair value of securities classified as available for sale and held to maturity follow.











The following table presents the amortized cost and estimated fair value of debt securities at June 30, 2017 by contractual maturity.  Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.







The Company held no securities classified as trading at June 30, 2017 or December 31, 2016.    

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The fair value and gross unrealized losses for securities classified as available for sale with unrealized losses for the periods indicated follow. 











The fair value and gross unrealized losses for securities classified as held to maturity with unrealized losses for the periods indicated follow. 







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The unrealized losses primarily relate to changes in market rates on fixed-rate debt securities since the respective purchase dates.  In all cases, the indicated impairment on these debt securities 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 issuers’ abilities 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.

Proceeds from the sales of securities were approximately $213.9 million with no gross gain or loss and $102.3 million with a gross gain of $1.1 million and no loss for the six months ended June 30, 2017 and 2016, respectively. 

Securities with carrying values totaling $3.8 billion at June 30, 2017 and December 31, 2016 were pledged as collateral primarily to secure public deposits or securities sold under agreements to repurchase.



4.  Loans and Allowance for Loan Losses

The Company generally makes loans in its market areas of south Mississippi, southern and central Alabama, south Louisiana, the Houston, Texas areas and the northern, central and panhandle regions of Florida. Loans, net of unearned income, by portfolio are presented in the table below.









The following briefly describes the composition of each loan category.



Commercial and industrial



Commercial and industrial loans are made available to businesses for working capital (including financing of inventory and receivables), business expansion, to facilitate the acquisition of a business, and the purchase of equipment and machinery, including equipment leasing. These loans are primarily made based on the identified cash flows of the borrower and, when secured, have the added strength of the underlying collateral.



Commercial non-real estate loans may be secured by the assets being financed or other business assets such as accounts receivable, inventory, ownership or commodity interests, and may incorporate a personal or corporate guarantee; however, some short-term loans may be made on an unsecured basis, including a small portfolio of corporate credit cards, generally issued as a part of overall customer relationships.



Commercial real estate – owner occupied loans consist of commercial mortgages on properties where repayment is generally dependent on the cash flow from the ongoing operations and activities of the borrower.  Like commercial non-real estate, these loans

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are primarily made based on the identified cash flows of the borrower, but also have the added strength of the value of underlying real estate collateral.  



Commercial real estate – income producing



Commercial real estate – income producing loans consist of loans secured by commercial mortgages on properties where the loan is made to real estate developers or investors and repayment is dependent on the sale, refinance, or income generated from the operation of the property.  Properties financed include retail, office, multifamily, senior housing, hotel/motel, skilled nursing facilities and other commercial properties. 



Construction and land development



Construction and land development loans are made to facilitate the acquisition, development, improvement and construction of both commercial and residential-purpose properties.  Such loans are made to builders and investors where repayment is expected to be made from the sale, refinance or operation of the property or to businesses to be used in their business operations.  This portfolio also includes a small amount of residential construction loans and loans secured by raw land not yet under development.   



Residential Mortgages



Residential mortgages consist of closed-end loans secured by first liens on 1- 4 family residential properties. The portfolio includes both fixed and adjustable rate loans, although most longer-term, fixed-rate loans originated are sold in the secondary mortgage market.  



Consumer



Consumer loans include second lien mortgage home loans, home equity lines of credit and nonresidential consumer purpose loans. Nonresidential consumer loans include both direct and indirect loans.   Direct nonresidential consumer loans are made to finance the purchase of personal property, including automobiles, recreational vehicles and boats, and for other personal purposes (secured and unsecured), and deposit account secured loans. Indirect nonresidential loans include automobile financing provided to the consumer through an agreement with automobile dealerships.  Consumer loans also include a small portfolio of credit card receivables issued on the basis of applications received through referrals from the Bank’s branches, online and other marketing efforts.    



Allowance for Loan Losses

The following schedule shows activity in the allowance for loan losses by portfolio class for the six months ended June 30, 2017 and 2016, as well as the corresponding recorded investment in loans at the end of each period.







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Impaired Loans

The following table shows the composition of nonaccrual loans by portfolio class.  Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be performing and are excluded from the table. 







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Nonaccrual loans include loans modified in troubled debt restructurings (“TDRs”) of $96.3 million and $81.9 million at June 30, 2017 and December 31, 2016, respectively.  Total TDRs, both accruing and nonaccruing, were $186.8 million as of June 30, 2017 and $121.7 million at December 31, 2016.  All TDRs are individually evaluated for impairment.

The table below details TDRs that were modified during the six months ended June 30, 2017 and June 30, 2016 by portfolio class. 







The TDRs during the six months ended June 30, 2017 reflected in the table above include $28.4 million of loans with extended amortization terms or other payment concessions, $40.2 million of loans with significant covenant waivers and $35.7 million with other modifications.  The TDRs during the six months ended June 30, 2016 include $31.0 million of loans with extended terms or other payment concessions and $27.3 million of other modifications.

No TDRs that subsequently defaulted within twelve months of modification were recorded in the six months ended June 30, 2017 or 2016. 

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The tables below present loans that are individually evaluated for impairment disaggregated by portfolio class at June 30, 2017 and December 31, 2016.  Loans individually evaluated for impairment include TDRs and loans that are determined to be impaired and have aggregate relationship balances of $1 million or more. 







The tables below present the average balances and interest income for total impaired loans for the three and six months ended June 30, 2017 and 2016.  Interest income recognized represents interest on accruing loans modified in a TDR.





























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Aging Analysis

The tables below present the age analysis of past due loans by portfolio class at June 30, 2017 and December 31, 2016.  Purchased credit impaired loans accounted for in pools with an accretable yield are considered to be current. 











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Credit Quality Indicators

The following tables present the credit quality indicators by segments and portfolio class of loans at June 30, 2017 and December 31, 2016. 











Below are the definitions of the Company’s internally assigned grades:

Commercial:

Residential and Consumer:

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Purchased Credit Impaired Loans

Changes in the carrying amount of purchased credit impaired loans and related accretable yield are presented in the following table for the six months ended June 30, 2017 and the year ended December 31, 2016.







Loans Acquired in an FDIC-Assisted Transaction and the Related FDIC Loss Share Receivable



Loans purchased in the 2009 acquisition of Peoples First Community Bank were covered by two loss share agreements between the FDIC and the Company.  In the second quarter of 2017, the Company reached an agreement with the FDIC to terminate the agreements on the remaining covered loan balances, totaling $154 million at June 30, 2017.  The Company wrote down the indemnification asset by $6.6 million to the settlement amount of $3.2 million in the second quarter of 2017, with the final payment to occur in the third quarter of 2017.   

The following schedule shows activity in the FDIC loss share receivable for the six months ended June 30, 2017 and 2016.







Residential Mortgage Loans in Process of Foreclosure



Included in loans are $4.2 million and $10.1 million of consumer loans secured by single family residential real estate that are in process of foreclosure as of June 30, 2017 and December 31, 2016, respectively.   Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction.  In addition to the single family residential real estate loans in process of foreclosure, the Company also held $2.7 million and $3.1 million of foreclosed single family residential properties in other real estate owned as of June 30, 2017 and December 31, 2016, respectively.



5.  Securities Sold under Agreements to Repurchase

Included in short-term borrowings are customer securities sold under agreements to repurchase (“repurchase agreements”) that mature daily and are secured by U.S. agency securities totaling $482.1 million and $358.1 million at June 30, 2017 and December 31, 2016, respectively.  The Company borrows funds on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury management services offered to its deposit customers. As the Company maintains effective control over assets sold under agreements to repurchase, the securities continue to be carried on the consolidated statements of financial condition. Because the Company acts as borrower transferring assets to the counterparty, and the agreements mature daily, the Company’s risk is limited.



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6.  Derivatives

Risk Management Objective of Using Derivatives

The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments, currently related to select pools of variable rate loans and fixed-rate brokered deposits.  The Bank also enters 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 its net risk exposure resulting from such agreements.  The Bank also enters into risk participation agreements under which it may either sell or buy credit risk associated with a customer’s performance under certain interest rate derivative contracts related to loans in which participation interests have been sold to or purchased from other banks.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts and fair values of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2017 and December 31, 2016.  Effective January 3, 2017, the Company’s central clearing counterparty amended its rulebook to legally characterize variation margin accounts as settlements, rather than being reflected separately as collateral.  As a result of that change, the Company began prospectively reflecting derivative assets and liabilities net of the central clearing counterparty derivative margin account.

 





Cash Flow Hedges of Interest Rate Risk

The Company is party to various interest rate swap agreements designated and qualifying as cash flow hedges of the Company’s forecasted variable cash flows for pools of variable rate loans.   For each agreement, the Company receives interest at a fixed rate and pays at a variable rate.  The swap agreements at June 30, 2017 expire as follows:  notional amount of $250 million expire in 2019;  $200 million expire in 2020; and $300 million expire in 2022.    

During the terms of the swap agreements, the effective portion of changes in the fair value of the derivative instruments are recorded in Accumulated Other Comprehensive Income (“AOCI”) and subsequently reclassified into earnings in the periods that the hedged forecasted variable-rate interest payments affect earnings.  The impact on AOCI is reflected in Note 7.  There was no ineffective portion of the change in fair value of the derivatives recognized directly in earnings during the three or six months ended June 30, 2017 and 2016.



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Fair Value Hedges of Interest Rate Risk 



During 2017, the Company entered into interest rate swap agreements that modify the Company’s exposure to interest rate risk by effectively converting a portion of the Company’s brokered certificates of deposit from fixed rates to variable rates. The maturities and call features of these interest rate swaps match the features of the hedged deposits.  As interest rates fall, the decline in the value of the certificates of deposit is offset by the increase in the value of the interest rate swaps.  Conversely, as interest rates rise, the value of the underlying deposits increase, but the value of the interest rate swaps decrease, resulting in no impact on earnings.  Interest expense is adjusted by the difference between the fixed and floating rates for the period the swaps are in effect.  Hedge ineffectiveness on these transactions results in an increase or decrease of noninterest income. 

Derivatives Not Designated as Hedges

Customer interest rate derivative program

The Bank enters into interest rate derivative agreements, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies.  The Bank enters into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions.  Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

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 the Bank’s normal credit review process.

Mortgage banking derivatives

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

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 their risk management strategies.  The Bank manages its risk exposure from such transactions by entering into offsetting agreements with unrelated financial institutions.  Because the foreign exchange forward contract derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Effect of Derivative Instruments on the Income Statement



Derivative income consisting primarily of customer interest rate swap fees, net of fair value adjustments, is reflected in the income statement in other noninterest income, totaling $2.7 million and $3.1 million for the three and six months ended June 30, 2017, respectively, and $0.5 million and $0.4 million for the three and six months ended June 30, 2016, respectively.  The impact to interest income from cash flow hedges was ($0.2) million and ($0.1) million for the three and six months ended June 30, 2017, respectively and $0.7 million and $1.0 million for the three and six months ended June 30, 2016, respectively.  For the six months ended June 30, 2017, the fair value hedges entered into during the period reduced interest expense on deposits by $0.4 million and reduced noninterest income by $0.1 million due to ineffectiveness.   

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 a 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, 2017,  the aggregate fair value of derivative instruments with credit risk-related contingent features that were in a net liability position was $16.8 million. 

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Offsetting Assets and Liabilities

The Bank’s derivative instruments to certain counterparties contain legally enforceable netting provisions that allow for net settlement of multiple transactions to a single amount, which may be positive, negative, or zero.  Agreements with certain bilateral counterparties require both parties to maintain collateral in the event the fair values of derivative instruments exceed established exposure thresholds.  For centrally cleared derivatives, the Company is subject to initial margin posting and daily variation margin exchange with the central clearinghouses.  As noted above, effective January 3, 2017, the Company began to reflect its derivative assets and liabilities net of the central clearing party variation margin account in the statement of financial position.  Offsetting information in regards to all derivative assets and liabilities, including accrued interest, subject to these master netting agreements at June 30, 2017 and December 31, 2016 is presented in the following tables.











The Company has excess collateral compared to total exposure due to initial margin requirements for day-to-day rate volatility. 



7.    Stockholders’ Equity



The presentation of the components of stockholders’ equity was modified from prior filings to consolidate treasury stock into surplus in the consolidated balance sheets and statements of changes in stockholders’ equity in order to simplify the presentation.  Additional information on treasury stock is reflected in the common shares outstanding section below.





Common Shares Outstanding



Shares outstanding exclude treasury shares of 1.0 million and 1.3 million at June 30, 2017 and December 31, 2016, respectively, with a first-in-first-out cost basis of $17.6 million and $24.1 million at June 30, 2017 and December 31, 2016, respectively.  Shares outstanding also exclude unvested restricted share awards of 1.7 million and 2.0 million at June 30, 2017 and December 31, 2016, respectively.

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Accumulated Other Comprehensive Income (Loss)

The components of AOCI and changes in those components are presented in the following table.





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.  Subject to certain thresholds, unrealized losses on employee benefit plans will be reclassified into income as pension and post-retirement costs are recognized over the remaining service period of plan participants.  Accumulated gains/losses on the cash flow hedge of the variable-rate loans described in Note 6 will be reclassified into income over the life of the hedge.  Gains (losses) in AOCI are net of deferred income taxes. 

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The following table shows the line items in the consolidated income statements affected by amounts reclassified from AOCI.









 



8.  Other Noninterest Income

Components of other noninterest income are as follows.

























































9.  Other Noninterest Expense

Components of other noninterest expense are as follows.





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10.  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.





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 19,397 and 17,701, respectively, for the three and six months ended June 30, 2017.  Weighted-average anti-dilutive potential common shares totaled 548,821 and 602,809, respectively, for the three and six months ended June 30, 2016.    

 

11.  Retirement Plans



During the second quarter of 2017, the Company amended both the Hancock Holding Company Pension Plan and Trust Agreement (“Pension Plan”), a qualified defined benefit plan, and the Hancock Holding Company 401(k) Savings Plan and Trust Agreement (“401 (k) Plan”), a defined contribution plan.  The Pension Plan was amended to exclude any individual hired or rehired by the Company after June 30, 2017 from eligibility to participate. The Pension Plan amendment further provides that the accrued benefit of each participant in the Pension Plan whose combined age plus years of service as of January 1, 2018 totals less than 55 will be frozen as of January 1, 2018 and will not thereafter increase.  As a result of the plan amendments, pension assets and the benefit obligations were re-measured.  As of June 30, 2017, pension assets totaled $537.6 million and the benefit obligation totaled $476.9 million.  The impact of the amendment to the benefit obligation was a reduction of $17.3 million. 

The 401(k) Plan was amended for participants whose benefits are frozen under the Pension Plan, to add an enhanced Company contribution beginning January 1, 2018, in the amount of 2%,  4% or 6% of such participant’s eligible compensation, based on the participant’s age and years of service with the Company. The 401(k) Plan’s amendment further provides that the Company will contribute to the benefit of those associates of the Company hired or rehired after June 30, 2017 and those associates of the Company never enrolled in the Pension Plan an additional basic contribution in an amount equal to 2% of the associate’s eligible compensation beginning January 1, 2018.  Participants will vest in the new basic and enhanced Company contributions upon completion of three years of service.



The Company also has a nonqualified defined benefit plan covering certain legacy Whitney employees that was frozen as of December 31, 2012 and no future benefits are accrued under this plan.

The Company sponsors defined benefit postretirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits.  Benefits under the Hancock plan are not available to employees hired on or after January 1, 2000. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007.



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The following tables show the components of net periodic benefits cost included in expense for the plans for the periods indicated.







No contribution to the pension plans is required in 2017 to meet minimum funding requirements, and the Company has no plans to make a contribution in the current year.

 

12.  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 16 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Effective January 1, 2017, the Company prospectively adopted accounting guidance intended to improve the accounting for employee share-based payments.  The Company elected to account for forfeitures as they occur. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.    

A summary of option activity for the six months ended June 30, 2017 is presented below.



The total intrinsic value of options exercised for the six months ended June 30, 2017 was $4.1 million.  There was no total intrinsic value of options exercised for the six months ended June 30, 2016.

The restricted and performance shares in the table below are subject to service requirements. A summary of the status of the Company’s nonvested restricted and performance shares as of June 30, 2017 and changes during the six months ended June 30, 2017, is presented in the following table.



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As of June 30, 2017,  there was $43.8 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 3.2 years.  The total fair value of shares which vested during the six months ended June 30, 2017 and 2016 was $10.0 million and $2.0 million, respectively.    

During the six months ended June 30, 2017, the Company granted 23,489 performance shares subject to a total shareholder return (“TSR”) performance metric with a grant date fair value of $42.92 per share and 23,489 performance shares subject to a core earnings per share performance metric with a grant date fair value of $38.26 per share to key members of executive management. The number of performance shares subject to TSR that ultimately vest at the end of the three-year performance period, if any, will be based on the relative rank of the Company’s three-year TSR among the TSRs of a peer group of 44 regional banks. The fair value of the performance shares subject to TSR at the grant date was determined using a Monte Carlo simulation method.  The number of performance shares subject to core earnings per share that ultimately vest will be based on the Company’s attainment of certain core earnings per share goals over the two-year performance period.  The maximum number of performance shares that could vest is 200% of the target award.  Compensation expense for these performance shares is recognized on a straight-line basis over the three-year service period. 

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13.  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.

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present for each of the fair value hierarchy levels the Company’s assets and liabilities that are measured at fair value on a recurring basis in the consolidated balance sheets.













Securities classified as level 2 include obligations of U.S. Government agencies and U.S. Government-sponsored agencies, residential mortgage-backed securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and

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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 securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five years.  Company policies generally limit investments to U.S. agency securities and municipal securities determined to be investment grade according to an internally generated score which generally includes a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency.    There were no transfers between valuation hierarchy levels during the periods shown. 

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

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

Fair Value of Assets Measured on a Nonrecurring Basis

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

Other real estate owned, including both foreclosed property and surplus banking property, are level 3 assets that are adjusted to fair value, less estimated selling costs, upon transfer to other real estate owned.  Subsequently, other real estate owned is carried at the lower of carrying value or fair value less estimated selling costs.  Fair values are determined by sales agreement or third-party appraisals as discounted for estimated selling costs, information from comparable sales, and marketability of the property. 

The fair value information presented below is not as of the period-end, rather it was as of the date the fair value adjustment was recorded during the twelve months for each of the dates presented below, and excludes nonrecurring fair value measurements of assets no longer on the balance sheet. 

The following tables present the Company’s financial assets that are measured at fair value on a nonrecurring basis for each of the fair value hierarchy levels.











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.

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

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

Loans, Net - The fair value measurement for certain impaired loans was discussed earlier in the note.  For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows using discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality. 

Loans Held for Sale – These loans are recorded at fair value and carried at the lower of cost or market.  The carrying amount is considered a reasonable estimate of fair value. 

Deposits - The accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (“carrying amounts”).  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

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, 2017 and December 31, 2016.









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14.  Recent Accounting Pronouncements



Accounting Standards Adopted in 2017



In March 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which amends the amortization period for certain purchased callable debt securities held at a premium.  The amendments require the premium to be amortized to the earliest call date.  The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity.  The amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.  These amendments are effective for fiscal years, and for interim period within those fiscal years, beginning after December 15, 2018.  The Company early adopted this amendment and, in accordance with the standards, the Company began amortizing the premium for certain purchased callable debt securities to the earliest call date.  The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.



In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” to improve the accounting for employee share-based payments. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences; classification of awards as either equity or liabilities; and classification on the statement of cash flows.  The amendments were effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods and we adopted the guidance effective January 1, 2017.  In accordance with the standard, the Company elected to account for forfeitures of stock-based compensation as they occur and will now reclass dividends paid on forfeited shares to compensation expense from retained earnings.    Classification of shares forfeited for taxes are reflected in the statement of cash flows as a financing rather than operating activity, with all historical periods restated.  In addition, the Company began recognizing excess tax benefits and tax deficiencies during the period to income (rather than in equity) on a prospective basis.  Our adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations, however, the change in treatment  of excess tax benefits and tax deficiencies could result in volatility of future earnings, depending on changes in the Company’s stock price. 



Issued but Not Yet Adopted Accounting Standards



In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting,” which seeks to provide clarity, reduce diversity in practice, and reduce complexity when applying the guidance regarding a change to the terms of conditions of a share-based payment award.  Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied:  (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the

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original award is modified.  The amendments are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued.  The Company is currently assessing this pronouncement and the impact of adoption, but it is not expected to have a material impact on the Company’s financial condition or results of operations.



In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs,” to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost.  The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments also allow only the service cost component to be eligible for capitalization when applicable.  These amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance, meaning early adoption should be within the first interim period if an employer issues interim financial statements.  Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption.  The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.  The Company is currently assessing this pronouncement and the impact of adoption, but it is not expected to have a material impact on the Company’s financial condition or results of operations.



In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, ASU No. 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  This ASU is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The ASU should be applied using a prospective method.  The Company is currently assessing this pronouncement and is considering early adoption, but it is not expected to have a material impact on the Company’s financial condition or results of operations.



In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business,” which addresses stakeholders’ concerns that the current definition of a business is applied too broadly and analyzing transactions under the current definition is difficult and costly.  Under the amended guidance, a transaction is initially subject to a screening process to determine whether a “set” (i.e. an integrated set of assets and activities) qualifies as a business.  Under the screen, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or in a group of similar identifiable assets, the set is deemed not to be a business.  Further evaluation is required only if the transferred set does not meet the screen.  Under the further evaluation, to be considered a business, a set must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output.  The amendment also narrows the definition of the term “output” so that it is consistent with the manner in which outputs are described in Topic 606, Revenue from Contracts with Customers.  The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  Early application is permitted under certain circumstances.  The amendments should be applied prospectively on or after the effective date.  The Company is currently assessing this pronouncement and the impact of adoption on the Company’s financial condition and results of operations.



In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory,” which addresses stakeholders’ concerns that the limited amount of authoritative guidance has led to diversity in practice and is a source of complexity in financial reporting and results in an unfaithful representation of the economics of an intra-entity asset transfer.  The amendment eliminates the exception to the United States generally accepted accounting principle (“U.S. GAAP”) of comprehensive recognition of current and deferred income taxes that prohibits recognizing current and deferred income tax consequences for an intra-equity asset transfer (excluding the transfer of inventory) until the asset has been sold to an outside party.  The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods.  Early adoption is permitted, including adoption in an interim period.  The amendments should be applied using a retrospective transition method to each period presented.  The Company is currently assessing this pronouncement and the impact of adoption; however, the adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

   



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In August 2016, the FASB issued ASU 2016-15, “Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments provide guidance on eight specific cash flow issues, including debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned), life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.  The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The amendments should be applied using a retrospective transition method to each period presented.  This guidance is not expected to have a material impact on the Company’s financial condition or results of operations.



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credits Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  The ASU, more commonly referred to as Current Expected Credit Losses, or CECL, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques currently applied will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.  In addition, the ASU amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.  The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  Early application is permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company has begun the process of implementation and currently is not planning to early adopt.  The Company expects the guidance will result in an increase in the allowance for loan losses given the change from covering losses inherent in the portfolio to covering losses over the remaining expected life of the portfolio and the nonaccretable difference on purchased credit impaired loans moving to an allowance (offset by an increase in the carrying value of the related loans). The guidance will also result in the establishment of an allowance for credit loss on held to maturity debt securities.  The amount of the increase in these allowances will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.



In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” that provides new lease accounting guidance.  Under the guidance, lessees (with the exception of short-term leases) will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Lessor accounting is largely unchanged.  Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability.  Lessees will no longer be provided with a source of off-balance sheet financing.  Public business entities are required to apply the amendments for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently assessing this pronouncement and the impact of adoption by reviewing its existing lease contracts and service contracts that may include embedded leases.  The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets; the extent of such is under evaluation.  The Company does not expect material changes to the recognition of operating lease expense in its consolidated results of operations.



In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” that improves the recognition and measurement of financial instruments through targeted changes to existing GAAP. It requires equity investments (except those that are accounted for under the equity method of accounting or result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It also requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company is currently assessing this pronouncement; however, the adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” 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. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are also excluded from the scope.  Subsequent to issuance of the revenue recognition guidance, the FASB has issued several updates that deferred by one year the effective date for revenue recognition guidance; clarified its guidance for performing the principal-versus-agent analysis; clarified guidance for identifying performance obligations allowing entities to ignore immaterial promised goods and services in the context of a contract with a customer and other clarifying guidance and technical corrections.  Entities can elect to adopt the guidance either on a full or modified retrospective basis.  Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented.  Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance.  The standard will be effective for the Company for annual reporting periods beginning after December 15, 2017.  The Company is still in process of gathering an inventory and evaluating all contracts with customers and does not plan to early adopt the guidance. The Company plans to use the modified retrospective approach for reporting and make a cumulative effect adjustment to the beginning balance of retained earnings.  The preliminary analysis suggests this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.







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



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. Forward looking statements that we may make include statements regarding balance sheet and revenue growth, the provision for loans losses, loan growth expectations, management’s predictions about charge-offs for loans, including energy-related credits, the impact of changes in oil and gas prices on our energy portfolio, and the downstream impact on businesses that support the energy sector, especially in the Gulf Coast region, the impact of the First NBC transactions on our performance and financial condition, including our ability to successfully integrate the business, deposit trends, credit quality trends, net interest margin trends, future expense levels, success of revenue-generating initiatives, projected tax rates, future profitability, improvements in expense to revenue (efficiency) ratio, purchase accounting impacts such as accretion levels, and the financial impact of regulatory requirements. Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.

Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward looking statements. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements can be found in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in other periodic reports that we file with the SEC.

OVERVIEW



Non-GAAP Financial Measures



Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe Hancock’s performance.  A reconciliation of those measures to GAAP measures are provided within the appropriate sections of this Item. 



Consistent with Securities and Exchange Commission Industry Guide 3, the Company presents net interest income, net interest margin and efficiency ratios on a fully taxable equivalent (“te”) basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The Company believes this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources.



Over the past several quarters we have disclosed our focus on strategic initiatives that were designed to replace declining levels of purchase accounting income from acquisitions with improvement in core income, which the Company defines as income excluding net purchase accounting income. The Company presents core income non-GAAP measures including core net interest income and core net interest margin, core revenue and core pre-tax, pre-provision profit.  These measures are provided to assist the reader with a  better understanding of the Company’s performance period over period as well as providing investors with assistance in understanding the success management has experienced in executing its strategic initiatives.



We define Core Net Interest Income as net interest income (te) excluding net purchase accounting accretion resulting from the fair market value adjustments related to acquired operations.  We define Core Net Interest Margin as reported core net interest income, annualized, expressed as a percentage of average earning assets.  



We define Core Revenue as core net interest income and noninterest income less the amortization of the FDIC loss share receivable related to loans acquired in an FDIC assisted transaction and other nonoperating revenues.  



We define Core Pre-Provision Net Revenue as core revenue less noninterest expense, excluding intangible amortization and other nonoperating items. Management believes that core pre-tax, pre-provision net revenue is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.



Acquisitions

On March 10, 2017, the Company completed a transaction with First NBC Bank (“FNBC”), whereby the Company acquired approximately $1.2 billion in loans (net of fair value discount or “loan mark”), nine branch locations with $398 million in deposits, and assumed $604 million in FHLB borrowings.  The operational conversion of the branch locations occurred in the second quarter of

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2017, along with the simultaneous closure of 10 overlapping branches.  This transaction is referred to as the FNBC I transaction throughout this document.



On April 28, 2017, the Company entered into a purchase and assumption agreement with the FDIC (“Agreement”), which acted as the receiver for the Louisiana Office of Financial Institutions (OFI) following the OFI’s closure of FNBC.  Pursuant to the Agreement, Whitney Bank acquired selected assets and liabilities of FNBC from the FDIC and continued to operate the 29 branch locations (24 in Louisiana and five in Florida).  This transaction is referred to as the FNBC II transaction throughout this document.    



Under the Agreement, Whitney acquired/assumed the following assets and liabilities:





Whitney received approximately $798 million of cash in the transaction ($640 million in preliminary settlements from the FDIC for net liabilities assumed, and $158 million in branch cash acquired). 

 

Whitney had an option to purchase (or assume the leases for) FNBC’s branch and non-branch locations, including furniture, fixtures, and equipment subsequent to the date of the transaction.  The option to acquire seven locations was exercised, adding additional acquired assets from this transaction in the third quarter of 2017.  The final settlement with the FDIC is expected to occur in the second half of 2017.  In connection with its election to retain seven former FNBC locations, Whitney closed four of its existing branches considered to be overlapping.



The terms of the Agreement require the FDIC to indemnify Whitney against certain liabilities of FNBC and its affiliates not assumed or otherwise purchased by Whitney. Neither the Company nor Whitney Bank acquired any assets, common stock, preferred stock or debt, or assumed any other obligations, of First NBC Bank Holding Company.



Systems conversions and consolidation of the FNBC II operations occurred in July 2017.  Management believes these low risk in-market transactions strengthen our position in the Greater New Orleans area and are financially compelling, which will help us achieve our long term goals.



For additional information on both transactions, see Notes to Consolidated Financial Statements – Note 2 - Acquisitions.    

Recent Economic and Industry Developments

Current Economic Environment

Most of Hancock’s market area reflected a modest to moderate expansion in economic activity in the latter part of the second quarter of 2017, according to the Federal Reserve’s Summary of Commentary on Current Economic Conditions (“Beige Book”).  Energy-related businesses operating mainly in Hancock’s south Louisiana and Houston, Texas markets again showed improvement in the current quarter. Demand for oilfield services improved with the increase in rig count; however, there is concern that the current pace of growth may not be sustainable.  While overall oil and gas outlooks are positive, continued volatility in the sector is expected.

The commercial real estate market continued to improve in most of our footprint, with growing demand for office and industrial space in certain market areas.  Commercial construction activity also increased in these sectors.  Continued improvement is expected in the commercial real estate market. 

The residential real estate market experienced slow but steady growth across our footprint, with construction activity up year-over-year.  Home prices increased modestly, with buyers remaining price sensitive. Apartment demand was strong in all markets.  Leasing activity improved in Houston, as the market conditions are beginning to stabilize. New home sales and construction activity are expected to remain flat or improve slightly in the near term in all of our markets, with many builders focusing on bringing modestly-priced homes to the market.

Retail sales activity and consumer spending were mixed with merchants expecting sales to remain flat.  Auto sales declined throughout the Company’s footprint, possibly due to lenders tightening credit restrictions amid increasing delinquencies.   Employment increased at a moderate pace over the reporting period, while wage increases remained steady as compared to the last reporting period.  Energy companies indicated that hiring had tightened during the second quarter, citing upward wage pressure, especially for experienced personnel. 



Loan demand across the geographic markets that Hancock serves improved.  Loan volumes increased primarily in residential with commercial and industrial loans and real estate (commercial and residential) loan growth slowing.  Economic outlooks were mostly optimistic; however, several contacts expressed concern about the regulatory environment. Overall, the economic outlook remains

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positive, as most businesses expect activity to increase over the next year.

Highlights of Second Quarter 2017 Financial Results

Net income in the second quarter of 2017 was $52.3 million, or $0.60 per diluted common share, compared to $49.0 million, or $0.57 per diluted common share, in the first quarter of 2017 and $46.9 million, or $0.59 per diluted common share, in the second quarter of 2016.  The second quarter of 2017 includes nonoperating expenses related to the FNBC I and II transactions of approximately $4.0 million ($0.03 per share), and a $6.6 million ($0.05 per share) expense related to the termination of Hancock’s loss share agreements with the FDIC for its Peoples First acquisition in December 2009.  The first quarter of 2017 included $2.1 million of nonoperating items ($0.01 per share) and there were no nonoperating items in the second quarter of 2016.  The Company expects to have additional nonoperating items related to the FNBC II transaction in the third quarter of 2017. 

Highlights of the Company’s second quarter 2017 results (compared to first quarter 2017):

The FNBC I and II transactions have positively impacted our franchise, and we expect to generate additional value as we move into the second half of 2017.  The two transactions, however, also temporarily added cost.  In addition to merger-related costs identified as nonoperating items, results also include other nonpermanent costs estimated at $7 million, or $0.05 per share, in the second quarter.  These nonpermanent expenses include costs of operating the 29 branches FNBC had when closed by the OFI, and maintaining FNBC’s separate operations to keep customers served, and to process work for the FDIC.  These expenses were temporarily elevated as we worked through systems conversions and consolidation of overlapping branches.  We expect these nonpermanent operating costs to decrease in the third quarter of 2017 and be eliminated by the fourth quarter of this year.

The total allowance for loan losses was $221.9 million at June 30, 2017, up $8.3 million from March 31, 2017 and down $4.2 million from June 30, 2016.  The ratio of the allowance for loan losses to period-end loans was 1.20% at June 30, 2017, up from 1.17% at March 31, 2017, and down from 1.41% at June 30, 2016.  There is no allowance for loan losses on the loans purchased in FNBC I or FNBC II transactions; however, a $58 million loan mark was applied to these loans at acquisition.  The allowance for credits in the energy portfolio totaled $83.4 million, or 6.8% of energy loans, at June 30, 2017, down from $83.7 million, or 6.5% of energy loans, at March 31, 2017 and $111.1 million, or 7.5% of energy loans, at June 30, 2016.  There were no energy charge-offs in the current quarter.







RESULTS OF OPERATIONS

Net Interest Income

Net interest income (te) for the second quarter of 2017 was $208.3 million, an $18.3 million, or 10% increase from the first quarter of 2017. Core net interest income was up $14.5 million.    Net interest income (te) for the second quarter of 2017 increased $37.1 million, or 22%, compared to the second quarter of 2016, while core net interest income was up $34.0 million, or 20%. The linked quarter increase is primarily attributable to a full quarter impact from the FNBC I transaction loan portfolio acquisition, as well as a full quarter impact from the March 2017 Federal Reserve rate increase. Net interest income was also impacted by the approximately $1.5 billion of higher cost deposits acquired in the FNBC II transaction, which were at an average cost of just under 1%. Most of the funds received in the FNBC II transaction were deployed to pay down FHLB borrowings and to bolster the investment securities portfolio.

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The reported net interest margin was 3.43% for the second quarter of 2017, up 6 bps from the first quarter of 2017.  The core net interest margin for the second quarter of 2017 was 3.29%, unchanged from the first quarter of 2017.  The loan yield, excluding purchase accounting adjustments, was up 13 bps. Partially offsetting this improvement was a 7 bp increase in the cost of funds.   The increase in the cost of funds was primarily related to the higher cost deposits acquired in the FNBC II transaction, offset in part by lower long-term debt rates with the payoff of a matured subordinated note on April 1, 2017 totaling $95.5 million.

Compared to the second quarter of 2016, the net interest margin increased 18 bps and the core margin was up 14 bps.  The major factors in these increases are largely the same as for the comparison to the first quarter of 2017, primarily the impact of the FNBC transactions and the four Federal Reserve rate hikes.  The securities yield was up 14 bps due to a more favorable mix of higher-yielding securities.



Net interest income (te) for the first six months of 2017 totaled $398.3 million, a $59 million, or 17%, increase from the first half of

2016. Core net interest income was up $56.9 million. Interest earned on loans, excluding purchase accounting accretion, increased

$56.6 million as average total loans grew $1.9 billion, or 12%, due to the FNBC transactions and organic loan growth. A $552 million, or 12%, increase in average investment securities and a 15 bps increase in the yield resulted in a $10.3 million increase in interest earned on investment securities.  Higher-yielding municipal securities comprised almost 19% of the investment securities portfolio, nearly double the percentage in 2016.

The reported net interest margin for the first six months of 2017 was 3.40%, up 16 bps from the same period in 2016.  Core margin was 3.29%, up 15 bps from the six months ended June 30, 2016.

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







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Due to the significant contribution from purchase accounting accretion related to assets acquired in business combinations, management believes that non-GAAP measures of core net interest income and core net interest margin provide investors with meaningful financial measures 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.







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Provision for Loan Losses

During the second quarter of 2017, the Company recorded a total provision for loan losses of $15.0 million, down $1.0 million from the first quarter of 2017 and down $2.2 million from the second quarter of 2016.  For the six months ended June 30, 2017, the Company recorded a total provision for loan losses of $30.9 million, compared to $77.2 million for the six months ended June 30, 2016.  The first half of 2016 included $50 million in provision expense related to the energy portfolio.  

The section in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan Losses and Asset Quality” provides additional information on changes in the allowance for loan losses and general credit quality.

Noninterest Income

Noninterest income totaled $67.5 million for the second quarter of 2017, up $4.0 million, or 6%, from the first quarter of 2017 and up $3.8 million, or 6%, compared to the second quarter of 2016.  Included in the first quarter of 2017 is a $4.4 million gain related to the sale of selected Hancock Horizon funds, classified as nonoperating. Virtually all categories experienced significant growth when compared to the prior quarter.  Most fee income lines are also up when comparing the three and six months ended June 30, 2017 and 2016. 

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







Service charges on deposits totaled $20.1 million for the second quarter of 2017, up $0.9 million, or 4%, from the first quarter of 2017 and up $1.7 million, or 9%, from the second quarter of 2016. These increases were primarily due to an increase in consumer overdraft fees, approximately half of which related to the addition of FNBC deposits.

Bank card and ATM fees totaled $13.7 million for the quarter ended June 30, 2017, compared to $12.5 million in the first quarter of 2017.  Compared to the second quarter of 2016, bank card and ATM fees were up $1.7 million, or 14% due to an increase in credit card and merchant fees. 

Secondary mortgage market operations fee income increased $0.7 million, or 19%, from the first quarter of 2017,  and were relatively flat compared to the second quarter of 2016. A $16 million increase in production and a higher percentage of loans sold in the secondary market were the primary factors in the linked quarter increase.  Mortgage loan originations for the second quarter of 2017 totaled $361 million, compared to $345 million in the first quarter of 2017 and $339 million in the second quarter of 2016. 



Trust fees, investment and annuity fees, and insurance commissions and fees totaled $18.0 million in the second quarter of 2017, up $1.5 million linked quarter and down $0.4 million compared to the second quarter of 2016. The decline in trust fees compared to the second quarter of 2016 was, in part, due to the sale of the Hancock Horizon funds mentioned above. The linked quarter increase in investment and annuity fees is attributable to both a sales initiative on fee-based investment products, including sales to former FNBC

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customers, and an overall appreciation in asset value as a result of favorable market conditions. Insurance commissions were up compared to the first quarter 2017, but down compared to the second quarter of 2016, due to changes in ancillary sales methodology, decreased seasonal demand and residual claims related to major flooding in Louisiana in 2016.  

Income from bank-owned life insurance increased $0.2 million, or 9% compared to the first quarter of 2017, but was down $1.6 million, or 36%, compared to the second quarter of 2016. An additional $50 million investment in bank-owned policies in the second quarter drove the linked quarter increase, while the second quarter of 2016 experienced an abnormally high level of income from death benefit claims.



Income on our customer interest rate derivative program resulted in a $2.7 million net gain for the second quarter of 2017 compared to net gains of $0.5 million in both the first quarter of 2017 and the second quarter of 2016.  This income can be volatile in nature and is dependent upon both customer sales activity and market value adjustments due to interest rate movement.  Management believes the derivative fee income for the quarter is approximately $1.0 million higher than a normal run rate.



Other miscellaneous income totaled $4.1 million in the second quarter of 2017, up $1.8 million linked quarter and $2.0 million compared to the second quarter of 2016.  Other miscellaneous fee income for second quarter 2017 includes a $1.0 million co-arranger fee related to a health care credit facility and $0.7 million in additional income from a Small Business Investment Company.  While these fees are part of our normal operations, they can be unpredictable as to future timing and amount and are driving most of the increase compared to prior periods.



Noninterest Expense

Noninterest expense for the second quarter of 2017 was $183.5 million, up $19.9 million, or 12%, from the first quarter of 2017, and up $32.5 million, or 22%, from the second quarter of 2016.  Excluding nonoperating expense items, noninterest expense for the second quarter of 2017 totaled $172.9 million, an increase of $15.8 million, or 10% linked quarter and up $21.9 million, or 15% from the second quarter of 2016.  For the first six months of 2017, total noninterest expense was $347.0 million, a $40.0, or 13% increase over 2016.  Excluding nonoperating expense items, noninterest expense for the first half of 2017 totaled $329.9 million, up $27.9 million, or 9% over 2016.

Nonoperating expenses in both the second and first quarters of 2017 included acquisition-related costs associated with the FNBC transactions totaling $4.0 million and $6.5 million, respectively.  The second quarter of 2017 also includes a $6.6 million expense due to the termination of a FDIC loss share agreement associated with the People’s First transaction in 2009.  There were no nonoperating expenses for the second quarter of 2016.    The components of noninterest expense and nonoperating expense are presented in the following tables for the indicated periods.



























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The following discussion of the components of operating expenses excludes nonoperating items for each period.



As noted earlier, expenses related to the FNBC I and II transactions include nonpermanent costs in addition to those identified as nonoperating.  These nonpermanent expenses include costs to maintain certain operations of the former FNBC, including 29 branch locations and other back office functions prior to systems conversion and consolidation of overlapping branches.  Management estimates that these nonpermanent costs were approximately $7 million, or $0.05 per share, in the second quarter of 2017.  We expect these nonpermanent operating costs to decrease through the third quarter of 2017 and be eliminated by the fourth quarter of 2017.

Personnel expense totaled $96.2 million for the second quarter of 2017, up $7.2 million, or 8% linked quarter, due to annual merit increases, higher bonus and incentive costs and $4.5 million related to the addition of personnel from FNBC. Approximately $3.5 million of the additional personnel costs are expected to be eliminated once consolidations are complete.  Year over year, personnel expense was up $12.0 million, or 14%.

Occupancy and equipment expenses totaled $16.8 million in the second quarter of 2017, up $2.3 million, or 16%, from the first quarter of 2017 and up $3.3 million, or 24%, compared to the second quarter of 2016 due, in part, to approximately $1.1 million in costs related to acquired branches to be consolidated in the second half of 2017. 



Net gains on ORE dispositions exceeded ORE expense by $1.0 million compared to near breakeven linked quarter and $0.3 million of net expense in the second quarter of 2017. Management does not expect this level of ORE gains to be sustainable in future quarters.



All other expenses, excluding amortization of intangibles and nonoperating expense items, totaled $55.1 million for the second quarter of 2017, up $6.2 million, or 13%, from the first quarter of 2017, and up $7.2 million, or 15% compared to the second quarter of 2016.  These increases were primarily seen in the professional services, data processing and advertising categories, including $2.2 million of temporary operating cost related to the FNBC transactions.















Income Taxes

The effective income tax rate for the second quarter of 2017 was approximately 24.0%, compared to 25.3% in the first quarter of 2017 and 22.5% in the second quarter of 2016.  Management expects the effective tax rate for 2017 will be in the range of 25% to 27%, excluding the impact of employee share-based compensation.  The adoption of the new accounting standard for employee share-based compensation results in stock compensation having a direct impact on income tax expense and therefore, the effective tax rate.  Depending upon the Company’s share price and the number of shares vesting during the period, the impact of stock compensation on income tax expense and the effective tax rate will vary from quarter to quarter.  For the second quarter of 2017, excess tax benefits from employee share-based compensation decreased income tax expense by $1.4 million.  The Company currently estimates that vesting of restricted stock awards in the third quarter of 2017 will be minimal and in the fourth quarter of 2017 will result in an additional income tax benefit of approximately $3.7 million.    This estimate is based on the share price as of the end of the second quarter and does not include the impact of stock option exercises. 

The Company’s effective tax rate varies from the 35% federal statutory rate primarily because of tax-exempt income and tax credits.  Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the BOLI program are the major components of tax-exempt income.  The main sources of tax credits have 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”) and Federal and State New Markets Tax Credit (“NMTC”) programs. The investments generate tax credits, which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. 



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The Company has invested in NMTC projects through investments in its own Community Development Entity (“CDE”), as well as, other unrelated CDEs.  These investments will generate approximately $104 million in federal and state tax credits.  Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years.

The Company intends to continue making investments in tax credit projects and qualified bonds.  However, its ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits.  Based on tax credit investments that have been made to date, the Company expects to realize benefits from federal and state tax credits totaling $7.8 million, $5.6 million and $3.2 million for 2018, 2019, and 2020, respectively.

The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the indicated periods.













Selected Financial Data

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











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

(b) The efficiency ratio is noninterest expense to total net interest (te) and noninterest income, excluding amortization of purchased intangibles and nonoperating items.

(c) The tangible common equity ratio is common stockholders’ equity less intangible assets divided by total assets less intangible assets.

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Reconciliation of reported to core net interest income (te) and core net interest margin















Core revenue (te) and core pre-tax, pre-provision net revenue (te)









 



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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 regularly monitors liquidity risk as part of its overall asset/liability management process.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, as well as maturities and repayments of investment securities.  Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements.  Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window.  As shown in the table below, our ratio of free securities to total securities was 33.57% at June 30, 2017, compared to 20.29% at March 31, 2017 and 28.39% at June 30, 2016.  The total amount of free securities at June 30, 2017 increased by $0.9 billion compared to the prior quarter as total securities rose by $0.7 billion due in part to the deployment of excess liquidity from the FNBC II transaction.  The total of pledged securities at June 30, 2017 was down $227 million compared to March 31,2017 as collateral related to seasonal public fund tax deposits was released. Total securities at June 30, 2017 were $0.9 billion higher than at June 30, 2016.



The liability portion of the balance sheet provides liquidity mainly through the Company’s ability to use cash sourced from various customers’ interest-bearing and noninterest-bearing deposit and sweep accounts.  Core deposits consist of total deposits excluding certificates of deposits (“CDs”) of $250,000 or more and brokered deposits. The ratio of core deposits to total deposits was 93.05% at June 30, 2017, compared to 92.93% at March 31, 2017 and 91.99% at June 30, 2016. Core deposits totaled $20.0 billion at June 30, 2017, an increase of $1.4 billion from March 31, 2017, and up $2.6 billion from June 30, 2016. These increases were primarily due to the FNBC transactions. Brokered deposits totaled $758 million as of June 30, 2017, a $42 million, or 5%, decrease from March 31, 2017, and down $201 million compared to June 30, 2016. The Company’s use of brokered deposits as a funding source is subject to strict parameters regarding the amount, term and interest rate. 

Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. Besides funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At June 30, 2017, the Bank had borrowed $1.3 billion from the FHLB and had approximately $2.6 billion available under this line. The Bank also has unused borrowing capacity at the Federal Reserve’s discount window of approximately $2.2 billion. The Company did not have any outstanding borrowings with the Federal Reserve at any date in the last 12 months.    

Wholesale funds, which are comprised of short-term borrowings and long-term debt, were 11.12% of core deposits at June 30, 2017, compared to 14.30% at March 31, 2017 and 9.03% at June 30, 2016.  The linked quarter decrease primarily related to the FNBC II transaction which added approximately $1.5 billion in core deposits. Cash received in the transaction allowed the Company to pay down approximately $800 million of FHLB borrowings.  In addition, long-term debt decreased $117 million, primarily due to the payoff of the Company’s subordinated debt that matured in April 2017.  The year-over-year increase was primarily due to an increase in FHLB borrowings.  FHLB borrowings totaled $1.3 billion at June 30, 2017 compared to $1.7 billion at March 31, 2017 and $0.7 billion at June 30, 2016.  The Company has established an internal target range for wholesale funds to be less than 25% of core deposits.    

Another key measure the Company uses to monitor its liquidity position is the loan-to-deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding).  The loan-to-deposit ratio measures the amount of funds the Company lends out for each dollar of deposits on hand.  The Company’s loan-to-deposit ratio for the second quarter of 2017 was 87.76%, compared to 89.90% linked quarter and 85.80% at June 30, 2016. The loan-to-deposit ratio for the second quarter of 2017 was impacted by the $1.5 billion in deposits acquired in the FNBC II transaction, while the first quarter of 2017 ratio was impacted by the $1.2 billion of loans and $0.4 billion of deposits acquired in the FNBC I transaction. The Company has established an internal target range for the loan-to-deposit ratio from 83% to 87%. 

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, 2017 and 2016. 



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Dividends received from the Bank have been the primary source of funds available to the Parent Company for the payment of dividends to our stockholders and for servicing its debt.   The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends the Bank can distribute to the Parent Company.  The Parent Company maintains cash and other liquid assets to provide liquidity in an amount sufficient to fund a minimum of at least six quarters of anticipated common stockholder dividends. 



CAPITAL RESOURCES



Stockholders’ equity totaled $2.8 billion at June 30, 2017, up $50 million, or 2% compared to March 31, 2017 and up $351 million, or 14% from June 30, 2016.  The tangible common equity ratio was 7.65% at June 30, 2017, compared to 7.94% at March 31, 2017 and 7.81% at June 30, 2016. The decline in the ratio from prior periods was due to the effect of the assets acquired in the FNBC transactions. Partially offsetting the year-over-year decrease was the $259 million stock issuance in the fourth quarter of 2016.    The Company has established an internal target for the tangible common equity ratio of at least 8.00%. However, management will allow the Company’s tangible common equity ratio to drop below 8.00% on a temporary basis if it believes that the shortfall can be replenished through normal operations.



At June 30, 2017, the regulatory capital ratios of the Company and the Bank were down compared to March 31, 2017 and December 31, 2016, due to the FNBC transactions, but remained well in excess of current regulatory minimum requirements, as indicated in the table below.  The Company and the Bank have been categorized as “well-capitalized” in the most recent notices received from our regulators and both currently exceed all capital requirements of the new Basel III requirements which were effective January 1, 2015, including the fully phased-in conservation buffer. Bank ratios reflect a $240 million capital contribution in the first quarter of 2017 to support the FNBC I transaction.  See the Supervision and Regulation section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of the Company’s capital requirements.

The following table shows the regulatory capital ratios for the Company and the Bank as calculated under current rules for the indicated periods.





Regulatory definitions:

 

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BALANCE SHEET ANALYSIS

Securities

Investment in securities totaled $5.7 billion at June 30, 2017, up $668 million, or 13%, from March 31, 2017 and $862 million from June 30, 2016.  During the second quarter of 2017, the Company purchased approximately $810 million of mortgage-backed securities and municipal securities at a nominal average yield of 2.35%.  At June 30, 2017, securities available for sale totaled $2.8 billion and securities held to maturity totaled $2.9 billion. 

The securities portfolio consists mainly of residential and commercial 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 effective duration for the overall portfolio of between two and five years.  The effective duration calculates the price sensitivity to changes in interest rates.  At June 30, 2017, the average maturity of the portfolio was 5.53 years with an effective duration of 4.84 years and a nominal weighted-average yield of 2.35%. Management simulations indicate that the effective duration would increase to 5.08 years with a 100 bps increase in the yield curve and to 5.20 years with a 200 bps increase.  At December 31, 2016, the average maturity of the portfolio was 5.79 years with an effective duration of 5.07 years and a nominal weighted-average yield of 2.35%.  The average maturity of the portfolio at June 30, 2016 was 5.0 years, while the duration was 3.39 years, and the nominal weighted average yield was 2.43%.

Loans

Total loans at June 30,  2017 were $18.5 billion, up approximately $269 million, or 1.5%, from March 31, 2017.  The increase includes approximately $165 million of loans from the FNBC II transaction (net of the fair value discount).  Loans to energy-related companies decreased $59 million and nonenergy shared national credits decreased $82 million during the second quarter.  There was loan growth throughout the markets across our footprint and in our mortgage and equipment finance lines of business. 

During the quarter, the Company reached an agreement with the FDIC to terminate the remaining portion of its 2009 loss share agreement.  In the second quarter of 2017, the Company wrote down the indemnification asset by $6.6 million to $3.2 million, the amount received from the FDIC in the third quarter of 2017.  The remaining loan balances that were covered under the agreement totaled $154 million at June 30, 2017, with a reserve totaling $15 million.    

The following table shows the composition of our loan portfolio.



The Company’s commercial customer base is diversified over a range of industries, including energy, healthcare, 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.

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The following tables provide detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes, and property type concentrations of our commercial real estate – income producing portfolios.





(a) The Company's energy related lending portfolio includes certain balances within each of these selected industry categories as the definition is based on source of revenue.  The energy related lending portfolio totaled $1.2 billion, $1.3 billion, $1.4 billion, $1.4 billion, and $1.5 billion, at June 30, 2017, March 31, 2017, December 31, 2016,  September 30, 2016, and June 30, 2016, respectively.

At June 30, 2017, commercial and industrial (“C&I”) loans, including both non-real estate and owner occupied real estate secured loans, totaled approximately $10.2 billion, an increase of $49.7 million, or 0.5%, from March 31, 2017.  Included in C&I are $1.2 billion in energy-related loans, which are comprised of credits to both the exploration and production segment and the support services segment.  Energy loans comprised 6.7% of total loans at June 30, 2017, down from 12.4% in fourth quarter of 2014, the beginning of the cycle.  Payoffs and paydowns of approximately $134 million were partially offset by approximately $75 million in draws on existing lines of credit.  Management has a strategic target to bring the level of energy loans to total loans to 5%.

The Bank lends mainly to middle-market and smaller commercial entities, although it participates in larger shared-credit loan facilities.  Shared national credits funded at June 30, 2017 totaling approximately $2.1 billion, or 11% of total loans, were down $114 million compared to March 31, 2017 and down $76 million from June 30, 2016.  Approximately $781 million of shared national credits were with energy-related customers at June 30, 2017, down approximately $32 million from March 31, 2017 and down $198 million from June 30, 2016. 



Commercial real estate – income producing loans totaled approximately $2.4 billion at June 30, 2017, a decrease of $103 million, or 4%, from March 31, 2017.  The majority of the decrease in commercial real estate – income producing loans was related to the multi-family property type.  The following table details commercial real estate – income producing by property types for the last five quarters.    

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Construction and land development loans, totaling approximately $1.3 billion at June 30, 2017, increased approximately $61 million from March 31, 2017.  Residential mortgages increased $228 million, in part, due to the FNBC II acquisition and partly due to the Company’s revenue-generating initiatives.  Consumer loans increased $34 million during the second quarter of 2017.



Allowance for Loan Losses and Asset Quality

The Company's total allowance for loan losses was $221.9 million at June 30, 2017, compared to $213.6 million at March 31, 2017.   The ratio of the allowance for loan losses to period-end loans increased to 1.20%, compared to 1.17% for the prior quarter end.  The increase in coverage is primarily driven by higher non-energy reserves that were increased to strengthen coverage as we continue to grow and diversify that portfolio.  Energy prices, while down from the prior quarter, have remained relatively stable and there is some improvement in energy criticized loan levels across all portfolios.  Management believes the allowance level for the energy portfolio, as built in previous quarters, remains adequate.

During the second quarter of 2017, Hancock recorded a total provision for loan losses of $15.0 million, down $1.0 million from $16.0 million in the first quarter of 2017. 

Net charge-offs from the non-purchased credit impaired loan portfolio were $6.0 million, or 0.13%, of average total loans on an annualized basis in the second quarter of 2017, down from $29.9 million, or 0.70%, of average total loans in the first quarter of 2017.  There were no charge-offs related to energy credits in the second quarter of 2017.  Energy charge-offs were approximately $23.0 million in the first quarter of 2017.

The following table provides a breakout of the Company’s allowance for loan loss for the energy portfolio, allocated by sector, as of June 30, 2017.

Management continues to closely monitor the impact that the sustained decrease in oil and natural gas prices will have on the ability of the Company’s energy-related customers to service their debt.  Part of the ongoing monitoring includes a review of customers’ balance sheets, leverage ratios, collateral values and other critical lending metrics.  As previously noted, even with improving oil prices, management expects a continued lag in the recovery of energy service and support credits.  Reserve-based lending credits are showing signs of improvement given the stabilization in oil prices, and we expect improvement in land-based services and non-drilling services in the Gulf of Mexico to follow.  However, as new information becomes available, additional risk rating downgrades could occur, which could lead to additional loan loss provisions, a higher allowance for loan losses, and additional charge-offs.  Management believes that any additional losses will be manageable and that capital will remain solid.  Based upon information currently available, management is maintaining the estimate that net charge-offs from energy-related credits could approximate $65 million to $95 million over the duration of the cycle, which started in the fourth quarter of 2014.  To date, the Company has recorded approximately $65 

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million in energy-related net charge-offs since the start of the cycle.  There were no charge offs in the second quarter of 2017.  See Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion of the Company’s energy portfolio and its potential impact on the allowance for loan losses.

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



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The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and foreclosed and surplus ORE and other foreclosed assets.  Loans past due 90 days or more and still accruing are also disclosed.







Nonperforming assets totaled $347 million at June 30, 2017, down $30 million, or 8%, from December 31, 2016, but up $20 million, or 6%, from March 31, 2017 and up $22 million from June 30, 2016.  During the second quarter of 2017, total nonperforming loans increased approximately $19 million, after a drop of almost $100 million in the first quarter.  ORE and other foreclosed assets increased approximately $1 million in the second quarter of 2017, following a $2 million decrease in the first quarter.  Nonperforming assets as a percent of total loans, ORE and other foreclosed assets was 1.88% at June 30, 2017, up 9 bps from March 31, 2017.  This ratio stood at 2.25% at December 31, 2016 and 2.02% at June 30, 2016.    

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Short-Term Investments

Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors.  Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, were $126 million at June 30, 2017. This total was up $75 million from the prior quarter end and down $27 million from June 30, 2016.  These assets are highly volatile on a daily basis depending upon movement in customer loan and deposit accounts.  Average short-term investments of $705 million for the second quarter of 2017 were up $296 million compared to the first quarter of 2017, and up $295 million compared to the second quarter of 2016. Year-to-date average short-term investments were $557 million, an increase of $93 million from the first six months of 2016.  See the Liquidity section above for further discussion regarding the Company’s management of its short-term investment portfolio and the impact upon its liquidity in general.

Deposits

Total deposits were $21.4 billion at June 30, 2017, up $1.5 billion, or 8% from March 31, 2017, and up $2.6 billion, or 14%, from June 30, 2016.  Average deposits for the second quarter of 2017 were $20.9 billion, up $1.7 billion, or 9%, from the first quarter of 2017 and up $2.2 billion, or 12%, from the second quarter of 2016. The FNBC transactions added $0.4 billion to deposits during the first quarter and $1.5 billion in the second quarter of 2017.  



Noninterest-bearing demand deposits were $7.9 billion at June 30, 2017, up $166 million, or 2%, linked quarter, and $736 million, or 10%, year over year. The FNBC transactions added noninterest-bearing demand deposits of $285 million. Noninterest-bearing demand deposits comprised 36.8% of total deposits at June 30, 2017, compared to 38.8% at March 31, 2017, and 38.0% at June 30, 2016.  



Interest-bearing transaction and savings accounts of $8.4 billion at June 30, 2017 increased $1.2 billion, or 17%, compared to March 31, 2017 and $1.6 billion, or 24%, compared to June 30, 2016.  Deposits assumed in the FNBC transactions accounted for the majority of these increases.    

Interest-bearing public fund deposits totaled $2.5 billion at June 30, 2017, down slightly from March 31, 2017. This category was up $183 million, or 8% compared to June 30, 2016.  Time deposits, other than public funds, totaled $2.6 billion at June 30, 2017.  The $174 million increase from March 31, 2017 was primarily due to an increase in public fund CDs and recapture of funds from CDs that the FDIC paid out as part of FNBC’s closure.    

Short-Term Borrowings

At June 30, 2017, short-term borrowings totaled $1.8 billion, down $311 million from March 31, 2017, as FHLB borrowings decreased $409 million, and securities sold under agreements to repurchase increased $37 million.  Short-term borrowings increased $716 million from June 30, 2016, due to both an increase in the Company’s FHLB borrowings and the assumption of $511 million in short-term FHLB borrowings as part of the FNBC I transaction.  The Company used a portion of the excess liquidity acquired in the FNBC II transaction to pay down FHLB debt.    

Average quarter-to-date short-term borrowings of $2.2 billion in the second quarter of 2017 were up $106 million, or 5% compared to the first quarter of 2017, and up $882 million, or 65% compared to the second quarter of 2016.  Customer repurchase agreements and FHLB borrowings are the major sources of short-term borrowings. Customer repurchase 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.  FHLB borrowings are funds from the Federal Home Loan Bank that are collateralized by single family and commercial real estate loans included in the Bank’s loan portfolio, subject to specific criteria.

Long-Term Debt

 At June 30, 2017, long-term debt totaled $408 million, down $117 million from March 31, 2017, primarily due to the payoff of the company’s $96 million in subordinated debt that matured in April, as well as the paydown of $17 million of long-term FHLB borrowings.  The Company was in compliance with all covenants, as amended, as of June 30, 2017.



OFF-BALANCE SHEET ARRANGEMENTS

Loan Commitments and Letters of Credit

In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of their customers.  Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank to varying degrees of credit risk and interest rate risk in much the same way as funded loans. Under regulatory capital guidelines, the Company must include unfunded commitments meeting certain criteria in its risk-weighted capital calculation.

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Commitments to extend credit include revolving commercial credit lines, nonrevolving loan commitments issued mainly to finance the acquisition and development or construction of real property or equipment, and credit card and personal credit lines.  The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions.  Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower.  Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates.  A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent future cash requirements of the Company.

A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform.  The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services. 

The contract amounts of these instruments reflect the Company's exposure to credit risk.  The Company undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. 

The following table shows the commitments to extend credit and letters of credit at June 30, 2017 according to expiration date. 







 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There were no material changes or developments with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with those generally practiced within the banking industry which require management to make estimates and assumptions about future events.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and the resulting estimates form the basis for making judgments about the carrying values of certain assets and liabilities not readily apparent from other sources.  Actual results could differ significantly from those estimates.



  

NEW ACCOUNTING PRONOUNCEMENTS

See Note 14 to our Consolidated Financial Statements included elsewhere in this report.  

  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our net income is materially dependent on net interest income.  The Company’s primary market risk is interest rate risk which stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect our financial products and services.  In order to manage the exposures to interest rate risk, management measures the sensitivity of 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.

The Company measures its interest rate sensitivity primarily by running various net interest income simulations.  The Company’s balance sheet is asset sensitive over a two-year period due to a larger volume of rate sensitive assets than rate sensitive liabilities.  The model measures annual net interest income sensitivity relative to a base case scenario and incorporates assumptions regarding balance sheet growth and the mix of earning assets and funding sources as well as pricing, re-pricing and maturity characteristics of the existing and projected balance sheet. 

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The table below presents the results of simulations run as of June 30, 2017 for year 1 and year 2, assuming the indicated instantaneous and sustained parallel shift in the yield curve at the measurement date. The results demonstrate an increase in net interest income as rates rise and a decline should rates fall as compared to the stable rate environment assumed for the base case.





Note: Decrease in interest rates limited to 100 basis points 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, 2016 included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 4. Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017, the Company’s disclosure controls and procedures were effective.

Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three-month period ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

The Company, including subsidiaries, is party to various legal proceedings arising in the ordinary course of business.  We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.

Item 1A.  Risk Factors

There were no changes to the risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. 

The risks described may not be the only risks facing us.  Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.

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

There were no purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the six months ended June 30, 2017.





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Item 6.  Exhibits

(a)  Exhibits:



















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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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