UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-13089
HANCOCK HOLDING COMPANY
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
(228) 868-4000
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
43,896,212 common shares were outstanding as of April 30, 2011 for financial statement purposes.
Hancock Holding Company
Index
Part I. Financial Information
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
Part II. Other Information
ITEM 1A.
ITEM 5.
ITEM 6.
Signatures
Item 1. Financial Statements
Hancock Holding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
Cash and due from banks
Interest-bearing deposits with other banks
Federal funds sold
Other short-term investments
Securities available for sale, at fair value (amortized cost of $1,545,730 and $1,445,721)
Loans held for sale
Loans
Less: allowance for loan losses
unearned income
Loans, net
Property and equipment, net of accumulated depreciation of $128,384 and $125,383
Other real estate, net
Accrued interest receivable
Goodwill
Other intangible assets, net
Life insurance contracts
FDIC loss share receivable
Deferred tax asset, net
Other assets
Total assets
Deposits:
Non-interest bearing demand
Interest-bearing savings, NOW, money market and time
Total deposits
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
Long-term notes
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 43,138,607 and 36,893,276 issued and outstanding, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive gain(loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited condensed consolidated financial statements.
1
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Interest income:
Loans, including fees
Securities - taxable
Securities - tax exempt
Other investments
Total interest income
Interest expense:
Deposits
Federal funds purchased and securities sold under agreements to repurchase
Long-term notes and other interest expense
Total interest expense
Net interest income
Provision for loan losses, net
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Other service charges, commissions and fees
Securities loss, net
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Equipment rentals, depreciation and maintenance
Amortization of intangibles
Other expense
Total noninterest expense
Net income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Dividends paid per share
Weighted avg. shares outstanding-basic
Weighted avg. shares outstanding-diluted
2
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
Balance, January 1, 2010
Comprehensive income
Net income per consolidated statements of income
Net change in unfunded accumulated benefit obligation, net of tax
Net change in fair value of securities available for sale, net of tax
Cash dividends declared ($0.24 per common share)
Common stock issued, long-term incentive plan, including income tax benefit of $203
Compensation expense, long-term incentive plan
Balance, March 31, 2010
Balance, January 1, 2011
Common stock issued, long-term incentive plan, including excess tax benefit on stock options of $74.
Balance, March 31, 2011
3
Condensed Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for loan losses
Losses on other real estate owned
Deferred tax benefit
Increase in cash surrender value of life insurance contracts
Gain on sale or disposal of other assets
Gain on sale of loans held for sale
Net amortization of securities premium/discount
Amortization of intangible assets
Stock-based compensation expense
Decrease in other liabilities
Decrease in interest payable
Increase in FDIC Indemnification Asset
Decrease (increase) in other assets
Proceeds from sale of loans held for sale
Originations of loans held for sale
Excess tax benefit from share based payments
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in interest-bearing time deposits
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of short term investments
Purchase of short term investments
Net decrease in federal funds sold
Net decrease in loans
Purchases of property and equipment
Proceeds from sales of property and equipment
Proceeds from sales of other real estate
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits
Net increase in federal funds purchased and securities sold under agreements to repurchase
Repayments of short-term notes
Repayments of long-term notes
Dividends paid
Proceeds from stock offering
Excess tax benefit from stock option exercises
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
CASH AND DUE FROM BANKS, BEGINNING
CASH AND DUE FROM BANKS, ENDING
SUPPLEMENTAL INFORMATION:
Restricted stock issued to employees of Hancock
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
Financed sale of foreclosed property
4
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The condensed consolidated financial statements of Hancock Holding Company and all majority-owned subsidiaries (the “Company”) included herein are unaudited; however, they include all adjustments all of which are of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Company’s Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010, the Company’s Condensed Consolidated Statements of Income for the three months ended March 31, 2011 and 2010, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Although the Company believes the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles 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 2010 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results expected for the full year.
Use of Estimates
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The accounting principles the Company follows and the methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry which requires management to make estimates and assumptions about future events. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, intangible assets and goodwill, income taxes, pension and postretirement benefit plans and contingent liabilities. These estimates and assumptions are based on the Company’s best estimates and judgments. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, rising unemployment levels and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Allowance for loan losses, deferred income taxes, and goodwill are potentially subject to material changes in the near term. Actual results could differ significantly from those estimates.
Certain reclassifications have been made to conform prior year financial information to the current period presentation. These reclassifications had no material impact on the unaudited condensed consolidated financial statements.
Critical Accounting Policies
There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and estimates as disclosed in our Form 10-K, for the year ended December 31, 2010.
5
Notes to Condensed Consolidated Financial Statements – (Continued)
2. Fair Value
The Financial Accounting Standards Board (FASB) issued authoritative guidance that establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. The guidance defines 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 (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. Available for sale securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and other debt and equity securities. Level 2 classified available for sale securities include mortgage-backed debt securities, collateralized mortgage obligations, and state and municipal bonds. The Company invests only in high quality securities of investment grade quality with a target duration, for the overall portfolio, generally between two to five years. The Company policies limit investments to securities having a rating of no less than “Baa”, or its equivalent by a Nationally Recognized Statistical Rating Agency, except for certain obligations of Mississippi, Louisiana, Florida or Alabama counties, parishes and municipalities. There were no transfers between levels.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present for each of the fair value hierarchy levels the March 31, 2011 and December 31, 2010.
Assets
Available for sale securities:
Debt securities issued by the U.S. Treasury and other government corporations and agencies
Debt securities issued by states of the United States and political subdivisions of the states
Corporate debt securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Equity securities
Short-term investments
Loans carried at fair value
Liabilities
Swaps
Total Liabilities
6
2. Fair Value (continued)
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis and, therefore, are not included in the above table. Impaired loans are level 2 assets measured using appraisals from external parties of the collateral less any prior liens or based on recent sales activity for similar assets in the property’s market. Other real estate owned are level 2 properties recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values are determined by sales agreement or appraisal. Inputs include appraisal values on the properties or recent sales activity for similar assets in the property’s market. The following table presents for each of the fair value hierarchy levels the Company’s financial assets that are measured at fair value (in thousands) on a nonrecurring basis at March 31, 2011 and December 31, 2010.
Impaired loans
Other real estate owned
7
The following methods and assumptions were used to estimate the fair value regarding disclosures about fair value of financial instruments of each class of financial instruments for which it is practicable to estimate:
Cash, Short-Term Investments and Federal Funds Sold – For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities – Estimated fair values for securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.
Loans, Net of Unearned Income – The fair value of loans is estimated by discounting the future cash flows using the current rates for similar loans with the same remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable – The carrying amounts are a reasonable estimate of their fair values.
Deposits – The 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.
Federal Funds Purchased – For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Securities Sold under Agreements to Repurchase, FHLB Borrowings and Federal Funds Purchased – For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Long-Term Notes – Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value. The fair value is estimated by discounting the future contractual cash flows using current market rates at which similar notes over the same remaining term could be obtained.
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
Financial assets:
Cash, interest-bearing deposits, federal funds sold, and short-term investments
Securities
Loans, net of unearned income
Financial liabilities:
FHLB Borrowings
Accrued interest payable
8
3. Securities
The amortized cost and fair value of securities classified as available for sale follow (in thousands):
U.S. Treasury
U.S. government agencies
Municipal obligations
Mortgage-backed securities
CMOs
Other debt securities
Other equity securities
The amortized cost and fair value of securities classified as available for sale at March 31, 2011, by contractual maturity, (expected maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties (in thousands):
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total available for sale securities
The Company held no securities classified as held to maturity or trading at March 31, 2011 or December 31, 2010.
The details concerning securities classified as available for sale with unrealized losses as of March 31, 2011 follow (in thousands):
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3. Securities (continued)
The details concerning securities classified as available for sale with unrealized losses as of December 31, 2010 follow (in thousands):
The unrealized losses relate to fixed-rate debt securities that have incurred fair value reductions due to higher market interest rates since the respective purchase date. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
As of March 31, 2011, the securities portfolio totaled $1.5 billion and as of December 31, 2010, the securities portfolio totaled $1.4 billion. Of the total portfolio, $253.0 million of securities were in an unrealized loss position of $4.8 million. Management and the Asset/Liability Committee continually monitor the securities portfolio and management is able to effectively measure and monitor the unrealized loss position on these securities. The Company has adequate liquidity and therefore does not plan to sell and is more likely than not, not to be required to sell these securities before recovery. Accordingly, the unrealized loss of these securities has been determined to be temporary.
Securities with a carrying value of approximately $1.5 billion at March 31, 2011 and $1.3 billion at December 31, 2010 were pledged primarily to secure public deposits and securities sold under agreements to repurchase.
Short-term Investments
The Company held $ 285.0 million at March 31, 2011 and $275.0 million at December 31, 2010 in U.S. government agency discount notes as securities available for sale at amortized cost. The short-term investments all mature in less than 1 year. As the amortized cost is a reasonable estimate for fair value of these short-term investments, there were no gross unrealized losses to evaluate for impairment at March 31, 2011 or at December 31, 2010.
10
4. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $4.8 billion at March 31, 2011 compared to $5.0 billion at December 31, 2010. Covered loans totaled $777.1 million at March 31, 2011 compared to $809.2 million at December 31, 2010. Covered loans refer to loans we acquired in the Peoples First FDIC-assisted transaction that are subject to loss-sharing agreements with the FDIC.
Loans, net of unearned income, consisted of the following:
Commercial loans:
Commercial
Commercial - covered
Total commercial
Construction
Construction - covered
Total construction
Real estate
Real estate - covered
Total real estate
Municipal loans
Municipal loans - covered
Total municipal loans
Lease financing
Total commercial loans
Total commercial loans - covered
Residential mortgage loans
Residential mortgage loans - covered
Total residential mortgage loans
Indirect consumer loans
Direct consumer loans
Direct consumer loans - covered
Total direct consumer loans
Finance company loans
Total covered loans
Total loans
11
4. Loans and Allowance for Loan Losses (continued)
Changes in the carrying amount of covered acquired loans and accretable yield for loans receivable at March 31, 2011 are presented in the following table (in thousands):
Balance at beginning of period
Payments received, net
Accretion
Balance at end of period
Excludes covered credit card loans and mortgage loans held for sale
The carrying value of loans receivable with deterioration of credit quality accounted for using the cost recovery method was $44.1 million at March 31, 2011, and $45.3 million at December 31, 2010. Each of these loans is on nonaccrual status. Loans with deterioration of credit quality that have an accretable difference are not included in nonperforming balances even though the customer may be contractually past due. These loans will accrete interest income over the remaining life of the loan. The Company also recorded $10.9 million for losses that have arisen since acquisition of covered loans with a corresponding increase for 95% coverage in our FDIC loss share receivable, which resulted in a net provision increase of $0.5 million in the provision for covered loans during the three months ended March 31, 2011.
The unpaid principal balance for purchased loans was $1,124 million and $1,193 million at March 31, 2011, and December 31, 2010, respectively.
It is the policy of Hancock to promptly charge off commercial, construction, and real estate loans and lease financings, or portions of these loans and leases, when available information reasonably confirms that they are uncollectible, generally after 90 days. Prior to recognizing a loss, asset value is established by determining the value of the collateral securing the loan, the borrower’s and the guarantor’s ability and willingness to pay and the status of the account in bankruptcy court, if applicable. Consumer loans are generally charged down to the fair value of the collateral less cost to sell when 120 days past due unless the loan is clearly both well secured and in the process of collection. Loans deemed uncollectible are charged off against the allowance account with subsequent recoveries added back to the allowance when collected.
12
The following table sets forth, for the periods indicated, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off:
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Net provision for loan losses (a)
Increase in indemnification asset (a)
Ending balance
Ending balance:
Individually evaluated for impairment
Collectively evaluated for impairment
Covered loans with deteriorated credit quality
Loans:
Covered loans
The provision for loan losses is shown “net” after coverage provided by FDIC loss share agreements on covered loans. This results in an increase in the indemnification asset, which is the difference between the provision for loan losses on covered loans of $10,899, and the impairment ($545) on those covered loans.
Net provision for loan losses
13
In some instances, loans are placed on nonaccrual status. All accrued but uncollected interest related to the loan is deducted from income in the period the loan is assigned a nonaccrual status. For such period as a loan is in nonaccrual status, any cash receipts are applied first to principal, second to expenses incurred to cause payment to be made and lastly to the recovery of any reversed interest income and interest that would be due and owing subsequent to the loan being placed on nonaccrual status for all classes of financing receivables. The following table shows the composition of non-accrual loans by portfolio segment:
Commercial - restructured
Residential mortgages
Residential mortgages - covered
Indirect consumer
Direct consumer
Direct consumer - covered
Finance Company
Total
Included in nonaccrual loans is $10.3 million in restructured commercial loans. Total troubled debt restructurings as of March 31, 2011 were $19.8 million. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would otherwise not be considered is granted to the borrower. The concessions involve paying interest only for a period of 6 to 12 months. Hancock does not typically lower the interest rate or forgive principal or interest as part of the loan modification. There have been no commitments to lend additional funds to any borrowers whose loans have been restructured. Troubled debt restructurings can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing to accrue, depending on the individual facts and circumstances of the borrower. The evaluation of the borrower’s financial condition and prospects include consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status. A sustained period of repayment performance generally would be a minimum of six months and would involve payments of cash or cash equivalents. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.
The Company’s investments in impaired loans at March 31, 2011 and December 31, 2010 were $103.4 million and $107.7 million, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three months ended March 31, 2011 was approximately $1.5 million. Interest recovered on nonaccrual loans that were recorded in net income for the three months ended March 31, 2011 was $0.5 million.
14
The following table presents impaired loans disaggregated by class at March 31, 2011 and December 31, 2010:
March 31, 2011
With no related allowance recorded:
With an allowance recorded:
Total:
December 31, 2010
15
Accruing loans 90 days past due as a percent of loans was 0.01% and 0.03% at March 31, 2011 and December 31, 2010, respectively. The following table presents the age analysis of past due loans at March 31, 2011 and December 31, 2010:
Commercial – restructured
Commercial – covered
Residential mortgages – covered
Direct consumer – covered
The following table presents the credit quality indicators of the Company’s various classes of loans at March 31, 2011 and December 31, 2010:
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Loss
16
Residential Mortgage Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
Performing
Nonperforming
All loans are reviewed periodically over the course of the year. Each Bank’s portfolio of loan relationships aggregating $500,000 or more is reviewed every 12 to 18 months by the Bank’s Loan Review staff with other loans also periodically reviewed.
Below are the definitions of the Company’s internally assigned grades:
Pass – loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Pass – Watch – Credits in this category are of sufficient risk to cause concern. This category is reserved for credits that display negative performance trends. The “Watch” grade should be regarded as a transition category.
17
Special Mention - These credits exhibit some signs of “Watch”, but to a greater magnitude. These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard”. They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the bank.
Substandard - These credits constitute an unacceptable risk to the bank. They have recognized credit weaknesses that jeopardize the repayment of the debt. Repayment sources are marginal or unclear. Credits that have debt service coverage less than one-to-one (1:1) or are collateral dependent will almost always be accorded this grade.
Doubtful - A Doubtful credit has all of the weaknesses inherent in one classified “Substandard” with the added characteristic that weaknesses make collection or liquidation in full questionable or improbable. The possibility of a loss is extremely high.
Loss - Credits classified as Loss are considered uncollectable and should be charged off promptly once so classified.
Performing - Loans on which payments of principal and interest are less than 90 days past due.
Non-performing - A non-performing loan is a loan that is in default or close to being in default and there are good reasons to doubt that payments will be made in full. All loans rated as non-accrual are also non-performing.
As of March 31, 2011 and December 31, 2010, the Company had $35.1 million and $35.9 million, respectively, in loans carried at fair value.
The Company held $7.5 million and $21.9 million in loans held for sale at March 31, 2011 and December 31, 2010, respectively, carried at lower of cost or fair value. Gain on the sale of loans totaled $0.03 million and $0.7 million as of March 31, 2011 and 2010, respectively. These loans are originated on a best-efforts basis, whereby a commitment by a third party to purchase the loan has been received concurrent with the Banks’ commitment to the borrower to originate the loan.
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5. Earnings Per Share
The Company adopted the FASB’s authoritative guidance regarding the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. This guidance was effective January 1, 2010.
Following is a summary of the information used in the computation of earnings per common share (in thousands), using the two-class method:
Numerator:
Net income to common shareholders
Net income allocated to participating securities — basic and diluted
Net income allocated to common shareholders - basic and diluted
Denominator:
Weighted-average common shares - basic
Dilutive potential common shares
Weighted average common shares - diluted
Earnings per common share:
Basic
Diluted
There were no anti-dilutive share-based incentives outstanding for the three and nine months ended March 31, 2011 and March 31, 2010.
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6. Share-Based Payment Arrangements
Stock Option Plans
Hancock maintains incentive compensation plans that incorporate share-based compensation. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in note 11 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2010. No options were granted in the first three months of 2011.
A summary of option activity under the plans for the three months ended March 31, 2011, and changes during the three months then ended is presented below:
Options
Outstanding at January 1, 2011
Granted
Exercised
Forfeited or expired
Outstanding at March 31, 2011
Exercisable at March 31, 2011
Share options expected to vest
The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $1.2 million and $0.5 million, respectively.
A summary of the status of the Company’s nonvested shares as of March 31, 2011, and changes during the
three months ended March 31, 2011, is presented below:
Nonvested at January 1, 2011
Vested
Forfeited
Nonvested at March 31, 2011
As of March 31, 2011, there was $14.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 3.6 years. The total fair value of shares which vested during the three months ended March 31, 2011 and 2010 was $0.7 million and $1.5 million, respectively.
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7. Retirement Plans
Net periodic benefits cost includes the following components for the three months ended March 31, 2011 and 2010:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Amortization of transition obligation
Net periodic benefit cost
The Company anticipates that it will contribute $10.0 million to its pension plan and approximately $1.8 million to its post-retirement benefits in 2011. During the first three months of 2011, the Company contributed approximately $3.6 million to its pension plan and approximately $0.4 million for post-retirement benefits.
8. Other Service Charges, Commission and Fees, and Other Income
Components of other service charges, commission and fees are as follows:
Trust fees
Credit card merchant discount fees
Income from insurance operations
Investment and annuity fees
ATM fees
Total other service charges, commissions and fees
21
8. Other Service Charges, Commission and Fees, and Other Income (continued)
Components of other income are as follows:
Three Months Ended
March 31,
Secondary mortgage market operations
Income from bank owned life insurance
Safety deposit box income
Appraisal fee income
Letter of credit fees
Gain on sale of property and equipment
Accretion of indemnification asset
Other
Total other income
9. Other Expense
Components of other expense are as follows:
Data processing expense
Postage and communications
Ad valorem and franchise taxes
Legal and professional services
Stationery and supplies
Advertising
Deposit insurance and regulatory fees
Training expenses
Other fees
Annuity expense
Claims paid
Insurance expense
ORE expense
Total other expense
22
10. Income Taxes
There were no material uncertain tax positions as of March 31, 2011 and December 31, 2010. The Company does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.
It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. The interest accrual is considered immaterial to the Company’s consolidated financial statements as of March 31, 2011 and December 31, 2010.
The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various returns in the states where its banking offices are located. Its filed income tax returns are no longer subject to examination by taxing authorities for years before 2007.
11. Segment Reporting
The Company’s primary segments are divided into the Mississippi (MS), Louisiana (LA), Alabama (AL), and Other. Effective January 1, 2010, the Company’s Florida segment was merged into Mississippi. The activity and assets of Peoples First acquired in December 2009 are included in Mississippi. Each segment offers the same products and services but is managed separately due to different pricing, product demand, and consumer markets. Each segment offers commercial, consumer and mortgage loans and deposit services. In the following tables, the column “Other” includes additional consolidated subsidiaries of the Company: Hancock Investment Services, Inc. and subsidiaries, Hancock Insurance Agency, Inc. and subsidiaries, Harrison Finance Company, Magna Insurance Company, Lighthouse Services Corp., Invest-Sure, Inc., Peoples First Transportation, Inc., Community First and subsidiaries, and three real estate corporations owning land and buildings that house bank branches and other facilities.
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11. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
Interest income
Interest expense
Noninterest income
Other noninterest expense
Securities transactions
Income tax expense (benefit)
Net income (loss)
Total interest income from affiliates
Total interest income from external customers
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12. New Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued updated guidance for receivables regarding a creditor’s determination of whether a restructuring is a troubled debt restructuring (TDR). The final standard does not change the long-standing guidance that a restructuring of a debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider”. The update clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The new guidance is effective for interim and annual periods beginning on June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material impact on the company’s financial condition or results of operations.
In April 2011, FASB issued an update on reconsideration of effective control for repurchase agreements. The guidance is intended to improved the accounting for repurchase agreements (“repos”) and other similar agreements. Specifically, the guidance modifies the criteria for determining when these transactions would be accounted for as financings (secured borrowings/lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). Currently, when assessing effective control, one of the conditions a transferor has to meet is the ability to repurchase or redeem the financial assets even in the event of default of the transferee. The update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by the transferee. The FASB’s action makes the level of cash collateral received by the transferor in a repo or other similar agreement irrelevant in determining if it should be accounted for as a sale. The guidance is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the company’s financial condition or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
General
The following discussion should be read in conjunction with our financial statements included with this report and our financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2010 Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section below entitled “Forward-Looking Statements.”
We were organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and are headquartered in Gulfport, Mississippi. We currently operate more than 180 banking and financial services offices and more than 160 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida and Alabama through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA) and Hancock Bank of Alabama, Mobile, Alabama (Hancock Bank AL). Hancock Bank MS, Hancock Bank LA, and Hancock Bank AL are referred to collectively as the “Banks.” Hancock Bank subsidiaries include Hancock Investment Services, Hancock Insurance Agency, and Harrison Finance Company.
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At March 31, 2011, we had total assets of $8.3 billion and employed 2,299 persons on a full-time equivalent basis.
RESULTS OF OPERATIONS OVERVIEW
For the quarter ended March 31, 2011, net income was $15.3 million with fully diluted earnings per share of $0.41. This compares to net income of $13.8 million with fully diluted earnings per share of $0.37 at March 31, 2010 and net income of $17.0 million with fully diluted earnings per share of $0.46 at December 31, 2010. This quarter’s earnings per share includes the impact of our recent common stock offering described below. Return on average assets was 0.75% compared to 0.65% at March 31, 2010 and 0.83% at December 31, 2010.
On December 21, 2010, we entered into a definitive agreement with Whitney Holding Corporation (“Whitney”), parent company of New Orleans-based Whitney Bank, for Whitney to merge into Hancock. The combined company will have approximately $20.0 billion in assets and operate more than 300 branches across the Gulf South. The transaction is expected to be completed in the second quarter of 2011, subject to customary closing conditions and regulatory approval. In the first quarter, we incurred $1.6 million in merger-related expenses associated with the proposed combination with Whitney.
On March 25, 2011, we closed a common stock offering. In connection with the offering, we issued 6,201,500 shares of common stock at a price of $32.25 per share. Net proceeds were approximately $191.0 million. The proceeds of the offering are intended to be used for general corporate purposes, including the enhancement of our capital position and the repurchase of Whitney Holding Corporation’s TARP preferred stock and warrants upon closing of the proposed merger. Our tangible common equity ratio stood at 11.94% at March 31, 2011. On April 26, 2011, we announced that the underwriters exercised the overallotment option granted to them in connection with the March 2011 stock offering and purchased 756,643 shares of common stock. Completion of the public offering and overallotment resulted in total net proceeds of approximately $214.0 million.
The principal driver of our improved 2011 first quarter earnings from the prior year’s first quarter was the continued improvement in our overall asset quality. We recorded a significantly lower provision for loan losses, down $5.0 million, or 36.2% compared to the prior year’s first quarter and down $2.6 million, or 22.6% from the fourth quarter of 2010. Net
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charge-offs of $6.8 million decreased $6.4 million, or 48.6%, from the 2010 first quarter and decreased $2.9 million, or 30.1% from the prior quarter. Net charge-offs were 0.57% of average loans, down 49 basis points from the first quarter of 2010 and down 21 basis points, compared with the preceding fourth quarter. Loans 90 days past due or greater (accruing) as a percent of period-end loans decreased 2 basis points from December 31, 2010, to 0.01% at March 31, 2011 and decreased 26 basis points compared to March 31, 2010.
Total assets at March 31, 2011, were $8.3 billion, up $172.7 million, or 2.1%, from $8.1 billion at December 31, 2010. Compared to March 31, 2010, total assets decreased $254.4 million, or 3.0%. We continue to remain well capitalized with total equity of $1.1 billion at March 31, 2011, up $206.9 million, or 24.3 percent, from March 31, 2010 and up $201.2 million, or 23.5 percent from December 31, 2010, due to the common stock offering in March of this year. The company’s tangible common equity ratio stood at 11.94% at March 31, 2011 compared to 9.69% at December 31, 2010 and 9.10% at March 31, 2010.
Net Interest Income
Net interest income (taxable equivalent or te) for the first quarter increased a slight $0.04 million, or 0.1%, from March 31, 2010, and decreased $2.2 million, or 3.0 percent, from the prior quarter. The net interest margin of 3.97% was 22 basis points wider than the same quarter a year ago but was 9 basis points narrower than the prior quarter. Average earning assets grew $31.2 million compared to prior quarter but declined $399.2 million, or 5.3%, compared with the same quarter a year ago. The $399.2 million decrease was caused by a decrease in loans ($200.8 million), securities ($128.0 million), and short-term investments ($70.4 million).
The company’s loan yield decreased 27 basis points over the prior year’s first quarter, while the yield on securities decreased 52 basis points, pushing the yield on average earning assets down 28 basis points. However, total funding costs over the same quarter a year ago were down 50 basis points.
Provision for Loan Losses
The amount of the allowance for loan losses equals the cumulative total of the provision for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off. A specific loan is charged-off when management believes, after considering, among other things, the borrower’s financial condition and the value of any collateral, that collection of the loan is unlikely. Provisions are made to the allowance to reflect incurred losses associated with our loan portfolio. In order to adjust the allowance to the level dictated by our reserving methodologies, we recorded a provision for loan losses of $8.8 million in the first quarter of 2011. The provision of $8.3 million on non-covered loans was primarily related to specific credits partially offset by a reduction of $1.5 million in the specific reserve for the Gulf Oil Spill. We continue to monitor the impact the Gulf Oil Spill is having on our affected markets. We also recorded $10.9 million for losses on our acquired covered loans with a corresponding increase for 95% coverage in our FDIC loss share receivable, which resulted in a net provision increase of $0.5 million in the provision for covered loans.
Allowance for Loan Losses and Asset Quality
At March 31, 2011, the allowance for loan losses was $94.4 million compared with $82.0 million at December 31, 2010, an increase of $12.4 million. The increase in the allowance for loan losses through the first three months of 2011 is primarily attributed to an increased estimated provision of $4.9 million for specific reserve analysis for those loans considered impaired under ASC 310 and a $10.9 million allowance on covered loans. The increases were offset by a $1.6 million reduction for loans that are considered non-impaired under ASC 450, a $1.5 million reduction in the specific Gulf Oil Spill reserve and a $0.4 million reduction in the covered credit card allowance. We do not offer subprime home mortgage loans, and therefore, our increased reserve is not associated with those high risk loans. The only higher risk loans we offer are through our finance company but those loans are immaterial to our loan portfolio. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses. Within the allowance for loan losses modeling, adequate segregation of geographic and specific loan types are documented and analyzed for
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appropriate risk metrics. We maintain a continuous credit quality policy that establishes acceptable loan-to-value thresholds on the front end underwriting process. Residential home values are continuously monitored by each market. A detailed description of our methodology was included in our annual report on Form 10-K for the year ended December 31, 2010. Management believes the March 31, 2011 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 0.57% for the first quarter of 2011, compared to 1.06% in the first quarter of 2010. Of the overall decrease in net charge-offs of $6.4 million, $6.1 million was reflected in commercial/real estate loans, $0.4 million in finance company loans and $0.2 million in mortgage loans with an offsetting increase in consumer loans of $0.3 million.
Non-accrual loans were $111.0 million at March 31, 2011, an increase of $18.2 million over $92.8 million at March 31, 2010. The increase is mainly due to continued deterioration in our legacy loan portfolio, mostly related to the continued decline in real estate values and overall duration of the current economic recession. Included in non-accrual loans is $10.3 million in restructured commercial loans. Total troubled debt restructurings for the period were $19.8 million. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would otherwise not be considered is granted to the borrower. Troubled debt restructurings can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing to accrue, depending on the individual facts and circumstances of the borrower.
Foreclosed assets are comprised of other real estate (ORE) and other repossessed assets. Foreclosed assets were $41.4 million at March 31, 2011 compared to $30.2 million at March 31, 2010, an increase of $11.2 million. Approximately $8.6 million of the $11.2 million increase in foreclosed assets are covered assets under FDIC loss share agreements. The increases in foreclosed assets are mainly due to the on-going national recession and weakness in residential development.
The following table sets forth, for the periods indicated, average net loans outstanding, allowance for loan losses, amounts charged off and recoveries of loans previously charged - off:
Net loans outstanding at end of period
Average net loans outstanding
Balance of allowance for loan losses at beginning of period
Loans charged-off:
Municipal
Residential mortgage
Total charge-offs
Recoveries of loans previously
Charged-off:
Total recoveries
Net charge-offs
Provision for (reversal of ) loan losses, net (a)
Balance of allowance for loan losses at end of period
Ratios
Gross charge-offs to average loans
Recoveries to average loans
Net charge-offs to average loans
Allowance for loan losses to year end loans
Net charge-offs to period-end net loans
Allowance for loan losses to average net loans
Net charge-offs to loan loss allowance
An allocation of the loan loss allowance by major loan category is set forth in the following table:
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Noninterest Income
Noninterest income for the first quarter of 2011 was up $2.8 million, or 9%, compared to the same quarter a year ago, largely due to the $3.0 million accretion on the FDIC indemnification asset from our fourth quarter 2009 acquisition of People First.
Investment and annuity fees were up $0.9 million, or 37%, compared to the first quarter of 2010 mainly because the first quarter of 2010 presented a large decrease in production due to poor market conditions.
ATM fees increased $0.8 million, or 40%, compared to the first quarter of 2010 due to increased activity in our Florida, Mississippi and Louisiana markets and a $0.10 increase in transaction fees.
Compared to the first quarter of 2010, gain on sale of property and equipment increased $0.5 million mainly due to gains on sale of a building in Florida and timberland in Mississippi.
Offsetting the increases in noninterest income was a $1.9 million, or 17% decrease in service charges on deposit accounts compared to the same quarter a year ago. Service charges on deposit accounts were down mainly because of lower overdraft and NSF item counts due to new Federal Reserve consumer protection regulations. Service charges include periodic account maintenance fees for both commercial and personal customers, charges for specific transactions or services, such as processing return items or wire transfers, and other revenue associated with deposit accounts, such as commissions on check sales.
Income from insurance operations was down $0.3 million, or 7%, compared to the first quarter of 2010 due to lower production of Credit Life and A&H and runoff of annuity business.
The components of noninterest income for the three months ended March 31, 2011 and 2010 are presented in the following table:
Outsourced check income/(loss)
Securities transactions loss, net
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Noninterest Expense
Operating expenses for the first quarter of 2011 were $5.2 million, or 8%, higher compared to the same quarter a year ago.
Total personnel expense increased $3.1 million, or 9%, compared to the same quarter last year. The increase is mainly due to additional full time equivalent employees, additional incentive expense, and salary increases. Total personnel expense consists of employee compensation and employee benefits. Employee compensation includes base salaries and contract labor costs, compensation earned under sales-based and other employee incentive programs, and compensation expense under management incentive plans. Employee benefits, in addition to payroll taxes, are the cost of providing health benefits for active and retired employees and the cost of providing pension benefits through both the defined-benefit plans and a 401(k) employee savings plan.
Legal and professional services increased $1.8 million, or 50%, compared to the first quarter of 2010, mostly due to professional services related to the upcoming merger with Whitney National Bank.
Other real estate owned expense increased $0.8 million compared to the first quarter of 2010 due to loss share expenses associated with loans acquired from Peoples First.
Advertising expense increased $0.7 million, or 52%, compared to the first quarter of 2010 mostly due to increased radio and direct mail activity related to our home equity line of credit (HELOC) promotion.
Equipment and data processing expense was down $0.9 million, or 10%, compared to the first quarter of last year mainly due to increased operating activity and the system conversion project associated with Peoples First during 2010.
Net occupancy expense decreased $0.2 million, or 4%, compared to the same quarter a year ago mainly due to the closing of some facilities that were acquired from Peoples First. Decreased expenses related mainly to building rent, utilities, property taxes and building insurance.
The following table presents the components of noninterest expense for the three months ended March 31, 2011 and 2010.
Employee compensation
Employee benefits
Total personnel expense
Equipment and data processing expense
Other real estate owned expense, net
Non loan charge-offs
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Income Taxes
For the three months ended March 31, 2011 and 2010, the effective income tax rates were approximately 20% and 15%, respectively. Because of the increased level of pretax income in 2011, the tax exempt interest income and the utilization of tax credits had less of an impact on the effective tax rate. The source of the tax credits for 2011 and 2010 resulted from investments in New Market Tax Credits, Qualified Bond Credits and Work Opportunity Tax Credits.
Selected Financial Data
The following tables contain selected financial data comparing our consolidated results of operations for the three and nine months ended March 31, 2011 and 2010.
Per Common Share Data
Earnings per share:
Cash dividends per share
Book value per share (period-end)
Weighted average number of shares:
Diluted (1)
Period-end number of shares
Market data:
High price
Low price
Period-end closing price
Trading volume (2)
Trading volume is based on the total volume as determined by NASDAQ on the last day of the quarter.
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Performance Ratios
Return on average assets
Return on average common equity
Earning asset yield (tax equivalent (“TE”))
Total cost of funds
Net interest margin (TE)
Common equity (period-end) as a percent of total assets (period-end)
Leverage ratio (period-end) (a)
FTE headcount
Asset Quality Information
Non-accrual loans
Restructured loans (b)
Foreclosed assets
Total non-performing assets
Non-performing assets as a percent of loans and foreclosed assets
Accruing loans 90 days past due (c)
Accruing loans 90 days past due as a percent of loans
Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets
Net charge-offs as a percent of average loans
Allowance for loan losses
Allowance for loan losses as a percent of period-end loans
Allowance for loan losses to NPAs + accruing loans 90 days past due
Average Balance Sheet
Earning assets
Noninterest bearing deposits
Interest bearing transaction deposits
Interest bearing public fund deposits
Time deposits
Total interest bearing deposits
Other borrowed funds
Common stockholders’ equity
Total liabilities & common stockholders’ equity
Calculated as Tier 1 capital divided by average total assets. Tier 1 capital is total equity less unrealized gain/loss on AFS securities, unfunded pension liability, unrecognized pension gain/loss, goodwill, core deposit and 10% net mortgage servicing rights.
Included in restructured loans are $10.3 million in non-accrual loans.
Accruing loans past due 90 days or more do not include purchased impaired loans which were written down to their fair value upon acquisition and accrete interest income over the remaining life of the loan.
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Period-end Balance Sheet
Commercial/real estate loans
Mortgage loans
Interest bearing public funds deposits
Net Charge-Off Information
Net charge-offs:
Total net charge-offs
Net charge-offs to average loans:
Total net charge-offs to average net loans
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Average Balance Sheet Composition
Percentage of funding sources/earning assets:
Other net interest-free funding sources
Total funding sources
Loan mix:
Average dollars
Total average loans
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The following tables detail the components of our net interest spread and net interest margin.
Average earning assets
Commercial & real estate loans (TE)
Consumer loans
Loan fees & late charges
Total loans (TE)
US treasury securities
US agency securities
Mortgage backed securities
Municipals (TE)
Other securities
Total securities (TE)
Total short-term investments
Average earning assets yield (TE)
Interest bearing liabilities
Public funds
Total borrowings
Total interest bearing liability cost
Net interest-free funding sources
Total Cost of Funds
Net Interest Spread (TE)
Net Interest Margin (TE)
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LIQUIDITY
Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring that we have adequate cash flow to meet our various needs, including operating, strategic and capital. Our principal source of liquidity is dividends from our subsidiary banks.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest-bearing deposits with other banks are additional sources of funding.
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and non-interest-bearing deposit accounts. Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity and represent our incremental borrowing capacity. Our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $467.8 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $135.6 million. We have FHLB advances of $10.0 million due September 12, 2011 at a fixed rate 3.455%.
We are planning an issuance of debt just prior to the closing of our merger with Whitney. The anticipated proceeds of up to $140.0 million will be used for general corporate purposes. This variable rate term loan will mature two years after the closing of the debt issuance.
The following liquidity ratios at March 31, 2011 and December 31, 2010 compare certain assets and liabilities to total deposits or total assets:
Total securities to total deposits
Total loans (net of unearned income) to total deposits
Interest-earning assets to total assets
Interest-bearing deposits to total deposits
CONTRACTUAL OBLIGATIONS
Payments due from us under specified long-term and certain other binding contractual obligations were scheduled in our annual report on Form 10-K for the year ended December 31, 2010. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. There have been no material changes since year end.
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CAPITAL RESOURCES
On March 25, 2011, we closed a successful common stock offering. In connection with the offering, we issued 6,201,500 shares of common stock at a price of $32.25 per share. Net proceeds were approximately $191.0 million. The proceeds of the offering are intended to be used for general corporate purposes, including the enhancement of our capital position and the repurchase of Whitney Holding Corporation’s TARP preferred stock and warrants upon closing of the proposed merger. On April 26, 2011, we announced that the underwriters exercised the overallotment option granted to them in connection with the March, 2011 stock offering (discussed under Results of Operations Overview) and purchased 756,643 shares of common stock. Completion of the public offering and overallotment resulted in total net proceeds of approximately $214.0 million.
We continue to be well capitalized. The ratios as of March 31, 2011 and December 31, 2010 are as follows:
Regulatory ratios:
Total capital to risk-weighted assets (1)
Tier 1 capital to risk-weighted assets (2)
Leverage capital to average total assets (3)
Total capital consists of equity capital less intangible assets plus a limited amount of allowance for loan losses. Risk-weighted assets represent the assigned risk portion of all on and off-balance-sheet assets. Based on Federal Reserve Board guidelines, assets are assigned a risk factor percentage from 0% to 100%. A minimum ratio of total capital to risk-weighted assets of 8% is required.
Tier 1 capital consists of equity capital less intangible assets. A minimum ratio of tier 1 capital to risk-weighted assets of 4% is required.
Leverage capital consists of equity capital less goodwill and core deposit intangibles. Regulations require a minimum 3% leverage capital ratio for an entity to be considered adequately capitalized.
BALANCE SHEET ANALYSIS
Goodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. In accordance with FASB authoritative guidance, goodwill is not amortized but tested for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Management reviews goodwill for impairment based on our primary reporting segments. We analyze goodwill using market capitalization to book value comparison. The last test was conducted as of September 30, 2010. No impairment charges were recognized as of March 31, 2011. The carrying amount of goodwill was $61.6 million as of March 31, 2011 and as of December 31, 2010.
Earnings Assets
Earning assets serve as the primary revenue streams for us and are comprised of securities, loans, federal funds sold, and other short-term investments. At March 31, 2011, average earning assets were $7.1 billion, or 85.9% of total assets, compared with $7.5 billion or 86.4% of total assets at March 31, 2010. The $399.2 million, or 5.3%, decrease from prior year quarter resulted from a decrease in loans of $200.8 million, a decrease in securities of $128.0 million and a decrease in short-term investments of $70.4 million.
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Our investment in securities was $1.6 billion at March 31, 2011 and $1.5 billion at December 31, 2010. The vast majority of securities in our portfolio are U.S. Treasury and U.S. government agency securities and mortgage-backed securities issued or guaranteed by U.S. government agencies. We also maintain portfolios of securities consisting of CMOs and tax-exempt obligations of states and political subdivisions. The portfolios are designed to enhance liquidity while providing acceptable rates of return. Therefore, we invest only in high quality securities of investment grade quality and with a target duration, for the overall portfolio, generally between two to five years. Our policies limit investments to securities having a rating of no less than “Baa”, or its equivalent by a Nationally Recognized Statistical Rating Agency, except for certain obligations of Mississippi, Louisiana, Florida or Alabama counties, parishes and municipalities.
We held $4.9 billion in loans at March 31, 2011 and $5.0 billion at December 31, 2010. Our primary lending focus is to provide commercial, consumer, commercial leasing and real estate loans to consumers and to small and middle market businesses in their respective market areas. Each loan file is reviewed by the Bank’s loan operations quality assurance function, a component of its loan review system, to ensure proper documentation and asset quality. At March 31, 2011, our average total loans were $4.9 billion, compared to $5.1 billion at March 31, 2010. Commercial and real estate loans comprised 63.4% of the average loan portfolio at March 31, 2011 compared to 61.8% at March 31, 2010. Included in this category are commercial real estate loans, which are secured by properties, used in commercial or industrial operations.
Total Construction
The following table sets forth non-performing assets by type for the periods indicated, consisting of non-accrual loans, troubled debt restructurings and other real estate owned. Loans past due 90 days or more and still accruing are also disclosed:
Loans accounted for on a non-accrual basis:
Commercial loans
Commercial loans-restructured
Subtotal
Commercial loans - covered
Total Commercial loans
Residential mortgage loans - restructured
Total non-accrual loans
Restructured loans:
Commercial loans - non-accrual
Residential mortgage loans - non-accrual
Total restructured loans - non-accrual
Commercial loans - still accruing
Residential mortgage loans - still accruing
Total restructured loans - still accruing
Total restructured loans
Foreclosed assets - covered
Total foreclosed assets
Total non-performing assets*
Loans 90 days past due still accruing
Non-performing assets to loans plus other real estate
Allowance for loan losses to non-performing assets and accruing loans 90 days past due
Allowance for loan losses to non-performing assets and accruing loans 90 days past due, excluding covered loans
Loans 90 days past due still accruing to loans
Includes total non-accrual loans, total restructured loans-still accruing and total foreclosed assets.
Other Earning Assets
Federal funds sold, interest-bearing deposits in banks, and other short-term investments averaged $742.8 million at March 31, 2011 compared to $813.1 million at March 31, 2010. The decrease of $70.4 million, or 8.7%, from prior year quarter was caused by a decrease of $292.9 million in interest-bearing deposits in banks that was offset by an increase of $222.7 million in other short-term investments. We utilize these products as a short-term investment alternative whenever we have excess liquidity.
Interest Bearing Liabilities
Interest bearing liabilities include our interest bearing deposits as well as borrowings. Deposits represent our primary funding source. We continue our focus on multiple account, core deposit relationships and strategic placement of time deposit campaigns to stimulate overall deposit growth. Borrowings consist primarily of sales of securities under repurchase agreements.
Total deposits were $6.7 billion at March 31, 2011 and $6.8 billion at December 31, 2010. Average interest bearing deposits at March 31, 2011 were $5.6 billion compared to $6.1 billion at March 31, 2010. The decrease of $495.3 million, or 8.1%, over March 31, 2010 was primarily attributable to an expected runoff of Peoples First time deposits. Peoples First deposits were priced very aggressively in order to attract deposits and their deposit rates were higher than comparable banks. We have several programs designed to attract depository accounts offered to consumers and to small and middle market businesses at interest rates generally consistent with market conditions. We traditionally price our deposits to position competitively within the local market. Deposit flows are controlled primarily through pricing, and to a certain extent, through promotional activities.
Borrowings
Our borrowings consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and other borrowings. Total borrowings at March 31, 2011 were $426.6 million compared to $375.2 million at December 31, 2010. The increase of $51.4 million, or 13.7%, was due primarily to a $50.0 million increase in securities sold under agreements to repurchase.
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OFF-BALANCE SHEET ARRANGEMENTS
Loan Commitments and Letters of Credit
In the normal course of business, we enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. Such instruments are not reflected in the accompanying condensed consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the condensed consolidated balance sheets. The contract amounts of these instruments reflect our exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. We undertake the same credit evaluation in making commitments and conditional obligations as we do for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At March 31, 2011, we had $934.9 million in unused loan commitments outstanding, of which approximately $769.0 million were at variable rates, with the remainder at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent our future cash requirements. We continually evaluate each customer’s credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in our obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At March 31, 2011, we had $65.0 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at March 31, 2011 according to expiration date.
Commitments to extend credit
Letters of credit
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The accounting principles we follow and the methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry which requires 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, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. On an ongoing basis, we evaluate our estimates, including those related to the allowance for loan losses, intangible assets and goodwill, income taxes, pension and postretirement benefit plans and contingent liabilities. These estimates and assumptions are based on
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our best estimates and judgments. We evaluate estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, rising unemployment levels and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Allowance for loan losses, deferred income taxes, and goodwill are potentially subject to material changes in the near term. Actual results could differ significantly from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 12 to our Condensed Consolidated Financial Statements included elsewhere in this report.
FORWARD LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This Act provides a safe harbor for such disclosures that protects the companies from unwarranted litigation if the actual results are different from management expectations. This report contains forward-looking statements and reflects management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our net income is dependent, in part, on our net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. Interest rate risk sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. In an attempt to manage our exposure to changes in interest rates, management monitors interest rate risk and administers an interest rate risk management policy designed to produce a relatively stable net interest margin in periods of interest rate fluctuations.
Notwithstanding our interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income and the fair value of our investment securities. As of March 31, 2011, the effective duration of the securities portfolio was 2.4 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 2.8 years, while a reduction in rates of 100 basis points would result in an effective duration of 1.1 years.
In adjusting our asset/liability position, the Board and management attempt to manage our interest rate risk while enhancing net interest margins. This measurement is done primarily by running net interest income simulations. The net interest income simulations run at March 31, 2011 indicate that we are slightly asset sensitive as compared to the stable rate environment. Exposure to instantaneous changes in interest rate risk for the current quarter is presented in the following table.
Change in
interest rate
(basis point)
Estimated
increase (decrease)
in net interest income
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, 2010 included in our 2010 Annual Report on Form 10-K.
Item 4. Controls and Procedures
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officers and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officers and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to timely alert them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act filings.
Our management, including the Chief Executive Officers and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended March 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no other material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2010. 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.
Issuer Purchases of Equity Securities
There were no purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the three months ended March 31, 2011.
Item 4. Reserved.
Item 5. Other Information.
The Company’s Annual Meeting was held on March 31, 2011.
The Directors elected at the Annual Meeting held on March 31, 2011 were:
1. Frank E Bertucci
2 Carl J Chaney
3. Thomas H Olinde
4. John H Pace
PricewaterhouseCoopers was approved as the independent public accountants of the Company.
For
Against
Abstained
29,816,751
(Non-Binding) To approve compensation of the named executive officers set forth under the heading “Compensation of Directors and Executive Officers”
23,837,161
(Non-Binding) To approve compensation of the named executive officers of the Company will occur every 1, 2, or 3 years
1 year
2 years
3 years
10,652,703
At a Special Shareholder Meeting April 29, 2011, the votes cast for and against, and those abstaining from voting with respect to the proposal to approve the merger agreement, dated as of December 21, 2010, by and between Hancock Holding Company and Whitney Holding Corporation, as such agreement may be amended from time to time, were as follows:
28,752,203
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Item 6. Exhibits.
(a) Exhibits:
ExhibitNumber
Description
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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.
By:
/s/ Carl J. Chaney
Carl J. Chaney
President & Chief Executive Officer
/s/ John M. Hairston
John M. Hairston
Chief Executive Officer & Chief Operating Officer
/s/ Michael M. Achary
Michael M. Achary
Date: May 5, 2011
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Index to Exhibits