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 September 30, 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.
84,703,448 common shares were outstanding as of October 31, 2011 for financial statement purposes.
Hancock Holding Company
Index
Part I. Financial Information
ITEM 1.
Financial Statements
Condensed Consolidated Balance Sheets —
September 30, 2011 (unaudited) and December 31, 2010
Condensed Consolidated Statements of Income (unaudited) —
Three months and nine months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) —
Nine months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Cash Flows (unaudited) —
Notes to Condensed Consolidated Financial Statements (unaudited) —
September 30, 2011
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
ITEM 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits
Signatures
Item 1. Financial Statements
Hancock Holding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(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 $4,508,807 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 $139,262 and $125,383
Prepaid expenses
Other real estate, net
Accrued interest receivable
Goodwill and other indefinite lived intangibles
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
Other short-term borrowings
FHLB borrowings
Long-term debt
Accrued interest payable
Payable for securities not settled
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 84,698,246 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
(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 gain/(loss), net
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Equipment rentals, depreciation and maintenance
Amortization of intangibles
Professional services expense
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)
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 ($0.72 per common share)
Common stock issued, long-term incentive plan, including income tax benefit of $223
Compensation expense, long-term incentive plan
Balance, September 30, 2010
Balance, January 1, 2011
Common stock issued in stock offering
Common stock issued in connection with Whitney acquisition
Common stock issued for long-term incentive plan, including income tax benefit of $92.
Balance, September 30, 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 expense (benefit)
Increase in cash surrender value of life insurance contracts
Loss on sales of securities available for sale, net
Gain on sale or disposal of other assets
Loss (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 (increase) in FDIC Indemnification Asset
Decrease 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:
Decrease in interest-bearing time deposits
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Net decrease in short term investments, excluding amortization
Net (increase) decrease in federal funds sold
Net decrease in loans
Purchases of property and equipment
Proceeds from sales of property and equipment
Cash paid for acquisition, net of cash received
Proceeds from sales of other real estate
Net cash paid for divestiture of branches
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
Repayments of long-term notes
Repayments of short-term notes
Proceeds from issurance of long-term notes
Dividends paid
Proceeds from exercise of stock options
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 FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
Financed sale of foreclosed property
Transfers from loans to loans held for sale
Common Stock issued in connection with acquisition
Fair value of assets acquired
Liabilities assumed
Net identifiable assets acquired
4
Notes to Condensed and 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 September 30, 2011 and December 31, 2010, the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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 nine months ended September 30, 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 accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. These accounting principles require management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements. 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 purchase accounting, the allowance for loan losses, intangible assets and goodwill, income taxes, pension and postretirement benefit plans and contingent liabilities. 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. Tightened credit markets, volatile equity markets, sustained high 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.
Critical Accounting Policies
In the third quarter, as part of the integration of policies between Hancock and Whitney, the Company prospectively changed its policy for specific reserve analysis from loans greater than $250,000 to loans greater than $500,000, resulting in the removal of approximately $2.8 million in loans from the specific reserve. The Company increased the unallocated reserve to ensure adequate coverage for these loans.
There have been no other 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 and Consolidated Financial Statements – (continued)
2. Acquisition of Whitney Holding Corporation
On June 4, 2011, Hancock acquired all of the outstanding common stock of Whitney Holding Corporation (Whitney), a bank holding company based in New Orleans, Louisiana, in a stock and cash transaction. Whitney common shareholders received 0.418 shares of Hancock common stock in exchange for each share of Whitney stock, resulting in Hancock issuing 40,794,261 common shares at a fair value of $1.3 billion. Whitney’s preferred stock and common stock warrant issued under TARP were purchased by the Company for $307.7 million as part of the merger transaction. In total, the purchase price was approximately $1.6 billion including the value of the options to purchase common stock.
On September 16, 2011, seven Whitney Bank branches located on the Mississippi Gulf Coast and one branch located in Bogalusa, LA with approximately $47 million in loans and $180 million in deposits were divested in order to resolve branch concentration concerns of the U.S. Department of Justice relating to the merger.
The Whitney transaction was accounted for using the purchase method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Assets acquired totaled $11.7 billion, including $6.5 billion in loans, $2.6 billion of investment securities, and $780 million of intangibles. Liabilities assumed were $10.1 billion, including $9.2 billion of deposits.
Preliminary goodwill of $514 million was calculated as the excess of the consideration exchanged over the net identifiable assets acquired and represents the value expected from the synergies created from combining the businesses as well as the economies of scale expected from combining the operations of the two companies.
The following table provides the assets purchased, the liabilities assumed and the consideration transferred:
Preliminary Statement of Net Assets Acquired (at fair value) and Consideration Transferred
(in millions except per share)
ASSETS
Cash and cash equivalents
Securities
Loans and leases
Property and equipment
Other intangible assets (1)
Total identifiable assets
LIABILITIES
Borrowings
Goodwill (2)
Net assets acquired
CONSIDERATION:
Hancock Holding Company common shares issued
Purchase price per share of the Company’s common stock (3)
Company common stock issued and cash exchanged for fractional shares
Stock options converted
Cash paid for TARP preferred stock and warrants
Fair value of total consideration transferred
Intangible assets consists of core deposit intangible of $189 million, trade name of $54 million, trust relationships of $11 million, and credit card relationships of $11 million. The amortization life is 13 - 15 years for the CDI intangible asset; 17 years for credit card relationships and 12 years for trust. They will be amortized on an accelerated basis.
No goodwill is expected to be deductible for federal income tax purposes. The goodwill will be primarily allocated to the Whitney Bank segment.
The value of the shares of common stock exchanged with Whitney shareholders was based upon the closing price of the Company’s common stock at June 3, 2011, the last traded day prior to the date of acquisition.
6
2. Acquisition of Whitney Holding Corporation (continued)
The following table (in thousands) provides a reconciliation of goodwill and other indefinite lived intangibles:
Goodwill and indefinite lived intangibles balance at December 31, 2010
Additions:
Goodwill Whitney acquisition
Trade Name Whitney acquisition
Goodwill and indefinite lived intangibles balance at September 30, 2011
The operating results of the Company for the period ended September 30, 2011 include the operating results of the acquired assets and assumed liabilities for the 118 days subsequent to the acquisition date of June 4, 2011. Whitney’s operations contributed approximately $128.9 million in revenue, net of interest expense, and an estimated $25.6 million in net income for the period from the acquisition and is included in the consolidated financial statements. Whitney’s results of operations prior to the acquisition are not included in Hancock’s consolidated statement of income.
Merger related charges of $46.6 million associated with the Whitney acquisition are included in noninterest expense for 2011. Such expenses were for professional services and other temporary help fees associated with the conversion of systems and integration of operations; costs related to branch and office consolidations, costs related to termination of existing contractual arrangements for various services, marketing and promotion expenses, retention and severance and incentive compensation costs, travel costs, and printing, supplies and other costs.
The following unaudited pro forma information presents the results of operations for three months ended and nine months ended September 30, 2011 and 2010, as if the acquisition had occurred at the beginning of the earliest period presented. These adjustments include the impact of certain purchase accounting adjustments such as intangible assets amortization, fixed assets depreciation and reversal of Whitney’s provision. In addition, the $46.6 million in merger expenses discussed above are included in each year. Additionally, the Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.
(In millions)
Total revenues , net of interest expense
Net Income
In many cases, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate future cash flows associated with those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant estimates related to the valuation of acquired loans. For such loans, the excess of cash flows expected to be collected as of the acquisition date over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the expected cash flows at acquisition date reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Whitney’s previously established allowance for credit losses.
7
The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30 (acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC 310-20 (acquired performing). In addition, the loans were further categorized into different loan pools by loan types. The Company determined expected cash flows on the acquired loans based on the best available information at the date of acquisition. If new information is obtained about circumstances as of the acquisition date that impact cash flows, management will revise the related purchase accounting adjustments in accordance with accounting for business combinations.
Loans at the acquisition date of June 4, 2011 are presented in the following table.
Commercial non-real estate
Commercial real estate owner-occupied
Construction and land development
Commercial real estate non-owner occupied
Total commercial/real estate
Residential mortgage
Consumer
Total
The following table presents information about the acquired impaired loans at acquisition (in thousands).
Contractually required principal and interest payments
Nonaccretable difference
Cash flows expected to be collected
Accretable difference
Fair value of loans acquired with a deterioration of credit quality
The fair value of the acquired performing loans at June 4, 2011, was $5.9 billion. The gross contractually required principal and interest payments receivable for acquired performing loans was $6.8 billion.
The fair value of net assets acquired includes certain contingent liabilities that were recorded as of the acquisition date. Whitney has been named as a defendant in various pending legal actions and proceedings arising in connection with its activities as a financial services institution. Some of these legal actions and proceedings include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Whitney is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. Due to the number of variables and assumptions involved in assessing the possible outcome of these legal actions, sufficient information did not exist to reasonably estimate the fair value of these contingent liabilities. As such, these contingencies have been measured in accordance with accounting guidance on contingencies which states that a loss is recognized when it is probable of occurring and the loss amount can be reasonably estimated.
8
In connection with the Whitney acquisition, on June 4, 2011, the Company recorded a liability for contingent payments to certain employees for arrangements that were in existence prior to acquisition. The fair value of this liability was $59.6 million. The Company also recorded a liability with a fair value of $14.0 million for a contractual contingency assumed in connection with Whitney’s obligations under contracts for a systems conversion and replacement initiative. This initiative was suspended in anticipation of the acquisition. Substantially all of these liabilities are expected to be paid within one year from acquisition date.
3. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Subordinated notes payable
Term note payable
Subordinated debentures
Other long-term debt
Total long-term debt
As part of the merger, the Company assumed Whitney National Bank’s $150 million par value subordinated notes which carry an interest rate of 5.875% and mature April 1, 2017. These notes qualify as capital for the calculation of the regulatory ratio of total capital to risk-weighted assets. Beginning in the second quarter of 2012, these notes will be subject to a 20% reduction in the amount allowed as capital for each year as they approach maturity.
During the second quarter of 2011, the Company borrowed $140 million under a term loan facility at a variable rate based on LIBOR plus 2.00% per annum. The note matures on June 3, 2013 and is pre-payable at any time and the Company is subject to covenants customary in financings of this nature which are not expected to impact operations. The Company must maintain the following financial covenants: maximum ratio of consolidated non-performing assets to consolidated total loans and OREO excluding covered loans of 4.0% through June 2012 and 3.5% thereafter; consolidated net worth of $2.1 billion which will increase each subsequent quarter by 50% of consolidated net income but will not decrease for any losses and will increase by 100% for issuance of common stock. The Company must also maintain a Tier 1 leverage ratio of greater than or equal to 7%; Tier 1 risk based capital ratio of greater than or equal to 9.5%; and total risk based capital ratio of greater than or equal to 11.5%. The Company remained in compliance with the covenants as of September 30, 2011 except that the Tier 1 leverage ratio on Hancock Bank was 6.93%, 7 basis points lower than required. The Company has taken action to regain compliance with this covenant.
In the merger with Whitney, the Company also assumed $16.8 million of obligations under subordinated debentures payable to unconsolidated trusts that issued trust preferred securities. The Company received regulatory approval to call these debentures, and redeemed $6.5 million in the third quarter. The remaining $10.3 million was redeemed on October 24, 2011.
9
3. Long-Term Debt (continued)
Substantially all of the other long-term debt consists of borrowings associated with tax credit fund activities. These borrowings mature at various dates beginning in 2015 through 2018.
4. 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 our variable rate borrowing and fixed rate loans. The Company has also entered into interest rate derivative agreements as a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its customer derivatives in order to minimize its net risk exposure resulting from such agreements.
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value (in thousands) of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2011 and December 31, 2010.
Derivatives designated as hedging instruments
Interest rate products
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Total derivatives not designated as hedging instruments
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4. Derivatives (continued)
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. As of September 30, 2011, the Company had one interest rate swap with an aggregate notional amount of $140.0 million that was designated as a cash flow hedge associated with the Company’s variable-rate borrowing.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2011, such derivatives were used to hedge the forecasted variable cash outflows associated with existing term loan agreements beginning June 2012. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three and nine months ended September 30, 2011. The Company did not have any cash flow hedges outstanding at September 30, 2010. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0.1 million will be reclassified as a decrease to interest expense.
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate derivatives, primarily rate swaps, with commercial banking customers to facilitate their risk management strategies. Hancock simultaneously enters into offsetting agreements with unrelated financial institutions, thereby minimizing its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. As of September 30, 2011, the Company had entered into interest rate derivatives, including both customer and offsetting agreements, with an aggregate notional amount of $488.4 million related to this program.
11
Effect of Derivative Instruments on the Income Statement
The tables below present the effect of the Company’s derivative financial instruments (in thousands) on the income statement for the three and nine months ended September 30, 2011.
Derivatives in FASB
ASC 815 Cash Flow
Hedging Relationships
Amount of Gain or
(Loss) Recognized
in OCI on Derivative
(Effective Portion)
Location of
Gain or (Loss)
Reclassified fromAccumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain
or (Loss)Reclassified from
Accumulated OCI
into Income(Effective Portion)
Location ofGain or (Loss)Recognized in
Income on
Derivative(Ineffective
or (Loss)
Recognized inIncome onDerivative(IneffectivePortion)
Nine
MonthsEnded
NineMonths
Ended
ThreeMonths
Months
30-Sep
-11
-10
- 11
Interest Rate Products
Derivatives Not
Designated as
Hedging Instruments
Location of Gain or(Loss) Recognized inIncome on Derivative
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company has agreements with its derivative counterparties that contain provisions that require the Company’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company’s credit rating is reduced below investment grade then the Company could be forced to terminate its derivatives at the then current fair value.
The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well / adequate capitalized institution as well as maintain multiple capital ratios, then the Company could be forced to terminate its derivatives at the then current fair value.
As of September 30, 2011 the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $11.5 million. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted collateral of $11.6 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2011, it could have been required to settle its obligations under the agreements at the termination value.
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5. 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 and collateralized mortgage obligations that are agency securities, 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. 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 non-rated obligations of Mississippi, Louisiana, Texas, Florida or Alabama counties, parishes and municipalities within our markets. There were no transfers between levels during the periods shown.
The fair value of interest rate swaps is obtained from a third-party pricing service that uses an industry-standard discounted cash flow model that relies on inputs, such as interest rate futures, 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.
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5. Fair Value (continued)
The following tables present for each of the fair value hierarchy levels the Company’s financial assets that are measured at fair value (in thousands) on a recurring basis at September 30, 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
Derivative financial instruments - assets
Liabilities
Derivative financial instruments - liabilities
Total Liabilities
Debt securities issued by states of the United
States and political subdivisions of the states
Short-term investments
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.
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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 September 30, 2011 and December 31, 2010.
Impaired loans
Other real estate owned
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 and Loans Held for Sale - The fair value measurement for certain impaired loans was discussed earlier. For the remaining portfolio, fair values were generally determined by discounting scheduled cash flows by discount rates determined with reference to current market rates at which loans with similar terms would be made to borrowers of similar credit quality.
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, Federal Funds Purchased, and Short-term Borrowings - 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.
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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
Financial liabilities:
FHLB Borrowings
Long-term notes
6. 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
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6. Securities (continued)
The amortized cost and fair value of securities classified as available for sale at September 30, 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)):
Fair
Value
Securities Available for Sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total available for sale securities
The Company held no securities classified as held to maturity or trading at September 30, 2011 or December 31, 2010.
The details concerning securities classified as available for sale with unrealized losses as of September 30, 2011 follow (in thousands):
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The details concerning securities classified as available for sale with unrealized losses as of December 31, 2010 follow (in thousands):
Substantially all of 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 September 30, 2011, the securities portfolio totaled $4.6 billion and as of December 31, 2010, the securities portfolio totaled $1.5 billion. The increase in the securities portfolio is related to the acquisition of Whitney. Of the total portfolio, $522.7 million of securities were in an unrealized loss position of $2.5 million. Management and the Asset/Liability Committee continually monitor the securities portfolio and the unrealized loss position on these securities. The Company has concluded they have adequate liquidity and, therefore, does not plan to sell and more likely than not will not be required to sell these securities before recovery. Accordingly, the unrealized loss of these securities has not been determined to be other than temporary.
Securities with a fair value of approximately $2.1 billion at September 30, 2011 and $1.3 billion at December 31, 2010 were pledged primarily to secure public deposits and securities sold under agreements to repurchase. The increase is due to the acquisition of Whitney.
Short-term Investments
The Company held no short-term investments at September 30, 2011 and $275.0 million at December 31, 2010 in U.S. government agency discount notes as securities available for sale at amortized cost. 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 December 31, 2010.
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7. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $11.1 billion at September 30, 2011 compared to $5.0 billion at December 31, 2010. The increase reflects the addition of loans from the Whitney acquisition. Covered loans totaled $721.8 million at September 30, 2011 compared to $809.2 million at December 31, 2010. Covered loans refer to loans 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 - originated
Commercial - acquired
Commercial - covered
Total commercial
Construction - originated
Construction - acquired
Construction - covered
Total construction
Real estate - originated
Real estate - acquired
Real estate - covered
Total real estate
Municipal loans - originated
Municipal loans - acquired
Municipal loans - covered
Total municipal loans
Lease financing - originated
Total commercial loans - originated
Total commercial loans - acquired
Total commercial loans - covered
Total commercial loans
Residential mortgage loans - originated
Residential mortgage loans - acquired
Residential mortgage loans - covered
Total residential mortgage loans
Indirect consumer loans - originated
Direct consumer loans - originated
Direct consumer loans - acquired
Direct consumer loans - covered
Total direct consumer loans
Finance Company loans - originated
Total originated loans
Total acquired loans
Total covered loans
Total loans
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7. Loans and Allowance for Loan Losses (continued)
Changes in the carrying amount of acquired impaired loans and accretable yield are presented in the following table:
Nine Months Ended
Balance at beginning of period
Additions
Payments received, net
Accretion
Balance at end of period
Excludes covered credit card loans and loans held for sale
The carrying value of acquired impaired loans accounted for using the cost recovery method was $34.1 million at September 30, 2011, and $45.3 million at December 31, 2010. Each of these loans is on nonaccrual status. Acquired impaired loans 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 a $33.4 million allowance for additional expected losses that have arisen since the acquisition of covered loans with a corresponding increase for 95% coverage in our FDIC loss share receivable. This resulted in a net provision for loan loss of $1.7 million during the nine months ended September 30, 2011.
The unpaid principal balance for acquired impaired loans was $1.7 billion and $1.2 billion at September 30, 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. Prior to recognizing a loss, asset value is established by determining the value of the collateral securing the loan, and the borrower’s and the guarantor’s ability and willingness to pay. Consumer loans are generally charged down to the fair value of the collateral less cost to sell when 120 days past due. Loans deemed uncollectible are charged off against the allowance account with subsequent recoveries added back to the allowance when collected.
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The following table sets forth, for the periods ended, 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 (decrease) 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
Acquired loans (b)
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 ($1,671), and the impairment $33,448 on those covered loans.
Acquired loans are recorded at fair value with no allowance brought forward in accordance with acquisition accounting.
Net Provision for loan losses
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In some instances, loans are placed on nonaccrual status. All accrued but uncollected interest related to the loans are deducted from income in the period the loans are 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. Covered and acquired loans accounted for in accordance with ASC 310-30 are considered to be performing due to the application of the accretion method. These loans are excluded from the table due to their performing status. Certain covered loans accounted for using the cost recovery method or in accordance with ASC 310-20 are disclosed as non-accrual loans below. A reserve is recorded when estimated losses are in excess of the net purchase accounting marks. Loans under ASC 310-20 have accretable interest income over the life based on contractual payments receivable. The following table shows the composition of non-accrual loans by portfolio segment:
Commercial - restructured
Residential mortgages - originated
Residential mortgages - restructured
Residential mortgages - covered
Direct consumer - originated
Direct consumer - acquired
Direct consumer - covered
Finance Company - originated
Included in nonaccrual loans is $4.4 million in restructured commercial loans. Total troubled debt restructurings as of September 30, 2011 were $14.0 million and $12.6 million at December 31, 2010. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and 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 terms of a troubled debt restructuring are violated, the loan is considered in default.
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The table below details the troubled debt restructurings that occurred during the period by portfolio segment (in thousands):
In accordance with accounting guidance, acquired impaired loans that have been restructured are considered to be performing due to the application of the accretion method. These loans are excluded from the table.
Number
of
Contracts
ofContracts
Troubled Debt Restructurings:
Commercial
September 30,
2011
2010
Troubled Debt Restructurings That Subsequently Defaulted:
A reserve analysis is completed on all loans that have been determined to be troubled debt restructurings by Management. All troubled debt restructurings are rated substandard and are considered impaired in calculating the allowance for loan losses.
The Company’s investments in impaired loans at September 30, 2011 and December 31, 2010 were $83.6 million and $107.7 million, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three and nine months ended September 30, 2011 was approximately $1.5 million and $3.8 million, respectively. Interest recovered on nonaccrual loans that were recorded in net income for the three and nine months ended September 30, 2011 was $0.2 million and $0.9 million, respectively.
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The following table presents impaired loans disaggregated by class at September 30, 2011 and December 31, 2010:
With no related allowance recorded:
With an allowance recorded:
Total:
Residential mortgages
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Accruing loans 90 days past due as a percent of loans was 0.01% and 0.03% at September 30, 2011 and December 31, 2010, respectively. Covered and acquired loans accounted for in accordance with ASC 310-30 are considered to be performing due to the application of the accretion method. These loans are excluded from the table due to their performing status. Certain covered loans accounted for using the cost recovery method or acquired loans accounted for in accordance with ASC 310-20 are disclosed as non-current loans below. The following table presents the age analysis of past due loans at September 30, 2011 and December 31, 2010:
past due
Residential mortgages - acquired
Indirect consumer - originated
Finance Company
Greater than90 days
Indirect consumer
Direct consumer
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The following table presents the credit quality indicators of the Company’s various classes of loans at September 30, 2011 and December 31, 2010:
Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Grade:
Pass
Pass-Watch
Special Mention
Substandard
Doubtful
Loss
Residential Mortgage Credit Exposure
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
directconsumer
Performing
Nonperforming
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All loans are reviewed periodically over the course of the year. Lending officers are primarily responsible for ongoing monitoring and the assignment of risk ratings to individual loans based on established guidelines. An independent credit review function assesses the accuracy of officer ratings and the timeliness of rating changes and performs reviews of the underwriting processes.
Below are the definitions of the Company’s internally assigned grades:
Commercial:
Pass - loans properly approved, documented, collateralized, and performing which do not reflect an abnormal credit risk.
Pass - Watch - Credits in this category are of sufficient risk to cause concern. This category is reserved for credits that display negative performance trends. The “Watch” grade should be regarded as a transition category.
Special Mention - These credits exhibit some signs of “Watch”, but to a greater magnitude. These credits constitute an undue and unwarranted credit risk, but not to a point of justifying a classification of “Substandard”. They have weaknesses that, if not checked or corrected, weaken the asset or inadequately protect the bank.
Substandard - These credits constitute an unacceptable risk to the bank. They have recognized credit weaknesses that jeopardize the repayment of the debt. Repayment sources are marginal or unclear. 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.
Consumer:
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.
The Company held $64.5 million and $21.9 million in loans held for sale at September 30, 2011 and December 31, 2010, respectively, carried at lower of cost or fair value. Of the $64.5 million, $22.4 million are problem commercial loans held for sale. The remainder of $42.1 million is mortgage loans held for sale. Gain on the sale of mortgage loans totaled $0.05 million and $1.0 million for the nine months ended September 30, 2011 and 2010, respectively. Mortgage loans held for sale 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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8. 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, using the two-class method (in thousands, except per share amounts):
Numerator:
Net income to common shareholders
Net income allocated to participating securities - basic and diluted
Net income allocated to common shareholders - basic and diluted
Denominator:
Weighted-average common shares - basic
Dilutive potential common shares
Weighted average common shares - diluted
Earnings per common share:
Basic
Diluted
Potential common shares consist of employee and director stock options. These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share. Weighted-average anti-dilutive potential common shares totalled 489,727 and 236,173, respectively, for the three months and nine months ended September 30, 2011. All anti-dilutive potential common shares represent options assumed in the Whitney acquisition. There were no anti-dilutive potential common shares in 2010.
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9. 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.
Whitney’s outstanding stock options were converted to Hancock options at the date of acquisition. These options will expire at the earlier of (1) their expiration date (which is generally ten years after the grant date), except for grants made in 2005, which will expire six months following the Merger or (2) a date following termination of employment, as set forth in the prior grant plan document. These options have no intrinsic value.
A summary of option activity under the plans for the nine months ended September 30, 2011, and changes during the nine months then ended is presented below:
Outstanding at January 1, 2011
Whitney options converted at acquisition date
Granted
Exercised
Forfeited or expired
Outstanding at September 30, 2011
Exercisable at September 30, 2011
The total intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $0.1 million and $0.6 million, respectively.
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9. Share-Based Payment Arrangements (continued)
A summary of the status of the Company’s nonvested shares as of September 30, 2011, and changes during the nine months ended September 30, 2011, is presented below:
Nonvested at January 1, 2011
Vested
Forfeited
Nonvested at September 30 , 2011
As of September 30, 2011, there was $26.4 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 3.2 years. The total fair value of shares which vested during the nine months ended September 30, 2011 and 2010 was $8.0 million and $1.6 million, respectively.
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10. Retirement Plans
Net periodic benefits cost includes the following components for the three and nine months ended September 30, 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 nine months of 2011, the Company contributed approximately $7.8 million to its pension plan and approximately $1.0 million for post-retirement benefits.
The Company is in the process reviewing retirement plans for future changes and to make a determination regarding final benifit structure. The Whitney pension plan and post-retirement plan has been closed to new participants since 2008 and remains closed. The other Whitney plans continue to operate as before and will admit new participants if those participants meet the eligibility conditions and perform services at a legacy Whitney location. The merger document requires the defined benefit pension plan to remain in place for a period of 12 to 18 months post-merger.
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10. Retirement Plans (continued)
Certain legacy Whitney employees are covered by a noncontributory qualified defined benefit pension plan. The benefits were based on an employee’s total years of service and his or her highest consecutive five-year level of compensation during the final ten years of employment. Contributions were made in amounts sufficient to meet funding requirements set forth in federal employee benefit and tax laws plus such additional amounts as the Company determined to be appropriate. Whitney also has an unfunded nonqualified defined benefit pension plan that provided retirement benefits to designated executive officers. These benefits are calculated using the qualified plan’s formula, but without applying the restrictions imposed on qualified plans by certain provisions of the Internal Revenue Code. Benefits that become payable under the nonqualified plan supplement amounts paid from the qualified plan.
Legacy Whitney sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code that covered substantially all full-time employees. Tax law imposed limits on total annual participant savings. Participants are fully vested in their savings and in the matching Company contribution at all times. Concurrent with the defined-benefit plan amendments in late 2008, the Board also approved amendments to the employee savings plan. These amendments authorized the Company to make discretionary profit sharing contributions, beginning in 2009, on behalf of participants in the savings plan who are either (a) ineligible to participate in the qualified defined-benefit plan or (b) subject to the freeze in benefit accruals under the defined-benefit plan. The discretionary profit sharing contribution for a plan year is up to 4% of the participants’ eligible compensation for such year and is allocated only to participants who were employed on the first day of the plan year and at year end. Participants must have completed three years of service to become vested in the Company’s contributions subject to earlier vesting in the case of retirement, death or disability. The Whitney board amended the plan shortly prior to the merger to provide that Whitney employees terminated in connection with the merger would also be vested in any unvested Company contributions.
Net periodic benefits cost for the Whitney-sponsored plan includes the following components from acquisition date of June 4, 2011 through September 30, 2011:
The retirement and restoration plans’ projected benefit obligation (PBO) at acquisition were $217.0 million and $14.4 million respectively. These were calculated based on a discount rate of 5.35% at June 4, 2011. Plan assets for these obligations were $223.5 million for the retirement plan and $0 for the restoration plan at June 4, 2011.
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11. Other Service Charges, Commissions and Fees, and Other Income
Components of other service charges, commissions and fees are as follows:
Three Months Ended
Trust fees
Bank card fees
Income from insurance operations
Investment and annuity fees
ATM fees
Total other service charges, commissions and fees
Components of other income are as follows:
Secondary mortgage market operations
Income from bank owned life insurance
Safety deposit box income
Letter of credit fees
(Loss)/gain on sale of assets
Accretion of indemnification asset
Other
Total other income
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12. Other Expense
Components of other expense are as follows:
Data processing expense
Insurance expense
Ad valorem and franchise taxes
Deposit insurance and regulatory fees
Postage and communications
Stationery and supplies
Advertising
Other fees
Travel expense
Other real estate owned expense, net
Total other expense
13. Income Taxes
In determining the effective tax rate and tax expense for the three months and nine months ended September 30, 2011, the Company referred to the actual results for the current interim periods rather than projected results for the full year. Projections for pretax income for the full year vary widely primarily due to difficulty in estimating the timing and amount of integration costs for our acquisition of Whitney. Changes in these estimates cause significant volatility in a projected tax rate.
Management analyzed the deferred tax assets and liabilities of the Company after the merger with Whitney in order to determine if a valuation allowance was warranted against any deferred tax assets. As a result of the Whitney merger, federal and state net operating loss carryforwards and tax credits were acquired that will be able to be utilized by the Company going forward, subject to certain limitations. Based on the current projections for the Company, and considering the appropriate limitations, the entire federal net operating loss is expected to be fully utilized within three to five years. Based on the Company’s history of sustained profitability, combined with income projections and the full utilization of the material tax attributes obtained in the merger, no federal valuation allowances against deferred tax assets were deemed to be necessary.
Louisiana-sourced income of commercial banks is not subject to state income taxes. Rather, a bank in Louisiana pays a tax based on the value of its capital stock in lieu of income and franchise taxes. The Company’s corporate value tax, related to our Whitney Bank subsidiary headquartered in Louisiana, is included in noninterest expense. This expense will fluctuate in part based on changes in the Whitney Bank’s equity and earnings and in part based on market valuation trends for the banking industry.
There were no material uncertain tax positions as of September 30, 2011 and December 31, 2010. The Company does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.
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13. Income Taxes (continued)
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 September 30, 2011 and December 31, 2010.
The Company and its subsidiaries file a consolidated U.S. federal income tax return and 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.
14. Segment Reporting
The Company’s primary segments are divided into Hancock, Whitney, and Other. Effective January 1, 2010, the Company’s Florida segment was merged into Hancock, which was previously referred to as Mississippi (“MS” in prior filings). On June 4, 2011, we completed the acquisition of Whitney Holding Corporation. Whitney National Bank was merged into Hancock Bank of Louisiana and renamed Whitney Bank. Prior to the merger the segment now called Whitney Bank was Hancock Bank Louisiana, labeled “LA” on the prior period table. As part of the merger, Hancock Bank of Alabama (“AL” in prior filings) was merged into Whitney Bank. Subsequently, the assets and liabilities of the former Hancock Bank of Alabama were then transferred to Hancock Bank. Prior periods report the segment formerly called Alabama in the Mississippi segment. As a result, Hancock Holding Company is now the parent company of two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank) and Whitney Bank, New Orleans, Louisiana (Whitney Bank). 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, Whitney Securities LLC, Berwick LLC, Key Investment Securities, Inc., and Southern Coastal Insurance Agency, and subsidiaries, and three real estate corporations owning land and buildings that house bank branches and other facilities.
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14. 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 gain
Goodwill
Total interest income from affiliates
Total interest income from external customers
Income tax (benefit)/expense
36
Securities transactions (loss)/gain
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15. New Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued guidance to simplify how entities test goodwill for impairment. The final standard allows an entity to first assess qualitative factors to determine whether is it “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the company’s financial condition or results of operations.
In June 2011, the FASB issued guidance eliminating the option to present the components of other comprehensive income as part of the statement of changes to stockholder’s equity. The final standard allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amendment does not change the items that must be reported in other comprehensive income or when an item in other comprehensive income must be reclassified to net income. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of this guidance will change presentation only and will not have a material impact on the company’s financial condition or results of operations.
In May 2011, the FASB issued amendments to achieve common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value”. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The guidance is to be applied prospectively and is effective during interim and annual periods beginning 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.
In April 2011, 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 did not have a material impact on the company’s financial condition or results of operations.
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15. New Accounting Pronouncements (continued)
In April 2011, FASB issued an update on reconsideration of effective control for repurchase agreements. The guidance is intended to improve 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.
16. Legal Proceedings
In January, February, and April 2011, several lawsuits were filed against Whitney regarding the acquisition by Hancock. These lawsuits were settled in principle in the second quarter and the agreed settlement amounts were not material to the Company’s financial condition or results of operations.
On August 22, 2011, a putative class action lawsuit, Angelique LaCour, et al, v. Whitney Bank, was filed in the United States District Court for the Middle District of Florida against Whitney Bank relating to the imposition of overdraft fees and non-sufficient fund fees on demand deposit accounts. Plaintiff alleges that Whitney’s methodology for posting transactions to customer accounts, which Plaintiff claims was designed to maximize the generation of overdraft fees, is unfair and unconscionable. Plaintiff further alleges that Whitney failed to provide its customers with sufficient notice of those practices or an opportunity to opt-out. Plaintiff’s Complaint includes claims for breach of contract and breach of the covenant of good faith and fair dealing, unconscionability, conversion, unjust enrichment, and violations of the Electronic Funds Transfer Act and Regulation E. Plaintiff seeks a range of remedies, including declaratory relief, restitution, disgorgement, actual damages, injunctive relief, punitive and exemplary damages, interest, costs, and attorneys’ fees. Currently, there is uncertainty with regard to whether the putative class will ultimately be certified, the dimensions of any such class, and the range of remedies that might be sought on any certified claims.
The Company is party to various other legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, each matter is not expected to have a material adverse effect on the financial statements of the Company.
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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. On June 4, 2011, we completed the acquisition of Whitney Holding Corporation. Whitney National Bank was merged into Hancock Bank of Louisiana and renamed Whitney Bank. As part of the merger, Hancock Bank of Alabama was merged into Whitney Bank. The assets and liabilities of the former Hancock Bank of Alabama were then transferred to Hancock Bank. As a result, Hancock Holding Company is now the parent company of two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank) and Whitney Bank, New Orleans, Louisiana (Whitney Bank). On September 16, 2011, seven Whitney Bank branches located on the Mississippi Gulf Coast and one branch located in Bogalusa, LA with approximately $47 million in loans and $180 million in deposits were divested in order to resolve branch concentration concerns of the U.S. Department of Justice relating to the merger.
Hancock Bank and Whitney Bank are referred to collectively as the “Banks.” Hancock Bank subsidiaries include Hancock Investment Services, Hancock Insurance Agency, and Harrison Finance Company. Whitney Bank subsidiaries include Whitney Securities LLC, Berwick LLC, Key Investment Securities, Inc., and Southern Coastal Insurance Agency. We currently operate over 300 banking and financial services offices and almost 400 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida, Alabama, and Texas. 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 September 30, 2011, we had total assets of $19.4 billion and employed 4,742 persons on a full-time equivalent basis.
RESULTS OF OPERATIONS OVERVIEW
For the quarter ended September 30, 2011, net income was $30.4 million with fully diluted earnings per share of $0.36 compared to net income of $14.9 million with fully diluted earnings per share of $0.40 at September 30, 2010. This quarter’s earnings per share includes the impact of our recent common stock offering that occurred in the first quarter and additional shares issued in the acquisition of Whitney Holding Company discussed below. Net income for the third quarter was significantly impacted by $22.8 million in pre-tax merger-related expenses related to the acquisition of Whitney Holding Company. Operating income for the third quarter of 2011 was $45.2 million or $0.53 per diluted common share compared to $26.6 million or $0.48 and $14.9 million or $0.40 in the second quarter of 2011 and third quarter of 2010, respectively. Operating income is defined as net income excluding tax-adjusted merger costs and securities transactions gains or losses. See selected financial data for a reconciliation of net income to operating income. Return on average assets was 0.62% compared to 0.70% at September 30, 2010.
The quarter’s numbers reflect a full quarter impact of the Whitney acquisition and the period-end balance sheet reflects the completion of the divestiture of the seven Whitney branches along the Gulf Coast of Mississippi and one branch in Bogalusa, Louisiana. The divestiture was completed on September 16, 2011, and resulted in the sale of approximately $47 million in loans and $180 million in deposits.
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. On April 26, 2011, we announced that the
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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 proceeds of the offering were used for general corporate purposes, including the enhancement of our capital position and the purchase of Whitney Holding Corporation’s TARP preferred stock and warrant upon closing of the acquisition.
The impact of the Whitney acquisition is reflected in the Company’s financial information from the acquisition date. Whitney common shareholders received 0.418 shares of Hancock common stock in exchange for each share of Whitney stock, resulting in Hancock issuing 40,794,261 common shares at a fair value of $1.3 billion. Whitney preferred stock and common stock warrant issued under TARP were purchased by the Company for $307.7 million as part of the merger transaction. In total, the purchase price was approximately $1.6 billion including the value of options to purchase Whitney common stock assumed in the transaction. Assets acquired totaled $11.7 billion, including $6.5 billion in loans, $2.6 billion of investment securities, and $780 million of intangibles. The fair value of liabilities assumed were $10.1 billion, including $9.2 billion of deposits. See Note 2 to the consolidated financial statements for further information.
Total assets at September 30, 2011, were $19.4 billion, compared to $8.2 billion at September 30, 2010 and $8.1 billion at December 31, 2010. The increase from prior period quarter mainly reflects the $11.7 billion in assets acquired in the Whitney merger.
Hancock continues to remain well capitalized, with total equity of $2.4 billion at September 30, 2011 compared to $865.8 million at September 30, 2010 and $856.5 million at December 31, 2010. The increase from prior periods mainly reflects the value of the Hancock shares issued in the Whitney acquisition and in the stock offering earlier in 2011. The Company’s tangible common equity ratio was 8.56% at September 30, 2011 compared to 9.68% at September 30, 2010 and 9.69% at December 31, 2010. The declines from prior periods reflect the impact of the Whitney acquisition.
Net Interest Income
Net interest income (taxable equivalent or te) for the third quarter increased $110.5 million, or 158%, from September 30, 2010, and $78.2 million, or 77%, from the prior quarter. The net interest margin (te) of 4.32% was 47 basis points wider than the same quarter a year ago and was 21 basis points wider than the prior quarter. Average earning assets grew to $16.6 billion in the current quarter, a $9.4 billion increase from the third quarter of 2010 and up $6.7 billion from the second quarter of 2011. The increase from the third quarter of 2010 was due to the Whitney acquisition, while the effect of the balances of Whitney for a full quarter led to the increase in earning assets compared to last quarter.
The increases in the net interest margin compared to both last quarter and the same quarter of 2010 were mainly related to the Whitney acquisition. A favorable shift in funding sources and a decline in cost of funding sources were partially offset by a less favorable shift in the mix of earnings assets and a decline in investment portfolio yields.
Loan yields in the third quarter of 2011 were up 27 basis points from the prior year and up 14 basis points from the prior quarter. The yield on the investment portfolio was down 141 basis points from the third quarter of 2010 and down 88 basis points from the prior quarter. The combined effect of these changes resulted in the yield on earnings assets decreasing by 5 basis points compared to last year and up by 5 basis points compared to the second quarter of 2011.
The cost of funds was down 52 basis points to 0.50% compared to the third quarter of 2010 and was down 16 basis points compared to the prior quarter. Noninterest bearing deposits averaged 30% of earning assets in the current quarter, double the percentage for the third quarter of 2010, and was stable with the prior quarter. Rates paid on interest bearing deposits in the third quarter were about half the rates in the year ago quarter.
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Provision for Loan Losses
Provisions are made to the allowance to reflect incurred losses inherent in our loan portfolio. Hancock recorded a total provision for loan losses for the third quarter of 2011 of $9.3 million compared to $9.1 million in the second quarter of 2011 and to $16.3 million in the third quarter of 2010.
During the third quarter of 2011 the company recorded a $4.5 million increase in the allowance for losses due to impairment on certain pools of covered loans since the December 2009 acquisition of Peoples First, which was mostly offset by an increase in the Company’s FDIC loss share receivable for the 95% loss coverage. This resulted in a net provision for the third quarter of $0.2 million on the covered loans.
Noninterest Income
Noninterest income for the third quarter of 2011 was up $29.7 million, or 84%, compared to the same quarter a year ago, primarily due to the Whitney acquisition. Excluding the impact of Whitney, noninterest income increased approximately $2.7 million, or 8% compared to the same quarter a year ago, largely due to the $3.5 million increase in accretion on the FDIC indemnification asset from our fourth quarter 2009 acquisition of Peoples First. These increases were partially offset by a decrease in service charges on deposit accounts of $1.8 million as a result of new regulations. Management expects that the new interchange rates related to the Durbin amendment implemented in the fourth quarter of 2011 could result in approximately $2 million to $3 million of lower fee income for the remainder of 2011 and approximately $15 million to $18 million of lower fee income in 2012.
The components of noninterest income for the three and nine months ended September 30, 2011 and 2010 are presented in the following table:
Securities transactions gain/(loss), net
Noninterest Expense
Operating expenses for the third quarter of 2011 were $126.0 million, or 185%, higher compared to the same quarter a year ago primarily due to the impact of the Whitney acquisition. Merger-related costs totaled $22.8 million for the quarter. Included in this amount are $10.5 million for professional services related to systems integration, $2.0 million in retention and severance costs, $1.4 million in data processing expense and $6.3 million in miscellaneous expense related to lease terminations.
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Excluding the impact of Whitney and merger-related expenses, noninterest expense increased approximately $5.7 million, or 10% compared to the same quarter a year ago.
Total personnel expense, excluding the impact of the Whitney acquisition and merger-related expenses, increased $5.0 million, or 14%, compared to the same quarter last year. The increase is mainly due to additional incentive and bonus compensation. 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 through both the defined-benefit plans and a 401(k) employee savings plan.
After excluding merger-related expenses and expenses related to Whitney, professional services expenses increased less than $1 million, mainly due to increased audit fees.
Deposit insurance and regulatory fees, net of the impact of Whitney, decreased $2.2 million as a result of implementation of a new assessment method based on asset size.
ORE expenses increased $3.4 million compared to the third quarter of 2010, mostly due to $2 million in losses related to Peoples First ORE property auctions. The rest of the increase is due to growth in holdings.
The following table presents the components of noninterest expense for the three and nine months ended September 30, 2011 and 2010.
Employee compensation
Employee benefits
Total personnel expense
Equipment
Travel
Income Taxes
For the nine months ended September 30, 2011 and 2010, the effective income tax rates were approximately 21% and 13%, respectively. In determining the effective tax rate and tax expense for the three and nine months ended September 30, 2011, the Company referred to the actual results for the current interim periods rather than projected results for the full year. Projections for the full year vary widely primarily due to difficulty in estimating the timing and amount of integration costs for our acquisition of Whitney. Changes in these estimates cause significant volatility in a projected effective tax rate. The Company’s effective tax rates have varied from
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the 35% federal statutory rate primarily because of tax-exempt income and the availability of tax credits. Interest income from the financing of state and local governments and earnings from the bank-owned life insurance program are the major components of tax-exempt income. 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. Tax-exempt income and tax credits tend to decrease the effective tax expense rate from the statutory rate in profitable periods and to increase the effective tax benifit rate in loss periods.
Management analyzed the deferred tax assets and liabilities of the Company after the merger with Whitney in order to determine if a valuation allowance was warranted against any deferred tax assets. As a result of the Whitney merger, federal and state net operating loss carryforwards and tax credits were acquired that will be able to be utilized by the Company going forward, subject to certain limitations. Based on the current projections for the Company, and considering the appropriate limitations, the entire federal net operating loss is expected to be fully utilized within the next few years. Based on the Company’s history of sustained profitability, combined with income projections and the full utilization of the material tax attributes obtained in the merger, no federal valuation allowances against deferred tax assets were deemed to be necessary.
Selected Financial Data
The following tables contain selected financial data comparing our consolidated results of operations for the three and nine months ended September 30, 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:
Period-end number of shares
Market data:
High price
Low price
Period-end closing price
Trading volume
Reconciliation of Net Income to Operating Income:
Merger-related expenses
Securities transactions gains/(losses)
Taxes on adjustments
Operating income (a)
Net income less tax-effected merger costs and securities gains/losses. Management believes that this is a useful financial measure measure because it enables investors to assess ongoing operations.
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Net charge-offs:
Commercial/real estate loans
Mortgage loans
Direct consumer loans
Indirect consumer loans
Finance company loans
Total net charge-offs
Net charge-offs to average loans:
Total net charge-offs to average net loans
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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)
Total non-performing loans
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
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 non-performing loans + accruing loans 90 days past due
Calculated as Tier 1 capital divided by average total assets excluding disallowed intangibles. Tier 1 capital is total equity less unrealized gain/loss on AFS securities, unfunded pension liability, unrecognized pension gain/loss, net goodwill, core deposits and 10% net mortgage service rights.
Included in restructured loans are $4.4 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.
Supplemental Asset Quality Information (excluding covered assets and acquired loans) 1
Non-accrual loans (2) (3)
Restructured loans
Foreclosed assets (4)
Accruing loans 90 days past due
Allowance for loan losses (5)
Allowance for loan losses to nonperforming loans + accruing loans 90 days past due
Covered and acquired loans are considered to be performing due to the application of the accretion method under acquisition accounting. Acquired loans are recorded at fair value with no allowance brought forward in accordance with acquisition accounting. Certain loans and foreclosed assets are also covered under FDIC loss sharing agreements, which provide considerable protection against credit risk. Due to the protection of loss sharing agreements and impact of acquisition accounting, management has excluded acquired loans and covered assets from this table to provide for improved comparability to prior periods and better perspective into asset quality trends.
Excludes acquired covered loans not accounted for under the accretion method of $34,106 and $54,527.
Excludes non-covered acquired loans at fair value not accounted for under the accretion method of $1,061 and $0 for the period ended September 30, 2011. There were no amounts in prior periods.
Excludes covered foreclosed assets of $23,306 and $13,301. On June 4, 2011, Hancock acquired $81,195 of foreclosed assets in the Whitney merger.
Excludes impairment recorded on covered acquired loans of $33,747 and $0.
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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
Period-end Balance Sheet
Interest bearing public funds deposits
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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.
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 $2.8 billion and borrowing capacity at the Federal Reserve’s Discount Window in excess of $1 billion.
During the second quarter, the Company entered into a $140 million par value term loan facility which matures on June 3, 2013. The variable interest rate is LIBOR plus 2.00% per annum. The note is pre-payable at any time and the Company is subject to covenants customary in financings of this nature. The proceeds are being used for general corporate purposes.
In the merger with Whitney, the Company also assumed $16.5 million of obligations under subordinated debentures payable to unconsolidated trusts that issued trust preferred securities. The weighted-average yield was approximately 4.32% at June 4, 2011, with maturities from 2031 through 2034 callable with prior regulatory approval. Subject to certain adjustments, these debentures currently qualify as capital for the calculation of regulatory capital ratios. The Company received required regulatory approval to call these debentures, and $6 million was redeemed in the third quarter. The remaining $10.3 million, with a yield of approximately 3.05% was redeemed on October 24, 2011.
The following liquidity ratios at September 30, 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
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CONTRACTUAL OBLIGATIONS
We have contractual obligations to make future payments on certain debt and lease agreements. The following table summarizes all significant contractual obligations at September 30, 2011, according to payments due by period.
Contractual Obligations
1-3
years
3-5
Certificates of deposit
Short-term debt obligations
Long-term debt obligations
Capital lease obligations
Operating lease obligations
CAPITAL RESOURCES
We continue to be well capitalized. The ratios as of September 30, 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 (3)
Total capital consists of Tier 1 capital plus the allowed portion of allowance for loan losses and certain long term debt. 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 is total equity less unrealized gain/loss on AFS securities, unfunded pension liability, unrecognized pension gain/loss, net goodwill, core deposits, and 10% net mortgage servicing rights. A minimum ratio of tier 1 capital to risk-weighted assets of 4% is required.
Tier 1 capital divided by average total assets less intangible assets. Regulations require a minimum 3% leverage capital ratio for an entity to be considered adequately capitalized.
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BALANCE SHEET ANALYSIS
Goodwill and Indefinite Lived Assets
Goodwill represents the excess of the fair value of the consideration exchanged in a purchase business combination over the fair value of net assets acquired. 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. In September 2011, the Financial Accounting Standards Board (FASB) issued guidance to simplify how entities test goodwill for impairment. The final standard allows an entity to first assess qualitative factors to determine whether is it “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test as described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. We review goodwill for impairment based on our primary reporting segments and analyze goodwill using discounted cash flow analysis when step 1 is performed. The last analysis was conducted as of September 30, 2011 and will be reviewed in the fourth quater.
The carrying amount of goodwill and other indefinite lived assets was $629.7 million as of September 30, 2011 and $61.6 million as of December 31, 2010. The increase is the result of our merger with Whitney. See Note 2 for additional information.
Earnings Assets
Earning assets serve as the primary revenue source for us and are comprised of securities, loans, federal funds sold, and other short-term investments. For the third quarter of 2011, average earning assets were $16.6 billion, or 84.8% of total assets, compared with $7.3 billion, or 86.2% of total assets at December 31, 2010, and with $7.2 billion or 86.0% of total assets, at September 30, 2010. The $9.4 billion increase from prior year quarter resulted from an increase in loans of $6.3 billion, an increase in securities of $2.8 billion and an increase in short-term investments of $297.9 million. The increase in earnings assets from the prior periods is the result of our merger with Whitney.
Our investment in securities was $4.6 billion at September 30, 2011 and $1.5 billion at December 31, 2010. The increase is the result of our merger with Whitney. 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 non-rated obligations of Mississippi, Louisiana, Texas, Florida or Alabama counties, parishes and municipalities within our markets.
We held $11.1 billion in loans at September 30, 2011 and $5.0 billion at December 31, 2010. The increase is the result of our merger with Whitney. Commercial and real estate loans comprised 72.5% of the loan portfolio at September 30, 2011 compared to 63.2% at December 31, 2010. The Whitney portfolio we acquired was more heavily weighted to commercial loans. Total loans at September 30, 2011, were $11.1 billion, down $147 million, or 1%, from the second quarter. The decline included approximately $47 million from the divestiture and approximately $26 million in loss share covered charge-offs related to the 2009 acquisition of Peoples First. Another $60 million of the decline from the second quarter was related to the resolution of problem credits with half coming from the Texas market. The remaining net decline reflected payoffs and pay downs in excess of new originations during the quarter. In this slow growth economic environment, some customers are choosing to reduce their debt with excess liquidity and we did see payoffs and pay downs on several large credits. Our
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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 quality assurance function, a component of the loan review system, to ensure proper documentation.
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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 - originated
Commercial loans - restructured
Subtotal
Commercial loans - covered
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 - originated
Total non-performing loans**
Foreclosed assets - originated
Foreclosed assets - acquired
Foreclosed assets - covered
Total foreclosed assets
Total non-performing assets*
Loans 90 days past due still accruing
Ratios
Non-performing assets to loans plus foreclosed assets
Allowance for loan losses to non-performing loans and accruing loans 90 days past due
Allowance for loan losses to non-performing loans 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.
Includes total non-accrual loans and total restructured loans - still accruing.
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Allowance for Loan Losses and Asset Quality
At September 30, 2011, the allowance for loan losses was $118.1 million compared with $82.0 million at December 31, 2010, an increase of $36.1 million. The increase in the allowance for loan losses through the first nine months of 2011 is primarily attributed to a $33.4 million allowance on covered loans. The increase was offset by a $31.7 million increase in the FDIC loss share indemnification asset. The ratio of the allowance for loan losses as a percent of period-end loans was 1.06% at September 30, 2011 compared to 1.65% at December 31, 2010. The decrease in the allowance ratio is related to the addition of the Whitney loan portfolio. Whitney’s allowance was not carried forward at acquisition. The ratio of the allowance for loan losses as a percent of period-end loans, excluding the acquired and covered portfolios, was 1.86% at September 30, 2011 compared to 1.99% at June 30, 2011. Additional asset quality metrics for the acquired (Whitney), covered (Peoples First) and legacy (Hancock plus newly originated) portfolios are included in Selected Financial Data.
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 appropriate risk metrics. We maintain a credit quality policy that establishes acceptable loan-to-value thresholds on the front end underwriting process. Residential home values are 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 September 30, 2011 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 0.28% for the third quarter of 2011, compared to 1.10% in the third quarter of 2010. Of the overall decrease in net charge-offs of $5.9 million, $4.0 million was reflected in commercial/real estate loans, $1.4 million in mortgage loans and $0.5 million in Finance Company loans.
Non-accrual loans were $98.2 million at September 30, 2011, a decrease of $22.8 million from December 31, 2010. Covered and acquired loans accounted for in accordance with ASC 310-30 are considered to be performing due to the application of the accretion method. These loans are excluded due to their performing status. Certain covered loans accounted for using the cost recovery method or acquired loans accounted for in accordance with ASC 310-20 are disclosed as non-accrual loans in the above table. Included in non-accrual loans is $4.4 million in restructured commercial loans. Total troubled debt restructurings for the period were $14.0 million. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and 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 $123.1 million at September 30, 2011 compared to $31.9 million at September 30, 2010, an increase of $91.2 million. The majority of the increase in foreclosed assets is from the Whitney acquisition. The increases, excluding Whitney, in foreclosed assets are mainly due to the on-going weak economy and weakness in residential development.
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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. See supplemental asset quality information excluding covered and acquired loans in Selected Financial Data.
Net loans outstanding at end of period
Average net loans outstanding
Balance of allowance for loan losses at beginning of period
Loans charged-off:
Commercial/Real Estate
Lease financing
Total charge-offs
Recoveries of loans previously charged-off:
Total recoveries
Provision for loan losses, net (a)
Increase in indemnification asset (a)
Balance of allowance for loan losses at end of period
Gross charge-offs to average loans
Recoveries to average loans
Net charge-offs to average loans
Allowance for loan losses to period-end net loans
Net charge-offs to period-end net loans
Net charge-offs to loan loss allowance
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 ($225), and the impairment $4,500 on those covered loans for the three months ended September 30, 2011. This results in an increase in the indemnification asset, which is the difference between the provision for loan losses on covered loans of ($1,671), and the impairment $33,448 on those covered loans for the nine months ended September 30, 2011.
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An allocation of the loan loss allowance by major loan category is set forth in the following table:
Unallocated
Other Earning Assets
Federal funds sold, interest-bearing deposits in banks, and other short-term investments averaged $919.1 million for the nine months ended September 30, 2011 compared to $728.7 million for the nine months ended September 30, 2010. The increase of $190.4 million, or 26.1%, from prior year quarter was primarily caused by an increase of $143.7 million Federal Reserve interest-bearing accounts and $44.5 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 $15.3 billion at September 30, 2011 and $6.8 billion at December 31, 2010. The $8.5 billion increase is the result of the merger with Whitney. Total deposits at September 30, 2011, were $15.3 billion, down $296 million, or 2%, from June 30, 2011. The linked quarter decline included $180 million from the divested branches, $73 million from expected Peoples First CD runoff and $160 million in seasonal public fund outflows. 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.
Our borrowings consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, long-term debt and other borrowings. Total borrowings at September 30, 2011 were $1.2 billion compared to $375.2 million at December 31, 2010. The increase of $864.7 million was primarily in securities sold under agreements to repurchase of $515.6 million and in long-term debt of $355.9 million. The $355.9 million increase in long-term debt resulted from the assumption of debt of $219.7 million in the merger with Whitney. In addition, in June 2011, the Company issued a $140 million variable rate term loan to use for general corporate purposes. See Note 3 for additional information on long-term debt.
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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. 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 September 30, 2011, we had $4.1 billion in unused loan commitments outstanding, of which approximately $3.6 billion 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. 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. At September 30, 2011, we had $431.5 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2011 according to expiration date.
Commitments to extend credit
Letters of credit
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with 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.
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We evaluate our estimates, including those related to purchase accounting, 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 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. Tightened credit markets, volatile equity markets, sustained high 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. As part of the integration process, we evaluated Whitney’s critical accounting policies and found them to be very similar to our policies. Where there were minor differences, the Hancock policy was implemented. See our 2010 10-K for descriptions of our critical accounting policies.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 15 to our Condensed Consolidated Financial Statements included elsewhere in this report.
SEGMENT REPORTING
See Note 14 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 re-price 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 September 30, 2011, the effective duration of the securities portfolio was 2.7 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 3.5 years, while a reduction in rates of 100 basis points would result in an effective duration of 1.4 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 September 30, 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.
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.
Other than changes required in connection with the ongoing integration of Whitney and Hancock operations, our management, including the Chief Executive Officers and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended September 30, 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 1. Legal Proceedings
On January 7, 2011, a purported shareholder of Whitney filed a lawsuit in the Civil District Court for the Parish of Orleans of the State of Louisiana captioned De LaPouyade v. Whitney Holding Corporation, et al., No. 11-189, naming Whitney and members of Whitney’s board of directors as defendants. This lawsuit is purportedly brought on behalf of a putative class of Whitney’s common shareholders and seeks a declaration that it is properly maintainable as a class action. The lawsuit alleges that Whitney’s directors breached their fiduciary duties and/or violated Louisiana state law and that Whitney aided and abetted those alleged breaches of fiduciary duty by, among other things, (a) agreeing to consideration that undervalues Whitney, (b) agreeing to deal protection devices that preclude a fair sales process, (c) engaging in self-dealing, and (d) failing to protect against conflicts of interest. Among other relief, the plaintiff sought to enjoin the merger. The parties have reached a settlement in principle.
On February 17, 2011, a complaint in intervention was filed by the Louisiana Municipal Police Employees Retirement System (“MPERS”) in the De LaPouyade case. The MPERS complaint is substantially identical to and seeks to join in the De LaPouyade complaint. The parties have reached a settlement in principle.
On February 7, 2011, another putative shareholder class action lawsuit, Realistic Partners v. Whitney Holding Corporation, et al., Case No. 2:11-cv-00256, was filed in the United States District Court for the Eastern District of Louisiana against Whitney, members of Whitney’s board of directors, and Hancock asserting violations of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duty under Louisiana state law, and aiding and abetting breach of fiduciary duty by, among other things, (a) making material misstatements or omissions in the proxy statement, (b) agreeing to consideration that undervalues Whitney, (c) agreeing to deal protection devices that preclude a fair sales process, (d) engaging in self-dealing, and (e) failing to protect against conflicts of interest. Among other relief, the plaintiff sought to enjoin the merger. On February 24, 2011, the plaintiff moved for class certification. The parties have reached a settlement in principle.
On April 11, 2011, another putative shareholder class action lawsuit, Jane Doe v. Whitney Holding Corporation, et al., Case No. 2:11-cv-00794-ILRL-JCW, was filed in the United States District Court for the Eastern District of Louisiana against Whitney, members of Whitney’s board of directors, and the defendants’ insurance carrier asserting breach of fiduciary duty under Louisiana state law by, among other things, (a) agreeing to consideration that undervalues Whitney, (b) agreeing to deal protection devices that preclude a fair sales process, (c) engaging in self-dealing, and (d) failing to protect against conflicts of interest. Among other relief, the plaintiff sought to enjoin the merger. On April 20, 2011, this case was consolidated with theRealistic Partners case. The parties have reached a settlement in principle.
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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 nine months ended September 30, 2011.
Item 6. Exhibits.
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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Index to Exhibits
ExhibitNumber
Description