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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2012 OR
For the transition period from to Commission File Number 0-13089
HANCOCK HOLDING COMPANY (Exact name of registrant as specified in its charter)
(228) 868-4000 (Registrant’s telephone number, including area code) NOT APPLICABLE (Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 84,771,111 common shares were outstanding as of April 30, 2012 for financial statement purposes.
Table of ContentsHancock Holding Company
Table of ContentsHancock Holding Company and Subsidiaries (In thousands, except share data)
See notes to unaudited condensed consolidated financial statements.
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Table of ContentsHancock Holding Company and Subsidiaries Consolidated Statements of Income (Unaudited) (In thousands, except per share)
See notes to unaudited condensed consolidated financial statements.
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Table of ContentsHancock Holding Company and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited) (In thousands, except share and per share data)
See notes to unaudited condensed consolidated financial statements.
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Table of ContentsHancock Holding Company and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (In thousands, except share and per share data)
See notes to unaudited condensed consolidated financial statements.
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Table of ContentsHancock Holding Company and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (In thousands)
See notes to unaudited condensed consolidated financial statements.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of Hancock Holding Company and all majority-owned subsidiaries (the “Company”). They include all adjustments that are, in the opinion of management, necessary to present fairly the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. Some financial information and disclosures normally included in financial statements prepared in accordance with 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 2011 Annual Report on Form 10-K. Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations, or cash flows for any other interim or annual periods. 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 and assumptions about future events that affect the amounts reported in the consolidated financial statements and the accompanying footnotes. Actual results could differ significantly from those estimates. Critical Accounting Policies and Estimates There have been no material changes or developments underlying assumption or methodologies that the Company uses when applying what management believes are critical accounting policies and estimates and developing critical accounting estimates as disclosed in our Form 10-K for the year ended December 31, 2011. Securities Securities that the Company both positively intends and has the ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. The intent and ability to hold are not considered satisfied when a security is available to be sold in response to changes in interest rates, prepayment rates, liquidity needs or other reasons as part of an overall asset/liability management strategy. Premiums and discounts on securities, both those held to maturity and those available for sale, are amortized and accreted to income as an adjustment to the securities’ yields using the interest method. Realized gains and losses on securities, including declines in value judged to be other than temporary, are reported net as a component of noninterest income. The cost of securities sold is specifically identified for use in calculating realized gains and losses. 2. Fair Value The FASB defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB’s guidance also established a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value, giving preference to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
2. Fair Value (continued)
Fair Value of Assets and Liabilities Measured on a Recurring Basis The following tables present for each of the fair value hierarchy levels the Company’s financial assets and liabilities that are measured at fair value (in thousands) on a recurring basis in the consolidated balance sheets.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
2. Fair Value (continued)
Securities classified as level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and certain other debt and equity securities. Level 2 classified securities include mortgage-backed debt securities and collateralized mortgage obligations that are issued or guaranteed by U.S. government agencies, and state and municipal bonds. The level 2 fair value measurements for investment securities were obtained from a third-party pricing service that uses industry-standard pricing models. Substantially all of the model inputs were observable in the marketplace or can be supported by observable data. The Company invests only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two to five years. Company policies limit investments to securities having a rating of no less than “Baa”, or its equivalent by a nationally recognized statistical rating agency, except for certain non-rated obligations of counties, parishes and municipalities within our markets in Mississippi, Louisiana, Texas, Florida and Alabama. There were no transfers between valuation hierarchy levels during the periods shown. The fair value of derivative financial instruments, which are predominantly 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. The Company’s policy is to measure counterparty credit risk for all derivative instruments subject to master netting arrangements consistent with how market participants would price the net risk exposure at the measurement date.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
2. Fair Value (continued)
Fair Value of Assets Measured on a Nonrecurring Basis Certain assets and liabilities are measured at fair value on a nonrecurring basis. Collateral-dependent impaired loans are level 2 assets measured using third-party appraisals of the collateral or other market-based information such as recent sales activity for similar assets in the property’s market. Other real estate owned are level 2 assets carried at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less. Fair values are determined by sales agreement or third-party appraisal. 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 nonrecurring basis.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
2. Fair Value (continued)
Accounting guidance from the FASB requires the disclosure of estimated fair value information about certain on- and off- balance sheet financial instruments, including those financial instruments that are not measured and reported at fair value on a recurring basis. The significant methods and assumptions used by the Company to estimate the fair value of financial instruments are discussed below. Cash, Short-Term Investments and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities - The fair values measurement for securities available for sale was discussed earlier. The same measurement techniques were applied to the valuation of securities held to maturity. Loans, Net - The fair value measurement for certain impaired loans was discussed earlier. 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 accounting guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold under Agreements to Repurchase and, Federal Funds Purchased - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value. Long-Term Debt- The fair value is estimated by discounting the future contractual cash flows using current market rates at which similar notes over the same remaining term could be obtained. Derivative Financial Instruments - The fair value measurement for derivative financial instrument was discussed earlier.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
2. Fair Value (continued)
The following tables present the estimated fair values of the Company’s financial instruments by fair value hierarchy levels and the corresponding carrying amount at March 31, 2012 and December 31, 2011 (in thousands):
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
3. Securities The amortized cost and fair value of securities classified as available for sale and held to maturity follow (in thousands):
During the first quarter of 2012, the Company reclassified approximately $1.5 billion of securities available for sale as securities held to maturity. As a result of the acquisition of Whitney National Bank, the securities portfolio grew to such a size that the company determined that only a portion of the portfolio is needed for liquidity purposes. The securities reclassified consisted primarily of CMOs and in-market municipal securities. The securities were transferred at fair value, which became the cost basis for the securities held to maturity. The unrealized net holding gain on the available for sale securities on the date of transfer totaled approximately $39 million, and continues to be reported, net of tax, as a component of accumulated other comprehensive income. This net unrealized gain will be accreted to interest income over the remaining life of the securities as a yield adjustment, which will serve to offset the impact of the amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
3. Securities (continued)
The following table presents the amortized cost and fair value of securities classified as available for sale and held to maturity at March 31, 2012, by contractual maturity (in thousands). Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties.
The Company held no securities classified as trading at March 31, 2012 or December 31, 2011. The Company held no securities classified as held to maturity at December 31, 2011. The details concerning securities classified as available for sale with unrealized losses as of March 31, 2012 follow (in thousands): Available for sale
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
3. Securities (continued)
The details concerning securities classified as available for sale with unrealized losses as of December 31, 2011 follow (in thousands):
The details concerning securities classified as held to maturity with unrealized losses as of March 31, 2012 follow (in thousands):
Substantially all of the unrealized losses relate mainly to changes in market rates on fixed-rate debt securities since the respective purchase date. In all cases, the indicated impairment would be recovered by the security’s maturity date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption of the obligations. The Company has adequate liquidity and, therefore, does not plan to sell and, more likely than not, will not be required to sell these securities before recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary. Securities with a fair value of approximately $2.7 billion at March 31, 2012 and $3.0 billion at December 31, 2011 were pledged primarily to secure public deposits or securities sold under agreements to repurchase.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses Loans, net of unearned income, totaled $11.1 billion at March 31, 2012 compared to $11.2 billion at December 31, 2011. Originated loans totaled $5.5 billion at March 31, 2012 compared to $4.9 billion at December 31, 2011. Originated loans include loans from legacy Hancock and loans newly originated from legacy Whitney locations. Acquired loans totaled $5.0 billion at March 31, 2012 compared to $5.6 billion at December 31, 2011. Acquired loans are those purchased in the Whitney acquisition on June 4, 2011. Covered loans totaled $633.8 million at March 31, 2012 compared to $671.4 million at December 31, 2011. 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:
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The following briefly describes the distinction between originated, acquired and covered loans and certain significant accounting policies relevant to each category. Originated loans Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recognized in income as earned. The accrual of interest on originated loans is discontinued when it is probable that the borrower will be unable to meet payment obligations as they become due. The Company maintains an allowance for loan losses on originated loans that represents management’s estimate of probable losses inherent in this portfolio category. The methodology for estimating the allowance is described in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. As actual losses are incurred, they are charged against the allowance. Subsequent recoveries are added back to the allowance when collected. Acquired loans Acquired loans are those purchased in the Whitney Holding Corporation acquisition on June 4, 2011. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration (“acquired impaired”), and then further segregated into pools using common risk characteristics, such as loan type, geography and risk rating. The fair value estimate for each pool was based on an estimate of cash flows, both principal and interest, expected to be collected from that pool, discounted at prevailing market rates of interest. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The difference between the fair value of a acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. Management estimates an allowance for loan losses for acquired performing loans at each subsequent reporting date using a methodology similar to that used for originated loans. The allowance determined for each loan pool is compared to the remaining fair value discount for that pool. If greater, the excess is added to the reported allowance through a provision for loan losses. If less, no additional allowance or provision is recognized. Actual losses are first charged against any remaining fair value discount for the loan pool. Once the discount is fully depleted, losses are applied against the allowance established for that pool. The excess of cash flows expected to be collected from an acquired impaired loan pool over the pool’s estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the pool. Management updates the estimate of cash flows expected to be collected on each acquired impaired loan pool at each reporting date. If expected cash flows for a pool decrease, an increase in the reported allowance for loan losses is made through a provision for loan losses. If expected cash flows for a pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. Covered loans and the related loss share indemnification asset The loans purchased in the 2009 acquisition of Peoples First Community Bank are covered by two loss share agreements between the FDIC and the Company that afford the Company significant loss protection. Covered loans are accounted for as acquired impaired loans as described above. The loss share indemnification asset is measured separately from the related covered loans as it is not contractually embedded in the loans and is not transferable should the loans be sold. The fair value of the indemnification asset at acquisition was estimated by discounting projected cash flows from the loss share agreements based on expected reimbursements for allowable loss claims, including appropriate consideration of possible true-up payments to the FDIC at the expiration of the agreements. The discounted amount is accreted into non-interest income over the remaining life of the covered loan pool or the life of the shared loss agreement. In the following discussion and tables, commercial loans include the commercial, construction and real estate loans categories shown in previous table.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The following schedule shows activity in the allowance for loan losses, by portfolio segment and the related corresponding recorded investment in loans, for the three months ended March 31, 2012 and March 31, 2011:
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The following table shows the composition of non-accrual loans by portfolio segment and class. Covered and acquired loans are considered to be performing due to the application of the accretion method and are excluded from the table. Certain covered loans accounted for using the cost recovery method do not have an accretable yield and are disclosed below as non-accrual loans.
The amount of interest that would have been recorded on nonaccrual loans for the three months ended March 31, 2012 was approximately $1.7 million. Interest actually received on nonaccrual loans during the three months ended March 31, 2012 was $0.5 million.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The table below details the troubled debt restructurings (TDR) that occurred during the current and prior year quarter by portfolio segment (dollar amounts in thousands). During these periods, no loan modified as a TDR defaulted within twelve months of its modification date. 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.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The following table presents impaired loans disaggregated by class at March 31, 2012 and December 31, 2011:
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Condensed and Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
Covered and acquired loans with an accretable yield are considered to be current in the following table. Certain covered loans accounted for using the cost recovery method are disclosed according to their contractual payment status below. The following table presents the age analysis of past due loans.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
The following table presents the credit quality indicators of the Company’s various classes of loans at March 31, 2012 and December 31, 2011. December 31, 2011 commercial-originated and commercial-acquired, pass and substandard grades, were restated due to the correction of a misclassification. Commercial-originated pass was overstated with commercial-originated substandard understated by $91.6 million. Commercial-acquired pass was understated and commercial-acquired substandard was overstated by the same amount. Commercial Credit Exposure Credit Risk Profile by Internally Assigned Grade
Residential Mortgage Credit Exposure Credit Risk Profile by Internally Assigned Grade
Consumer Credit Exposure Credit Risk Profile Based on Payment Activity
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
4. Loans and Allowance for Loan Losses (continued)
All loans are reviewed periodically over the course of the year. Each Bank’s portfolio of loan relationships aggregating $500,000 or more is reviewed every 12 to 18 months by the Bank’s Loan Review staff with other loans also periodically reviewed. Commercial:
Consumer:
The Company held $42.5 million and $72.4 million, respectively, in loans held for sale at March 31, 2012 and December 31, 2011. Of the $42.5 million, $9.3 million are problem commercial loans held for sale. The remainder of $33.2 million represents mortgage loans originated for sale, which are carried at the lower of cost or estimated fair value. Residential mortgage loans are originated on a best-efforts basis, whereby a commitment by a third party to purchase the loan has been received concurrent with the Banks’ commitment to the borrower to originate the loan.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Condensed and Consolidated Financial Statements – (continued) (Unaudited)
4. 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:
5. 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. The Company manages a matched book with respect to its customer derivatives in order to minimize its net risk exposure resulting from such agreements.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
5. Derivatives (continued)
Fair Values of Derivative Instruments on the Balance Sheet The Company is making an accounting policy election to use the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for derivative instruments, consistent with the guidance in 820-10-35-18G. The table below presents the fair value (in thousands) of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2012 and December 31, 2011.
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 March 31, 2012, 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 forecasted variable cash flows beginning in June 2012 under a variable-rate term loan agreement. The Company did not have any cash flow hedges outstanding at March 31, 2011 or during the first quarter of 2011.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
5. Derivatives (continued)
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. The impact on AOCI was insignificant during the first quarter of 2012, and the impact of reclassifications on earnings during 2012 is expected to also be insignificant. 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 months ended March 31, 2012. 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. The Company 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 March 31, 2012, the Company had entered into interest rate derivatives, including both customer and offsetting agreements, with an aggregate notional amount of $610.4 million related to this program. Effect of Derivative Instruments on the Income Statement The effect of the Company’s derivative financial instruments on the income statement was immaterial for the three months ended March 31, 2012 and 2011. Credit-risk-related Contingent Features Certain of the Banks’ derivative instruments contain provisions allowing the financial institution counterparty to terminate the contracts in certain circumstances, such as the downgrade of the Banks’ credit ratings below specified levels, a default by the Bank on its indebtedness, or the failure of a Bank to maintain specified minimum regulatory capital ratios or its regulatory status as a well-capitalized institution. These derivative agreements also contain provisions regarding the posting of collateral by each party. As of March 31, 2012 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 $17.9 million. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted collateral of $11.5 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2012, it could have been required to settle its obligations under the agreements at the termination value.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Condensed and Consolidated Financial Statements – (continued) (Unaudited)
6. Earnings Per Share Hancock calculates earnings per share using the two-class method. The two-class method allocates net income to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings. Participating securities consist of unvested stock-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. 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):
Potential common shares consist of employee and director stock options. These potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share. Weighted-average anti-dilutive potential common shares totaled 378,788 for the three months ended March 31, 2012. There were no anti-dilutive shares for the three months ended March 31, 2011. 7. Share-Based Payment Arrangements Stock Option Plans Hancock maintains incentive compensation plans that incorporate share-based compensation for employees and directors. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in note 13 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2011.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
7. Share-Based Payment Arrangements (continued)
A summary of option activity for the three months ended March 31, 2012 is presented below:
The total intrinsic value of options exercised during the three months ended March 31, 2012 and 2011 was $0.4 million and $0.04 million, respectively. A summary of the status of the Company’s nonvested restricted share awards as of March 31, 2012, and changes during the three months ended March 31, 2012, is presented below. These restricted shares are subject to service requirements.
Hancock also makes annual grants of performance stock to key members of executive and senior management. On January 26, 2012, Hancock granted a target award of 14,858 performance shares with a fair value on the grant date of $36.16 per share. The number of 2012 performance shares that ultimately vest at the end of the three-year required service period will be based on the relative rank of Hancock’s three-year total shareholder return (TSR) among the TSRs of a peer group of fifty regional banks. The maximum number of performance shares that could vest is 200% of the target award. The fair value of this award at the grant date was determined using a Monte Carlo simulation method. Compensation expense for these performance shares will be recognized on a straight-line basis over the service period. As of March 31, 2012, there was $26.7 million of total unrecognized compensation expense related to nonvested restricted shares and performance shares. This compensation is expected to be recognized in expense over a weighted-average period of 3.2 years. The total fair value of restricted shares which vested during the three months ended March 31, 2012 and 2011 was $0.73 million and $2.8 million, respectively.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
8. Retirement Plans The Company has defined benefit pension plans covering legacy Hancock employees as well as plans covering certain legacy Whitney employees. The Whitney plans have been closed to new participants since 2008, and benefit accruals have been frozen for participants who did not meet certain vesting, age and years of service criteria as of December 31, 2008. The Company also sponsors defined benefit postretirement plans for both legacy Hancock and legacy Whitney employees that provide health care and life insurance benefits. Benefits under the Whitney plan are restricted to retirees who were already receiving benefits at the time of plan amendments in 2007 or active participants who were eligible to receive benefits as of December 31, 2007. The Company is in the process of reviewing all retirement benefit plans to determine appropriate changes needed to transition legacy Whitney employees into the Company’s benefit plans. The following tables show the components of net periodic benefits cost included in expense for both the Hancock and Whitney Plans. Hancock Plan
Whitney Plan
During the first three months of 2012, the Company contributed approximately $10 million to its pension plans and anticipates a total contribution of $26 million in 2012.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
9. Other Noninterest Income Components of other income are as follows:
10. Other Noninterest Expense Components of other expense are as follows:
Other noninterest expense for the first quarter of 2012 includes $5.9 million of costs associated with the Whitney acquisition and the integration of Whitney’s operations into Hancock. Total merger-related costs included in noninterest expense were $33.9 million for the first quarter of 2012 and $1.6 million in the first quarter of 2011.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
11. Segment Reporting The Company’s primary operating segments are divided into Hancock, Whitney, and Other. The Hancock segment coincides with the Company’s Hancock Bank subsidiary and the Whitney segment with its Whitney Bank subsidiary. Each bank segment offers commercial, consumer and mortgage loans and deposit services as well as certain other services, such as trust and treasury management services. Although the bank segments offer the same products and services, they are managed separately due to different pricing, product demand, and consumer markets. On June 4, 2011, the Company completed its acquisition of Whitney Holding Corporation, the parent of Whitney National Bank. Whitney National Bank was merged into Hancock Bank of Louisiana and the combined entity was renamed Whitney Bank. Prior to the merger the segment now called Whitney Bank was comprised generally of Hancock Bank Louisiana. On March 15, 2012 Whitney Bank transferred the assets and liabilities of its operations in Florida and Alabama and Mississippi to Hancock Bank. As part of the merger, the assets and liabilities of the former Hancock Bank of Alabama were transferred to Hancock Bank. In the following tables, the “Other” segment includes activities of other consolidated subsidiaries that provide investment services, insurance agency services, insurance underwriting and various other services to third parties.
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Table of ContentsHancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements – (continued) (Unaudited)
11. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
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