UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 ------- Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 ------- For Quarter Ending September 30, 2005 --------------------------------------------------- Commission File Number 0-13089 ----------------------------------------------- HANCOCK HOLDING COMPANY - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MISSISSIPPI 64-0693170 - ---------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) ONE HANCOCK PLAZA, P.O. BOX 4019, GULFPORT, MISSISSIPPI 39502 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (985) 726-2313 - ---------------------------------------------------------------------------- (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO -------- -------- 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. 32,313,508 common shares were outstanding as of October 31, 2005 for financial statement purposes.
HANCOCK HOLDING COMPANYINDEXPART I. FINANCIAL INFORMATION PAGE NUMBERITEM 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) -- September 30, 2005 and December 31, 2004 3 Condensed Consolidated Statements of Earnings (Unaudited) -- Three and Nine Months Ended September 30, 2005 and 2004 4 Condensed Consolidated Statements of Common Stockholders' Equity Equity (Unaudited) -- Nine Months Ended September 30, 2005 and 2004 5 Condensed Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended September 30, 2005 and 2004 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 33 ITEM 4. Controls and Procedures 35PART II. OTHER INFORMATIONITEM 1. Legal Proceedings 35 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 36 ITEM 3. Defaults upon Senior Securities 36 ITEM 4. Submission of Matters to a Vote of Security Holders 36 ITEM 5. Other Information 37 ITEM 6. Exhibits 37SIGNATURES 38
PART I - FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSHANCOCK HOLDING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in thousands, except par value and share data) (Unaudited) September 30, December 31, 2005 2004 * -------------------- -------------------- ASSETS: Cash and due from banks (non-interest bearing) $ 195,863 $ 155,797 Interest-bearing time deposits with other banks 8,031 8,126 Federal funds sold 133,239 142,135 Securities available for sale, at fair value (amortized cost of $1,130,259 and $1,118,622) 1,145,385 1,114,468 Securities held to maturity, at amortized cost (fair value of $179,573 and $193,578) 177,781 187,901 Loans 2,995,586 2,760,266 Less: Allowance for loan losses (76,584) (40,682) Unearned income (11,416) (11,706) -------------------- -------------------- Loans, net 2,907,586 2,707,878 Property and equipment, net of accumulated depreciation of $52,145 and $77,766 74,957 79,848 Other real estate, net 2,888 3,007 Accrued interest receivable 30,720 23,783 Goodwill, net 56,713 55,409 Other intangible assets, net 16,503 14,783 Life insurance contracts 82,211 79,630 Reinsurance receivables 52,798 59,190 Other assets 28,815 32,771 -------------------- -------------------- TOTAL ASSETS $ 4,913,490 $ 4,664,726 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Non-interest bearing demand $ 909,585 $ 697,353 Interest-bearing savings, NOW, money market and time 3,115,568 3,100,592 -------------------- -------------------- Total deposits 4,025,153 3,797,945 Federal funds purchased 2,200 800 Securities sold under agreements to repurchase 191,947 195,478 Long-term notes 50,271 50,273 Policy reserves and liabilities 109,186 111,107 Other liabilities 65,674 44,541 -------------------- -------------------- TOTAL LIABILITIES 4,444,431 4,200,144 COMMON STOCKHOLDERS' EQUITY: Common Stock-$3.33 par value per share; 75,000,000 shares authorized, 32,308,600 and 32,439,702 issued, respectively 107,588 108,024 Capital surplus 129,724 134,905 Retained earnings 252,303 234,423 Accumulated other comprehensive loss, net (18,016) (11,121) Unearned compensation (2,540) (1,649) -------------------- -------------------- TOTAL COMMON STOCKHOLDERS' EQUITY 469,059 464,582 -------------------- -------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $ 4,913,490 $ 4,664,726 ==================== ==================== * The balance sheet at December 31, 2004 has been derived from the audited balance sheet at that date. See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(UNAUDITED)(amounts in thousands, except share and per share data) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- ---------------------------- 2005 2004 2005 2004 ---------- ----------- ----------- ----------- INTEREST INCOME: Loans, including fees $ 50,724 $ 42,834 $ 144,549 $ 124,691 Securities - taxable 12,758 12,652 38,832 36,734 Securities - tax exempt 1,746 1,898 5,314 5,882 Federal funds sold 409 27 1,404 232 Other investments 7 13 103 45 ---------- ---------- ----------- ----------- Total interest income 65,644 57,424 190,202 167,584 ---------- ---------- ----------- ----------- INTEREST EXPENSE: Deposits 17,279 13,333 48,417 39,006 Federal funds purchased and securities sold under agreements to repurchase 1,619 609 3,532 1,307 Long-term notes and other interest expense 761 625 1,959 1,942 ---------- ---------- ----------- ----------- Total interest expense 19,659 14,567 53,908 42,255 ---------- ---------- ----------- ----------- NET INTEREST INCOME 45,985 42,857 136,294 125,329 Provision for loan losses 36,905 3,388 41,556 10,741 ---------- ---------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,080 39,469 94,738 114,588 ---------- ---------- ----------- ----------- NON-INTEREST INCOME Service charges on deposit accounts 7,975 11,567 27,924 32,568 Other service charges, commissions and fees 10,874 7,101 31,019 22,120 Securities gains (losses), net (18) (2) (26) 159 Net storm-related items (Net gain on insurance less direct expenses incurred) 12,276 - 12,276 - Gain on sale of branches - - - 5,258 Other income 2,751 2,305 9,778 8,135 ---------- ---------- ----------- ----------- Total non-interest income 33,858 20,971 80,971 68,240 ---------- ---------- ----------- ----------- NON-INTEREST EXPENSE Salaries and employee benefits 24,275 20,664 69,579 64,698 Net occupancy expense of premises 2,617 2,470 7,688 7,288 Equipment rentals, depreciation and maintenance 2,319 2,419 7,042 7,121 Amortization of intangibles 514 558 1,676 1,407 Other expense 13,045 12,195 40,932 36,492 ---------- ---------- ----------- ----------- Total non-interest expense 42,770 38,306 126,917 117,006 ---------- ---------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 168 22,134 48,792 65,822 Income tax expense (benefit) (1,267) 6,738 13,824 19,909 ---------- ---------- ----------- ----------- NET EARNINGS $ 1,435 $ 15,396 $ 34,968 $ 45,913 ========== ========== =========== =========== BASIC EARNINGS PER SHARE $ 0.04 $ 0.47 $ 1.08 $ 1.42 ========== ========== =========== =========== DILUTED EARNINGS PER SHARE $ 0.04 $ 0.47 $ 1.06 $ 1.39 ========== ========== =========== =========== DIVIDENDS PAID PER SHARE $ 0.195 $ 0.165 $ 0.525 $ 0.415 ========== ========== =========== =========== WEIGHTED AVG. SHARES OUTSTANDING-BASIC 32,308 32,495 32,388 32,365 ========== ========== =========== =========== WEIGHTED AVG. SHARES OUTSTANDING-DILUTED 32,940 33,054 32,959 33,039 ========== ========== =========== =========== See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITYUNAUDITED(amounts in thousands, except per share data) Accumulated Other Common Stock Capital Retained Comprehensive Unearned Shares Amount Surplus Earnings Loss, net Compensation ------------ ------------ ------------ ----------- ------------- -----------Balance, January 1, 2004 30,455,358 $101,416 $111,963 $ 191,696 $ (6,304) $ (957) Net earnings 45,913 Cash dividends - $0.415 per common share (13,403) Preferred stock conversion 2,200,976 7,329 29,886 Change in fair value of securities available for sale, net (384) Restricted Stock Awards Granted - - 1,385 (1,385) Restricted Stock Awards Vested 2,625 9 18 Restricted Stock Award Forfietures 775 3 (17) 5 Restricted Stock Award Amortization - - - 488 Repurchase/retirement of common stock (324,392) (1,080) (9,596) Options exercised, net 127,763 425 1,835 Other stock transactions, net 9,168 30 (2,797) ------------ ------------ ------------ ----------- ------------- -----------Balance, September 30, 2004 32,472,273 $ 108,132 $132,659 $ 224,206 $ (6,688) $ (1,831) ============ ============ ============ =========== ============= ===========Balance, January 1, 2005 32,439,702 $ 108,024 $134,905 $ 234,423 $(11,121) $ (1,649) Net earnings 34,968 Cash dividends - $0.525 per common share (17,088) Change in fair value of securities available for sale, net (6,895) Restricted Stock Awards Granted - - 1,490 (1,490) Restricted Stock Awards Vested 37,426 125 Restricted Stock Award Forfietures 3,203 11 47 128 Restricted Stock Award Amortization 471 Repurchase/retirement of common stock (262,850) (875) (7,395) Options exercised, net 81,887 273 479 Other stock transactions, net 9,232 30 198 ------------ ------------ ------------ ----------- ------------- -----------Balance, September 30, 2005 32,308,600 $ 107,588 $129,724 $ 252,303 $(18,016) $ (2,540) ============ ============ ============ =========== ============= =========== See notes to unaudited condensed consolidated financial statements
HANCOCK HOLDING COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED(amounts in thousands) Nine Months Ended September 30, ------------------------------------------ 2005 2004 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 34,968 $ 45,913 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,844 6,888 Provision for loan losses 41,556 10,741 Provision for losses on other real estate owned 261 198 Increase in cash surrender value of life insurance contracts (2,581) (2,596) Loss (gain) on sales of securities available for sale, net 26 (159) Gain on sale of assets - (5,258) Gain on involuntary conversion of assets (14,135) - (Accretion) amortization of securities premium/discount, net (2,476) 4,382 Amortization of intangible assets 1,676 1,407 Amortization of compensation element of restricted stock 471 488 (Increase) decrease in deferred tax asset (18,770) 407 (Increase) decrease in interest receivable (6,937) 1,779 Increase in accrued expenses 19,487 5,322 Increase in other liabilities 496 3,084 Increase (decrease) in interest payable 1,150 (574) Increase (decrease) in unearned premiums (1,921) 80,952 Decrease in reinsurance receivable 6,392 13,628 (Increase) decrease in other assets, net 30,049 (42,006) Other, net 5,775 19,125 --------------- --------------- Net cash provided by operating activities 102,331 143,721 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest-bearing time deposits 95 (1,849) Proceeds from maturities, calls or prepayments of securities held to maturity 17,895 17,693 Proceeds from sales and maturities of securities available for sale 594,188 504,297 Purchases of securities held to maturity (7,736) (40,483) Purchases of securities available for sale (622,686) (556,383) Net decrease in federal funds sold 8,896 19,232 Net increase in loans (245,959) (224,121) Purchases of property, equipment and software, net (5,549) (6,523) Proceeds from sales of other real estate 1,784 4,120 Proceeds from the sale of merchant services business - 3,000 Premiums paid on bank owned life insurance contracts - (25,000) Net cash paid in connection with sale of branches - (22,999) Net cash paid in connection with purchase transaction (3,890) (15,364) --------------- --------------- Net cash used in investing activities (262,962) (344,380) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 227,208 132,147 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (2,131) 82,536 Repayment of short-term note (2) (9,400) Reductions of long-term notes - (148) Dividends paid (17,088) (13,403) Proceeds from exercise of stock options 752 2,260 Repurchase/retirement of common stock (8,270) (10,676) Other stock transactions, net 228 2,193 --------------- --------------- Net cash provided by financing activities 200,697 185,509 --------------- --------------- NET DECREASE IN CASH AND DUE FROM BANKS 40,066 (15,150) CASH AND DUE FROM BANKS, BEGINNING 155,797 178,082 --------------- --------------- CASH AND DUE FROM BANKS, ENDING $ 195,863 $ 162,932 =============== =============== SUPPLEMENTAL INFORMATION: Income taxes paid $ 13,752 $ 21,165 Interest paid 52,758 42,829 Restricted stock issued to employees of Hancock 1,490 - SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Transfers from loans to other real estate $ 2,347 $ 3,867 Financed sale of foreclosed property 583 1,189 See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company (the Company) is a financial holding company headquartered in Gulfport, Mississippi operating in the states of Mississippi, Louisiana, Alabama and Florida through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi, Hancock Bank of Louisiana, Baton Rouge, Louisiana and Hancock Bank of Florida, Tallahassee, Florida (the Banks). 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. The Company’s operating strategy is to provide its 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.
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the banking industry. The consolidated financial statements of the Company include the accounts of the Company, the Banks, Hancock Investment Services, Inc., Hancock Insurance Agency, Inc., Harrison Finance Company, Magna Insurance Company and subsidiary, as well as three real estate corporations owning land and buildings that house bank branches and other facilities. Significant intercompany transactions and balances have been eliminated in consolidation.
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. The determination of the allowance for loan losses is a material estimate that is particularly subject to significant change. Certain prior year amounts have been reclassified to conform to the 2005 presentation.
For further information, refer to the consolidated financial statements and notes thereto of Hancock Holding Company’s 2004 Annual Report to Shareholders.
Following is a summary of the Company’s comprehensive earnings (loss) for the three months and nine months ended September 30, 2005 and 2004.
(Amounts in Thousands) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------------- 2005 2004 2005 2004 ----------- ------------ -------------- -------------- Net earnings $ 1,435 $ 15,396 $ 34,968 $ 45,913 Other comprehensive income (loss) (net of income tax): Change in fair value of securities available for sale, net of tax ($3,411) and $9,343, ($3,722) and ($151), respectively (6,334) 17,350 (6,912) (281) Reclassification adjustments for gains included in net earnings, net of tax of $6 and $1, $9 and ($56), respectively 12 1 17 (103) ----------- ----------- -------------- -------------- Total Comprehensive Earnings (Loss) $ (4,887) $ 32,747 $ 28,073 $ 45,529 =========== =========== ============== ==============
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized. The Company has adopted the disclosure-only option under Statement of Financial Accounting Standards (SFAS) No. 123. Had compensation costs for the Company’s stock options and restricted stock awards been determined based on the fair value at the grant date, consistent with the method under SFAS No. 123, the Company’s net earnings and earnings per share would have been as indicated below:
(Amounts in Thousands, Except Per Share Data) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------ -------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Net earnings available to common stockholders: As reported $ 1,435 $ 15,396 $ 34,968 $ 45,913 Add stock based compensation expense included in reported net income, net of tax 118 107 306 317 Deduct total stock based compensation determined under the fair value method for all awards, net of tax (736) (252) (2,160) (752) ------------- ------------- ------------- ------------- Pro forma net earnings available to common stockholders $ 817 $ 15,251 $ 33,114 $ 45,478 ============= ============= ============= ============= Basic earnings per share: As reported $ 0.04 $ 0.47 $ 1.08 $ 1.42 Pro forma $ 0.03 $ 0.47 $ 1.02 $ 1.41 Diluted earnings per share: As reported $ 0.04 $ 0.47 $ 1.06 $ 1.39 Pro forma $ 0.02 $ 0.46 $ 1.00 $ 1.38
On July 1, 2005, the Company acquired J. Everett Eaves, Inc., a highly regarded independent insurance agency serving the New Orleans, Louisiana area. The transaction was consummated June 30, 2005, with an effective date of July 1, 2005 for $4.2 million cash in exchange for all of the outstanding stock of J. Everett Eaves, Inc. The post-purchase entity will retain the J. Everett Eaves, name and will become a subsidiary of Hancock Insurance Agency.
During the fourth quarter of 2004, the Company acquired Ross-King-Walker, Inc. (RKW), a well-known Hattiesburg, MS based property and casualty insurance agency, as a division of Hancock Insurance Agency in an all cash transaction. The post-purchase entity will retain the RKW name and become an affiliate of Hancock Insurance Agency.
During March 2004, the Company acquired the majority of loans, securities and deposits of the former Guaranty National Bank of Tallahassee, Florida. The Office of the Comptroller of Currency closed all locations of Guaranty National on March 12, 2004. With the transaction, the Company acquired five locations with approximately $40.0 million in performing loans and approximately $69.1 million in deposits from the Federal Deposit Insurance Corporation (FDIC) for a premium of $13.6 million, or 20% of acquired deposits. The Company paid $5.0 million in consideration for the acquisition of assets, net of related deposit liabilities. In accounting for the transaction, management considered it to be an “acquisition of business” and, accordingly, accounted for it under the purchase method of accounting pursuant to SFAS No. 141. Final allocations of asset and liability fair values have been recorded based on an analysis performed by an independent third party.
Hancock's third quarter earnings were significantly impacted by Hurricane Katrina which struck the coasts of Mississippi and Louisiana on August 29, 2005. While the total impact of this hurricane on Hancock's financial condition and results of operation may not be known for some time, the Company has included in third quarter earnings, certain charges, including the establishment of specific accruals, related to the hurricane. The pretax negative impact of Hurricane Katrina on Hancock's third quarter earnings totaled $26.71 million. The $26.71 million net pretax negative impact included the following items: $35.20 million (pretax) to establish a storm-related provision for credit losses, a $1.86 million charge (pretax) related to direct expenses incurred through September 30, 2005, and approximately $3.79 million (pretax) of fees and service charges that were waived to assist affected individuals and businesses. Also included in the $26.71 million impact was a net pretax gain of $14.14 million representative of write-off of destroyed or impaired assets totaling $9.7 million offset by recognition of receivables representing only the portion of casualty loss claims for which settlement was substantially complete.
On March 8, 2004, the Company completed the sale of four Louisiana branches to Sabine State Bank, resulting in a $2.3 million pre-tax gain. The branches that were sold were acquired in the 1999 American Security Bank purchase. The Company made a cash payment of approximately $23 million, whereby approximately $19.7 million in loans were transferred and $42.9 million in deposits liabilities assumed by Sabine State Bank in this transaction.
On February 4, 2004, the Company completed the redemption/conversion of substantially all $37.1 million of its 8% Cumulative Convertible Preferred Stock which had been originally issued in partial payment for the acquisition of Lamar Capital Corporation in July, 2001. The conversion factor was .6666 shares of Hancock Holding Company common stock for each share of the preferred stock. A total of 7,304 shares of the preferred stock was redeemed for cash at the contract price of $20.00 per share plus pro rated dividends of $0.1511 per share.
On February 26, 2004 the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% common stock dividend. The additional shares were payable March 18, 2004 to shareholders of record at the close of business on March 8, 2004.
All information, including earnings per share, dividends per share, and number of shares outstanding has been adjusted to give retroactive effect to this split.
The Company’s primary segments are geographically divided into the Mississippi (MS), Louisiana (LA) and Florida (FL) markets. 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., Hancock Insurance Agency, Inc., Harrison Finance Company, Magna Insurance Company and subsidiary and three real estate corporations owning land and buildings that house bank branches and other facilities. Following is selected information for the Company’s segments (amounts in thousands):
Three Months Ended, September 30, 2005 MS LA FL Other Eliminations Consolidated ------------ ------------- ----------- ----------- ------------- ------------- Interest income $ 34,386 $ 27,855 $ 1,986 $ 4,509 $ (3,092) $ 65,644 Interest expense 11,927 9,103 558 1,070 (2,999) 19,659 ------------ ------------- ----------- ----------- ------------- ------------- Net interest income 22,459 18,752 1,428 3,439 (93) 45,985 Provision for loan losses 24,106 11,636 11 1,152 - 36,905 Non-interest income 21,239 6,298 49 6,298 (26) 33,858 Depreciation and amortization 1,413 633 105 (144) (3) 2,004 Other non-interest expense 17,695 13,897 1,121 8,067 (14) 40,766 ------------ ------------- ----------- ----------- ------------- ------------- Earnings (loss) before income taxes 484 (1,116) 240 662 (102) 168 Income tax expense (benefit) (642) (922) 92 205 - (1,267) ------------ ------------- ----------- ----------- ------------- ------------- Net earnings (loss) $ 1,126 $ (194) $ 148 $ 457 $ (102) $ 1,435 ============ ============= =========== =========== ============= ============= Three Months Ended, September 30, 2004 MS LA FL Other Eliminations Consolidated ------------ ------------- ----------- ----------- ------------- ------------- Interest income $ 30,374 $ 23,093 $ 925 $ 4,411 $ (1,379) $ 57,424 Interest expense 9,585 5,292 271 720 (1,301) 14,567 ------------ ------------- ----------- ----------- ------------- ------------- Net interest income 20,789 17,801 654 3,691 (78) 42,857 Provision for loan losses 949 1,688 23 728 - 3,388 Non-interest income 10,026 7,156 156 4,301 (668) 20,971 Depreciation and amortization 1,475 642 25 141 (3) 2,280 Other non-interest expense 16,521 12,461 983 6,001 60 36,026 ------------ ------------- ----------- ----------- ------------- ------------- Earnings (loss) before income taxes 11,870 10,166 (221) 1,122 (803) 22,134 Income tax expense (benefit) 3,627 3,070 (85) 398 (272) 6,738 ------------ ------------- ----------- ----------- ------------- ------------- Net earnings (loss) $ 8,243 $ 7,096 $ (136) $ 724 $ (531) $ 15,396 ============ ============= =========== =========== ============= =============
Nine Months Ended, September 30, 2005 MS LA FL Other Eliminations Consolidated ------------- ------------ ------------ ----------- -------------- -------------- Interest income $ 100,536 $ 79,464 $ 4,829 $ 12,663 $ (7,290) $ 190,202 Interest expense 33,244 23,645 1,306 2,751 (7,038) 53,908 ------------- ------------ ------------ ----------- -------------- -------------- Net interest income 67,292 55,819 3,523 9,912 (252) 136,294 Provision for loan losses 24,868 14,462 228 1,998 - 41,556 Non-interest income 41,924 21,814 277 17,083 (127) 80,971 Depreciation and amortization 4,240 1,876 350 378 - 6,844 Other non-interest expense 54,824 41,038 3,362 20,786 63 120,073 ------------- ------------ ------------ ----------- -------------- -------------- Earnings (loss) before income taxes 25,284 20,257 (140) 3,832 (442) 48,792 Income tax expense (benefit) 7,126 5,563 (53) 1,255 (68) 13,824 ------------- ------------ ------------ ----------- -------------- -------------- Net earnings (loss) $ 18,158 $ 14,694 $ (87) $ 2,577 $ (374) $ 34,968 ============= ============ ============ =========== ============== ============== Nine Months Ended, September 30, 2004 MS LA FL Other Eliminations Consolidated ------------- ------------ ------------ ----------- -------------- -------------- Interest income $ 89,122 $ 67,178 $ 1,962 $ 12,591 $ (3,269) $ 167,584 Interest expense 28,256 14,627 627 1,749 (3,004) 42,255 ------------- ------------ ------------ ----------- -------------- -------------- Net interest income 60,866 52,551 1,335 10,842 (265) 125,329 Provision for loan losses 3,775 4,202 387 2,377 - 10,741 Non-interest income 29,556 26,084 306 14,156 (1,862) 68,240 Depreciation and amortization 4,434 2,010 25 419 - 6,888 Other non-interest expense 51,372 38,101 2,085 18,171 388 110,118 ------------- ------------ ------------ ----------- -------------- -------------- Earnings (loss) before income taxes 30,841 34,322 (856) 4,031 (2,519) 65,822 Income tax expense (benefit) 9,052 10,532 (330) 1,454 (799) 19,909 ------------- ------------ ------------ ----------- -------------- -------------- Net earnings (loss) $ 21,789 $ 23,790 $ (526) $ 2,577 $ (1,717) $ 45,913 ============= ============ ============ =========== ============== ==============
Goodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. In accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangibles”, the Company tests its goodwill for impairment annually. No impairment charges were recognized as of September 30, 2005. Intangibles totaling $4.7 million were recorded during the third quarter and resulted from the acquisition of J. Everett Eaves, Inc. The carrying amount of goodwill as of September 30, 2005 and December 31, 2004 was $56.7 million and $55.4 million, respectively. In addition to recording intangibles associated with the J. Everett Eaves, Inc. acquisition, reclassifications of certain intangibles were effected due to the re-allocation of intangibles related to the acquisition of Ross-King-Walker, Inc. as a result of obtaining an independent appraisal, as previously disclosed.
The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated (amounts in thousands):
As of As of September 30, 2005 December 31, 2004 -------------------------------------- -------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization --------------- --------------- --------------- --------------- Amortizable Intangible Assets: Core deposit intangibles $ 14,148 $ 5,524 $ 14,148 $ 4,281 Value of insurnace business acquired 7,489 1,470 2,575 179 Mortgage servicing rights 4,582 2,722 4,835 2,315 --------------- --------------- --------------- --------------- Total $ 26,219 $ 9,716 $ 21,558 $ 6,775 =============== =============== =============== =============== Three months ended Sept. 30 Nine months ended Sept. 30 --------------------------------------- ------------------------------------- 2005 2004 2005 2004 --------------- --------------- --------------- --------------- Aggregate Amortization Expense for: Core deposit intangibles $ 411 $ 498 $ 1,243 $ 1,267 Value of insurnace business acquired 103 60 433 139 Mortgage servicing rights 197 254 635 808 --------------- --------------- --------------- --------------- Total $ 711 $ 812 $ 2,311 $ 2,214 =============== =============== =============== ===============
Amortization of the core deposit intangibles is estimated to be approximately $1.7 million in 2005, $1.4 million in 2006, $1.2 million in 2007, $1.1 million in 2008, $1.1 million in 2009 and the remainder of $3.4 million thereafter. The amortization of the value of businesses acquired is expected to approximate $660,000 in 2005, $491,000 in 2006, $355,000 in 2007, $258,000 in 2008, $244,000 in 2009 and the remainder of $1.2 million thereafter. Amortization of mortgage servicing rights is estimated to be approximately $827,000 in 2005, $630,000 in 2006, $440,000 in 2007, $287,000 in 2008, $196,000 in 2009 and the remainder of $140,000 thereafter. The weighted-average amortization period used for intangibles is 10 years.
Net periodic benefits cost includes the following components for the three and nine months ended September 30, 2005 and 2004 (amounts in thousands):
Three months ended September 30, Pension Benefits Other Post-retirement Benefits --------------------------------- -------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------ Service Cost $ 538,285 $ 514,357 $ 77,500 $ 69,472 Interest Cost 848,769 787,772 97,000 92,714 Expected return on plan assets (852,597) (760,753) - - Amortization of prior service cost 6,531 20,712 (13,250) (13,259) Amortization of net loss 249,765 234,478 22,000 20,589 Amortization of transition obligation - - 1,250 1,288 ------------- ------------- ------------- ------------ Net periodic benefit cost $ 790,753 $ 796,566 $ 184,500 $ 170,804 ============= ============= ============= ============ Nine months ended September 30, Pension Benefits Other Post-retirement Benefits --------------------------------- -------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------ Service Cost $1,614,855 $1,543,071 $ 232,500 $ 208,416 Interest Cost 2,546,307 2,363,316 291,000 278,142 Expected return on plan assets (2,557,791) (2,282,259) - - Amortization of prior service cost 19,593 62,138 (39,750) (39,777) Amortization of net loss 749,295 703,434 66,000 61,767 Amortization of transition obligation - - 3,750 3,864 ------------- ------------- ------------- ------------- Net periodic benefit cost $2,372,259 $2,389,700 $ 553,500 $ 512,412 ============= ============= ============= =============
The Company anticipates that it will contribute $3.2 million to its pension plan and approximately $474,000 for post-retirement benefits in 2005. During the first, second and third quarter of 2005, the Company contributed $683,000, $683,000 and $683,000 respectively, to its pension plan and approximately $133,000, $131,000 and 129,000, respectively, for post-retirement benefits.
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 (amounts in thousands):
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, --------------------------------- --------------------------------- 2005 2004 2005 2004 -------------- -------------- -------------- -------------- Balance of allowance for loan losses at beginning of period $ 41,382 $ 38,300 $ 40,682 $ 36,750 Provision for loan losses 36,905 3,388 41,556 10,741 Loans charged-off: Commercial, Real Estate & Mortgage 1,139 880 3,089 4,501 Direct & Indirect Consumer 1,134 1,306 4,171 4,644 Finance Company 628 721 1,723 1,987 Demand Deposit Accounts 798 1,574 2,281 3,734 -------------- -------------- -------------- -------------- Total charge-offs 3,699 4,481 11,264 14,866 -------------- -------------- -------------- -------------- Recoveries of loans previously charged-off: Commercial, Real Estate & Mortgage 1,150 167 2,065 1,868 Direct & Indirect Consumer 268 398 1,324 1,339 Finance Company 116 94 366 310 Demand Deposit Accounts 462 859 1,855 2,583 -------------- -------------- -------------- -------------- Total recoveries 1,996 1,518 5,610 6,100 -------------- -------------- -------------- -------------- Net charge-offs 1,703 2,963 5,654 8,766 -------------- -------------- -------------- -------------- Balance of allowance for loan losses at end of period $ 76,584 $ 38,725 $ 76,584 $ 38,725 ============== ============== ============== ==============
The following table sets forth, for the periods indicated, certain ratios related to the Company’s charge-offs, allowance for loan losses and outstanding loans:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------ -------------------------------- 2005 2004 2005 2004 ------------ ------------- ------------- ------------- Ratios : Net charge-offs to average net loans (annualized) 0.23% 0.45% 0.27% 0.46% Net charge-offs to period-end net loans (annualized) 0.23% 0.44% 0.76% 0.44% Allowance for loan losses to average net loans 2.62% 1.47% 2.69% 1.51% Allowance for loan losses to period-end net loans 2.57% 1.45% 2.57% 1.45% Net charge-offs to loan loss allowance 2.23% 7.65% 7.38% 22.64% Provision for loan losses to net charge-offs 2165.65% 114.34% 734.87% 122.53%
As of September 30, 2005 and December 31, 2004, the Company had investments in classified loans totaling $153.4 million and $119.4 million, respectively. The Company's Allowance for Loan Losses includes reserves of $15.7 million and $13.6 million associated with these loans as of September 30, 2005 and December 31, 2004, respectively. The remaining amount of these loans, $138.7 million and $105.8, respectively, is not provided for specifically in the Allowance for Loan Losses.
In some instances, loans are placed on a nonaccrual status. All accrued but uncollected interest related to the loan is deducted from income in the period the loan is assigned a nonaccrual status. For such period as a loan is in a 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.
The Company’s average investment in impaired loans for the periods reported is shown in the table below.
Three months ended Sept. 30, Nine months ended Sept. 30, Twelve months - ----------------------------------------- ------------------------------- ended 2005 2004 2005 2004 Dec. 31, 2004 - ------------------ ---------------- ---------- --------------- ---------------- $ 8,394 $ 8,911 $ 8,472 $ 10,137 $ 9,796 Note: In accordance with accounting principles generally accepted in the United States of America, no interest income was recognized on nonaccrual loans.
The Company sustained significant impairment to several of its facilities and equipment in its coastal markets in Mississippi and Louisiana on August 29, 2005 as Hurricane Katrina passed over the Mississippi and Louisiana coasts. Losses related to the damaged facilities and equipment have been charged against earnings in the third quarter of 2005. The losses have been determined with information currently available as to estimated identified carrying amounts of impaired assets and extent of damage sustained. Should the sustained damage differ from the initial assessments, the result may cause additional charges against or adjustment of estimated losses to flow to future earnings. The amount of estimated losses recorded for the current period totaled $9.7 million.
The percent of damage sustained was determined by independent consultants, insurance adjusters and the Company’s Facilities Management personnel. Policies held by the Company provide for replacement value coverage.
Casualty loss receivables in the amount of $26.5 million were recorded in the third quarter of 2005 and were based on substantially complete settlement agreements with the respective insurance carriers.
Following is a summary of the information used in the computation of earnings per common share (in thousands).
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------- ------------------------------ 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Net earnings - used in computation of diluted earnings per share $ 1,435 $ 15,396 $ 34,968 $ 45,913 ============= ============= ============= ============= Weighted average number of shares outstanding - used in computation of basic earnings per share 32,308 32,495 32,388 32,365 Effect of dilutive securities Stock options and restricted stock awards 632 559 571 674 ------------- ------------- ------------- ------------- Weighted average number of shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per share 32,940 33,054 32,959 33,039 ============= ============= ============= =============
There were no anti-dilutive shares outstanding for the three and nine months ended September 30, 2005 and 2004.
The following tables present selected comparative financial data. All share and per share data have been restated to reflect the 100% stock dividend made March 18, 2004.
(amounts in thousands, except per share data) Three Months Ended Nine Months Ended --------------------------- --------------------------- 9/30/2005 9/30/2004 9/30/2005 9/30/2004 ------------- ------------- ------------- -------------Per Common Share DataEarnings per share: Basic $0.04 $0.47 $1.08 $1.42 Diluted $0.04 $0.47 $1.06 $1.39 Cash dividends per share $0.195 $0.165 $0.525 $0.415 Book value per share (period end) $14.52 $14.16 $14.52 $14.16 Weighted average number of shares: Basic 32,308 32,495 32,388 32,365 Diluted (1) 32,940 33,054 32,959 33,039 Period end number of shares 32,309 32,472 32,309 32,472 Market data: High closing price $37.84 $34.27 $37.84 $34.27 Low closing price $29.93 $27.32 $28.25 $25.00 Period end closing price $34.14 $31.79 $34.14 $31.79 Trading volume 8,760 2,792 15,575 8,789 (1) There were no anti-dilutive shares outstanding for the three and nine months ended September 30, 2005 and 2004.
(dollar amounts in thousands)Three Momths Ended Nine Months Ended -------------------------- -------------------------- 9/30/2005 9/30/2004 9/30/2005 9/30/2004 ------------ ------------- ------------ -------------Performance RatiosReturn on average assets 0.12% 1.37% 0.98% 1.40% Return on average common equity 1.18% 13.67% 9.81% 13.88% Earning asset yield (Tax Equivalent ("TE")) 6.19% 5.86% 6.06% 5.84% Total cost of funds 1.80% 1.44% 1.67% 1.43% Net interest margin (TE) 4.40% 4.42% 4.39% 4.41% Non-interest expense as a percent of total revenue (TE) before amortization of purchased intangibles, net storm- related items, gains on sale of branches and credit card merchant, and securities transactions 60.85% 57.55% 59.53% 59.72% Average common equity as a percent of average total assets 10.13% 10.00% 10.00% 10.06% Leverage ratio (period end) 8.64% 8.86% 8.64% 8.86% FTE Headcount 1,590 1,731 1,590 1,731Asset Quality InformationNon-accrual loans $10,373 $7,770 $10,373 $7,770 Foreclosed assets $2,973 $4,151 $2,973 $4,151 Total non-performing assets $13,346 $11,921 $13,346 $11,921 Non-performing assets as a percent of loans and foreclosed assets 0.45% 0.44% 0.45% 0.44% Accruing loans 90 days past due $6,156 $5,277 $6,156 $5,277 Accruing loans 90 days past due as a percent of loans 0.21% 0.20% 0.21% 0.20% Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets 0.65% 0.64% 0.65% 0.64% Net charge-offs $1,704 $2,963 $5,655 $8,766 Net charge-offs as a percent of average loans 0.23% 0.45% 0.27% 0.46% Allowance for loan losses $76,584 $38,725 $76,584 $38,725 Allowance for loan losses as a percent of period end loans 2.57% 1.45% 2.57% 1.45% Allowance for loan losses to NPAs + accruing loans 90 days past due 392.70% 225.17% 392.70% 225.17% Provision for loan losses $36,905 $3,388 $41,556 $10,741 Provision for loan losses to net charge-offs 2165.65% 114.34% 734.87% 122.53%Average Balance SheetTotal loans $2,918,709 $2,640,689 $2,844,003 $2,561,148 Securities 1,364,219 1,368,701 1,388,143 1,353,685 Short-term investments 52,933 15,667 77,300 40,080 Earning assets 4,335,861 4,025,057 4,309,446 3,954,913 Allowance for loan losses (41,765) (38,455) (41,217) (37,753) Other assets 487,867 495,787 496,811 474,770 Total assets $4,781,962 $4,482,388 $4,765,041 $4,391,930 Non-interest bearing deposits $729,216 $654,780 $720,413 $642,836 Interest bearing transaction deposits 1,311,779 1,370,508 1,321,105 1,360,280 Interest bearing public fund deposits 617,017 556,300 670,477 584,568 Time deposits 1,143,691 1,032,267 1,116,876 1,012,857 Total interest bearing deposits 3,072,488 2,959,075 3,108,457 2,957,705 Total deposits 3,801,704 3,613,856 3,828,870 3,600,541 Other borrowed funds 335,758 286,629 304,192 253,897 Other liabilities 160,232 133,831 155,437 92,705 Preferred stock - - - 2,992 Common stockholders' equity 484,269 448,072 476,542 441,795 Total liabilities & common stockholders' equity $4,781,962 $4,482,388 $4,765,041 $4,391,930
(dollar amounts in thousands)Three Months Ended Nine Months Ended -------------------------- -------------------------- 9/30/2005 9/30/2004 9/30/2005 9/30/2004 ------------- ------------ ------------ -------------Period end Balance SheetCommercial/real estate loans $1,637,011 $1,414,104 $1,637,011 $1,414,104 Mortgage loans 441,512 404,697 441,512 404,697 Direct consumer loans 501,704 495,357 501,704 495,357 Indirect consumer loans 339,822 302,897 339,822 302,897 Finance company loans 64,121 60,436 64,121 60,436 Total loans 2,984,170 2,677,490 2,984,170 2,677,490 Securities 1,323,166 1,349,594 1,323,166 1,349,594 Short-term investments 141,270 7,403 141,270 7,403 Earning assets 4,448,606 4,034,487 4,448,606 4,034,487 Allowance for loan losses (76,584) (38,725) (76,584) (38,725) Other assets 541,467 495,887 541,467 495,887 Total assets $4,913,490 $4,491,649 $4,913,490 $4,491,649 Non-interest bearing deposits $909,585 $650,484 $909,585 $650,484 Interest bearing transaction deposits 1,369,886 1,358,262 1,369,886 1,358,262 Interest bearing public funds deposits 574,603 569,627 574,603 569,627 Time deposits 1,171,080 1,023,932 1,171,080 1,023,932 Total interest bearing deposits 3,115,568 2,951,821 3,115,568 2,951,821 Total deposits 4,025,153 3,602,304 4,025,153 3,602,304 Other borrowed funds 249,228 286,956 249,228 286,956 Other liabilities 170,049 142,445 170,049 142,445 Common stockholders' equity 469,059 459,943 469,059 459,943 Total liabilities & common stockholders' equity $4,913,490 $4,491,649 $4,913,490 $4,491,649Net Charge-Off InformationNet charge-offs (recoveries): Commercial/real estate loans ($17) $734 $955 $2,682 Mortgage loans 7 (22) 70 (49) Direct consumer loans 861 1,222 1,853 3,040 Indirect consumer loans 342 402 1,420 1,417 Finance company loans 511 627 1,357 1,676 ------------- ------------ ------------ ------------- Total net charge-offs $1,704 $2,963 $5,655 $8,766 ============= ============ ============ ============= Net charge-offs to average loans: Commercial/real estate loans 0.00% 0.21% 0.08% 0.27% Mortgage loans 0.01% -0.02% 0.02% -0.02% Direct consumer loans 0.68% 1.00% 0.49% 0.84% Indirect consumer loans 0.40% 0.54% 0.59% 0.67% Finance company loans 3.17% 4.16% 2.91% 3.88% Total net charge-offs to average net loans 0.23% 0.45% 0.27% 0.46%
(dollar amounts in thousands)Three Months Ended Nine Months Ended ---------------------------- ---------------------------- 9/30/2005 9/30/2004 9/30/2005 9/30/2004 ---------------------------- ----------------------------Average Balance Sheet CompositionPercentage of earning assets/funding sources: Loans 67.32% 65.61% 65.99% 64.76% Securities 31.46% 34.00% 32.21% 34.23% Short-term investments 1.22% 0.39% 1.79% 1.01% Earning assets 100.00% 100.00% 100.00% 100.00% Non-interest bearing deposits 16.82% 16.27% 16.72% 16.25% Interest bearing transaction deposits 30.25% 34.05% 30.66% 34.39% Interest bearing public funds deposits 14.23% 13.82% 15.56% 14.78% Time deposits 26.38% 25.65% 25.92% 25.61% Total deposits 87.68% 89.78% 88.85% 91.04% Other borrowed funds 7.74% 7.12% 7.06% 6.42% Other net interest-free funding sources 4.58% 3.09% 4.09% 2.54% Total funding sources 100.00% 100.00% 100.00% 100.00% Loan mix: Commercial/real estate loans 54.28% 52.87% 53.91% 52.69% Mortgage loans 14.75% 15.17% 14.71% 15.09% Direct consumer loans 17.28% 18.45% 17.79% 18.97% Indirect consumer loans 11.49% 11.24% 11.40% 10.99% Finance company loans 2.19% 2.27% 2.19% 2.26% Total loans 100.00% 100.00% 100.00% 100.00% Average dollars Loans $2,918,709 $2,640,689 $2,844,003 $2,561,148 Securities 1,364,219 1,368,701 1,388,143 1,353,685 Short-term investments 52,933 15,667 77,300 40,080 ---------------------------- ---------------------------- Earning assets $4,335,861 $4,025,057 $4,309,446 $3,954,913 ============================ ============================ Non-interest bearing deposits $729,216 $654,780 $720,413 $642,836 Interest bearing transaction deposits 1,311,779 1,370,508 1,321,105 1,360,280 Interest bearing public funds deposits 617,017 556,300 670,477 584,568 Time deposits 1,143,691 1,032,267 1,116,876 1,012,857 ---------------------------- ---------------------------- Total deposits 3,801,704 3,613,856 3,828,870 3,600,541 Other borrowed funds 335,758 286,629 304,192 253,897 Other net interest-free funding sources 198,399 124,572 176,384 100,475 ---------------------------- ---------------------------- Total funding sources $4,335,861 $4,025,057 $4,309,446 $3,954,913 ============================ ============================ Loans: Commercial/real estate loans $1,584,244 $1,396,149 $1,533,208 $1,349,498 Mortgage loans 430,615 400,710 418,479 386,485 Direct consumer loans 504,362 487,139 505,899 485,918 Indirect consumer loans 335,482 296,755 324,122 281,488 Finance company loans 64,006 59,935 62,295 57,759 ---------------------------- ---------------------------- Total average loans $2,918,709 $2,640,689 $2,844,003 $2,561,148 ============================ ============================
In October 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Accounting Position (SOP) 03-3, which addresses accounting for differences between contractual cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations. This SOP would apply to loans originated by the Company and would limit the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally would be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected would be recognized as impairment. This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. The Company adopted this SOP during the first quarter as required and its effect on the consolidated financial statements to date has not been material.
On December 16, 2004, the Financial Accounting Standards Board (FASB) published SFAS No. 123(R), “Share-Based Payment”. This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. It will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the first annual reporting period that begins after June 15, 2005. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, SFAS No. 123(R) includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards. The Company will adopt SFAS No.123(R) effective January 1, 2006. The effect of this statement on the consolidated financial statements is not expected to be material.
In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. The FASB recently discussed a staff position that will replace the recognition guidance of EITF 03-1. The new staff position is expected to reference existing GAAP and therefore should not impact the Company’s current accounting for other-than-temporary impairment of investments. Effective July 1, 2004, the Company adopted all other provisions of EITF 03-1, including measurement guidance for evaluating whether impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement is a replacement of APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine period-specific effects of an accounting change on one or more individual prior periods presented. Then the new accounting principle is applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earning for that period rather that being reported in an income statement. Further, the accounting principle is to be applied prospectively from the earliest date when it is impracticable to determine the effect to all prior periods. The effective date of this statement is for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Therefore, this Statement is effective for the Company as of January 1, 2006. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.
The following discussion provides management’s analysis of certain factors that have affected the Company’s consolidated financial condition and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements. Hancock Holding Company (the Company), organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is headquartered in Gulfport, Mississippi. At September 30, 2005, the Company operated more than 100 banking offices and more than 130 automated teller machines (ATMs) in the states of Mississippi, Louisiana and Florida through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA) and Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL). Hancock Bank MS also operates a loan production office in the State of Alabama. Hancock Bank MS, Hancock Bank LA, and Hancock Bank FL are referred to collectively as the “Banks”.
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. The Company’s operating strategy is to provide its 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, 2005, the Company had total assets of $4.9 billion and employed on a full-time equivalent basis 1,094 persons in Mississippi, 463 persons in Louisiana and 33 persons in Florida.
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If the financial condition of its borrowers were to deteriorate, resulting in an impairment of their ability to make payments, its estimates would be updated, and additional provisions for loan losses may be required.
The Company manages liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and securities held to maturity and sales and maturities of securities available for sale.
The following liquidity ratios at September 30, 2005, June 30, 2005, March 31, 2005 and December 31, 2004 compare certain assets and liabilities to total deposits or total assets:
September 30, June 30, March 31, December 31, 2005 2005 2005 2004 ----------------- -------------- ---------------- --------------- Total securities to total deposits 32.87% 36.01% 36.38% 34.29% Total loans (net of unearned income) to total deposits 74.14% 74.26% 71.82% 72.37% Interest-earning assets to total assets 90.54% 90.48% 90.18% 90.06% Interest-bearing deposits to total deposits 77.40% 81.11% 81.37% 81.64%
The Company continues to maintain an adequate capital position. The ratios as of September 30, 2005, June 30, 2005, March 31, 2005 and December 31, 2004 are as follows:
September 30, June 30, March 31, December 31, 2005 2005 2005 2004 ----------------- ------------- ---------------- ---------------- Average equity to average assets 10.13% 9.94% 9.94% 10.11% Regulatory ratios: Average equity to average assets (1) 9.78% 10.05% 10.02% 10.17% Total capital to risk-weighted assets (2) 12.82% 13.58% 13.49% 13.58% Tier 1 capital to risk-weighted assets (3) 11.57% 12.41% 12.30% 12.39% Leverage capital to average total assets (4) 8.61% 8.83% 8.75% 8.97% (1) Equity capital, for regulatory purposes, consists of stockholders' equity (excluding unrealized gains/(losses)). (2) Total capital consists of equity capital less intangible assets plus a limited amount of allowance for loan losses. Risk-weighted assets represent the assigned risk portion of all on and off-balance-sheet assets. Based on Federal Reserve Board guidelines, assets are assigned a risk factor percentage from 0% to 100%. A minimum ratio of total capital to risk-weighted assets of 8% is required. (3) Tier 1 capital consists of equity capital less intangible assets. A minimum ratio of tier 1 capital to risk-weighted assets of 4% is required. (4) Leverage capital consists of equity capital less goodwill and core deposit intangibles. Regulations require a minimum 3% leverage capital ratio for an entity to be considered adequately capitalized.
Net earnings for the nine months of 2005 totaled $35.0 million, compared to $45.9 million reported for the first nine months of 2004, a decrease of $10.9 million, or 23.7%. Net earnings decreased $14.0 million, or 90.9%, to $1.4 million for the third quarter of 2005 compared to $15.4 million in third quarter of 2004.
Hancock’s third quarter earnings were significantly impacted by Hurricane Katrina which struck the coasts of Mississippi and Louisiana on August 29, 2005. While the total impact of this hurricane on Hancock’s financial condition and results of operation may not be known for some time, the Company has included in third quarter earnings, certain charges, including the establishment of specific accruals, related to the hurricane. The pretax negative impact of Hurricane Katrina on Hancock’s third quarter earnings totaled $26.71 million. The $26.71 million net pretax negative impact included the following items: $35.20 million (pretax) to establish a storm-related provision for credit losses, a $1.86 million charge (pretax) related to direct expenses incurred through September 30, 2005, and approximately $3.79 million (pretax) of fees and service charges that were waived to assist affected individuals and businesses. Also included in the $26.71 million impact was a net pretax gain of $14.14 million representative of write-off of destroyed or impaired assets totaling $9.7 million offset by recognition of receivables representing only the portion of casualty loss claims for which settlement was substantially complete.
Excluding the aforementioned impact of Hurricane Katrina, Hancock’s third quarter 2005 earnings were $18.81 million, an increase of $3.41 million, or 22%, from the third quarter of 2004. Diluted earnings per share for the third quarter of 2005, excluding the hurricane’s impact, were $0.57, an increase of $0.11, or 23%, from the same quarter a year ago. Compared to the second quarter of 2005, third quarter earnings, excluding the hurricane’s impact, were up $.70 million, or 4%, with diluted earnings per share up $0.02, also a 4% increase.
The Company’s third quarter return on average assets, excluding the impact of hurricane Katrina, was 1.56%, while the return on average equity was 15.41%. These returns were 4 and 14 basis points higher, respectively, than the second quarter of 2005.
The Company carries business interruption insurance coverage for revenue loss an event-related expense. Expenses for which reimbursement is expected are expensed as incurred. A recovery of those items for which the Company receives reimbursement, if any, will be recognized in the period payment is received.
The following is selected information for quarterly and year-to-date comparison:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------------ ---------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Results of Operations: Return on average assets 0.12% 1.37% 0.98% 1.40% Return on average equity 1.18% 13.67% 9.81% 13.88% Net Interest Income: Yield on average interest-earning assets (TE) 6.19% 5.86% 6.06% 5.84% Cost of average interest-bearing funds 2.29% 1.79% 2.11% 1.76% ------------- ------------- ------------- ------------- Net interest spread (TE) 3.91% 4.07% 3.95% 4.08% ============= ============= ============= ============= Net interest margin (TE) (net interest income on a tax-equivalent basis divided by average interest-earning assets) 4.40% 4.42% 4.39% 4.41% ============= ============= ============= =============
Net interest income (te) for the third quarter of 2005 increased $3.23 million, or 7%, from the third quarter of 2004, and was up $.04 million, or .1%, from the second quarter of 2005. The Company’s net interest margin (te) was 4.40% in the third quarter of 2005, 2 basis points narrower than the same quarter a year ago and 2 basis points narrower than the previous quarter.
Compared to the same quarter a year ago, the primary driver of the $3.23 million increase in net interest income (te) was a $311 million, or 8%, increase in average earning assets mainly from average loan growth of $278 million, or 11%. Average deposit growth of $188 million, or 5%, along with an increase in other borrowings (mostly customer repurchase agreements) of $49 million, or 17%, funded the Company’s loan growth and related increase in earning assets. The overall improvement in the earning asset mix enabled the Company to improve its loan to deposit ratio to approximately 77% in the third quarter of 2005. In addition, loans now comprise 67% of the Company’s earning asset base, as compared to 66% for the same quarter a year ago. The net interest margin (te) narrowed 2 basis points as the increase in the earning asset yield (34 basis points) did not offset the increase in total funding costs (36 basis points).
The Company’s level of net interest income (te) in the third quarter of 2005 was essentially flat with the prior quarter - up $.04 million, or .1%. Although the Company experienced significant loan growth in the third quarter with average loans increasing $83 million, average earning assets were up only $3.54 million, or .1%. The entire increase in average loans for the quarter was funded through reductions in the Company’s securities portfolio (down $85 million from the previous quarter). Average deposits were down $49 million, compared to the prior quarter, as outflows of public funds totaling $65 million were experienced during the third quarter. The reduction in average deposits was mitigated, in part, by a $31 million increase in other borrowings. The net interest margin (te) narrowed 2 basis points from the prior quarter as the yield on average earning assets increased 11 basis points, while total funding costs were up 14 basis points. The higher overall cost of funds was due largely to a 46 basis point increase in the funding costs of the Company’s $642 million public fund deposit base, most of which is indexed to short-term rates.
The following tables detail the components of the Company’s net interest spread and net interest margin.
Three Months Ended Sept. 30, Three Months Ended Sept. 30, ---------------------------------- ---------------------------------- 2005 2004 ---------------------------------- ----------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate ----------- ------------- -------- ---------- -------------- -------- Average Earning Assets Commercial & real estate loans (TE) $25,770 $1,584,244 6.46% $19,650 $1,396,149 5.60% Mortgage loans 5,921 430,615 5.50% 5,753 400,710 5.74% Consumer loans 17,772 903,850 7.80% 15,991 843,830 7.54% Loan fees & late charges 2,183 - 0.00% 2,179 - 0.00% ----------- ------------- -------- ---------- -------------- -------- Total loans (TE) 51,646 $2,918,709 7.03% 43,573 2,640,689 6.57% US treasury securities 62 11,296 2.17% 149 11,391 5.19% US agency securities 4,834 464,450 4.16% 4,757 445,886 4.27% CMOs 2,251 229,934 3.92% 2,815 285,862 3.94% Mortgage backed securities 4,773 436,733 4.37% 4,388 399,959 4.39% Municipals (TE) 2,792 160,502 6.96% 3,030 169,812 7.14% Other securities 733 61,304 4.78% 434 55,790 3.11% ----------- ------------- -------- ---------- -------------- -------- Total securities (TE) 15,444 1,364,219 4.53% 15,572 1,368,701 4.55% Fed funds sold 409 44,535 3.65% 27 7,807 1.36% Cds with banks 6 8,398 0.30% 13 7,860 0.66% ----------- ------------- -------- ---------- -------------- -------- Total short-term investments 416 52,933 3.12% 40 15,667 1.01% Average earning assets yield (TE) $67,506 $4,335,861 6.19% $59,184 $4,025,057 5.86% Interest-Bearing Liabilities Interest-bearing transaction deposits $2,317 $1,311,779 0.70% $2,067 $1,370,508 0.60% Time deposits 10,222 1,143,691 3.55% 8,971 1,032,267 3.46% Public Funds 4,740 617,017 3.05% 2,295 556,300 1.64% ----------- ------------- -------- ---------- -------------- -------- Total interest bearing deposits 17,279 $3,072,487 2.23% 13,333 2,959,075 1.79% Customer repos 1,467 248,505 2.34% 532 212,573 1.00% Other borrowings 913 87,253 4.15% 702 70,223 3.98% ----------- ------------- -------- ---------- -------------- -------- Total borrowings 2,380 335,758 2.81% 1,234 282,796 1.74% Total interest bearing liability cost $19,659 $3,408,246 2.29% $14,567 $3,245,705 1.79% Noninterest-bearing deposits 729,216 654,780 Other net interest-free funding sources 198,399 124,572 Total Cost of Funds $19,659 $4,335,861 1.80% $14,567 $4,025,057 1.44% Net Interest Spread (TE) $47,847 3.91% $44,617 4.07% Net Interest Margin (TE) $47,847 $4,335,861 4.40% $44,617 $4,025,057 4.42%
Nine Months Ended Sept. 30, Nine Months Ended Sept 30, ----------------------------------- ---------------------------------- 2005 2004 ----------------------------------- ----------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate ----------- ------------- --------- ---------- ------------- --------- Average Earning Assets Commercial & real estate loans (TE) $71,847 $1,533,208 6.26% $56,185 $1,349,498 5.56% Mortgage loans 17,504 418,479 5.58% 16,538 386,485 5.71% Consumer loans 51,200 892,316 7.67% 47,458 825,165 7.68% Loan fees & late charges 6,510 - 0.00% 6,755 - 0.00% ----------- ------------- --------- ---------- ------------- --------- Total loans (TE) 147,061 2,844,003 6.91% 126,936 2,561,148 6.62% US treasury securities 182 11,144 2.19% 312 10,857 3.84% US agency securities 14,096 159,784 4.09% 13,250 424,328 4.16% CMOs 7,546 253,121 3.97% 8,857 305,801 3.86% Mortgage backed securities 14,490 439,270 4.40% 12,582 390,539 4.30% Municipals (TE) 8,504 162,160 6.99% 9,416 175,975 7.13% Other securities 2,189 62,664 4.66% 1,365 46,185 3.94% ----------- ------------- --------- ---------- ------------- --------- Total securities (TE) 47,008 1,388,143 4.52% 45,782 1,353,685 4.51% Fed funds sold 1,404 67,093 2.80% 232 31,106 1.00% Cds with banks 71 8,322 1.14% 32 7,150 0.60% Other short-term investments 32 1,885 2.26% 13 1,824 0.97% ----------- ------------- --------- ---------- ------------- --------- Total short-term investments 1,507 77,300 2.61% 277 40,080 0.92% Average earning assets yield (TE) $195,576 $4,309,446 6.06% $172,996 $3,954,913 5.84% Interest-Bearing Liabilities Interest-bearing transaction deposits $6,367 $1,321,105 0.64% $6,151 $1,360,280 0.60% Time deposits 29,151 1,116,876 3.49% 26,047 1,012,857 3.44% Public Funds 12,900 670,477 2.57% 6,808 584,568 1.56% ----------- ------------- --------- ---------- ------------- --------- Total interest bearing deposits 48,417 3,108,457 2.08% 39,006 2,957,705 1.76% Customer repos 3,226 231,736 1.86% 1,186 185,946 0.85% Other borrowings 2,265 72,455 4.18% 2,063 64,662 4.26% ----------- ------------- --------- ---------- ------------- --------- Total borrowings 5,491 304,192 2.41% 3,249 250,608 1.73% Total interest bearing liability cost $53,908 $3,412,649 2.11% $42,255 $3,211,602 1.76% Noninterest-bearing deposits 720,413 642,836 Other net interest-free funding sources 176,384 100,475 Total Cost of Funds $53,908 $4,309,446 1.67% $42,255 $3,954,913 1.43% Net Interest Spread (TE) $141,667 3.95% $130,740 4.08% Net Interest Margin (TE) $141,667 $4,309,446 4.39% $130,740 $3,954,913 4.41%
The amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with the bank’s loan portfolio. A specific loan is charged-off when management believes, after considering, among other things, the borrower’s financial condition and the value of any collateral, that collection of the loan is unlikely.
During the third quarter of 2005, the Company established a special allowance of $35.2 million associated with the anticipated additional exposure created by the impact of damages sustained by borrowers from Hurricane Katrina. In establishing the special allowance for the loss exposure created by Hurricane Katrina, commercial and direct installment loans were segmented by division and loss factors applied based on the estimated percentage of loans affected by the storm. These loss factors were arrived at through a combination of objective and subjective criteria. Those divisions that were not significantly affected by the storm such as Florida, the Central Division in Louisiana and the Northern Division in Mississippi, where there was only wind damage, should be covered by standard homeowner's insurance, were not subject to flood damage and thus were not included for special reserve purposes. In determining the actual amount to reserve in the affected divisions (namely Pochartrain Division of Hancock Bank of Louisiana, and all remaining divisions of Hancock Bank of Mississippi, excluding the Northern Division) numerous considerations were used.
In the initial days after the storm, lending officers began an effort to personally contact each borrower to determine the extent of damage, to discuss the possibility of business interruption, to assess their insurance coverage, to inspect collateral and to gauge their early plans in regard to business continuation. A "Status Report" form was designed/completed to document various details of those discussions and meetings. Contacts were also made with several other banks in the region to determine their current processes as to establishing a special reserve and to review their experiences from hurricanes over the last two years. Banks on the Alabama Coast and in the Florida Panhandle were included in the group. The loan review department also compiled a preliminary watchlist from a review of all risk rating reports completed over the last year, identifying all loans with balances of $100,000 or greater that had a substantial probability of realizing major damage to property and or business interruption and related credit problems. Consultation with Management who had experience following Hurricane Camille in 1969 was used to gain the benefit of their experience for the purpose of this effort. Based on an assessment of all these sources, loss factors were assigned to the overall commercial and direct consumer loans in the affected divisions. Those factors were reflective of the geographic proximity to the most heavily affected areas, the early feed-back as recorded in the Status Reports and recommendations from managers in the field.
The lease portfolio was assumed to have a fairly high degree of exposure due to the location of leased equipment in areas that may have been flooded, but would not have been covered by flood insurance and credit problems occasioned by business interruption, loss of customer base and related issues. The loss factor arrived at for the lease portfolio reflects these concerns and also took into consideration that most lease contracts are void of any down-payment or equity by the customer.
The largest exposure in the direct consumer portfolio was in the home equity family of products. Personal contacts were made by lenders and the Consumer Centralized Underwriting Unit and property assessments were conducted. When the property was deemed to be damaged to the extent that excessive risk to the Banks was apparent, the lines were either frozen or closed so that no additional advances could be made. In some cases, the customer was asked to consider using a conventional construction loan to work through the rebuilding or repair process. The non-home equity portion of the direct portfolio was treated very much like the indirect portfolio (discussed just below) for special reserve purposes.
To estimate the credit loss on indirect auto loans, an analysis was done to estimate the number of vehicles affected. We realized that there would be no "wind vs water" insurance challenges associated with these loans. It was assumed insurance would pay the majority of losses with the Banks' exposure being in those units where the outstanding balance exceeded coverage and that in many instances; even these types of situations would not result in a loss due to "gap insurance" being written on 45% of vehicles financed. This product insures the difference between payoff and insured value. Based on the results of this analysis, total exposure was estimated to arrive at a total portfolio loss factor.
Mortgage loans, which may represent the largest exposure, were analyzed using property addresses (by zip code), flood map over-lays, and FEMA surge map over-lays of Hurricane Katrina affected areas to estimate the total balance that may have been affected. The greatest concern involving mortgages is the lack of flood insurance in those areas that were not in a federally designated flood zone. Also on larger homes, there was concern that some customers may have had only the maximum $250,000 coverage afforded under the National Flood Insurance Program and without additional supplemental coverage. A factor was assigned in light of those potential short-falls in coverage.
In addition to determining an adequate reserve for losses related to Hurricane Katrina, a review and renewing of the Company's "Insurance Check Policy and Procedure" was conducted. Proper handling of insurance checks would be critical in seeing that losses were minimized. That policy was rewritten with the assistance of lenders in the field, the in-house legal staff and credit administration personnel. Once complete, training was conducted in the field and selected representatives in the field were designated to insure proper handling of those checks or escrowing if needed.
Management believes that the allowance of $35.2 million, as indicated by the analysis conducted, is representative of their best estimate of inherent loss expected to be incurred as a result of Hurricane Katrina. The analysis of loss by loan type, described above, will be updated and revisions to this estimate of inherent loss will be made if and when determined.
The following information is useful in determining the adequacy of the loan loss allowance and loan loss provision. The ratios are calculated using average loan balances. (Dollar amounts shown are in thousands.)
At and for the ------------------------------------------------------------------------- Three Months Ended Sept. 30, Nine Months Ended Sept. 30, --------------------------------- --------------------------------- 2005 2004 2005 2004 -------------- -------------- --------------- -------------- Annualized net charge-offs to average loans 0.23% 0.45% 0.27% 0.46% Annualized provision for loan losses to average loans 5.06% 0.51% 5.84% 0.56% Average allowance for loan losses to average loans 2.62% 1.47% 2.69% 1.51% Gross charge-offs $ 3,699 $ 4,481 $ 11,264 $ 14,866 Gross recoveries $ 1,996 $ 1,518 $ 5,610 $ 6,100 Non-accrual loans $ 10,373 $ 7,770 $ 10,373 $ 7,770 Accruing loans 90 days or more past due $ 6,156 $ 5,277 $ 6,156 $ 5,277
Excluding the impact of net storm-related items (net gain on insurance and direct expenses incurred), non-interest income for the third quarter of 2005 was up $627,000, or 3%, compared to the same quarter a year ago. Non-interest income, excluding the impact of net storm-related items, was down $3.10 million, or 13%, compared to the second quarter of 2005. The primary factors impacting the higher levels of non-interest income as compared to the same quarter a year ago, were higher levels of insurance fees (up $2.83 million) mostly related to the higher revenues associated with Magna Insurance Company, the Company’s wholly owned insurance company and the July, 1, 2005 acquisition of J. Everett Eaves, Inc. In addition, investment and annuity income was up $866,000, when compared to the same quarter a year ago. However, service charges were down $3.59 million due mostly to waived return item fees as a result of accommodations to customers impacted by Hurricane Katrina. The decrease in non-interest income for the third quarter of 2005 (excluding the 2005 net storm-related items and securities transactions) compared to the prior quarter was primarily due to decreases in service charges on deposit accounts (down $2.48 million due to waivers of return items as a result of Hurricane Katrina) and other income (down $1.05 million) and partly offsetting these items were increased insurance fees (up $1.38 million).
The components of non-interest income for the three and nine months ended September 30, 2005 and 2004 are presented in the following table (amounts in thousands):
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------------ ------------------------------------- 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Service charges on deposit accounts $ 7,975 $ 11,567 $ 27,924 $ 32,568 Trust fees 2,761 2,281 8,161 6,544 Credit card merchant discount fees 1,055 1,197 3,160 3,100 Income from insurance operations 4,883 2,056 12,262 7,369 Investment & annuity fees 1,304 438 4,039 1,714 ATM fees 871 1,129 3,397 3,393 Secondary mortgage market operations 377 529 1,552 1,445 Other income 2,374 1,776 8,227 6,690 ------------- ------------- ------------- ------------- Total other non-interest income 21,600 20,973 68,721 62,823 Net storm-related items (Net gain on insurance less direct expenses incurred 12,276 - 12,276 - Gain on sale of assets - - - 5,258 Securities transactions gains (losses), net (18) (2) (26) 159 ------------- ------------- ------------- ------------- Total non-interest income $ 33,858 $ 20,971 $ 80,971 $ 68,240 ============= ============= ============= =============
Non-interest expenses for the third quarter of 2005 were $4.46 million higher, or 12%, compared to the same quarter a year ago and were $265,000 higher, or 1%, than the previous quarter. The increase from the same quarter a year ago was reflected in higher personnel expense (up $3.61 million) and higher expenses associated with Magna Insurance Company (up $1.21 million). The increase from the prior quarter was reflected in increased personnel expense (up $1.35 million) and higher Magna expenses ($815,000) partly offset by a lower level of other operating expenses (down $1.89 million).
The following table presents the components of non-interest expense for the three and nine months ended September 30, 2005 and 2004.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------------ ------------------------------------(dollars in thousands) 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Employee compensation $ 19,799 $ 17,298 $ 55,854 $ 50,945 Employee benefits 4,476 3,366 13,725 13,753 ------------- ------------- ------------- ------------- Total personnel expense 24,275 20,664 69,579 64,698 ------------- ------------- ------------- ------------- Equipment and data processing expense 4,205 4,303 12,896 12,924 Net occupancy expense 2,617 2,470 7,688 7,288 Postage and communications 2,203 2,079 5,871 6,222 Ad valorem and franchise taxes 1,066 652 2,570 2,302 Legal and professional services 2,391 2,177 8,295 6,054 Stationery and supplies 376 436 1,326 1,374 Amortization of intangible assets 514 558 1,676 1,407 Advertising 916 898 3,763 3,023 Deposit insurance and regulatory fees 161 218 656 643 Training expenses 60 60 325 311 Other real estate owned expense 158 215 379 513 Other expense 3,828 3,576 11,893 10,247 ------------- ------------- ------------- ------------- Total non-interest expense $ 42,770 $ 38,306 $ 126,917 $ 117,006 ============= ============= ============= =============
The effective federal income tax rate of the Company continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income. For the nine months ended September 30, 2005 and 2004, the effective federal income tax rate was approximately 28% and 30%, respectively. The amount of tax-exempt income earned during the first nine months of 2005 was $9.5 million compared to $9.7 million for the comparable period in 2004.
The Company's results for the third quarter reflect a tax benefit. Although there was a significant decrease in income for the quarter, the amount of tax-exempt income for the quarter was not reduced.
In the normal course of business, the Company enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the consolidated balance sheets. The contract amounts of these instruments reflect the Company’s exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. The Company undertakes the same credit evaluation in making commitments and conditional obligations as it does for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At September 30, 2005, the Company had $479.2 million in unused loan commitments outstanding, of which approximately $335.2 million were at variable rates, with the remainder at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company continually evaluates 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 the Company obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At September 30, 2005, the Company had $53.4 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2005 according to expiration date.
Expiration Date (dollars in thousands) Less than 1-3 3-5 More than Total 1 year years years 5 years ------------- ------------ ------------ ----------- ------------ Commitments to extend credit $ 479,192 $ 208,303 $ 21,169 $ 39,581 $ 210,139 Letters of credit 53,360 18,821 18,936 15,603 - ------------- ------------ ------------ ----------- ------------ Total $ 532,552 $ 227,124 $ 40,105 $ 55,184 $ 210,139 ============= ============ ============ =========== ============
The Company’s liability associated with letters of credit is not material to the Company’s consolidated financial statements.
The following table shows all significant contractual obligations of the Company at September 30, 2005 according to payments due by period.
Payment due by period -----------------------------------------------(dollars in thousands) Less than 1-3 3-5 More than Total 1 year years years 5 years ------------- ------------ ---------------- ----------- ----------- Certificates of Deposit $1,338,076 $612,198 $550,668 $175,210 $ - Long-Term Debt Obligations 50,271 11 20 50,029 211 Operating Lease Obligations 16,883 3,203 4,653 3,553 5,474 ------------- ------------ ---------------- ----------- ----------- Total $1,405,230 $615,412 $555,341 $228,792 $5,685 ============= ============ ================ =========== ===========
On December 16, 2004, the FASB published SFAS No. 123(R), “Share-Based Payment”. This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. It will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the first annual reporting period that begins after June 15, 2005. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, SFAS No. 123(R) includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards. The Company will adopt SFAS No.123(R) effective January 1, 2006. The effect of this statement on the consolidated financial statements is not expected to be material.
In September 2004, the FASB approved issuance of Staff Position (“FSP”) EITF 03-1-1, “Effective Date of Paragraphs 10 through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). FSP EITF 03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as they relate to recognition of other-than-temporary impairment for cost method and marketable investments. The FASB recently discussed a staff position that will replace the recognition guidance of EITF 03-1. The new staff position is expected to reference existing GAAP and therefore should not impact the Company’s current accounting for otherthan-temporary impairment of investments. Effective July 1, 2004, the Company adopted all other provisions of EITF 03-1, including measurement guidance for evaluating whether impairment has occurred for marketable securities and cost method investments. Adoption of these requirements did not have a material effect on the results of operations.
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 the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
The Company’s net earnings are dependent, in part, on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage its exposure to changes in interest rates, management monitors the Company’s interest rate risk. The Company’s interest rate management policy is designed to produce a relatively stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company’s securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner.
Notwithstanding the Company’s 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 the Company’s investment securities. As of quarter close, the effective duration of the securities portfolio was 2.68. A rate increase of 100 basis points would move the effective duration to 3.31, while a 200 basis point rise would result in an effective duration of 3.59.
In adjusting the Company’s asset/liability position, the Board and management attempt to manage the Company’s interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values are well positioned for a rising interest rate environment. The cumulative gap at 12 months is +9%; indicating the balance sheet is asset sensitive. Exposure to interest rate risk is presented in the following table.
Net Interest Income (te) at Risk Change in interest Estimated increase (decrease) rates (basis points) in net interest income --------------------------- ---------------------------- - 100 -6.35% Stable 0.00% + 100 +3.19% + 200 +5.77% + 300 +7.68%
The Company also controls interest rate risk by emphasizing the core relationship aspects of non-certificate depositor accounts and selected maturity targets for certificate of deposit accounts. As of September 30, 2005, regular savings and club accounts represented $281.2 million and money market accounts and now accounts totaled $1.1 billion. Excluding public fund accounts, this represents 53.9% of total interest bearing deposit accounts.
The Company has controlled the interest rate sensitivity of its depositor accounts through targeted changes in deposit rates that fit the overall rate sensitivity profile of the balance sheet. Excluding public funds, interest-bearing transaction yields have gone up by 5 basis points as compared to the second quarter of 2005. Consumer time deposits have gone up 11 basis points during the quarter. Average interest-bearing transaction deposit balances were down 0.59%, while time deposits increased by 2.39%. During the quarter, the Federal Reserve increased rates by 50 basis points. The Company’s loan-to-deposit ratio was 77% (up 3%), and the average earning asset yield improved 11 basis points. This growth was driven primarily by continued emphasis on variable rate loans that adjusted with the rising rate environment. The impact of these strategies can be seen in the Company’s static gap report as of September 30, 2005.
Analysis of Interest Sensitivity at September 30, 2005 Within 6 months 1 to 3 > 3 Non-Sensitive Overnight 6 months to 1 year years years Balance Total ---------- --------- --------------- --------- ---------- ---------- -------- (amounts in thousands) Assets Securities $ - $ 197,891 $ 220,706 $ 338,937 $ 565,633 $ - $1,323,167 Federal funds sold & Short-term investments 133,239 - 8,031 - - - 141,270 Loans 43,710 1,394,503 245,321 641,651 582,401 - 2,907,586 Other assets - - - - - 541,467 541,467 ---------- ----------- ------------- ----------- ------------ ------------ ---------- Total Assets $176,949 $ 1,592,394 $ 474,058 $980,588 $1,148,034 $541,467 $4,913,490 ========== =========== ============= =========== ============ ============ ========== Liabilities Interest bearing transaction deposits $ - $ 790,399 $ 238,513 $678,779 $ 69,802 $ - $1,777,493 Time deposits - 359,880 252,319 550,668 175,210 - 1,338,077 Non-interest bearing deposits - - - - 909,585 - 909,585 Federal funds purchased 2,200 - - - - - 2,200 Borrowings 196,757 4 7 20 50,239 - 247,027 Other liabilities - - - - - 170,049 170,049 Shareholders' Equity - - - - - 469,059 469,059 ---------- ----------- ------------- ----------- ------------ ------------ ---------- Total Liabilities & Equity $198,957 $1,150,283 $ 490,839 $1,229,467 $1,204,836 $639,108 $4,913,490 ========== =========== ============= =========== ============ ============ ========== Interest sensitivity gap $(22,008) $ 442,111 $ (16,781) $ (248,879) $ (56,802) $(97,641) Cumulative interest rate sensitivity gap $(22,008) $ 420,103 $ 403,322 $ 154,443 $ 97,641 $ - Cumulative interest rate sensitivity gap as a percentage of total earning assets (1.0)% 10.0% 9.0% 4.0% 2.0% Analysis of Interest Sensitivity at December 31, 2004 Within 6 months 1 to 3 > 3 Non-Sensitive Overnight 6 months to 1 year years years Balance Total ---------- --------- ------------ --------- ---------- ---------- ---------- (amounts in thousands) Assets Securities $ - $216,564 $130,944 $371,665 $583,196 $ - $1,302,369 Federal funds sold & Short-term investments 142,135 - 8,126 - - - 150,261 Loans 39,370 1,327,083 214,990 583,394 543,041 - 2,707,878 Other assets - - - - - 504,218 504,218 ---------- ---------- ------------ --------- ---------- ---------- ---------- Total Assets $181,505 $1,543,647 $354,060 $955,059 $1,126,237 $504,218 $4,664,726 ========== ========== ============ ========= ========== ========== ========== Liabilities Interest bearing transaction deposits $ - $ 867,682 $249,596 $703,988 $ 68,429 $ - $1,889,695 Time deposits - 418,642 116,162 436,094 239,999 - 1,210,897 Non-interest bearing deposits - - - - 697,353 - 697,353 Federal funds purchased 800 - - - - - 800 Borrowings 200,036 3 3 17 50,250 - 250,309 Other liabilities - - - - - 151,090 151,090 Shareholders' Equity - - - - - 464,582 464,582 ---------- ---------- ------------ --------- ---------- ---------- ---------- Total Liabilities & Equity $200,836 $1,286,327 $365,761 $1,140,099 $1,056,031 $615,672 $4,664,726 ========== ========== ============ ========= ========== ========== ========== Interest sensitivity gap $(19,331) $ 257,320 $(11,701) $ (185,040) $ 70,206 $(111,454) Cumulative interest rate sensitivity gap $(19,331) $ 237,989 $226,288 $ 41,248 $ 111,454 $ - Cumulative interest rate sensitivity gap as a percentage of total earning assets 0.0% 6.0% 5.0% 1.0% 3.0%
Certain assumptions in assessing interest rate risk were employed in preparing data for the Company included in the preceding tables portraying the Company’s interest rate risk sensitivity. These assumptions relate to interest rates, loan and deposit growth, pricing, loan prepayment speeds, deposit decay rates, securities portfolio strategy and market value of certain assets under the various interest rate scenarios. Even if interest rates change in the designated amounts, there can be no assurance that the Company’s assets and liabilities would perform as anticipated. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to the net interest income than indicated above.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.
Even though permissible under the Asset Liability Management Policy approved by the Board of Directors, the Company is not currently engaged in the use of derivatives to control interest rate risk. Management and the Board of Directors review the need for such activities on a regular basis as part of its monthly interest rate risk analysis.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.
The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2004 included in the Company’s 2004 Annual Report on Form 10-K.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2005, (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.
During the third quarter of 2005, the Company’s internal control measures were modified to accommodate the operational changes that were required in the aftermath of Hurricane Katrina. Alternate and mitigating controls were implemented to provide continued assurance of proper internal control over activities affecting financial reporting. These modifications of internal controls over financial reporting have not materially affected, and are not reasonably likely to materially affect, the Company’s internal control over financial reporting.
Not applicable
On February 4, 2004 the Company completed the redemption/conversion of substantially all $37.1 million of the 8% Cumulative Convertible Preferred Stock issued in partial payment for the acquisition of Lamar Capital Corporation in July, 2001. The conversion factor was .6666 shares of Hancock Holding Company common stock for each share of the preferred stock. A total of 7,304 shares of the preferred stock was redeemed for cash at the contract price of $20.00 per share plus pro rated dividends of $0.1511 per share.
In July 2000, the Company announced the execution of a stock buyback program that provides for the repurchase of up to 10% of the Company’s issued common stock. The program authorizes the repurchase of approximately 3,320,000 shares of the Company’s issued common stock.
All information concerning earnings per share, dividends per share, and number of shares outstanding has been adjusted to give effect to this split.
The following table provides information with respect to purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities.
(a) (b) (c) (d) Total number of Maximum number shares purchased of shares Total number as a part of publicly that may yet be of shares or Average Price announced plans purchased under units purchased Paid per Share or programs (1) Plans or Programs ---------------- ---------------- ------------------ ----------------- Jul. 1, 2005 - Jul. 31, 2005 517 (2) $37.1800 - 585,201 Aug. 1, 2005 - Aug. 31, 2005 13,392 (3) 32.6460 11,800 573,401 Sep. 1, 2005 - Sep. 30, 2005 15,020 (4) 31.8801 - 573,401 ---------------- ---------------- ------------------ Total as of Sep. 30, 2005 28,929 $32.3294 11,800 ================ ================ ================== (1) The Company publicly announced its stock buy-back program on July 18, 2000. (2) 517 shares were purchased on the open market during July in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (3) 1,592 shares were purchased on the open market during August in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (4) 15,020 shares were purchased on the open market during September in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996.
Not applicable.
Not Applicable
Exhibits: 1. Exhibit 31 - Rule 13a-14(a) / 15d-14(a) Certifications 2. Exhibit 32 - Section 1350 Certifications
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. HANCOCK HOLDING COMPANY ---------------------------------------------- Registrant November 8, 2005 By: /s/ George A. Schloegel - --------------------- --------------------------------------- Date George A. Schloegel Vice-Chairman of the Board & Chief Executive Officer November 8, 2005 By: /s/ Carl J. Chaney - --------------------- --------------------------------------- Date Carl J. Chaney Executive Vice President & Chief Financial Officer