UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549FORM 10-QX 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 March 31, 2006 ------------------------- 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 Number) incorporation or organization) ONE HANCOCK PLAZA, P.O. BOX 4019, GULFPORT, MISSISSIPPI 39502 - ----------------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (228) 868-4000 - ----------------------------------------------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - ----------------------------------------------------------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer Non-accelerated filer ------ ------ ------ 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. 32,509,076 common shares were outstanding as of April 30, 2006 for financial statement purposes.
HANCOCK HOLDING COMPANY ----------------------- INDEX ----- PART I. FINANCIAL INFORMATION PAGE NUMBER - ------------------------------ ----------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 2006 (Unaudited) and December 31, 2005 1 Condensed Consolidated Statements of Income (Unaudited) -- Three Months Ended March 31, 2006 and 2005 2 Condensed Consolidated Statements of Common Stockholders' Equity Equity - March 31, 2006 (Unaudited) and March 31, 2005 3 Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) - Three Months Ended March 31, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows (Unaudited) -- Three Months Ended March 31, 2006 and 2005 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-17 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-31 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 32-34 ITEM 4. Controls and Procedures 35 PART II. OTHER INFORMATION - --------------------------- ITEM 1A. Risk Factors 35 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 ITEM 4. Submission of Matters to a Vote of Security Holders 36 ITEM 6. Exhibits 36 SIGNATURES 37 - ----------
PART I. FINANCIAL INFORMATIONItem 1. Financial Statements.HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value)March 31, 2006 December 31, (Unaudited) 2005 -------------------- -------------------- ASSETS: Cash and due from banks (non-interest bearing) $ 258,511 $ 271,104 Interest-bearing time deposits with other banks 7,886 7,258 Federal funds sold 409,488 402,968 Securities available for sale, at fair value (amortized cost of $2,312,340 and $1,980,745) 2,278,613 1,959,261 Loans 2,983,270 3,000,618 Less: allowance for loan losses (73,961) (74,558) unearned income (12,099) (11,432) -------------------- -------------------- Loans, net 2,897,210 2,914,628 Property and equipment, net of accumulated depreciation of $59,557 and $58,005 89,013 79,386 Other real estate, net 1,521 1,833 Accrued interest receivable 36,262 35,046 Goodwill, net 61,418 61,418 Other intangible assets, net 10,109 10,781 Life insurance contracts 83,944 83,080 Reinsurance receivables 47,528 49,452 Deferred tax asset, net 45,481 40,380 Other assets 29,605 33,592 -------------------- -------------------- TOTAL ASSETS $6,256,589 $5,950,187 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Non-interest bearing demand $1,225,744 $1,324,938 Interest-bearing savings, NOW, money market and time 4,093,205 3,664,882 -------------------- -------------------- Total deposits 5,318,949 4,989,820 Federal funds purchased 2,750 1,475 Securities sold under agreements to repurchase 215,849 250,807 Long-term notes 50,265 50,266 Policy reserves and liabilities 101,191 105,368 Other liabilities 78,142 75,036 -------------------- -------------------- TOTAL LIABILITIES 5,767,146 5,472,772 COMMON STOCKHOLDERS' EQUITY: Common Stock-$3.33 par value per share; 75,000,000 shares authorized, 32,493,960 and 32,301,123 issued, respectively 108,205 107,563 Capital surplus 130,340 129,222 Retained earnings 280,690 265,039 Accumulated other comprehensive loss, net (29,792) (22,066) Unearned compensation - (2,343) -------------------- -------------------- TOTAL COMMON STOCKHOLDERS' EQUITY 489,443 477,415 -------------------- -------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $6,256,589 $5,950,187 ==================== ==================== See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)Three Months Ended March 31, 2006 2005 ---------- --------- INTEREST INCOME: Loans, including fees $ 53,259 $ 45,580 Securities - taxable 21,866 11,695 Securities - tax exempt 1,693 1,790 Federal funds sold 3,586 711 Other investments 1,186 755 ---------- --------- Total interest income 81,590 60,531 ---------- --------- INTEREST EXPENSE: Deposits 23,021 15,032 Federal funds purchased and securities sold under agreements to repurchase 1,659 674 Long-term notes and other interest expense 593 583 ---------- --------- Total interest expense 25,273 16,289 ---------- --------- NET INTEREST INCOME 56,317 44,242 Provision for (recovery of) loan losses (705) 2,760 ---------- --------- NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) LOAN LOSSES 57,022 41,482 ---------- --------- NON-INTEREST INCOME: Service charges on deposit accounts 7,884 9,490 Other service charges, commissions and fees 12,505 10,012 Securities gains, net 118 7 Other income 4,501 2,925 ---------- --------- Total non-interest income 25,008 22,434 ---------- --------- NON-INTEREST EXPENSE: Salaries and employee benefits 26,202 22,379 Net occupancy expense of premises 3,659 2,495 Equipment rentals, depreciation and maintenance 2,668 2,357 Amortization of intangibles 675 584 Other expense 15,961 13,827 ---------- --------- Total non-interest expense 49,165 41,642 ---------- --------- EARNINGS BEFORE INCOME TAXES 32,865 22,274 Income tax expense 10,854 6,836 ---------- --------- NET EARNINGS $ 22,011 $ 15,438 ========== ========= BASIC EARNINGS PER SHARE $ 0.68 $ 0.48 ========== ========= DILUTED EARNINGS PER SHARE $ 0.67 $ 0.47 ========== ========= DIVIDENDS PAID PER SHARE $ 0.195 $ 0.165 ========== ========= WEIGHTED AVG. SHARES OUTSTANDING-BASIC 32,393 32,463 ========== ========= WEIGHTED AVG. SHARES OUTSTANDING-DILUTED 33,088 33,019 ========== ========= See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands, except share and per share amounts)Accumulated Other Common Stock Capital Retained Comprehensive Unearned Shares Amount Surplus Earnings (Loss), net Compensation ----------- ---------- --------- --------- ------------- ------------Balance, January 1, 2005 32,439,702 $108,024 $134,905 $234,423 $(11,121) $(1,649) Net earnings 15,438 Cash dividends - $0.165 per common share (5,384) Change in fair value of securities available for sale, net (14,097) Restricted stock awards granted 1,490 (1,490) Restricted stock awards vested 37,426 125 (125) Restricted stock awards forfeited (29) 29 Amortization of compensation element of restricted stock 198 Repurchase/retirement of common stock (44,413) (148) (1,264) Shares issued for options exercised 23,784 79 346 Shares tendered for options exercised (2,075) (7) (58) Other stock transactions, net 8,095 27 (161) ----------- ----------- ---------- ----------- --------------- -------------Balance, March 31, 2005 32,462,519 $108,100 $135,104 $244,477 $(25,218) $(2,912) =========== =========== ========== =========== =============== =============Balance, January 1, 2006 32,301,123 $107,563 $129,222 $265,039 $(22,066) $(2,343) Net earnings 22,011 Cash dividends - $0.195 per common share (6,360) Change in fair value of securities available for sale, net (7,726) Reclass of unearned compensation due to adoption of SFAS No. 123R (2,343) 2,343 Amortization of compensation element of restricted stock 215 Repurchase/retirement of common stock (17,000) (57) (710) Shares issued for options exercised 246,034 819 4,230 Shares tendered for options exercised (47,607) (159) (1,882) Amortization of compensation element of stock options 1,057 Other stock transactions, net 11,410 39 551 ----------- ----------- ---------- ----------- --------------- -------------Balance, March 31, 2006 32,493,960 $108,205 $130,340 $280,690 $(29,792) $ - =========== =========== ========== =========== =============== ============= See notes to unaudited condensed consolidated financial statements
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED) (In thousands)Three Months Ended March 31, 2006 2005 ----------- ----------- Net earnings $ 22,011 $ 15,438 Other comprehensive income (net of income tax): Change in fair value of securities available for sale, net of tax benefit of $4,542 and $7,588, respectively (7,649) (14,092) Reclassification adjustments for (losses) gains included in net earnings, net of tax effect of $45 and $3, respectively (77) (5) ----------- ----------- Total comprehensive earnings $ 14,285 $ 1,341 =========== =========== See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)Three Months Ended March 31, 2006 2005 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 22,011 $ 15,438 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,238 2,236 Provision for (recovery of) loan losses (705) 2,760 Provision for (recovery of) losses on other real estate owned (109) 35 Deferred tax benefit (5,306) (366) Increase in cash surrender value of life insurance contracts (864) (849) Gain on sales of securities available for sale, net (118) (7) Loss (gain) on sales of real estate owned, net (39) 73 (Accretion) amortization of securities premium/discount, net (3,458) 780 Amortization of intangible assets 823 810 Amortization of compensation element of restricted stock 215 198 Amortization of compensation element of stock options 1,057 - (Increase) decrease in interest receivable (1,216) 1,569 Increase in accrued expenses 2,729 133 Increase (decrease) in other liabilities (59) 1,835 Increase (decrease) in interest payable 436 (202) Increase (decrease) in policy reserves and liabilities (4,177) 2,816 Decrease in reinsurance receivable 1,924 3,501 (Increase) decrease in other assets 8,043 (2,210) Other, net 91 (1,677) --------------- --------------- Net cash provided by operating activities 23,516 26,873 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) in interest-bearing time deposits (628) (22) Proceeds from maturities, calls or prepayments of securities held to maturity - 6,559 Proceeds from sales and maturities of securities available for sale 143,469 130,745 Purchases of securities held to maturity - (4,819) Purchases of securities available for sale (471,488) (267,265) Net (increase) decrease in federal funds sold (6,520) 55,353 Net increase (decrease) in loans 17,781 (46,620) Purchases of property, equipment and software, net (11,551) (2,633) Proceeds from sales of other real estate 707 641 --------------- --------------- Net cash used in investing activities (328,230) (128,061) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 329,129 89,263 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (33,683) 15,477 Repayments of long-term notes (1) (1) Dividends paid (6,360) (5,384) Proceeds from exercise of stock options 3,008 360 Repurchase/retirement of common stock (767) (1,412) Excess tax benefit from exercise of stock options 205 - Other stock transactions, net 590 (134) --------------- --------------- Net cash provided by financing activities 292,121 98,169 --------------- --------------- NET DECREASE IN CASH AND DUE FROM BANKS (12,593) (3,019) CASH AND DUE FROM BANKS, BEGINNING 271,104 155,797 --------------- --------------- CASH AND DUE FROM BANKS, ENDING $ 258,511 $ 152,778 =============== =============== SUPPLEMENTAL INFORMATION: Income taxes paid $ 2,079 $ 5,462 Interest paid 24,837 16,491 Restricted stock issued to employees of Hancock 2,373 1,490 SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Transfers from loans to other real estate $ 342 $ 3,867 Financed sale of foreclosed property - 222 See notes to unaudited condensed consolidated financial statements.
The condensed consolidated financial statements of Hancock Holding Company and subsidiaries (the “Company”) included herein are unaudited; however, they include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Company’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Common Stockholders’ Equity at March 31, 2006 and the Company’s Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Earnings for the three months ended March 31, 2006 and 2005. Although the Company believes the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005 and the notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results expected for the full year.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, investments, intangible assets and goodwill, property, plant and equipment, income taxes, insurance, employment benefits and contingent liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Certain reclassifications have been made to conform prior year financial information to the current period presentation.
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. With the exception of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R discussed herein, there have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K for the year ended December 31, 2005.
The guidance in Emerging Issues Task Force 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-01”), was originally effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of EITF 03-01 was delayed by the Financial Accounting Standards Board (“FASB”) Staff Position EITF Issue 03-1-1, The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (“FSP EITF 03-1-1”), posted on September 30, 2004. The disclosure requirements continue to be effective and have been implemented by the Company. In November 2005, the FASB issued Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP FAS 115-1 and FAS 124-1”), which amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not for Profit Organizations and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 and FAS 124-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. FSP FAS 115-1 and FAS 124-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted FSP FAS 115-1 and FAS 124-1 effective January 1, 2006. The adoption of FSP FAS 115-1 and FAS 124-1 has not had a material impact on the Company’s financial condition or results of operations.
In December 2004, the FASB published SFAS No. 123(R), Share-Based Payments (“SFAS No. 123(R)”). SFAS No. 123(R) 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 based on the fair value of the equity or liability instruments issued. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of stock-based payment arrangements for public companies. The Company adopted SFAS No.123(R) under the modified prospective method and considered the guidance in SAB 107 effective January 1, 2006. The after-tax effect on earnings for the first quarter of 2006 is an increase in compensation expense of $917,000, or a reduction in diluted earnings per share of $0.03.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”). SFAS No. 154 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. SFAS No. 154 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. SFAS No. 154 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 earnings for that period rather than 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 Company adopted SFAS No. 154 effective January 1, 2006. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.
On March 17, 2006, the FASB published SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”). SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to subsequently measure those servicing assets and servicing liabilities at fair value. The effective date of this statement is the first fiscal year that begins after September 15, 2006. The Company intends on using the amortization method and does not believe the adoption of SFAS No. 156 will have a material impact on its results of operations and financial position.
The following table sets forth, for the periods indicated, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off (amounts in thousands):
Three Months Ended March 31, 2006 2005 ------------ ------------- Balance of allowance for loan losses at beginning of period $ 74,558 $ 40,682 Provision for (recovery of) loan losses (705) 2,760 Loans charged-off: Commercial, Real Estate & Mortgage 603 1,099 Direct & Indirect Consumer 1,938 1,647 Finance Company 441 519 Demand Deposit Accounts 940 761 ------------ ------------- Total charge-offs 3,922 4,026 ------------ ------------- Recoveries of loans previously charged-off: Commercial, Real Estate & Mortgage 2,190 261 Direct & Indirect Consumer 452 549 Finance Company 193 138 Demand Deposit Accounts 1,195 818 ------------ ------------- Total recoveries 4,030 1,766 ------------ ------------- Net charge-offs (recoveries) (108) 2,260 ------------ ------------- Balance of allowance for loan losses at end of period $ 73,961 $ 41,182 ============ =============
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 March 31, 2006 2005 ------------- ------------ Ratios : Net (recoveries) charge-offs to average net loans (annualized) -0.01% 0.33% Net (recoveries) charge-offs to period-end net loans (annualized) -0.01% 0.32% Allowance for loan losses to average net loans 2.49% 1.48% Allowance for loan losses to period-end net loans 2.49% 1.48% Net charge-offs (recoveries) to loan loss allowance -0.15% 5.49% Provision for loan losses to net charge-offs 655.76% 122.13%
As of March 31, 2006 and December 31, 2005, the Company had investments in classified loans totaling $92.2 million and $112.1 million, respectively. The Company’s allowance for loan losses includes allocations of $12.5 million and $17.1 million associated with these loans as of March 31, 2006 and December 31, 2005, respectively.
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 investments in impaired loans for the three months ended March 31, 2006 and March 31, 2005 were $9.9 million and $9.4 million, respectively. No interest was recognized on nonaccrual loans. The amount of interest that would have been accrued on these loans would not have had a material effect on earnings for the three months ended March 31, 2006 and March 31, 2005.
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 March 31, 2006. The carrying amount of goodwill was $61.4 million as of March 31, 2006 and December 31, 2005.
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 March 31, 2006 As of December 31, 2005 ---------------------------------- ---------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization --------------- --------------- --------------- --------------- Amortizable intangible assets: Core deposit intangibles $ 14,137 $ 6,265 $ 14,137 $ 5,924 Value of insurance business acquired 1,827 1,072 1,673 833 Non-compete agreements 228 130 228 76 Mortgage servicing rights 4,144 2,760 4,292 2,716 --------------- --------------- --------------- --------------- Total $ 20,336 $ 10,227 $ 20,330 $ 9,549 =============== =============== =============== =============== Three Months Ended March 31, 2006 2005 --------------- --------------- Aggregate amortization expense for: Core deposit intangibles $ 341 $ 419 Value of insurance business acquired 280 165 Non-compete agreements 54 - Mortgage servicing rights 148 226 --------------- --------------- Total $ 823 $ 810 =============== ===============
Amortization of the core deposit intangibles is estimated to be approximately $1.1million in 2006, $1.2 million in 2007, $1.1 million in 2008, $1.1 million in 2009, $1.1 million in 2010 and the remainder of $2.3 million thereafter. The amortization of the value of business acquired and non-compete agreements are expected to approximate $237,000 in 2006, $201,000 in 2007, $166,000 in 2008, $132,000 in 2009, $97,000 in 2010 and the remainder of $20,000 thereafter. Amortization of servicing rights is estimated to be approximately $448,000 in 2006, $389,000 in 2007, $255,000 in 2008, $177,000 in 2009 and $115,000 in 2010. The weighted-average amortization period used for intangibles is 10 years. The servicing rights are included in the mortgage subsidiary’s assets, which have been reported within the Mississippi segment.
Following is a summary of the information used in the computation of earnings per common share (in thousands).
Three Months Ended March 31, 2006 2005 -------------- ------------- Net Earnings - used in computation of earnings per share $ 22,011 $ 15,438 ============== ============= Weighted average number of shares outstanding - used in computation of basic earnings per share 32,393 32,463 Effect of dilutive securities Stock options and restricted stock awards 695 556 -------------- ------------- Weighted average number of shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per share 33,088 33,019 ============== =============
At March 31, 2006, the Company had two share-based payment plans for employees, which are described below. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees(“APB 25”), and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). Compensation cost for stock options was not recognized in our Condensed Consolidated Statement of Income for the three months ending March 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Prior to January 1, 2006, compensation cost was recognized for restricted share awards. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment(“SFAS No. 123(R)”), using the modified-prospective method. Under this method, compensation cost recognized in the first quarter of 2006 includes: (1) compensation cost for all the Company’s share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all the Company’s share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
As a result of adoption SFAS No. 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the quarter ended March 31, 2006, are $1,039,415 and $834,715 lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the quarter ended March 31, 2006 would have been $0.71 and $0.70, respectively, if the Company had not adopted SFAS No. 123(R), compared to reported basic and diluted earnings per share of $0.68 and $0.67, respectively.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the quarter ended March 31, 2006, there was $205,000 tax benefit classified as a financing cash inflow that would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123(R).
The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted for the quarter ended March 31, 2005. For purposes of this pro forma disclosure, the value of the options was estimated using a Black-Scholes-Merton option pricing formula and amortized to expense over the options’ vesting periods (dollars in thousands, except per share amounts).
Three Months Ended March 31, 2005 ------------------- Net income, as reported $ 15,438 Add: stock-based employee compensation expense included in reported net income, net of related tax effects 150 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (768) ------------------- Pro forma net income $ 14,820 =================== Earnings per share Basic - as reported $ 0.48 =================== Basic - pro forma $ 0.46 =================== Diluted - as reported $ 0.47 =================== Diluted - pro forma $ 0.45 ===================
The 1996 Hancock Holding Company Long-Term Incentive Plan (the “1996 Plan”) that was approved by the Company’s shareholders in 1996 was designed to provide annual incentive stock awards. Awards as defined in the 1996 Plan include, with limitations, stock options (including restricted stock options), restricted and performance shares, and performance stock awards, all on a stand-alone, combination or tandem basis. A total of fifteen million (15,000,000) common shares can be granted under the 1996 Plan with an annual grant maximum of two percent (2%) of the Company’s outstanding common stock as reported for the fiscal year ending immediately prior to such plan year. Grants of restricted stock awards are limited to one-third of the grant totals.
The exercise price is equal to the market price on the date of grant, except for certain of those granted to major stockholders where the option price is 110 percent of the market price. Options awards generally vest based on five years of continuous service and have ten-year contractual terms.
In March of 2005, the stockholders of the Company approved Hancock Holding Company’s 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan is designed to enable employees and directors to obtain a proprietary interest in the Company and to attract and retain outstanding personnel. The 2005 Plan provides that awards for up to an aggregate of five million (5,000,000) shares of the Company’s common stock may be granted during the term of the 2005 Plan. The 2005 Plan limits the number of shares for which awards may be granted during any calendar year to two percent (2%) of the outstanding Company’s common stock as reported for the fiscal year ending immediately prior to such plan year.
The fair value of each option award is estimated on the date of grant using Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Three Months Ended March 31, 2006 March 31, 2005-------------------- ------------------- Expected volatility 29.87% 31.33% Expected dividends 1.61% - 1.96% 2.12% Expected term (in years) 5 - 8 5 - 8 Risk-free rate 4.30% - 4.54% 4.00%
A summary of option activity under the plans for the three months ended March 31, 2006, and changes during the quarter then ended is presented below:
Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Term Intrinsic Options Shares Price ($) (Years) Value ($000)- -------------------------------------------- ----------------- ------------------ ----------------- ----------------- Outstanding at January 1, 2006 1,616,779 $ 22.32 6.6 Granted 347,043 $ 41.63 9.9 Exercised (245,397) $ 20.75 5.3 Forfeited or expired (1,303) $ 26.83 6.1 ----------------- Outstanding at March 31, 2006 1,717,122 $ 26.82 7.2 $ 33,831,152 ================= ================== ================= ================= Exercisable at March 31, 2006 1,370,104 $ 23.07 6.5 $ 32,134,909 ================= ================== ================= =================
The weighted-average grant-date fair value of options granted during the quarters ended March 31, 2006 and 2005 was $17.96 and $13.43, respectively. The total intrinsic value of options exercised during the quarters ended March 31, 2006 and 2005 was $5.3 million and $0.3 million, respectively.
A summary of the status of the Company’s nonvested shares as of March 31, 2006, and changes during the quarter ended March 31, 2006, is presented below:
Weighted- Average Number of Grant-Date Shares Fair Value ($) ----------------- -----------------Nonvested at January 1, 2006 132,635 $ 26.77 Granted 405,213 $ 21.37 Vested - $ - Forfeited (867) $ 28.41 -------------- Nonvested at March 31, 2006 536,981 $ 22.69 ==============
As of March 31, 2006, there was $10.6 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 4.4 years. The total fair value of shares vested during the quarters ended March 31, 2006 and 2005 was $0 and $1.9 million, respectively.
During 2005, the Board of Directors of the Company approved the accelerated vesting of all outstanding unvested options granted to employees. The Company used guidance provided in FASB Interpretations (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation, in the determination of the expense associated with the accelerated vesting of the unvested options outstanding. Compensation expense was calculated as the difference between the grant price and the current market price on the date of the vesting. Forfeiture rates were calculated based on observation of historical trends. The impact of this action was a reduction in 2005 pretax income of approximately $558,000. The acceleration of the vesting of these options allowed the Company to avoid future compensation expense estimated to be approximately $6.4 million.
Net periodic benefits cost includes the following components for the three months ended March 31, 2006 and 2005 (amounts in thousands):
Pension Benefits Other Post-retirement Benefits ------------------------------------------ ----------------------------------------- Three Months Ended March 31, 2006 2005 2006 2005 ------------------- ------------------- ------------------ ------------------Service cost $ 575,934 $ 538,285 $ 78,750 $ 77,500 Interest cost 874,760 848,769 98,500 97,000 Expected return on plan assets (966,840) (852,597) - - Amortization of prior service cost - 6,531 (13,250) (13,250) Amortization of net loss 265,527 249,765 29,000 22,000 Amortization of transition obligation - - 1,250 1,250 Net periodic benefit cost $ 749,381 $ 790,753 $ 194,250 $ 184,500
The Company anticipates that it will contribute $4.4 million to its pension plan and approximately $777,000 to its post-retirement benefits in 2006. During the first quarter of 2006, the Company contributed $993,000 to its pension plan and approximately $130,000 for post-retirement benefits.
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, March 31, 2006 MS LA FL Other Eliminations Consolidated ------------- ------------ ----------- ----------- ------------- ----------------- Interest income $ 45,713 $ 31,042 $ 2,362 $ 3,244 $ (771) $ 81,590 Interest expense 15,121 10,328 501 - (677) 25,273 ------------- ------------ ----------- ----------- ------------- ----------------- Net interest income 30,592 20,714 1,861 3,244 (94) 56,317 Provision for (recovery of) loan losses (1,412) 519 43 145 - (705) Non-interest income 10,879 7,491 112 6,565 (39) 25,008 Depreciation and amortization 1,440 610 74 114 - 2,238 Other non-interest expense 21,969 15,269 1,106 8,598 (15) 46,927 ------------- ------------ ----------- ----------- ------------- ----------------- Earnings before income taxes 19,474 11,807 750 952 (118) 32,865 Income tax expense 6,645 3,560 274 420 (45) 10,854 ------------- ------------ ----------- ----------- ------------ ----------------- Net earnings $ 12,829 $ 8,247 $ 476 $ 532 $ (73) $ 22,011 ============= ============ =========== =========== ============= ================= Total assets $3,745,211 $2,332,736 $ 121,028 $ 607,662 $(550,048) $6,256,589 ============= ============ =========== =========== ============= ================= Three Months Ended, March 31, 2005 MS LA FL Other Eliminations Consolidated ------------- ------------ ----------- ----------- ------------- ----------------- Interest income $ 31,973 $ 25,170 $ 1,191 $ 3,144 $ (947) $ 60,531 Interest expense 10,122 6,708 326 1 (868) 16,289 ------------- ------------ ----------- ----------- ------------- ----------------- Net interest income 21,851 18,462 865 3,143 (79) 44,242 Provision for loan losses 736 1,544 99 381 - 2,760 Non-interest income 9,451 7,620 98 5,343 (78) 22,434 Depreciation and amortization 1,364 601 142 129 - 2,236 Other non-interest expense 18,242 13,232 1,192 6,763 (23) 39,406 ------------- ------------ ----------- ----------- ------------- ----------------- Earnings (loss) before income taxes 10,960 10,705 (470) 1,213 (134) 22,274 Income tax expense (benefit) 3,351 3,248 (180) 437 (20) 6,836 ------------- ------------ ----------- ----------- ------------- ----------------- Net earnings (loss) $ 7,609 $ 7,457 $ (290) $ 776 $ (114) $ 15,438 ============= ============ =========== =========== ============= ================= Total assets $2,732,441 $1,952,770 $108,846 $595,112 $(620,153) $4,769,016 ============= ============ =========== =========== ============= =================
On April 6, 2006, the Company completed an early retirement of its $50.0 million debt obligation to the Federal Home Loan Bank. This obligation was recorded as a long-term liability in the accompanying condensed consolidated balance sheets as of March 31, 2006 and December 31, 2005. As a result of this transaction, a $41,000 loss on early extinguishment of debt will be recognized in the second quarter of 2006.
The following discussion should be read in conjunction with our financial statements included with this report and our financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December31, 2005 included in our Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section below entitled “Forward-Looking Statements.”
We were organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and are headquartered in Gulfport, Mississippi. We currently operate more than 100 banking offices and more than 120 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. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At March 31, 2006, we had total assets of $6.3 billion and employed on a full-time equivalent basis 1,206 persons in Mississippi, 524 persons in Louisiana and 38 persons in Florida.
Selected Financial Data(amounts in thousands, except per share data) Three Months Ended March 31, 2006 2005 -------------- --------------- Per Common Share Data - --------------------- Earnings per share: Basic $0.68 $0.48 Diluted $0.67 $0.47 Cash dividends per share $0.195 $0.165 Book value per share (period end) $15.06 $14.16 Weighted average number of shares: Basic 32,393 32,463 Diluted (1) 33,088 33,019 Period end number of shares 32,494 32,463 Market data: High closing price $46.67 $34.20 Low closing price $37.75 $30.25 Period end closing price $46.52 $32.50 Trading volume 3,990 3,284 (1) There were no anti-dilutive shares outstanding for the three months ended March 31, 2006 and 2005.
Three Months Ended March 31, 2006 2005 ----------------------------------- Performance Ratios (dollar amounts in thousands) - ------------------ Return on average assets 1.49% 1.32% Return on average common equity 18.34% 13.32% Earning asset yield (tax equivalent (TE)) 6.17% 5.90% Total cost of funds 1.88% 1.55% Net interest margin (TE) 4.30% 4.35% Non-interest expense as a percent of total revenue (TE) before amortization of purchased intangibles 58.30% 59.99% Average common equity as a percent of average total assets 8.13% 9.94% Leverage ratio (period end) 7.45% 8.75% FTE headcount 1,768 1,766 Asset Quality Information - ------------------------- Non-accrual loans $8,676 $6,335 Foreclosed assets $1,779 $3,591 Total non-performing assets $10,455 $9,926 Non-performing assets as a percent of loans and foreclosed assets 0.35% 0.36% Accruing loans 90 days past due $6,632 $2,798 Accruing loans 90 days past due as a percent of loans 0.22% 0.10% Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets 0.57% 0.46% Net charge-offs ($108) $2,260 Net charge-offs as a percent of average loans -0.01% 0.33% Allowance for loan losses $73,961 $41,182 Allowance for loan losses as a percent of period end loans 2.49% 1.48% Allowance for loan losses to NPAs + accruing loans 90 days past due 432.85% 323.66% Provision for loan losses ($705) $2,260 Provision for loan losses to net charge-offs 655.76% 122.13% Average Balance Sheet - --------------------- Total loans $2,970,461 $2,776,229 Securities 2,152,958 1,350,505 Short-term investments 335,986 132,582 Earning assets 5,459,405 4,259,316 Allowance for loan losses (74,429) (40,688) Other assets 598,546 512,166 Total assets $5,983,521 $4,730,794 Non-interest bearing deposits $1,201,186 $701,144 Interest bearing transaction deposits 1,714,514 1,332,152 Interest bearing public fund deposits 712,394 711,789 Time deposits 1,406,969 1,089,367 Total interest bearing deposits 3,833,877 3,133,308 Total deposits 5,035,063 3,834,452 Other borrowed funds 287,738 271,473 Other liabilities 173,989 154,801 Common stockholders' equity 486,731 470,068 Total liabilities & common stockholders' equity $5,983,521 $4,730,794
Three Months Ended March 31 2006 2005 ------------------------------------- Period End Balance Sheet (dollar amounts in thousands) - ------------------------ Commercial/real estate loans $1,688,820 $1,488,523 Mortgage loans 408,750 414,346 Direct consumer loans 456,888 510,116 Indirect consumer loans 349,412 318,164 Finance company loans 67,300 60,679 ---------------- ------------------- Total loans 2,971,171 2,791,829 Securities 2,278,613 1,414,037 Short-term investments 417,373 94,930 Earning assets 5,667,157 4,300,796 Allowance for loan losses (73,961) (41,182) Other assets 663,393 509,402 ---------------- ------------------- Total assets $6,256,589 $4,769,016 ================ =================== Non-interest bearing deposits $1,225,744 $724,338 Interest bearing transaction deposits 1,730,873 1,332,269 Interest bearing public funds deposits 892,894 724,362 Time deposits 1,469,438 1,106,238 ---------------- ------------------- Total interest bearing deposits 4,093,205 3,162,870 Total deposits 5,318,949 3,887,208 Other borrowed funds 273,629 266,528 Other liabilities 174,568 155,729 Common stockholders' equity 489,443 459,551 ---------------- ------------------- Total liabilities & common stockholders' equity $6,256,589 $4,769,016 ================ =================== Net Charge-off Information - -------------------------- Net charge-offs (recoveries): Commercial/real estate loans $ (1,769) $ 770 Mortgage loans 181 68 Direct consumer loans 579 501 Indirect consumer loans 653 540 Finance company loans 248 381 ---------------- ------------------- Total net charge-offs (including storm-related) (108) 2,260 Storm-related net charge-offs 597 - ---------------- ------------------- Total net charge-offs (excluding storm-related) $ (705) $ 2,260 ================ =================== Net charge-offs to average loans: Commercial/real estate loans -0.43% 0.21% Mortgage loans 0.18% 0.07% Direct consumer loans 0.50% 0.40% Indirect consumer loans 0.75% 0.70% Finance company loans 1.56% 2.54% Total net charge-offs to average net loans (including storm-related) -0.01% 0.33% Total net charge-offs to average net loans (excluding storm-related) -0.10% 0.33%
Three Months Ended March 31, 2006 2005 ------------------------------------------- Average Balance Sheet Composition (dollar amounts in thousands) - --------------------------------- Percentage of earning assets/funding sources: Loans 54.41% 65.18% Securities 39.44% 31.71% Short-term investments 6.15% 3.11% Earning assets 100.00% 100.00% Non-interest bearing deposits 22.00% 16.46% Interest bearing transaction deposits 31.40% 31.28% Interest bearing public funds deposits 13.05% 16.71% Time deposits 25.77% 25.58% Total deposits 92.23% 90.03% Other borrowed funds 5.27% 6.37% Other net interest-free funding sources 2.50% 3.60% Total funding sources 100.00% 100.00% Loan mix: Commercial/real estate loans 56.38% 53.71% Mortgage loans 13.80% 14.67% Direct consumer loans 15.82% 18.14% Indirect consumer loans 11.83% 11.29% Finance company loans 2.17% 2.19% Total loans 100.00% 100.00% Average dollars Loans $2,970,461 $2,776,229 Securities 2,152,958 1,350,505 Short-term investments 335,986 132,582 ------------------ ------------------- Earning assets $5,459,405 $4,259,316 ================== =================== Non-interest bearing deposits $1,201,186 $701,144 Interest bearing transaction deposits 1,714,514 1,332,152 Interest bearing public funds deposits 712,394 711,789 Time deposits 1,406,969 1,089,367 ------------------ ------------------- Total deposits 5,035,063 3,834,452 Other borrowed funds 287,738 271,473 Other net interest-free funding sources 136,604 153,391 ------------------ ------------------- Total funding sources $5,459,405 $4,259,316 ================== =================== Loans: Commercial/real estate loans $1,674,706 $1,491,008 Mortgage loans 410,023 407,258 Direct consumer loans 469,832 503,700 Indirect consumer loans 351,405 313,542 Finance company loans 64,496 60,720 ------------------ ------------------- Total average loans $2,970,461 $2,776,229 ================== ===================
We manage liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and maturities of securities available for sale.
The following liquidity ratios at March 31, 2006 and December 31, 2005 compare certain assets and liabilities to total deposits or total assets:
March 31, December 31, 2006 2005 ------------ ------------ Total securities to total deposits 42.84% 39.27% Total loans (net of unearned income) to total deposits 55.86% 59.91% Interest-earning assets to total assets 90.58% 90.06% Interest-bearing deposits to total deposits 76.96% 73.45%
We continue to maintain an adequate capital position. The ratios as of March 31, 2006 and December 31, 2005 are as follows:
March 31, December 31, 2006 2005 ----------------- ----------------- Average equity to average assets 8.13% 8.72% Regulatory ratios: Average equity to average assets (1) 8.47% 8.99% Total capital to risk-weighted assets (2) 12.88% 12.73% Tier 1 capital to risk-weighted assets (3) 11.60% 11.47% Leverage capital to average total assets (4) 7.45% 7.85% (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.
Payments due from us under specified long-term and certain other binding contractual obligations were scheduled in our annual report on Form 10-K for the year ended December 31, 2005. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities.
On April 6, 2006, we completed an early retirement of our $50.0 million debt obligation to the Federal Home Loan Bank. This obligation was recorded as a long-term liability in the accompanying condensed consolidated balance sheets as of March 31, 2006 and December 31, 2005. As a result of this transaction, a $41,000 loss on early extinguishment of debt will be recognized in the second quarter of 2006.
Net income for the first quarter of 2006 totaled $22.0 million, compared to $15.4 million reported for the first quarter of 2005, an increase of $6.6 million, or 43%. While our net income for the third and fourth quarters of 2005 were significantly impacted by Hurricane Katrina, the first quarter of 2006 contained no significant income statement items related to the impact of the storm.
Compared to the fourth quarter of 2005, first quarter 2006 net income was up $2.95 million, or 15%, with diluted earnings per share up $0.09. Our net income for the fourth quarter 2005 was $19.07 million, with diluted earnings per share of $0.58.
The following is selected information for quarterly and year-to-date comparison:
Three Months Ended March 31, 2006 2005 ------------- ------------ Results of Operations: Return on average assets 1.49 % 1.32 % Return on average equity 18.34 % 13.32 % Net Interest Income: Yield on average interest-earning assets (TE) 6.17 % 5.90 % Cost of average interest-bearing funds 2.49 % 1.94 % ------------- ------------ Net interest spread (TE) 3.69 % 3.96 % ============= ============ Net interest margin (TE) (net interest income on a tax-equivalent basis divided by average interest-earning assets) 4.30 % 4.35 % ============= ============
Net interest income (te) for the first quarter of 2006 increased $12.28 million, or 27 percent, from the first quarter of 2005, and was up $3.77 million, or 7 percent, from the fourth quarter of 2005. Our net interest margin (te) was 4.30 percent in the first quarter of 2006, 5 basis points narrower than the same quarter a year ago and 14 basis points narrower than the previous quarter.
Compared to the same quarter a year ago, the primary driver of the $12.28 million increase in net interest income (te) was $1.20 billion, or 28 percent, increase in average earning assets mainly from average deposit growth of $1.20 billion, or 31 percent, much of which was related to deposits inflows in the aftermath of Hurricane Katrina, primarily demand and other short-term deposits. The unprecedented deposit growth caused the Loan/Deposit Ratio to decline to 59 percent in the first quarter of 2006. The $1.20 billion increase in average earning assets was deployed into securities portfolio (average increase of $802.0 million, or 59 percent), short-term investments (average increase of $203.0 million), and into loans (average increase of $194.0 million, or 7 percent). Loans now comprise 54 percent of our average earning asset base, as compared to 61 percent for the same quarter a year ago. The net interest margin (te) narrowed 5 basis points as the increase in the average earning asset yield (27 basis points) did not offset the increase in total funding costs (33 basis points).
Our level of net interest income (te) in the first quarter of 2006 increased $3.77 million, or 7 percent, from the prior quarter. Average earning assets increased $571 million, or 12 percent, over the previous quarter. Fueled by storm-related deposit inflows, average deposits increased $522 million, or 12 percent, compared to the prior quarter. Of the $571 million increase in average earning assets, $19 million was deployed into short-term investments (mostly fed funds) and the balance, $581 million, into the securities portfolio. Average loans were down $28 million from the prior quarter as loan pay-downs continued to eclipse loan production. The net interest margin (te) narrowed 14 basis points from the prior quarter as the yield on average earning assets increased just 3 basis points, while total funding costs were up 18 basis points. The yield on average earning assets was impacted by the larger percent of our earning assets in securities and short-term investments (46 percent) than the previous quarter (39 percent). The total cost of funds was up 18 basis points mostly due to increase in cost of public fund deposits (indexed to short-term market rates).
The following tables detail the components of our net interest spread and net interest margin. Three Months Ended March 31, -------------------------------------------------------------------------------- 2006 2005 ------------------------------------ --------------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate Average Earning Assets: Commercial & real estate loans (TE) $28,637 $1,674,706 6.93% $22,303 $1,491,008 6.06% Mortgage loans 5,897 410,023 5.75% 5,697 407,258 5.60% Consumer loans 17,473 885,732 8.00% 16,409 877,963 7.58% Loan fees & late charges 2,320 - 0.00% 1,978 - 0.00% ------------------------------------ -------------------------------------- Total loans (TE) 54,327 2,970,461 7.40% 46,387 2,776,229 6.76% US treasury securities 627 60,086 4.23% 60 11,058 2.20% US agency securities 13,786 1,194,312 4.62% 4,285 430,408 3.98% CMOs 1,810 184,276 3.93% 2,686 267,037 4.02% Mortgage backed securities 5,519 477,789 4.62% 4,547 412,573 4.41% Municipals (TE) 2,723 163,175 6.67% 2,871 163,543 7.02% Other securities 872 73,320 4.76% 672 65,886 4.08% ------------------------------------ -------------------------------------- Total securities (TE) 25,336 2,152,958 4.71% 15,122 1,350,505 4.48% Total short-term investments 3,900 335,986 4.71% 792 132,582 2.42% Average earning assets yield (TE) $83,563 $5,459,405 6.17% $62,302 $4,259,316 5.90% Average Interest-Bearing Liabilities: Interest-bearing transaction deposits $3,266 $1,714,514 0.77% $1,921 $1,332,152 0.58% Time deposits 13,005 1,406,969 3.75% 9,360 1,089,367 3.48% Public Funds 6,750 712,394 3.84% 3,751 711,789 2.14% ------------------------------------ -------------------------------------- Total interest bearing deposits $23,021 $3,833,877 2.44% $15,032 $3,133,308 1.95% Customer repos 1,641 230,725 2.88% 664 214,878 1.25% Other borrowings 611 57,014 4.35% 593 56,595 4.25% ------------------------------------ -------------------------------------- Total borrowings 2,252 287,738 3.17% 1,256 271,473 1.88% Average interest bearing liability cost $25,273 $4,121,615 2.49% $16,289 $3,404,781 1.94% Noninterest-bearing deposits 1,201,186 701,144 Other net interest-free funding sources 136,604 153,391 Total Cost of Funds $25,273 $5,459,405 1.88% $16,289 $4,259,316 1.55% Net Interest Spread (TE) $58,290 3.69% $46,013 3.96% Net Interest Margin (TE) $58,290 $5,459,405 4.30% $46,013 $4,259,316 4.35%
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.
Our provision for loan losses in the first quarter was a negative $705,000, primarily due to a large commercial recovery (favorable impact to net charge-offs of $1.75 million); total reported net charge-offs for the quarter were a net recovery of $108,000 and included storm-related net charge-offs of $597,000; excluding the impact of the large commercial recovery and the storm-related charge-offs, net charge-offs would have been $1.05 million, or 0.14 percent, for the first quarter; non-performing assets as a percent of loans and foreclosed assets fell 7 basis points to 0.35 percent at March 31, 2006 from December 31, 2005, while loans 90 days past due fell 64 basis points to 0.22 percent
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 March 31, ------------------------------------- 2006 2005 ------------- ------------ Annualized net charge-offs to average loans -0.01% 0.33% Annualized provision (recovery) for loan losses to average loans -0.10% 0.40% Average allowance for loan losses to average loans 2.51% 1.47% Gross charge-offs $ 3,922 $ 4,026 Gross recoveries $ 4,030 $ 1,766 Non-accrual loans $ 8,676 $ 6,335 Accruing loans 90 days or more past due $ 6,632 $ 2,798
Accruing loans 90 days or more past due increased $3.8 million from March 31, 2005. This increase was related to the impact of Hurricane Katrina on the ability of certain borrowers to meet their regular payments. However, since December 31, 2005, accruing loans 90 days or more past due, net of deferrals, have decreased $10.8 million to $6.6 million at March 31, 2006.
Management is continuously reviewing the adequacy of the special storm-related allowance due to Hurricane Katrina and views the current level to be adequate and, as such, expects no material deviations once all storm-related net charge-offs are known.
Non-interest income for the first quarter of 2006 was up $2.46 million, or 11 percent, compared to the same quarter a year ago. Non-interest income was up $1.87 million, or 8 percent, compared to the fourth 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 $1.28 million) mostly related to higher revenues associated with Magna Insurance Company, our wholly-owned insurance company, and the July 1, 2005 acquisition of J. Everett Eaves, Inc. In addition, other income was up $1.26 million, when compared to the same quarter a year ago. However, service charges were down $1.61 million principally due to waived return item fees and other service charges as a result of accommodations to customers impacted by Hurricane Katrina. The increase in non-interest income for the first quarter of 2006 compared to the prior quarter was due to increases in service charges (up $1.03 million) and ATM fees (up $489,000).
The components of non-interest income for the three months ended March 31, 2006 and 2005 are presented in the following table (amounts in thousands):
Three Months Ended March 31, ---------------------------------- 2006 2005 -------------- ---------------- Service charges on deposit accounts $ 7,884 $ 9,490 Trust fees 3,078 2,541 Credit card merchant discount fees 1,709 1,030 Income from insurance operations 5,159 3,881 Investment & annuity fees 1,264 1,188 ATM fees 1,294 1,372 Secondary mortgage market operations 817 499 Other income 3,685 2,426 -------------- ---------------- Total other non-interest income 24,890 22,427 Securities transactions gains, net 118 7 -------------- ---------------- Total non-interest income $ 25,008 $ 22,434 ============== ================
Operating expenses for the first quarter of 2006 were $7.52 million, or 18 percent, higher compared to the same quarter a year ago and were $4.54 million, or 10 percent, higher than the previous quarter. The increase from the same quarter a year ago was reflected in higher levels of personnel expense (up $3.82 million), occupancy expense (up $1.16 million), telephone expense (up $910,000) and all other expenses (up $1.62 million). The increase from the prior quarter was reflected in higher personnel expense (up $1.62 million) and higher other operating expenses (up $2.34 million). Our overall increase in operating expenses for the first quarter of 2006, while not containing any significant direct expenses related to the impact of Hurricane Katrina, did include an unquantifiable level of expenses indirectly related to the storm. This would include on-going expenditures related to occupancy (due to large numbers of employees remaining displaced from their regular pre-storm workplaces) equipment replacement, repair and maintenance expenses, and other costs related to the resumption of non-storm related expenditures.
The following table presents the components of non-interest expense for the three months ended March 31, 2006 and 2005.
Three Months Ended March 31,(dollars in thousands) 2006 2005 --------------- ---------------- Employee compensation $ 21,086 $ 17,894 Employee benefits 5,116 4,485 --------------- ---------------- Total personnel expense 26,202 22,379 --------------- ---------------- Equipment and data processing expense 4,588 4,295 Net occupancy expense 3,659 2,495 Postage and communications 2,376 1,706 Ad valorem and franchise taxes 998 753 Legal and professional services 2,213 3,292 Stationery and supplies 548 469 Amortization of intangible assets 675 584 Advertising 1,359 1,100 Deposit insurance and regulatory fees 56 249 Training expenses 165 157 Other real estate owned expense (449) 206 Other expense 6,775 3,957 --------------- ---------------- Total non-interest expense $ 49,165 $ 41,642 =============== ================
Our effective federal income tax rate continues to be less than the statutory rate of 35% due primarily to tax-exempt interest income. For the three months ended March 31, 2006 and 2005, the effective federal income tax rate was approximately 33% and 31%, respectively. The total amount of tax-exempt income earned during the first three months of 2006 was $3.5 million compared to $3.1 million for the comparable period in 2005. Tax-exempt income for the first quarter of 2006 consisted of $1.7 million from securities and $1.8 million from loans and leases. Tax-exempt income for the first three months of 2005 consisted of $1.8 million from securities and $1.3 million from loans and leases.
In the normal course of business, we enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. Such instruments are not reflected in the accompanying condensed consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the condensed consolidated balance sheets. The contract amounts of these instruments reflect our exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. We undertake the same credit evaluation in making commitments and conditional obligations as we do for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At March 31, 2006, we had $629.2 million in unused loan commitments outstanding, of which approximately $379.6 million were at variable rates, with the remainder at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent our future cash requirements. We continually evaluate each customer’s credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in our obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At March 31, 2006, we had $55.8 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at March 31, 2006 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 $ 629,244 $ 343,034 $ 33,264 $ 29,696 $ 223,250 Letters of credit 55,845 32,874 13,482 9,489 - --------------- -------------- ------------ ------------ -------------- Total $ 685,089 $ 375,908 $ 46,746 $ 39,185 $ 223,250 =============== ============== ============ ============ ==============
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. With the exception of the adoption of SFAS No. 123R, as discussed in the Notes to Condensed Consolidated Financial Statements, there have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K for the year ended December 31, 2005.
The guidance in Emerging Issues Task Force 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-01”), was originally effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of EITF 03-01 was delayed by the Financial Accounting Standards Board (“FASB”) Staff Position EITF Issue 03-1-1, The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (“FSP EITF 03-1-1”), posted on September 30, 2004. The disclosure requirements continue to be effective and have been implemented by us. In November 2005, the FASB issued Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP FAS 115-1 and FAS 124-1”), which amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not for Profit Organizations and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 and FAS 124-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. FSP FAS 115-1 and FAS 124-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. We adopted FSP FAS 115-1 and FAS 124-1 effective January 1, 2006. The adoption of FSP FAS 115-1 and FAS 124-1 has not had a material impact on our financial condition or results of operations.
In December 2004, the FASB published SFAS No. 123(R), Share-Based Payments (“SFAS No. 123(R)”). SFAS No. 123(R) 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 based on the fair value of the equity or liability instruments issued. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 107 (“SAB 107”). SAB 107 summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of stock-based payment arrangements for public companies. We adopted SFAS No.123(R) and considered the guidance in SAB 107 effective January 1, 2006 under the modified prospective method. The after-tax effect on earnings for the first quarter of 2006 is an increase in compensation expense of $917,000, or a reduction in diluted earnings per share of $0.03.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”). SFAS No. 154 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. SFAS No. 154 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. SFAS No. 154 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 earnings for that period rather than 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. We adopted SFAS No. 154 effective January 1, 2006. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.
On March 17, 2006, the FASB published SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”). SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to subsequently measure those servicing assets and servicing liabilities at fair value. The effective date of this statement is the first fiscal year that begins after September 15, 2006. We intend on using the amortization method and do not believe the adoption of SFAS No. 156 will have a material impact on our results of operations and financial position.
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This Act provides a safe harbor for such disclosures that protects the companies from unwarranted litigation if the actual results are different from management expectations. This report contains forward-looking statements and reflects management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
Our net earnings are dependent, in part, on our net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. 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 our exposure to changes in interest rates, management monitors our interest rate risk. Our interest rate risk 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 our 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 our interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income and the fair value of our investment securities. As of quarter close, the effective duration of the securities portfolio was 2.28. A rate increase of 100 basis points would move the effective duration to 2.65, while a 200 basis point rise would result in an effective duration of 2.73.
In adjusting our asset/liability position, the Board and management attempt to manage our 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 our interest rate risk position somewhat in order to increase our net interest margin. Our results of operations and net portfolio values are well positioned for a rising interest rate environment. The cumulative gap at 12 months is -2% primarily driven by the increase in interest bearing transaction balances related to the hurricane. Exposure to interest rate risk is presented in the following table.
Net Interest Income (te) at Risk ----------------------------------------------- Change in Estimated interest rate increase (decrease) (basis point) in net interest income -------------------- ---------------------- -100 -5.59% Stable 0% +100 2.96% +200 5.61% +300 8.06%
Analysis of Interest Sensitivity at March 31, 2006 Within 6 months 1 to 3 > 3 Non-Sensitive Overnight 6 months to 1 year years years Balance Total ---------- ----------- ------------- ---------- ----------- ---------- ----------- (amounts in thousands) Assets Securities $ - $ 521,006 $ 349,506 $ 713,790 $ 682,103 $ 12,208 $2,278,613 Federal funds sold & Short-term investments 409,488 - 7,886 - - - 417,374 Loans 47,554 1,399,970 215,797 643,109 590,780 - 2,897,210 Other assets - - - - - 663,392 663,392 ---------- ----------- ------------- ---------- ----------- ---------- ----------- Total Assets $457,042 $1,920,976 $ 573,189 $1,356,899 $1,272,883 $ 675,600 $6,256,589 ========== =========== ============= ========== =========== ========== =========== Liabilities Interest bearing transaction deposits $ - $ 809,525 $ 376,577 $1,082,251 $ 185,177 $ - $2,453,530 Time deposits - 604,332 526,438 403,733 105,172 - 1,639,675 Non-interest bearing deposits - 392,431 146,642 491,047 195,623 - 1,225,744 Federal funds purchased 2,750 - - - - - 2,750 Borrowings 215,850 4 5 22 50,233 - 266,114 Other liabilities - - - - - 179,333 179,333 Shareholders' Equity - - - - - 489,443 489,443 ---------- ----------- ------------- ---------- ----------- ---------- ----------- Total Liabilities & Equity $218,600 $1,806,292 $1,049,662 $1,977,053 $ 536,206 $ 668,776 $6,256,589 ========== =========== ============= ========== =========== ========== =========== Interest sensitivity gap $238,442 $ 114,684 $ (476,473) $ (620,154) $ 736,677 $ 6,824 Cumulative interest rate sensitivity gap $238,442 $ 353,126 $ (123,347) $ (743,501) $ (6,824) $ - Cumulative interest rate sensitivity gap as a percentage of total earning assets 4.0% 6.0% (2.0)% (13.0)% 0.0% Analysis of Interest Sensitivity at December 31, 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 $ - $ 321,224 $ 396,374 $ 544,557 $ 685,504 $ 11,602 $1,959,261 Federal funds sold & Short-term investments 402,968 - 7,258 - - - 410,226 Loans 43,145 1,413,210 240,200 634,416 583,657 - 2,914,628 Other assets - - - - - 666,072 666,072 ---------- ----------- ------------- ---------- ----------- ---------- ----------- Total Assets $446,113 $1,734,434 $ 643,832 $1,178,973 $1,269,161 $677,674 $5,950,187 ========== =========== ============= ========== =========== ========== =========== Liabilities Interest bearing transaction deposits $ - $ 776,515 $ 309,737 $ 923,166 $ 155,417 $ - $2,164,835 Time deposits - 410,815 495,558 452,356 141,318 - 1,500,047 Non-interest bearing deposits - 425,444 159,876 533,352 206,266 - 1,324,938 Federal funds purchased 1,475 - - - - - 1,475 Borrowings 250,807 9 3 21 50,233 - 301,073 Other liabilities - - - - - 180,404 180,404 Shareholders' Equity - - - - - 477,415 477,415 ---------- ----------- ------------- ---------- ----------- ---------- ----------- Total Liabilities & Equity $252,282 $1,612,783 $ 965,174 $1,908,895 $ 553,234 $657,819 $5,950,187 ========== =========== ============= ========== =========== ========== =========== Interest sensitivity gap $193,831 $ 121,651 $(321,342) $ (729,922) $ 715,927 $ 19,855 Cumulative interest rate sensitivity gap $193,831 $ 315,482 $ (5,860) $ (735,782) $ (19,855) $ - Cumulative interest rate sensitivity gap as a percentage of total earning assets 4.0% 6.0% (0.1)% (14.0)% (0.4)%
We also control 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 March 31, 2006, regular savings and club accounts represented $401.5 million and money market accounts and now accounts totaled $1.3 billion. Excluding public fund accounts, this represents 51.3% of total interest bearing deposit accounts.
We have controlled the interest rate sensitivity of our 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 6 basis points as compared to the fourth quarter of 2005. Consumer time deposits have gone up 8 basis points during the quarter. Average interest-bearing transaction deposit balances were up 8.99%, while time deposits increased by 12.99%. During the quarter, the Federal Reserve increased rates by 50 basis points. Our loan-to-deposit ratio down 59% (down 7%), and the average earning asset yield improved 3 basis points. The impact of our growth is displayed in its static gap report as of March 31, 2006.
Certain assumptions in assessing interest rate risk were employed in preparing our data included in the preceding tables portraying our 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 our 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. We consider all of these factors in monitoring our exposure to interest rate risk.
Even though permissible under the Asset Liability Management Policy approved by the Board of Directors, we are 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 our monthly interest rate risk analysis.
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.
The foregoing disclosures related to our market risk should be read in conjunction with our audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2005 included in our 2005 Annual Report on Form 10-K.
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to timely alert them to material information relating to us (including our consolidated subsidiaries) required to be included in our Exchange Act filings.
Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three months period ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2005.
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 ------------------- ------------------ --------------------- --------------------- Jan. 1, 2006 - Jan. 31, 2006 - (2) $ - - 573,401 Feb. 1, 2006 - Feb. 28, 2006 - (3) - - 573,401 Mar. 1, 2006 - Mar. 31, 2006 17,000 (4) 45.1100 17,000 556,401 ------------------- ------------------ --------------------- Total as of Mar. 31, 2006 17,000 $ 32.3294 17,000 =================== ================== ===================== (1) The Company publicly announced its stock buy-back program on July 18, 2000. (2) 0 shares were purchased on the open market during January in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (3) 0 shares were purchased on the open market during February in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (4) 0 shares were purchased on the open market during March in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996.
Item 4. Submission of Matters to a Vote of Security Holders.A. The Company's Annual Meeting was held on March 30, 2006. B. The Directors elected at the Annual Meeting held on March 30, 2006 were: Votes Cast ---------- For Withheld --- -------- 1. Alton G. Bankston 28,880,366 34,972 2. James H. Horne 28,897,401 17,637 3. George A. Schloegel 28,848,877 66,491 4. Christine L. Smilek 28,896,761 52,534 Continuing Directors: 5. Frank E. Bertucci 6. Joseph F. Boardman, Jr. 7. Don P. Descant 8. James B. Estabrook, Jr. 9. Charles H. Johnson, Sr. 10. John H. Pace 11. Robert W. Roseberry 12. Leo W. Seal, Jr. C. KPMG was approved as the independent public accountants of the Company. For Against Abstained --- ------- --------- 28,818,293 52,534 44,256Item 6. Exhibits.(a) Exhibits:Exhibit Number Description- -------------- --------------------------------------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 By: /s/ George A. Schloegel ------------------------------------------- George A. Schloegel Vice-Chairman of the Board & Chief Executive Officer /s/ Carl J. Chaney ------------------------------------------- Carl J. Chaney Executive Vice President & Chief Financial Officer Date: May 9, 2006
Index to ExhibitsExhibit Number Description- -------------- --------------------------------------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.