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 June 30, 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 incorporation or organization) Number) 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. 32,561,186 common shares were outstanding as of July 31, 2006 for financial statement purposes.
HANCOCK HOLDING COMPANYINDEXPART I. FINANCIAL INFORMATION PAGE NUMBERITEM 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) -- June 30, 2006 and December 31, 2005 1 Condensed Consolidated Statements of Earnings (Unaudited) -- Three and Six Months Ended June 30, 2006 and 2005 2 Condensed Consolidated Statements of Common Stockholders' Equity (Unaudited) - Six Months Ended June 30, 2006 and 2005 3 Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) -- Three and Six Months Ended June 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows (Unaudited) -- Six Months Ended June 30, 2006 and 2005 5 Notes to Condensed Consolidated Financial Statements - (Unaudited) 6-19 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-34 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 34-37 ITEM 4. Controls and Procedures 37PART II. OTHER INFORMATIONITEM 1A. Risk Factors 38 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 ITEM 4. Submission of Matters to a Vote of Security Holders 39 ITEM 6. Exhibits 39SIGNATURES 39
Hancock Holding Company and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share and per share data)June 30, 2006 December 31, (Unaudited) 2005 ---------------------- ---------------------- ASSETS: Cash and due from banks (non-interest bearing) $ 209,880 $ 271,104 Interest-bearing time deposits with other banks 8,932 7,258 Federal funds sold 405,131 402,968 Securities available for sale, at fair value (amortized cost of $2,189,466 and $1,980,745) 2,133,792 1,959,261 Loans 3,058,619 3,000,618 Less: allowance for loan losses (70,960) (74,558) unearned income (14,555) (11,432) ---------------------- ---------------------- Loans, net 2,973,104 2,914,628 Property and equipment, net of accumulated depreciation of $61,816 and $58,005 106,146 79,386 Other real estate, net 1,528 1,833 Accrued interest receivable 33,442 35,046 Goodwill, net 59,060 61,418 Other intangible assets, net 11,831 10,781 Life insurance contracts 84,834 83,080 Reinsurance receivables 42,395 49,452 Deferred tax asset, net 54,375 40,380 Other assets 30,742 33,592 ---------------------- ---------------------- TOTAL ASSETS $ 6,155,192 $ 5,950,187 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Non-interest bearing demand $ 1,206,235 $ 1,324,938 Interest-bearing savings, NOW, money market and time 4,041,092 3,664,882 ---------------------- ---------------------- Total deposits 5,247,327 4,989,820 Federal funds purchased 4,350 1,475 Securities sold under agreements to repurchase 218,559 250,807 Long-term notes 265 50,266 Policy reserves and liabilities 98,012 105,368 Other liabilities 94,419 75,036 ---------------------- ---------------------- TOTAL LIABILITIES 5,662,932 5,472,772 COMMON STOCKHOLDERS' EQUITY: Common Stock-$3.33 par value per share; 75,000,000 shares authorized, 32,554,629 and 32,301,123 issued, respectively 108,407 107,563 Capital surplus 132,028 129,222 Retained earnings 295,484 265,039 Accumulated other comprehensive loss, net (43,659) (22,066) Unearned compensation - (2,343) ---------------------- ---------------------- TOTAL COMMON STOCKHOLDERS' EQUITY 492,260 477,415 ---------------------- ---------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $ 6,155,192 $ 5,950,187 ====================== ====================== See notes to unaudited condensed financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Earnings (Unaudited) (In thousands, except per share data)Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------------ 2006 2005 2006 2005 ----------- ------------ ------------- ------------- INTEREST INCOME: Loans, including fees $ 56,339 $ 48,245 $ 109,599 $ 93,825 Securities - taxable 24,451 13,706 47,487 26,073 Securities - tax exempt 1,659 1,778 3,352 3,569 Federal funds sold 3,915 283 7,501 995 Other investments 39 15 54 96 ----------- ------------ ------------- ------------- Total interest income 86,403 64,027 167,993 124,558 ----------- ------------ ------------- ------------- INTEREST EXPENSE: Deposits 26,888 16,106 49,909 31,139 Federal funds purchased and securities sold under agreements to repurchase 1,593 1,239 3,252 1,912 Long-term notes and other interest expense 155 616 747 1,198 ----------- ------------ ------------- ------------- Total interest expense 28,636 17,961 53,908 34,249 ----------- ------------ ------------- ------------- NET INTEREST INCOME 57,767 46,066 114,085 90,309 Provision for (recovery of) loan losses, net - 1,891 (705) 4,651 NET INTEREST INCOME AFTER PROVISION FOR ----------- ------------ ------------- ------------- (RECOVERY OF) LOAN LOSSES 57,767 44,175 114,790 85,658 ----------- ------------ ------------- ------------- NON-INTEREST INCOME Service charges on deposit accounts 9,223 10,459 17,107 19,949 Other service charges, commissions and fees 12,732 10,133 25,235 20,145 Securities gains (losses), net - (15) 118 (8) Other income 3,987 4,103 8,490 7,027 ----------- ------------ ------------- ------------- Total non-interest income 25,942 24,680 50,950 47,113 ----------- ------------ ------------- ------------- NON-INTEREST EXPENSE Salaries and employee benefits 26,400 22,925 52,602 45,304 Net occupancy expense 3,474 2,576 7,134 5,071 Equipment rentals, depreciation and maintenance 2,816 2,366 5,484 4,724 Amortization of intangibles 507 578 1,181 1,162 Other expense 17,975 14,059 33,937 27,887 ----------- ------------ ------------- ------------- Total non-interest expense 51,172 42,504 100,338 84,148 ----------- ------------ ------------- ------------- EARNINGS BEFORE INCOME TAXES 32,537 26,351 65,402 48,623 Income tax expense 10,539 8,256 21,393 15,091 ----------- ------------ ------------- ------------- NET EARNINGS $ 21,998 $ 18,095 $ 44,009 $ 33,532 =========== ============ ============= ============= BASIC EARNINGS PER SHARE $ 0.68 $ 0.56 $ 1.36 $ 1.03 =========== ============ ============= ============= DILUTED EARNINGS PER SHARE $ 0.66 $ 0.55 $ 1.32 $ 1.02 =========== ============ ============= ============= DIVIDENDS PAID PER SHARE $ 0.220 $ 0.165 $ 0.415 $ 0.330 =========== ============ ============= ============= WEIGHTED AVG. SHARES OUTSTANDING-BASIC 32,531 32,396 32,462 32,429 =========== ============ ============= ============= WEIGHTED AVG. SHARES OUTSTANDING-DILUTED 33,322 32,928 33,237 32,973 =========== ============ ============= ============= See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (In thousands, except share and per share data)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 33,532 Cash dividends - $0.33 per common share (10,759) Change in fair value of securities available for sale, net of taxes (573) Restricted stock awards granted 1,456 (1,456) Restricted stock awards vested 37,426 125 (125) Restricted stock awards forfeited (84) 84 Amortization of compensation element of restricted stock 297 Repurchase/retirement of common stock (233,921) (779) (6,556) Shares issued for options exercised, net of tendered shares 66,413 221 475 ---------------- ------------ ------------ ----------- ---------------- ---------------- Balance, June 30, 2005 32,309,620 $ 107,591 $ 130,071 $ 257,196 $ (11,694) $ (2,724) ================ ============ ============ =========== ================ ================ Balance, January 1, 2006 32,301,123 $ 107,563 $ 129,222 $ 265,039 $ (22,066) $ (2,343) Net earnings 44,009 Cash dividends - $0.415 per common share (13,564) Change in fair value of securities available for sale, net of taxes (21,593) Reclass of unearned compensation due to adoption of SFAS No. 123R (2,343) 2,343 Amortization of compensation element of restricted stock 987 Repurchase/retirement of common stock (39,393) (131) (4,238) Shares issued for options exercised 345,442 1,150 9,243 Shares tendered for options exercised (52,543) (175) (2,185) Amortization of compensation element of stock options 1,342 ---------------- ------------ ------------ ----------- ---------------- ---------------- Balance, June 30, 2006 32,554,629 $ 108,407 $ 132,028 $ 295,484 $ (43,659) $ - ================ ============ ============ =========== ================ ================ 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 June 30, Six Months Ended June 30, ----------------------------- ---------------------------------- 2006 2005 2006 2005 ------------- ------------- ---------------- --------------- Net earnings $ 21,998 $ 18,095 $ 44,009 $ 33,532 Other comprehensive earnings (loss) (net of income taxes): Change in fair value of securities available for sale, net of taxes $8,075 and ($7,277), $12,617 and ($311), respectively (13,867) 13,514 (21,516) (578) Reclassification adjustments for gains included in net earnings, net of taxes of $0 and ($5), $45 and ($3), respectively - 10 (77) 5 ------------- ------------- ---------------- --------------- Total Comprehensive Earnings $ 8,131 $ 31,619 $ 22,416 $ 32,959 ============= ============= ================ =============== See notes to unaudited condensed consolidated financial statements
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands, except per share data)Six Months Ended June 30, 2006 2005 ----------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 44,009 $ 33,532 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,759 5,378 Provision for (recovery of) loan losses, net (705) 4,651 Recovery of losses on other real estate owned, net (132) (8) Tax benefit from exercise of stock options (524) - Deferred tax benefit (1,397) (1,149) Increase in cash surrender value of life insurance contracts (1,754) (1,705) (Gain) loss on sales of securities available for sale, net (118) 8 Gain on sales of real estate owned, net (14) - (Accretion) amortization of securities premium/discount, net (6,263) 1,576 Amortization of mortgage servicing rights 289 438 Amortization of intangible assets 1,181 1,162 Amortization of compensation element of restricted stock 987 297 Amortization of compensation element of stock options 1,342 - (Increase) in accrued interest receivable 1,604 (315) Increase in accrued expenses 18,632 1,522 Increase (decrease) in other liabilities (600) 1,481 Increase (decrease) in interest payable 1,351 (406) Increase (decrease) in policy reserves and liabilities (7,356) 1,243 Decrease in reinsurance receivable 7,057 5,216 (Increase) decrease in other assets 3,241 (5,844) Other, net 25 (686) ----------------- ---------------- Net cash provided by operating activities 65,614 46,391 ----------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) in interest-bearing time deposits (1,674) (286) Proceeds from maturities, calls or prepayments of securities held to maturity - 11,887 Proceeds from sales of securities available for sale 9,954 151,779 Proceeds from maturities of securities available for sale 421,946 300,909 Purchases of securities held to maturity - (4,819) Purchases of securities available for sale (634,240) (545,768) Net (increase) decrease in federal funds sold (2,163) 66,094 Net increase in loans (58,614) (116,416) Purchases of property, equipment and software, net (32,098) (9,734) Proceeds from sales of other real estate 1,293 2,062 ----------------- ---------------- Net cash used in investing activities (295,596) (144,292) ----------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 257,507 55,068 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (29,373) 49,574 Repayments of long-term notes (50,001) (1) Dividends paid (13,564) (10,759) Proceeds from exercise of stock options 5,646 - Repurchase/retirement of common stock (1,981) (7,722) Excess tax benefit from exercise of stock options 524 - Other stock transactions, net - 918 ----------------- ---------------- Net cash provided by financing activities 168,758 87,078 ----------------- ---------------- NET DECREASE IN CASH AND DUE FROM BANKS (61,224) (10,823) CASH AND DUE FROM BANKS, BEGINNING 271,104 155,797 ----------------- ---------------- CASH AND DUE FROM BANKS, ENDING $ 209,880 $ 144,974 ================= ================ SUPPLEMENTAL INFORMATION: Income taxes paid $ 2,103 $ 13,160 Interest paid, net of amounts capitalized 52,558 34,656 Restricted stock issued to employees of Hancock 2,460 1,456 SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Transfers from loans to other real estate $ 842 $ 1,511 Financed sale of foreclosed property 253 583 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 Sheets at June 30, 2006 and December 31, 2005, the Company’s Condensed Consolidated Statement of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 and the Company’s Condensed Consolidated Statements of Earnings and Condensed Consolidated Statements of Comprehensive Earnings for the three and six months ended June 30, 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 six months ended June 30, 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 three and six months ended June 30, 2006 is an increase in compensation expense of $727,000 and $1,567,100, respectively, or a reduction in diluted earnings per share of $0.02 and $0.05, respectively.
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.
In June 2006, the FASB published Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The effective date of this interpretation is January 1, 2007, the first fiscal year beginning after December 15, 2006. The Company does not believe the adoption of FIN 48 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 June 30, Six Months Ended June 30, ---------------------------------- ---------------------------------- 2006 2005 2006 2005 ---------------- ---------------- ---------------- ---------------- Balance of allowance for loan losses at beginning of period $ 73,961 $ 41,182 $ 74,558 $ 40,682 Provision for (recovery of) loan losses, net - 1,891 (705) 4,651 Loans charged-off: Commercial, Real Estate & Mortgage 1,082 851 1,685 1,950 Direct & Indirect Consumer 1,500 1,389 3,438 3,036 Finance Company 417 577 858 1,096 Demand Deposit Accounts 1,743 722 2,683 1,483 ---------------- ---------------- ---------------- ---------------- Total charge-offs 4,742 3,539 8,664 7,565 ---------------- ---------------- ---------------- ---------------- Recoveries of loans previously charged-off: Commercial, Real Estate & Mortgage 435 654 2,624 915 Direct & Indirect Consumer 594 507 1,046 1,056 Finance Company 136 112 329 250 Demand Deposit Accounts 576 575 1,771 1,393 ---------------- ---------------- ---------------- ---------------- Total recoveries 1,741 1,848 5,771 3,614 ---------------- ---------------- ---------------- ---------------- Net charge-offs (recoveries) 3,001 1,691 2,893 3,951 ---------------- ---------------- ---------------- ---------------- Balance of allowance for loan losses at end of period $ 70,960 $ 41,382 $ 70,960 $ 41,382 ================ ================ ================ ================
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 June 30, Six Months Ended June 30, 2006 2005 2006 2005 ------------- -------------- ------------- ------------- Ratios : Net charge-offs to average net loans (annualized) 0.40% 0.24% 0.20% 0.28% Net charge-offs to period-end net loans (annualized) 0.39% 0.24% 0.19% 0.28% Allowance for loan losses to average net loans 2.37% 1.46% 2.38% 1.47% Allowance for loan losses to period-end net loans 2.33% 1.45% 2.33% 1.45% Net charge-offs to loan loss allowance 4.23% 4.09% 4.08% 9.55% Provision for loan losses to net charge-offs 0.00% 111.83% -24.39% 117.72%
As of June 30, 2006 and December 31, 2005, the Company had investments in higher-risk graded loans totaling $100.3 million and $112.1 million, respectively. For higher-risk graded loans in the portfolio, the Company determines estimated amounts of loan loss based on several factors, including historical loss experience, management’s judgment of economic conditions and the resulting impact on higher-risk graded loans, the financial capacity of the borrower, secondary sources of repayment (including collateral) and regulatory guidelines. The Company’s allowance for loan losses includes allocations of $13.6 million and $17.1 million associated with these loans as of June 30, 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 six months ended June 30, 2006 and June 30, 2005 were $18.3 million and $11.8 million, respectively. The amount of interest recorded on impaired loans as well as the interest that was not recognized on nonaccrual loans would not have had a material effect on earnings for the six months ended June 30, 2006 and June 30, 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 June 30, 2006. The carrying amount of goodwill was $59.1 million as of June 30, 2006 and $61.4 million as of December 31, 2005.
During the three months ended June 30, 2006, the Company recorded a $2.4 million preliminary reallocation of goodwill to other intangible assets related to the acquisition of J. Everett Eaves, Inc. The reallocation was based on a preliminary third-party study. The final reallocation will be made in the third quarter of 2006, and is not anticipated to be material.
The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated (amounts in thousands):
As of As of June 30, 2006 December 31, 2005 -------------------------------------- -------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ----------------- ------------------ ----------------- ----------------- Amortizable intangible assets: Core deposit intangibles $ 14,137 $ 6,607 $ 14,137 $ 5,924 Value of insurance business acquired 3,802 1,250 1,673 833 Non-compete agreements 652 157 228 76 Mortgage servicing rights 4,045 2,789 4,292 2,716 ----------------- ------------------ ----------------- ----------------- Total $ 22,636 $ 10,803 $ 20,330 $ 9,549 ================= ================== ================= ================= Three months ended June 30, Six months ended June 30, 2006 2005 2006 2005 ----------------- ------------------ ----------------- ----------------- Aggregate amortization expense for: Core deposit intangibles $ 342 $ 413 $ 683 $ 832 Value of insurance businesses acquired 138 165 418 330 Non-compete agreements 27 - 81 - Mortgage servicing rights 141 212 289 438 ----------------- ------------------ ----------------- ----------------- Total $ 648 $ 790 $ 1,471 $ 1,600 ================= ================== ================= =================
Amortization of the core deposit intangibles is estimated to be approximately $700,000 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 $400,000 in 2006, $679,000 in 2007, $529,000 in 2008, $431,000 in 2009, $327,000 in 2010 and the remainder of $681,000 thereafter. Amortization of servicing rights is estimated to be approximately $359,000 in 2006, $374,000 in 2007, $244,000 in 2008, $169,000 in 2009 and $110,000 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 June 30, Six Months Ended June 30, 2006 2005 2006 2005 -------------- --------------- --------------- --------------- Net Earnings - used in computation of earnings per share $ 21,998 $ 18,095 $ 44,009 $ 33,532 ============== =============== =============== =============== Weighted average number of shares outstanding - used in computation of basic earnings per share 32,531 32,396 32,462 32,429 Effect of dilutive securities Stock options and restricted stock awards 791 532 775 544 -------------- --------------- --------------- --------------- Weighted average number of shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per share 33,322 32,928 33,237 32,973 ============== =============== =============== ===============
At June 30, 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 Statements of Income for the three and six months ended June 30, 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 SFAS No. 123(R), Share-Based Payment, using the modified-prospective method. Under this method, compensation cost recognized in the three and six months ended June 30, 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.
For the three and six months ended June 30, 2006 and June 30, 2005, total compensation cost for share-based compensation recognized in income was $1,075,000, $2,329,000, $147,000 and $297,000, respectively. The total recognized tax benefit related to the share-based compensation was $348,000, $761,000, $46,000 and $92,000, respectively, for the three and six months ended June 30, 2006 and June 30, 2005. There was no compensation cost capitalized as part of the cost of an asset.
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 three and six months ended June 30, 2006, are $1,075,000, $727,000, $2,329,000 and $1,567,000 lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the three and six months ended June 30, 2006 would have been $0.66, $0.64, $1.31 and $1.27, respectively, if the Company had not adopted SFAS No. 123(R), compared to reported basic and diluted earnings per share of $0.68, $0.66, $1.36 and $1.32, 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 six months ended June 30, 2006, there was $524,000 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 three and six months ended June 30, 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 Six Months Ended Ended June 30, 2005 June 30, 2005 ------------------- ------------------ Net income, as reported $ 18,095 $ 33,532 Add: stock-based employee compensation expense included in reported net income, net of related tax effects 101 205 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (719) (1,441) ------------------- ------------------ Pro forma net income $ 17,477 $ 32,296 =================== ================== Earnings per share Basic - as reported $ 0.56 $ 1.03 =================== ================== Basic - pro forma $ 0.54 $ 1.00 =================== ================== Diluted - as reported $ 0.55 $ 1.02 =================== ================== Diluted - pro forma $ 0.53 $ 0.98 =================== ==================
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. The Company’s policy is to issue new shares upon share option exercise and issue treasury shares upon restricted stock award vesting.
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.
Six Months Ended June 30, 2006 June 30, 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 rates 4.30% - 4.54% 4.00%
A summary of option activity under the plans for the six months ended June 30, 2006, and changes during the six months 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 9.6 Exercised (323,231) $ 21.23 5.3 $ 7,605,079 Forfeited or expired (21,677) $ 22.94 4.9 ----------------- Outstanding at June 30, 2006 1,618,914 $ 27.06 7.0 $ 46,844,820 ================= ================== ================= ================= Exercisable at June 30, 2006 1,276,971 $ 23.16 6.3 $ 41,941,014 ================= ================== ================= ================= Share options expected to vest 309,049 $ 41.66 9.6 $ 4,431,128 ================= ================== ================= =================
The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $17.96 and $13.43, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $7.6 million and $1.0 million, respectively.
A summary of the status of the Company’s nonvested shares as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:
Weighted- Average Number of Grant-Date Shares Fair Value ($) ----------------- ----------------- Nonvested at January 1, 2006 132,635 $ 26.77 Granted 406,163 $ 21.40 Vested - $ - Forfeited (8,492) $ 22.93 ----------------- Nonvested at June 30, 2006 530,306 $ 22.72 =================
As of June 30, 2006, there was $8.3 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 4.1 years. The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $0 and $1.6 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 and six months ended June 30, 2006 and 2005 (amounts in thousands):
Pension Benefits Other Post-retirement Benefits ------------------------------------- ------------------------------------- Three Months Ended June 30, 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 Pension Benefits Other Post-retirement Benefits ------------------------------------- ------------------------------------- Six Months Ended June 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- ----------------- Service cost $ 1,151,868 $ 1,076,570 $ 157,500 $ 155,000 Interest cost 1,749,520 1,697,538 197,000 194,000 Expected return on plan assets (1,933,680) (1,705,194) - - Amortization of prior service cost - 13,062 (26,500) (26,500) Amortization of net loss 531,054 499,530 58,000 44,000 Amortization of transition obligation - - 2,500 2,500 Net periodic benefit cost $ 1,498,762 $ 1,581,506 $ 388,500 $ 369,000
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 six months of 2006, the Company contributed approximately $2.0 million to its pension plan and approximately $262,000 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. and subsidiaries, Hancock Insurance Agency, Inc. and subsidiaries, 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, June 30, 2006 MS LA FL Other Eliminations Consolidated ------------ ------------ ----------- ------------ ------------ -------------- Interest income $ 49,218 $ 33,980 $ 1,227 $ 5,209 $ (3,231) $ 86,403 Interest expense 17,045 12,760 536 1,421 (3,126) 28,636 ------------ ------------ ----------- ------------ ------------ -------------- Net interest income 32,173 21,220 691 3,788 (105) 57,767 Provision for loan losses - - - - - - Non-interest income 11,370 7,881 107 6,622 (38) 25,942 Depreciation and amortization 1,686 648 76 111 - 2,521 Other non-interest expense 23,166 16,330 1,206 7,959 (10) 48,651 ------------ ------------ ----------- ------------ ------------ -------------- Earnings before - income taxes 18,691 12,123 (484) 2,340 (133) 32,537 Income tax expense (benefit) 6,175 3,659 (196) 856 45 10,539 ------------ ------------ ----------- ------------ ------------ -------------- Net earnings (loss) $ 12,516 $ 8,464 $ (288) $ 1,484 $ (178) $ 21,998 ============ ============ =========== ============ ============ ============== Total assets $ 3,647,836 $2,337,408 $ 122,508 $ 710,125 $(662,685) $ 6,155,192 ============ ============ =========== ============ ============ ============== Total interest income from affiliates $ 2,910 $ 70 $ 145 $ 106 $ (3,231) $ - Total interest income from external customers $ 46,308 $ 33,910 $ 1,082 $ 5,103 $ - $ 86,403 Amortization & accretion of securities $ 2,485 $ 350 $ (14) $ (18) $ - $ 2,803 Three Months Ended, June 30, 2005 MS LA FL Other Eliminations Consolidated ------------ ------------ ----------- ------------ ------------ -------------- Interest income $ 34,176 $ 26,439 $ 1,651 $ 4,209 $ (2,448) $ 64,027 Interest expense 11,195 7,834 421 880 (2,369) 17,961 ------------ ------------ ----------- ------------ ------------ -------------- Net interest income 22,981 18,605 1,230 3,329 (79) 46,066 Provision for loan losses 26 1,283 118 464 - 1,891 Non-interest income 11,234 7,895 131 5,443 (23) 24,680 Depreciation and amortization 1,463 642 104 125 - 2,334 Other non-interest expense 18,887 13,908 1,049 6,444 (118) 40,170 ------------ ------------ ----------- ------------ ------------ -------------- Earnings (loss) before income taxes 13,839 10,667 90 1,739 16 26,351 Income tax expense 4,417 3,237 35 531 36 8,256 ------------ ------------ ----------- ------------ ------------ -------------- Net earnings $ 9,422 $ 7,430 $ 55 $ 1,208 $ (20) $ 18,095 ============ ============ =========== ============ ============ ============== Total assets $ 2,717,452 $2,010,010 $ 127,536 $ 713,367 $(779,300) $ 4,789,065 ============ ============ =========== ============ ============ ============== Total interest income from affiliates $ 2,324 $ - $ 45 $ 79 $ (2,448) $ - Total interest income from external customers $ 31,852 $ 26,439 $ 1,606 $ 4,130 $ - $ 64,027 Amortization & accretion of securities $ 405 $ 355 $ 20 $ 16 $ - $ 796
Six Months Ended, June 30, 2006 MS LA FL Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------ ------------- Interest income $ 94,931 $ 65,023 $ 3,589 $ 9,676 $ (5,226) $ 167,993 Interest expense 32,167 23,088 1,037 2,643 (5,027) 53,908 ------------ ------------ ----------- ----------- ------------ ------------- Net interest income 62,764 41,935 2,552 7,033 (199) 114,085 Provision for (recovery of) loan losses (1,412) 519 43 145 - (705) Non-interest income 22,250 15,372 219 13,186 (77) 50,950 Depreciation and amortization 3,126 1,257 149 227 - 4,759 Other non-interest expense 45,135 31,601 2,312 16,555 (24) 95,579 ------------ ------------ ----------- ----------- ------------ ------------- Earnings before - income taxes 38,165 23,930 267 3,292 (252) 65,402 Income tax expense 12,819 7,219 78 1,277 - 21,393 ------------ ------------ ----------- ----------- ------------ ------------- Net earnings $ 25,346 $ 16,711 $ 189 $ 2,015 $ (252) $ 44,009 ============ ============ =========== =========== ============ ============= Total assets $ 3,647,836 $2,337,408 $ 122,508 $ 710,125 $(662,685) $ 6,155,192 ============ ============ =========== =========== ============ ============= Total interest income from affiliates $ 4,828 $ 6 $ 193 $ 199 $ (5,226) $ - Total interest income from external customers $ 90,103 $ 65,017 $ 3,396 $ 9,477 $ - $ 167,993 Amortization & accretion of securities $ 5,663 $ 660 $ (28) $ (32) $ - $ 6,263 Six Months Ended, June 30, 2005 MS LA FL Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------ ------------- Interest income $ 66,150 $ 51,609 $ 2,842 $ 8,154 $ (4,197) $ 124,558 Interest expense 21,317 14,542 748 1,681 (4,039) 34,249 ------------ ------------ ----------- ----------- ------------ ------------- Net interest income 44,833 37,067 2,094 6,473 (158) 90,309 Provision for loan losses 762 2,826 217 846 - 4,651 Non-interest income 20,686 15,515 228 10,787 (103) 47,113 Depreciation and amortization 2,827 1,243 245 252 - 4,567 Other non-interest expense 37,129 27,140 2,241 13,213 (142) 79,581 ------------ ------------ ----------- ----------- ------------ ------------- Earnings (loss) before income taxes 24,801 21,373 (381) 2,949 (119) 48,623 Income tax expense (benefit) 7,768 6,485 (145) 968 15 15,091 ------------ ------------ ----------- ----------- ------------ ------------- Net earnings (loss) $ 17,033 $ 14,888 $ (236) $ 1,981 $ (134) $ 33,532 ============ ============ =========== =========== ============ ============= Total assets $ 2,717,452 $2,010,010 $ 127,536 $ 713,367 $(779,300) $ 4,789,065 ============ ============ =========== =========== ============ ============= Total interest income from affiliates $ 3,956 $ - $ 83 $ 158 $ (4,197) $ - Total interest income from external customers $ 62,194 $ 51,609 $ 2,759 $ 7,996 $ - $ 124,558 Amortization & accretion of securities $ 767 $ 739 $ 40 $ 30 $ - $ 1,576
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 December 31, 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 140 banking and financial services offices and more than 130 automated teller machines (ATMs) in the states of Mississippi, Louisiana and Florida through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA) and Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL). Hancock Bank MS also operates a loan production office in the state of Alabama. Hancock Bank MS, Hancock Bank LA, and Hancock Bank FL are referred to collectively as the “Banks.”
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. 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 June 30, 2006, we had total assets of $6.2 billion and employed on a full-time equivalent basis 1,211 persons in Mississippi, 531 persons in Louisiana and 35 persons in Florida.
(amounts in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 ------------- -------------- ------------- --------------Per Common Share DataEarnings per share: Basic $0.68 $0.56 $1.36 $1.03 Diluted $0.66 $0.55 $1.32 $1.02 Cash dividends per share $0.220 $0.165 $0.415 $0.330 Book value per share (period end) $15.12 $14.87 $15.12 $14.87 Weighted average number of shares: Basic 32,531 32,396 32,462 32,429 Diluted (1) 33,322 32,928 33,237 32,973 Period end number of shares 32,555 32,310 32,555 32,310 Market data: High closing price $57.19 $34.87 $57.19 $34.87 Low closing price $44.02 $28.25 $37.75 $28.25 Period end closing price $56.00 $34.40 $56.00 $34.40 Trading volume 8,737 3,527 12,528 6,814 (1) There were 53,359 and 89,894 anti-dilutive shares outstanding for the three and six months ended June 30, 2006, respectively. There were no anti-dilutive shares outstanding for the three and six months ended June 30, 2005.
Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 -------------- ------------- ------------- -------------Performance Ratios (dollar amounts in thousands) Return on average assets 1.45% 1.52% 1.47% 1.42% Return on average common equity 17.89% 15.28% 18.11% 14.31% Earning asset yield (Tax Equivalent ("TE")) 6.32% 6.08% 6.25% 5.99% Total cost of funds 2.05% 1.66% 1.96% 1.61% Net interest margin (TE) 4.27% 4.42% 4.28% 4.39% Common equity (period-end) as a percent of total assets (period-end) 8.00% 10.03% 8.00% 10.03% Leverage ratio (period end) 7.59% 8.83% 7.59% 8.83% FTE Headcount 1,777 1,813 1,777 1,813Asset Quality InformationNon-accrual loans $7,237 $8,052 $7,237 $8,052 Foreclosed assets $1,606 $2,567 $1,606 $2,567 Total non-performing assets $8,843 $10,619 $8,843 $10,619 Non-performing assets as a percent of loans and foreclosed assets 0.29% 0.35% 0.29% 0.35% Accruing loans 90 days past due $6,681 $3,914 $6,681 $3,914 Accruing loans 90 days past due as a percent of loans 0.22% 0.14% 0.22% 0.14% Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets 0.51% 0.51% 0.51% 0.51% Net charge-offs $3,001 $1,691 $2,893 $3,951 Net charge-offs as a percent of average loans 0.40% 0.24% 0.20% 0.28% Allowance for loan losses $70,960 $41,382 $70,960 $41,382 Allowance for loan losses as a percent of period end loans 2.33% 1.45% 2.33% 1.45% Allowance for loan losses to NPAs + accruing loans 90 days past due 457.10% 284.75% 457.10% 284.75% Provision for loan losses - $1,891 -$705 $4,651 Provision for loan losses to net charge-offs - 111.83% -24.39% 117.72%Average Balance SheetTotal loans $2,994,191 $2,835,506 $2,982,391 $2,806,031 Securities 2,273,012 1,449,554 2,213,317 1,400,303 Short-term investments 338,443 47,260 337,221 89,685 -------------- ------------- ------------- ------------- Earning assets 5,605,646 4,332,320 5,532,930 4,296,020 Allowance for loan losses (73,706) (41,185) (74,066) (40,938) Other assets 570,497 490,668 584,444 501,357 -------------- ------------- ------------- ------------- Total assets $6,102,438 $4,781,803 $6,043,308 $4,756,440 ============== ============= ============= ============= Non-interest bearing deposits $1,177,756 $730,570 $1,189,407 $715,938 Interest bearing transaction deposits 1,696,598 1,319,606 1,705,506 1,325,845 Interest bearing public fund deposits 837,751 683,665 775,418 697,649 Time deposits 1,504,343 1,116,973 1,455,925 1,103,246 -------------- ------------- ------------- ------------- Total interest bearing deposits 4,038,692 3,120,245 3,936,850 3,126,740 -------------- ------------- ------------- ------------- Total deposits 5,216,448 3,850,815 5,126,257 3,842,679 Other borrowed funds 210,388 304,637 248,849 288,147 Other liabilities 182,453 151,217 178,244 152,999 Common stockholders' equity 493,149 475,134 489,958 472,615 -------------- ------------- ------------- ------------- Total liabilities & common stockholders' equity $6,102,438 $4,781,803 $6,043,308 $4,756,440 ============== ============= ============= =============
Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 ------------- -------------- ------------- --------------Period end Balance Sheet (dollar amounts in thousands) Commercial/real estate loans $1,727,236 $1,539,576 $1,727,236 $1,539,576 Mortgage loans 423,001 424,725 423,001 424,725 Direct consumer loans 470,433 504,119 470,433 504,119 Indirect consumer loans 348,342 329,535 348,342 329,535 Finance company loans 75,053 63,450 75,053 63,450 ------------- -------------- ------------- -------------- Total loans 3,044,065 2,861,405 3,044,065 2,861,405 Securities 2,133,792 1,387,477 2,133,792 1,387,477 Short-term investments 414,062 84,453 414,062 84,453 ------------- -------------- ------------- -------------- Earning assets 5,591,919 4,333,334 5,591,919 4,333,334 Allowance for loan losses (70,960) (41,382) (70,960) (41,382) Other assets 634,233 497,113 634,233 497,113 ------------- -------------- ------------- -------------- Total assets $6,155,192 $4,789,065 $6,155,192 $4,789,065 ============= ============== ============= ============== Non-interest bearing deposits $1,206,235 $728,001 $1,206,235 $728,001 Interest bearing transaction deposits 1,640,552 1,303,152 1,640,552 1,303,152 Interest bearing public funds deposits 853,566 702,099 853,566 702,099 Time deposits 1,546,973 1,119,761 1,546,973 1,119,761 ------------- -------------- ------------- -------------- Total interest bearing deposits 4,041,092 3,125,012 4,041,092 3,125,012 ------------- -------------- ------------- -------------- Total deposits 5,247,327 3,853,013 5,247,327 3,853,013 Other borrowed funds 227,793 301,004 227,793 301,004 Other liabilities 187,812 154,608 187,812 154,608 Common stockholders' equity 492,260 480,440 492,260 480,440 ------------- -------------- ------------- -------------- Total liabilities & common stockholders' equity $6,155,192 $4,789,065 $6,155,192 $4,789,065 ============= ============== ============= ==============Net Charge-Off InformationNet charge-offs (recoveries): Commercial/real estate loans $620 $202 ($1,149) $972 Mortgage loans 28 (5) 209 63 Direct consumer loans 1,681 491 2,260 992 Indirect consumer loans 391 538 1,044 1,078 Finance company loans 281 465 529 846 ------------- -------------- ------------- -------------- Total net charge-offs $3,001 $1,691 $2,893 $3,951 ============= ============== ============= ============== Net charge-offs to average loans: Commercial/real estate loans 0.15% 0.05% -0.14% 0.13% Mortgage loans 0.03% 0.00% 0.10% 0.03% Direct consumer loans 1.45% 0.39% 0.98% 0.39% Indirect consumer loans 0.45% 0.67% 0.60% 0.68% Finance company loans 1.58% 3.00% 1.57% 2.78% Total net charge-offs to average net loans 0.40% 0.24% 0.20% 0.28%
Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 ------------- -------------- ------------- --------------Average Balance Sheet Composition (dollar amounts in thousands) Percentage of earning assets/funding sources: Loans 53.41% 65.45% 53.90% 65.32% Securities 40.55% 33.46% 40.00% 32.60% Short-term investments 6.04% 1.09% 6.09% 2.09% ------------- -------------- ------------- -------------- Earning assets 100.00% 100.00% 100.00% 100.00% ============= ============== ============= ============== Non-interest bearing deposits 21.01% 16.86% 21.50% 16.67% Interest bearing transaction deposits 30.27% 30.46% 30.82% 30.86% Interest bearing public funds deposits 14.94% 15.78% 14.01% 16.24% Time deposits 26.84% 25.78% 26.31% 25.68% ------------- -------------- ------------- -------------- Total deposits 93.06% 88.89% 92.64% 89.45% Other borrowed funds 3.75% 7.03% 4.50% 6.71% Other net interest-free funding sources 3.19% 4.08% 2.85% 3.85% ------------- -------------- ------------- -------------- Total funding sources 100.00% 100.00% 100.00% 100.00% ============= ============== ============= ============== Loan mix: Commercial/real estate loans 56.77% 53.72% 56.58% 53.72% Mortgage loans 13.71% 14.72% 13.76% 14.69% Direct consumer loans 15.50% 17.97% 15.65% 18.06% Indirect consumer loans 11.64% 11.39% 11.73% 11.35% Finance company loans 2.39% 2.19% 2.28% 2.19% ------------- -------------- ------------- -------------- Total loans 100.00% 100.00% 100.00% 100.00% ============= ============== ============= ============== Average dollars Loans $2,994,191 $2,835,506 $2,982,391 $2,806,031 Securities 2,273,012 1,449,554 2,213,317 1,400,303 Short-term investments 338,443 47,260 337,221 89,685 ------------- -------------- ------------- -------------- Earning assets $5,605,646 $4,332,320 $5,532,930 $4,296,020 ============= ============== ============= ============== Non-interest bearing deposits $1,177,756 $730,570 $1,189,407 $715,938 Interest bearing transaction deposits 1,696,598 1,319,606 1,705,506 1,325,845 Interest bearing public funds deposits 837,751 683,665 775,418 697,649 Time deposits 1,504,343 1,116,973 1,455,925 1,103,246 ------------- -------------- ------------- -------------- Total deposits 5,216,448 3,850,815 5,126,257 3,842,679 Other borrowed funds 210,388 304,637 248,849 288,147 Other net interest-free funding sources 178,810 176,868 157,824 165,194 ------------- -------------- ------------- -------------- Total funding sources 5,605,646 $4,332,320 5,532,930 $4,296,020 ============= ============== ============= ============== Loans: Commercial/real estate loans $1,699,768 $1,523,348 $1,687,306 $1,507,267 Mortgage loans 410,522 417,307 410,274 412,310 Direct consumer loans 463,977 509,628 466,888 506,681 Indirect consumer loans 348,463 323,100 349,926 318,347 Finance company loans 71,461 62,124 67,997 61,426 ------------- -------------- ------------- -------------- Total average loans $2,994,191 $2,835,506 $2,982,391 $2,806,031 ============= ============== ============= ==============
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 June 30, 2006, March 31, 2006 and December 31, 2005 compare certain assets and liabilities to total deposits or total assets:
June 30, March 31, December 31, 2006 2006 2005 --------------- -------------- --------------- Total securities to total deposits 40.66% 42.84% 39.27% Total loans (net of unearned income) to total deposits 58.01% 55.86% 59.91% Interest-earning assets to total assets 90.85% 90.58% 90.06% Interest-bearing deposits to total deposits 77.01% 76.96% 73.45%
We continue to maintain an adequate capital position. The ratios as of June 30, 2006, March 31, 2006 and December 31, 2005 are as follows:
June 30, March 31, December 31, 2006 2006 2005 ----------------- ----------------- ----------------- Common equity (period-end) as a percent of total assets (period-end) 8.00% 8.13% 8.72% Regulatory ratios: Total capital to risk-weighted assets (1) 11.95% 12.88% 12.73% Tier 1 capital to risk-weighted assets (2) 10.72% 11.60% 11.47% Leverage capital to average total assets (3) 7.59% 7.45% 7.85% (1) 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. (2) 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. (3) 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.
Net income for the second quarter of 2006 totaled $22.0 million, compared to $18.1 million reported for the second quarter of 2005, an increase of $3.9 million, or 22%. Compared to the first quarter of 2006, second quarter net income was down $13,000, or .1%, with diluted earnings per share down $0.01.
Net income for the first six months of 2006 was $44.0 million, an increase of $10.5 million, or 31% compared to the first six months of 2005. Diluted earnings per share for the first six months of 2006 were $1.32, an increase of $.30, or 30%, from the first six months of 2005.
The following is selected information for quarterly and year-to-date comparison:
Three Months Ended June 30, Six Months Ended June 30, 2006 2005 2006 2005 --------------- -------------- -------------- --------------- Results of Operations: Return on average assets 1.45 % 1.52 % 1.47 % 1.42 % Return on average equity 17.89 % 15.28 % 18.11 % 14.31 % Net Interest Income: Yield on average interest-earning assets (TE) 6.32 % 6.08 % 6.25 % 5.99 % Cost of average interest-bearing funds 2.70 % 2.10 % 2.60 % 2.02 % --------------- -------------- -------------- --------------- Net interest spread (TE) 3.62 % 3.98 % 3.65 % 3.97 % =============== ============== ============== =============== Net interest margin (TE) (net interest income on a tax-equivalent basis divided by average interest-earning assets) 4.27 % 4.42 % 4.28 % 4.39 % =============== ============== ============== ===============
Net interest income (te) for the second quarter of 2006 increased $11.93 million, or 25%, from the second quarter of 2005, and was up $1.45 million, or 2%, from the first quarter of 2006. Our net interest margin (te) was 4.27% in the second quarter of 2006, 15 basis points narrower than the same quarter a year ago and 3 basis points narrower than the previous quarter.
Compared to the same quarter a year ago, the primary driver of the $11.93 million increase in net interest income (te) was a $1.27 billion, or 29%, increase in average earning assets mainly from average deposit growth of $1.37 billion, or 35%, much of which was related to deposit inflows in the aftermath of Hurricane Katrina. The $1.27 billion increase in average earning assets was deployed into the securities portfolio (average increase of $823 million, or 57%), short-term investments (average increase of $291 million), and into loans (average increase of $159 million, or 6%). Loans now comprise 53% of our average earning asset base, as compared to 65% for the same quarter a year ago. The net interest margin (te) narrowed 15 basis points as the increase in the average earning asset yield (24 basis points) did not offset the increase in total funding costs (39 basis points).
The level of net interest income (te) in the second quarter of 2006 increased $1.45 million, or 2%, from the prior quarter. Average earning assets increased $146 million, or 3%, over the previous quarter. Fueled by storm-related deposit inflows, average deposits increased $181 million, or 4%, compared to the prior quarter. Of the $146 million increase in average earning assets, $2 million was deployed into short-term investments (mostly federal funds sold), $24 million into loans, and the remaining $120 million, into the securities portfolio. Average loans were up $24 million from the prior quarter. The net interest margin (te) narrowed 3 basis points from the prior quarter as the yield on average earning assets increased 14 basis points, while total funding costs were up 17 basis points. The total cost of funds was up 17 basis points mostly due to increase in cost of public fund deposits (indexed to short-term market rates) and higher rates on interest-bearing deposits (up 23 basis points).
The following tables detail the components of our net interest spread and net interest margin.
Three Months Ended June 30, Three Months Ended June 30, ---------------------------------- ------------------------------------ 2006 2005 ---------------------------------- ------------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate ---------------------------------- ------------------------------------ Average Earning Assets Commercial & real estate loans (TE) $30,613 $1,699,768 7.22% $23,775 $1,523,348 6.26% Mortgage loans 5,980 410,522 5.83% 5,886 417,307 5.64% Consumer loans 18,356 883,901 8.33% 17,018 894,852 7.63% Loan fees & late charges 2,476 - 0.00% 2,348 - 0.00% ---------------------------------- ------------------------------------ Total loans (TE) $57,425 $2,994,191 7.69% 49,028 2,835,506 6.93% US treasury securities 454 42,028 4.33% 61 11,076 2.20% US agency securities 15,954 1,346,963 4.74% 4,977 484,119 4.11% CMOs 1,626 164,825 3.95% 2,608 262,799 3.97% Mortgage backed securities 5,643 484,002 4.66% 5,170 468,239 4.42% Municipals (TE) 2,673 158,553 6.74% 2,841 162,467 6.99% Other securities 944 76,641 4.93% 785 60,853 5.16% ---------------------------------- ------------------------------------ Total securities (TE) 27,294 2,273,012 4.80% 16,441 1,449,554 4.54% Total short-term investments 3,656 338,443 4.33% 299 47,260 2.53% Average earning assets yield (TE) $88,375 $5,605,646 6.32% $65,767 $4,332,320 6.08% Interest-Bearing Liabilities Interest-bearing transaction deposits $3,780 $1,696,598 0.89% $2,129 $1,319,606 0.65% Time deposits 14,451 1,504,343 3.85% 9,570 1,116,973 3.44% Public Funds 8,658 837,751 4.15% 4,408 683,665 2.59% ---------------------------------- ------------------------------------ Total interest bearing deposits $26,889 $4,038,692 2.67% 16,106 3,120,245 2.07% Customer repos 1,573 200,973 3.14% 1,095 231,456 1.90% Other borrowings 174 9,415 7.43% 759 73,181 4.16% ---------------------------------- ------------------------------------ Total borrowings 1,747 210,388 3.33% 1,854 304,637 2.44% Total interest bearing liability cost $28,636 $4,249,079 2.70% $17,961 $3,424,882 2.10% Noninterest-bearing deposits 1,177,756 730,570 Other net interest-free funding sources 178,810 176,868 Total Cost of Funds $28,636 $5,605,646 2.05% $17,961 $4,332,320 1.66% Net Interest Spread (TE) $59,740 3.62% $47,807 3.98% Net Interest Margin (TE) $59,740 $5,605,646 4.27% $47,807 $4,332,320 4.42%
Six Months Ended June 30, Six Months Ended June 30, ---------------------------------- ------------------------------------ 2006 2005 ---------------------------------- ------------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate ---------------------------------- ------------------------------------ Average Earning Assets Commercial & real estate loans (TE) $59,250 $1,687,306 7.08% $46,078 $1,507,267 6.16% Mortgage loans 11,877 410,274 5.79% 11,583 412,310 5.62% Consumer loans 35,829 884,811 8.17% 33,427 886,454 7.60% Loan fees & late charges 4,796 - 0.00% 4,327 - 0.00% ---------------------------------- ------------------------------------ Total loans (TE) $111,752 $2,982,391 7.55% 95,415 2,806,031 6.85% US treasury securities 1,081 51,007 4.27% 121 11,067 2.20% US agency securities 29,740 1,271,059 4.68% 9,262 457,412 4.05% CMOs 3,435 174,497 3.94% 5,294 264,906 4.00% Mortgage backed securities 11,162 480,913 4.64% 9,717 440,560 4.41% Municipals (TE) 5,396 160,851 6.71% 5,712 163,002 7.01% Other securities 1,817 74,990 4.84% 1,456 63,356 4.60% ---------------------------------- ------------------------------------ Total securities (TE) 52,631 2,213,317 4.76% 31,563 1,400,303 4.51% Total short-term investments 7,556 337,221 4.52% 1,091 89,685 2.45% Average earning assets yield (TE) $171,939 $5,532,930 6.25% $128,069 $4,296,020 5.99% Interest-Bearing Liabilities Interest-bearing transaction deposits $7,046 $1,705,506 0.83% $4,050 $1,325,845 0.62% Time deposits 27,456 1,455,925 3.80% 18,929 1,103,246 3.46% Public Funds 15,407 775,418 4.01% 8,160 697,649 2.36% ---------------------------------- ------------------------------------ Total interest bearing deposits $49,909 $3,936,849 2.56% 31,139 3,126,740 2.01% Customer repos 3,214 215,766 3.00% 1,759 223,213 1.59% Other borrowings 786 33,083 4.79% 1,352 64,934 4.20% ---------------------------------- ------------------------------------ Total borrowings 4,000 248,849 3.24% 3,111 288,147 2.18% Total interest bearing liability cost $53,908 $4,185,699 2.60% $34,249 $3,414,887 2.02% Noninterest-bearing deposits 1,189,407 715,938 Other net interest-free funding sources 157,824 165,194 Total Cost of Funds $53,908 $5,532,930 1.96% $34,249 $4,296,020 1.61% Net Interest Spread (TE) $118,030 3.65% $93,820 3.97% Net Interest Margin (TE) $118,030 $5,532,930 4.28% $93,820 $4,296,020 4.39%
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 our 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.
We did not record a provision for loan losses in the second quarter of 2006 as management determined that the allowance level at June 30, 2006 was adequate and no addition to the allowance was necessary this quarter; this was done after considering current levels of charge-offs, delinquency levels, and loan growth levels, as well as the pace of recovery for the region.
Annualized net charge-offs as a percent of average loans for the second quarter of 2006 were 0.40 percent, compared to 0.24 percent for the second quarter of 2005, and were a negative (recovery) .01 percent in the first quarter of 2006. The second quarter’s net charge-offs of $3.00 million included $1.13 million of charge-offs that were classified as related to Hurricane Katrina. Excluding the storm-related items, net charge-offs for the second quarter of 2006 would have been $1.87 million, or 0.25 percent of average loans. During the first quarter of 2006, we recovered a large commercial credit totaling $1.75 million. In addition, net charge-offs of $597,000, or 0.08 percent, were related to Hurricane Katrina. Excluding the first quarter storm-related net charge-offs of $597,000 and the large commercial recovery of $1.75 million, net charge-offs for the first quarter were $1.05 million, or 0.14 percent of average loans.
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 June 30, Six Months Ended June 30, 2006 2005 2006 2005 -------------- -------------- -------------- -------------- Annualized net charge-offs to average loans 0.40% 0.24% 0.20% 0.28% Annualized provision (recovery) for loan losses to average loans 0.00% 0.27% -0.05% 0.33% Average allowance for loan losses to average loans 2.46% 1.45% 2.48% 1.46% Gross charge-offs $ 4,742 $ 3,539 $ 8,664 $ 7,565 Gross recoveries $ 1,741 $ 1,848 $ 5,771 $ 3,614 Non-accrual loans $ 7,237 $ 8,052 $ 7,237 $ 8,052 Accruing loans 90 days or more past due $ 6,681 $ 3,914 $ 6,681 $ 3,914
Accruing loans 90 days or more past due increased $2.8 million from June 30, 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 $10.7 million to $6.7 million at June 30, 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 based on available information at this time.
Excluding the impact of securities transactions, non-interest income for the second quarter of 2006 was up $1.25 million, or 5 percent, compared to the same quarter a year ago. 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 $1.10 million) mostly related to higher revenues associated with the July, 1, 2005 acquisition of J. Everett Eaves, Inc. In addition, debit card and merchant fees were up $789,000 and trust fees were up $550,000, when compared to the same quarter a year ago. However, service charges were down $1.24 million principally due to the impact of higher customer deposit balances related to the storm-related deposit inflows of the past year.
The components of non-interest income for the three and six months ended June 30, 2006 and 2005 are presented in the following table (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- --------------------------------- (amounts in thousands) 2006 2005 2006 2005 --------------- --------------- --------------- --------------- Service charges on deposit accounts $ 9,223 $ 10,459 $ 17,107 $ 19,949 Trust fees 3,409 2,859 6,487 5,399 Credit card merchant discount fees 1,863 1,074 3,571 2,105 Income from insurance operations 4,596 3,499 9,755 7,380 Investment & annuity fees 1,591 1,547 2,855 2,735 ATM fees 1,273 1,154 2,567 2,526 Secondary mortgage market operations 749 676 1,566 1,174 Other income 3,238 3,427 6,924 5,853 --------------- --------------- --------------- --------------- Total other non-interest income 25,942 24,695 50,832 47,121 Securities transactions gains (losses), net - (15) 118 (8) --------------- --------------- --------------- --------------- Total non-interest income $ 25,942 $ 24,680 $ 50,950 $ 47,113 =============== =============== =============== ===============
Operating expenses for the second quarter of 2006 were $8.67 million, or 20 percent, higher compared to the same quarter a year ago. The increase from the same quarter a year ago was reflected in higher levels of personnel expense (up $3.48 million), occupancy expense (up $898,000), professional services expense (up $1.10 million) and all other expenses (up $3.19 million).
Our overall increase in operating expenses for the second quarter of 2006, while not containing any significant direct expenses related to the impact of Hurricane Katrina, did include a modest 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.
The following table presents the components of non-interest expense for the three and six months ended June 30, 2006 and 2005.
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- --------------------------------- (amounts in thousands) 2006 2005 2006 2005 --------------- --------------- --------------- --------------- Employee compensation $ 21,553 $ 18,160 $ 42,639 $ 36,054 Employee benefits 4,847 4,765 9,963 9,250 --------------- --------------- --------------- --------------- Total personnel expense 26,400 22,925 52,602 45,304 --------------- --------------- --------------- --------------- Equipment and data processing expense 5,395 4,397 9,983 8,692 Net occupancy expense 3,474 2,576 7,134 5,071 Postage and communications 2,569 1,961 4,945 3,667 Ad valorem and franchise taxes 1,163 751 2,161 1,504 Legal and professional services 3,710 2,612 5,923 5,904 Stationery and supplies 537 481 1,085 950 Amortization of intangible assets 507 578 1,181 1,162 Advertising 1,748 1,747 3,107 2,847 Deposit insurance and regulatory fees 237 244 293 494 Training expenses 147 109 312 266 Other expense 5,285 4,124 11,612 8,287 --------------- --------------- --------------- --------------- Total non-interest expense $ 51,172 $ 42,505 $ 100,338 $ 84,148 =============== =============== =============== ===============
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 six months ended June 30, 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 six months of 2006 was $6.9 million compared to $6.2 million for the comparable period in 2005. Tax-exempt income for six months ended June 30, 2006 consisted of $3.4 million from securities and $3.5 million from loans and leases. Tax-exempt income for the first six months of 2005 consisted of $3.6 million from securities and $2.6 million from loans and leases.
Other comprehensive loss increased $21.6 million from $22.1 million at December 31, 2005 to $43.7 million at June 30, 2006 due to the change in fair value of securities available for sale. For the six months ended June 30, 2006, we purchased an additional $208.7 million in available for sale securities, most of which are short-term in nature, in order to invest the deposits we received from our customers. Substantially all the unrealized losses at June 30, 2006 resulted from increases in market interest rates during this time period and since the time the underlying securities were purchased. Management identified no value impairment related to credit quality in the portfolio, and no value impairment was evaluated as other than temporary.
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 June 30, 2006, we had $738.1 million in unused loan commitments outstanding, of which approximately $449.4 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 June 30, 2006, we had $56.3 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at June 30, 2006 according to expiration date.
Expiration Date(dollar amounts in thousands) Less than 1-3 3-5 More than Total 1 year years years 5 years --------------- -------------- ------------ ------------ -------------- Commitments to extend credit $ 738,125 $ 411,986 $ 58,678 $ 37,576 $ 229,885 Letters of credit 56,292 32,636 14,713 8,943 - --------------- -------------- ------------ ------------ -------------- Total $ 794,417 $ 444,622 $ 73,391 $ 46,519 $ 229,885 =============== ============== ============ ============ ==============
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 three and six months ended June 30, 2006 is an increase in compensation expense of $727,000 and $1,567,100, respectively, or a reduction in diluted earnings per share of $0.02 and $0.05, respectively.
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.
In June 2006, the FASB published Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The effective date of this interpretation is January 1, 2007, the first fiscal year beginning after December 15, 2006. We do not believe the adoption of FIN 48 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 2.50. A rate increase of 100 basis points would move the effective duration to 2.28, while a 200 basis point rise would result in an effective duration of 2.34. A reduction in rates of 100 basis points would result in an effective duration of 1.52.
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 high level of interest bearing and non-interest bearing transaction balances since August 2005. 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 -------------------- ---------------------- -200 -10.62% -100 -4.37% Stable 0.00% +100 1.68% +200 3.07% +300 4.28%
Analysis of Interest Sensitivity at June 30, 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 $ - $ 487,893 $ 327,292 $ 668,424 $ 638,751 $ 11,432 $2,133,792 Federal funds sold & Short-term investments 413,790 - 273 - - - 414,063 Loans 48,800 1,436,643 221,450 659,956 606,255 - 2,973,104 Other assets - - - - - 634,233 634,233 ---------- ---------- ----------- ----------- ----------- ----------- ----------- Total Assets $ 462,590 $1,924,536 $ 549,015 $1,328,380 $1,245,006 $ 645,665 $6,155,192 ========== ========== =========== =========== =========== =========== =========== Liabilities Interest bearing transaction deposits $ - $ 771,471 $ 358,874 $1,031,375 $ 176,472 $ - $2,338,192 Time deposits - 627,635 546,737 419,301 109,227 - 1,702,900 Non-interest bearing deposits - 386,186 144,308 483,231 192,510 - 1,206,235 Federal funds purchased 4,350 - - - - - 4,350 Borrowings 218,818 6 - - - - 218,824 Other liabilities - - - - - 192,431 192,431 Shareholders' Equity - - - - - 492,260 492,260 ---------- ---------- ----------- ----------- ----------- ----------- ----------- Total Liabilities & Equity $ 223,168 $1,785,298 $1,049,919 $1,933,907 $ 478,209 $ 684,691 $6,155,192 ========== ========== =========== =========== =========== =========== =========== Interest sensitivity gap $ 239,422 $ 139,238 $ (500,904) $ (605,527) $ 766,797 $ (39,026) Cumulative interest rate sensitivity gap $ 239,422 $ 378,660 $(122,245) $ (727,772) $ 39,025 $ - Cumulative interest rate sensitivity gap as a percentage of total earning assets 4.0 % 7.0 % (2.0)% (13.0)% 1.0 % 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 June 30, 2006, regular savings and club accounts represented $371.3 million and money market accounts and now accounts totaled $1.3 billion. Excluding public fund accounts, this represents 51.4% 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 12 basis points as compared to the first quarter of 2006. Consumer time deposits have gone up 10 basis points during the quarter. Average interest-bearing transaction deposit balances were down 1.04%, while time deposits increased by 6.92%. During the quarter, the Federal Reserve increased rates by 50 basis points. The loan-to-deposit ratio was 57.40% (down 1.6%), and the average earning asset yield (TE) improved 14 basis points. The impact of our growth is displayed in its static gap report as of June 30, 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 six month period ended June 30, 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 ------------------ ----------------- -------------------- ------------------- Apr. 1, 2006 - Apr. 30, 2006 - (2) $ - - 573,401 May 1, 2006 - May 31, 2006 - (3) - - 573,401 Jun. 1, 2006 - Jun. 30, 2006 22,393 (4) 54.2400 22,393 551,008 ------------------ ----------------- -------------------- Total as of Jun. 30, 2006 22,393 $ 54.2400 22,393 ================== ================= ==================== (1) The Company publicly announced its stock buy-back program on July 18, 2000. (2) 0 shares were purchased on the open market during April 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 May 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 June 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.NoneItem 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.SIGNATURESPursuant 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: August 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.