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 September 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 Number) incorporation or organization) ONE HANCOCK PLAZA, P.O. BOX 4019, GULFPORT, MISSISSIPPI 39502 - ---------------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (228) 868-4000 - ---------------------------------------------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE - ---------------------------------------------------------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- -------- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer Non-accelerated filer ----- ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 32,624,599 common shares were outstanding as of October 31, 2006 for financial statement purposes.
HANCOCK HOLDING COMPANYINDEXPART I. FINANCIAL INFORMATION PAGE NUMBERITEM 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) -- September 30, 2006 and December 31, 2005 1 Condensed Consolidated Statements of Income (Unaudited) -- Three and Nine Months Ended September 30, 2006 and 2005 2 Condensed Consolidated Statements of Common Stockholders' Equity (Unaudited) -- Nine Months Ended September 30, 2006 and 2005 3 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) -- Three and Nine Months Ended September 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended September 30, 2006 and 2005 5 Notes to Condensed Consolidated Financial Statements - (Unaudited) 6-22 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23-37 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 37-38 ITEM 4. Controls and Procedures 38PART II. OTHER INFORMATIONITEM 1A. Risk Factors 38 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 39 ITEM 4. Submission of Matters to a Vote of Security Holders 39 ITEM 6. Exhibits 39SIGNATURES 40
Hancock Holding Company and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share and per share data) September 30, 2006 December 31, (Unaudited) 2005 ---------------------- ----------------------ASSETS: Cash and due from banks (non-interest bearing) $ 201,243 $ 271,104 Interest-bearing time deposits with other banks 8,379 7,258 Federal funds sold 66,524 402,968 Securities available for sale, at fair value (amortized cost of $2,327,487 and $1,980,745) 2,303,396 1,959,261 Loans 3,139,465 2,976,399 Loans held for sale 18,700 24,219 Less: allowance for loan losses (48,352) (74,558) unearned income (17,003) (11,432) ---------------------- ---------------------- Loans, net 3,092,810 2,914,628 Property and equipment, net of accumulated depreciation of $63,803 and $58,005 123,709 79,386 Other real estate, net 863 1,833 Accrued interest receivable 39,467 35,046 Goodwill, net 59,708 61,418 Other intangible assets, net 11,006 10,781 Life insurance contracts 105,949 83,080 Reinsurance receivables 40,621 49,452 Deferred tax asset, net 31,048 40,380 Other assets 36,942 33,592 ---------------------- ---------------------- TOTAL ASSETS $ 6,121,665 $ 5,950,187 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Non-interest bearing demand $ 1,062,348 $ 1,324,938 Interest-bearing savings, NOW, money market and time 3,938,216 3,664,882 ---------------------- ---------------------- Total deposits 5,000,564 4,989,820 Federal funds purchased 250 1,475 Securities sold under agreements to repurchase 425,753 250,807 Long-term notes 264 50,266 Policy reserves and liabilities 96,287 105,368 Other liabilities 56,446 75,036 ---------------------- ---------------------- TOTAL LIABILITIES 5,579,564 5,472,772 COMMON STOCKHOLDERS' EQUITY: Common Stock-$3.33 par value per share; 75,000,000 shares authorized, 32,583,948 and 32,301,123 issued, respectively 108,505 107,563 Capital surplus 133,662 129,222 Retained earnings 323,651 265,039 Accumulated other comprehensive loss, net (23,717) (22,066) Unearned compensation - (2,343) ---------------------- ---------------------- TOTAL COMMON STOCKHOLDERS' EQUITY 542,101 477,415 ---------------------- ---------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $ 6,121,665 $ 5,950,187 ====================== ====================== See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) (In thousands, except per share data)Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ------------- ------------- ------------- -------------INTEREST INCOME: Loans, including fees $ 60,034 $ 50,724 $ 169,633 $ 144,549 Securities - taxable 26,422 12,758 73,909 38,832 Securities - tax exempt 1,649 1,746 5,000 5,314 Federal funds sold 1,117 409 8,618 1,404 Other investments 11 7 66 103 ------------- ------------- ------------- ------------- Total interest income 89,233 65,644 257,226 190,202 ------------- ------------- ------------- ------------- INTEREST EXPENSE: Deposits 28,936 17,279 78,845 48,417 Federal funds purchased and securities sold under agreements to repurchase 3,115 1,619 6,368 3,532 Long-term notes and other interest expense (63) 761 684 1,959 ------------- ------------- ------------- ------------- Total interest expense 31,988 19,659 85,897 53,908 ------------- ------------- ------------- ------------- NET INTEREST INCOME 57,245 45,985 171,329 136,294 Provision for (reversal of) loan losses, net (20,000) 36,905 (20,705) 41,556 NET INTEREST INCOME AFTER PROVISION FOR ------------- ------------- ------------- ------------- (REVERSAL OF) LOAN LOSSES 77,245 9,080 192,034 94,738 ------------- ------------- ------------- ------------- NON-INTEREST INCOME Service charges on deposit accounts 9,719 7,975 26,826 27,924 Other service charges, commissions and fees 11,881 10,874 37,118 31,019 Securities gains (losses), net 110 (18) 228 (26) Net storm-related gain - 12,276 - 12,276 Other income 4,027 2,751 12,515 9,778 ------------- ------------- ------------- ------------- Total non-interest income 25,737 33,858 76,687 80,971 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSE Salaries and employee benefits 27,059 24,275 79,661 69,579 Net occupancy expense 2,882 2,617 10,015 7,688 Equipment rentals, depreciation and maintenance 2,647 2,319 8,131 7,042 Amortization of intangibles 445 514 1,626 1,676 Other expense 17,304 13,045 51,241 40,932 ------------- ------------- ------------- ------------- Total non-interest expense 50,337 42,770 150,674 126,917 ------------- ------------- ------------- ------------- NET INCOME BEFORE INCOME TAXES 52,645 168 118,047 48,792 Income tax expense (benefit) 16,614 (1,267) 38,006 13,824 ------------- ------------- ------------- ------------- NET INCOME $ 36,031 $ 1,435 $ 80,041 $ 34,968 ============= ============= ============= ============= BASIC EARNINGS PER SHARE $ 1.11 $ 0.04 $ 2.46 $ 1.08 ============= ============= ============= ============= DILUTED EARNINGS PER SHARE $ 1.08 $ 0.04 $ 2.41 $ 1.06 ============= ============= ============= ============= DIVIDENDS PAID PER SHARE $ 0.240 $ 0.195 $ 0.655 $ 0.525 ============= ============= ============= ============= WEIGHTED AVG. SHARES OUTSTANDING-BASIC 32,566 32,308 32,500 32,388 ============= ============= ============= ============= WEIGHTED AVG. SHARES OUTSTANDING-DILUTED 33,333 32,940 33,274 32,959 ============= ============= ============= ============= See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Common Stockholders' Equity (Unaudited) (In thousands, except share and per share 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 income - - - 34,968 - - Cash dividends - $0.525 per common share - - - (17,088) - - Change in fair value of securities available for sale, net of taxes - - - - (6,895) - Restricted stock awards granted - - 1,490 - - (1,490) Restricted stock awards vested 37,426 125 - - - - Restricted stock awards forfeited 3,203 11 47 - - 128 Amortization of compensation element of restricted stock - - - - - 471 Repurchase/retirement of common stock (262,850) (875) (7,395) - - - Shares issued for options exercised, net of tendered shares 91,119 303 677 - - - --------------- ---------- ----------- ---------- --------------- --------------- Balance, September 30, 2005 32,308,600 $ 107,588 $ 129,724 $ 252,303 $ (18,016) $ (2,540) =============== ========== =========== ========== =============== =============== Balance, January 1, 2006 32,301,123 $ 107,563 $ 129,222 $ 265,039 $ (22,066) $ (2,343) Net income - - - 80,041 - - Cash dividends - $0.655 per common share - - - (21,429) - - Change in fair value of securities available for sale, net of taxes - - - - (1,651) - Reclass of unearned compensation due to adoption of SFAS No. 123R - - (2,343) - - 2,343 Amortization of compensation element of restricted stock - - 1,370 - - - Repurchase/retirement of common stock (88,570) (295) (3,841) - - - Shares issued for options exercised 371,395 1,237 7,647 - - - Amortization of compensation element of stock options - - 1,607 - - - --------------- ---------- ----------- ---------- --------------- --------------- Balance, September 30, 2006 32,583,948 $ 108,505 $ 133,662 $ 323,651 $ (23,717) $ - =============== ========== =========== ========== =============== =============== See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 -------------- --------------- --------------- ----------------Net Income $ 36,031 $ 1,435 $ 80,041 $ 34,968 Other comprehensive income (loss) (net of income taxes): Change in fair value of securities available for sale, net of taxes ($11,695) and $3,411, $877 and $3,722, respectively 20,009 (6,334) (1,510) (6,912) Reclassification adjustments for (gains)/losses included in net income, net of taxes of $42 and ($6), $87 and ($9), respectively (68) 12 (141) 17 -------------- --------------- --------------- ---------------- Total comprehensive income (loss) $ 55,972 $ (4,887) $ 78,390 $ 28,073 ============== =============== =============== ================ See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)Nine Months Ended September 30, 2006 2005 ----------------- ----------------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 80,041 $ 34,968 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,042 6,844 Provision for (reversal of) loan losses, net (20,705) 41,556 Provision for losses on other real estate owned, net 170 261 Deferred tax benefit 9,332 (18,770) Increase in cash surrender value of life insurance contracts (2,869) (2,581) (Gain) loss on sales of securities available for sale, net (228) 26 Gain on involuntary conversion of assets - (14,135) Gain on sales of real estate owned, net (22) - (Accretion) amortization of securities premium/discount, net (9,050) 2,341 Amortization of mortgage servicing rights 422 635 Amortization of intangible assets 1,626 1,676 Amortization of compensation element of restricted stock 1,370 471 Amortization of compensation element of stock options 1,607 - Increase in accrued interest receivable (4,421) (6,937) Increase (decrease) in accrued expenses (19,024) 19,487 Increase (decrease) in other liabilities (680) 496 Increase in interest payable 1,114 1,150 Decrease in policy reserves and liabilities (9,081) (1,921) Decrease in reinsurance receivable 8,831 6,392 (Increase) decrease in other assets (2,718) 30,049 Decrease in loans held for sale 5,519 1,972 Other, net (569) 323 ----------------- ---------------- Net cash provided by operating activities 47,707 104,303 ----------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest-bearing time deposits (1,121) 95 Proceeds from maturities, calls or prepayments of securities held to maturity - 17,895 Proceeds from sales of securities available for sale 10,654 179,103 Proceeds from maturities of securities available for sale 624,509 415,085 Purchases of securities held to maturity - (7,736) Purchases of securities available for sale (971,672) (622,686) Net decrease in federal funds sold 336,444 8,896 Net increase in loans (164,260) (247,931) Purchases of property, equipment and software, net (51,990) (5,549) Premiums paid on life insurance contracts (20,000) - Proceeds from sales of other real estate 2,086 1,784 Net cash paid in connection with purchase transaction - (3,890) ----------------- ---------------- Net cash used in investing activities (235,350) (264,934) ----------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 10,744 227,208 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase 173,721 (2,131) Repayments of long-term notes (50,002) (2) Dividends paid (21,429) (17,088) Proceeds from exercise of stock options 8,884 752 Repurchase/retirement of common stock (4,136) (8,270) Other stock transactions, net - 228 ----------------- ---------------- Net cash provided by financing activities 117,782 200,697 ----------------- ---------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (69,861) 40,066 CASH AND DUE FROM BANKS, BEGINNING 271,104 155,797 ----------------- ---------------- CASH AND DUE FROM BANKS, ENDING $ 201,243 $ 195,863 ================= ================ SUPPLEMENTAL INFORMATION: Income taxes paid $ 48,491 $ 13,752 Interest paid, including capitalized interest of $247 and $0, respectively 79,174 52,758 Restricted stock issued to employees of Hancock 2,500 1,490 SUPPLEMENTAL INFORMATION FOR NON-CASH INVESTING AND FINANCING ACTIVITIES Transfers from loans to other real estate $ 1,264 $ 2,347 Financed sale of foreclosed property 294 583 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 September 30, 2006 and December 31, 2005, the Company’s Condensed Consolidated Statement of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 and the Company’s Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 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 nine months ended September 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. These reclassifications had no material impact on the condensed consolidated financial statements.
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 No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”), 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 03-1 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 include accounting considerations subsequent to the recognition of an other-than-temporary impairment and require 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) 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 provides 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 No. 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 nine months ended September 30, 2006 is an increase in compensation expense of $438,000 and $2,019,000, respectively, or a reduction in diluted earnings per share of $0.01 and $0.06, respectively.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. 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 issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements in accordance with SFAS No.109,Accounting for Income Taxes, when it is more likely than not that the position will be sustained based on its technical merits. FIN 48 also prescribes how to measure the tax benefit recognized and provides guidance on when a tax benefit should be derecognized as well as various other accounting, presentation and disclosure matters. This interpretation is effective for the Company beginning in fiscal year 2007. The Company does not believe the adoption of FIN 48 will have a material impact on its results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R). This pronouncement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, this statement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. Application of this standard at December 31, 2005 would have required adjustment to the Company’s accrued pension liability relating to its pension plan and its post-retirement benefit plans, resulting in an increase to accrued employee benefit liabilities of approximately $18.0 million, net of tax and decrease in stockholders’ equity of approximately $18.0 million, net of tax. However, the effect at December 31, 2006, the adoption date, or any other future date could significantly differ depending on the measurement of pension assets and obligations at such date. Management is currently evaluating the requirements of SFAS No. 158 and has not yet determined the impact of adoption on the Company’s consolidated financial statements.
In September 2006, the FASB ratified the consensus the EITF reached regarding EITF No.06-5, Accounting for Purchases of Life Insurance — Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin 85-4 (“EITF 06-5”). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract.” For group policies with multiple certificates or multiple policies with a group rider, the Task Force also tentatively concluded that the amount that could be realized should be determined at the individual policy or certificate level, i.e., amounts that would be realized only upon surrendering all of the policies or certificates would not be included when measuring the assets. This interpretation is effective for the Company beginning in fiscal year 2007. The Company does not believe the adoption of EITF 06-5 will have a material impact on its results of operations and financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. The Company is currently evaluating the impact of SAB 108 on its consolidated financial statements.
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 September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ---------------- ---------------- ---------------- ----------------Balance of allowance for loan losses at beginning of period $ 70,960 $ 41,382 $ 74,558 $ 40,682 Provision for (reversal of) loan losses, net (20,000) 36,905 (20,705) 41,556 Loans charged-off: Commercial, Real Estate & Mortgage 1,525 1,139 3,209 3,089 Direct & Indirect Consumer 1,113 1,134 4,551 4,171 Finance Company 555 628 1,414 1,723 Demand Deposit Accounts 3,165 798 5,848 2,281 ---------------- ---------------- ---------------- ---------------- Total charge-offs 6,358 3,699 15,022 11,264 ---------------- ---------------- ---------------- ---------------- Recoveries of loans previously charged-off: Commercial, Real Estate & Mortgage 636 1,150 3,261 2,065 Direct & Indirect Consumer 423 268 1,468 1,324 Finance Company 133 116 463 366 Demand Deposit Accounts 2,558 462 4,329 1,855 ---------------- ---------------- ---------------- ---------------- Total recoveries 3,750 1,996 9,521 5,610 ---------------- ---------------- ---------------- ---------------- Net charge-offs 2,608 1,703 5,501 5,654 ---------------- ---------------- ---------------- ---------------- Balance of allowance for loan losses at end of period $ 48,352 $ 76,584 $ 48,352 $ 76,584 ================ ================ ================ ================
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 September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ------------- ---------------- ------------- -------------Ratios : Net charge-offs to average net loans (annualized) 0.34% 0.23% 0.24% 0.27% Net charge-offs to period-end net loans (annualized) 0.33% 0.23% 0.23% 0.25% Allowance for loan losses to average net loans 1.57% 2.62% 1.60% 2.69% Allowance for loan losses to period-end net loans 1.54% 2.57% 1.54% 2.57% Net charge-offs to loan loss allowance 5.39% 2.23% 11.37% 7.38%
As of September 30, 2006 and December 31, 2005, the Company had investments in higher-risk graded loans totaling $89.4 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, the financial capacity of the borrower, secondary sources of repayment (including collateral), management’s judgment of economic conditions and the resulting impact on higher-risk graded loans and regulatory guidelines. The Company’s allowance for loan losses includes allocations of $13.4 million and $17.1 million associated with these loans as of September 30, 2006 and December 31, 2005, respectively.
As of September 30, 2006, the Company had $17.3 million in loans carried at fair value. There were no loans carried at fair value as of December 31, 2005. As of September 30, 2006 and December 31, 2005, the Company had investments in higher-risk graded loans totaling $89.4 million and $112.1 million, 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 nine months ended September 30, 2006 and September 30, 2005 were $15.9 million and $12.3 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 nine months ended September 30, 2006 and September 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 September 30, 2006. The carrying amounts of goodwill were $59.7 million as of September 30, 2006 and $61.4 million as of December 31, 2005.
During the nine months ended September 30, 2006, the Company recorded a $2.1 million reallocation of goodwill to other intangible assets and a $0.4 million increase in goodwill to record the final purchase price, both of which is related to the acquisition of J. Everett Eaves, Inc. The reallocation was based on a third-party study which valued the intangible assets.
The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated (amounts in thousands):
As of As of September 30, 2006 December 31, 2005 -------------------------------------- -------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ----------------- ------------------ ----------------- -----------------Amortizable intangible assets: Core deposit intangibles $ 14,137 $ 6,949 $ 14,137 $ 5,924 Value of insurance business acquired 3,768 1,329 1,673 833 Non-compete agreements 368 157 228 76 Mortgage servicing rights 3,938 2,845 4,292 2,716 Trade Name 100 25 - - ----------------- ------------------ ----------------- ----------------- Total $ 22,311 $ 11,305 $ 20,330 $ 9,549 ================= ================== ================= =================Three months ended September 30, Nine months ended September 30, 2006 2005 2006 2005 ----------------- ------------------ ----------------- -----------------Aggregate amortization expense for: Core deposit intangibles $ 341 $ 411 $ 1,024 $ 1,243 Value of insurance businesses acquired 79 103 496 433 Non-compete agreements - - 81 - Mortgage servicing rights 133 197 422 635 Trade Name 25 - 25 - ----------------- ------------------ ----------------- ----------------- Total $ 578 $ 711 $ 2,048 $ 2,311 ================= ================== ================= =================
The remaining amortization expense for the core deposit intangibles in 2006 is estimated to be approximately $341,000. The amortization expense for core deposit intangibles is estimated to be approximately $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, non-compete agreements and trade name are expected to approximate $125,000 for the remainder of 2006, $491,000 in 2007, $404,000 in 2008, $370,000 in 2009, $311,000 in 2010 and the remainder of $1,023,000 thereafter. Amortization of servicing rights is estimated to be approximately $153,000 for the remainder of 2006, $368,000 in 2007, $240,000 in 2008, $167,000 in 2009 and $108,000 in 2010, and the remainder of $57,000 thereafter. 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 September 30, Nine Months Ended September 30, 2006 2005 2006 2005 --------------- ---------------- --------------- ----------------Net Earnings - used in computation of earnings per share $ 36,031 $ 1,435 $ 80,041 $ 34,968 =============== ================ =============== ================ Weighted average number of shares outstanding - used in computation of basic earnings per share 32,566 32,308 32,500 32,388 Effect of dilutive securities Stock options and restricted stock awards 767 632 774 571 --------------- ---------------- --------------- ---------------- Weighted average number of shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per share 33,333 32,940 33,274 32,959 =============== ================ =============== ================
At September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2006 and September 30, 2005, total compensation cost for share-based compensation recognized in income was $648,000, $2,977,000, $182,000 and $471,000, respectively. The total recognized tax benefit related to the share-based compensation was $210,000, $958,000, $64,000 and $165,000, respectively, for the three and nine months ended September 30, 2006 and September 30, 2005.
As a result of the adoption SFAS No. 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the three and nine months ended September 30, 2006, are $648,000, $438,000, $2,977,000 and $2,019,000 lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic earnings per share for the three and nine months ended September 30, 2006 would have been $1.12 and $2.52, respectively, if the Company had not adopted SFAS No. 123(R), compared to reported basic earnings per share of $1.11 and $2.46, respectively. Diluted earnings per share for the three and nine months ended September 30, 2006 would have been $1.09 and $2.47, respectively, if the Company had not adopted SFAS No. 123(R), compared to reported diluted earnings per share of $1.08 and $2.41, 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 nine months ended September 30, 2006, there was no 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 nine months ended September 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 Nine Months Ended Ended September 30, 2005 September 30, 2005 ----------------------- -----------------------Net income, as reported $ 1,435 $ 34,968 Add: stock-based employee compensation expense included in reported net income, net of related tax effects 118 306 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (736) (2,160) ----------------------- ----------------------- Pro forma net income $ 817 $ 33,114 ======================= ======================= Earnings per share Basic - as reported $ 0.04 $ 1.08 ======================= ======================= Basic - pro forma $ 0.03 $ 1.02 ======================= ======================= Diluted - as reported $ 0.04 $ 1.06 ======================= ======================= Diluted - pro forma $ 0.02 $ 1.00 ======================= =======================
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. The 1996 Long-Term Incentive Plan expired in 2006.
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.
Nine Months Ended September 30, 2006 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 nine months ended September 30, 2006, and changes during the nine 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 9.3 Exercised (340,970) $ 21.22 5.1 $ 8,161,488 Forfeited or expired (27,208) $ 25.74 5.4 ----------------- Outstanding at September 30, 2006 1,595,644 $ 27.10 6.7 $ 42,207,918 ================= ================== ================= ================= Exercisable at September 30, 2006 1,259,203 $ 23.14 6.0 $ 38,172,494 ================= ================== ================= ================= Share options expected to vest 336,441 $ 41.62 9.3 $ 4,364,806 ================= ================== ================= =================
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 and 2005 was $17.96 and $13.43, respectively per optioned share. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $8.2 million and $1.8 million, respectively.
A summary of the status of the Company’s nonvested shares as of September 30, 2006, and changes during the nine months ended September 30, 2006, is presented below:
Weighted- Average Number of Grant-Date Shares Fair Value ($) ------------------- -----------------Nonvested at January 1, 2006 132,635 $ 26.77 Granted 409,055 $ 21.64 Vested (4,424) $ 34.56 Forfeited (13,009) $ 23.23 ------------------- Nonvested at September 30, 2006 524,257 $ 22.79 ===================
As of September 30, 2006, there was $7.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 3.9 years. The total fair value of shares which vested during the nine months ended September 30, 2006 and 2005 was $.53 million 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 nine months ended September 30, 2006 and 2005:
Pension Benefits Other Post-retirement Benefits ------------------------------------- ------------------------------------- Three Months Ended September 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 ------------------------------------- ------------------------------------- Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------Service cost $ 1,727,802 $ 1,614,855 $ 236,250 $ 232,500 Interest cost 2,624,280 2,546,307 295,500 291,000 Expected return on plan assets (2,900,520) (2,557,791) - - Amortization of prior service cost - 19,593 (39,750) (39,750) Amortization of net loss 796,581 749,295 87,000 66,000 Amortization of transition obligation - - 3,750 3,750 ----------------- ----------------- ----------------- ----------------- Net periodic benefit cost $ 2,248,143 $ 2,372,259 $ 582,750 $ 553,500 ================= ================= ================= =================
The Company anticipates that it will contribute $4.4 million to its pension plan and approximately $777,000 to its post-retirement benefits in 2006. During the first nine months of 2006, the Company contributed approximately $3.0 million to its pension plan and approximately $394,000 for post-retirement benefits.
Components of other service charges, commission and fees are as follows:
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------(amounts in thousands) Trust fees $ 3,174 $ 2,761 $ 9,662 $ 8,161 Credit card merchant discount fees 1,744 1,055 5,316 3,160 Income from insurance operations 4,145 4,883 13,900 12,262 Investment & annuity fees 1,595 1,304 4,450 4,039 ATM fees 1,223 871 3,790 3,397 ----------------- ----------------- ----------------- ----------------- Total $ 11,881 $ 10,874 $ 37,118 $ 31,019 ================= ================= ================= ================= Components of other income are as follows:Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------(amounts in thousands) Secondary mortgage market operations $ 1,018 $ 377 $ 2,583 $ 1,552 Income from bank owned life insurance 1,115 876 2,870 2,581 Other income 1,894 1,498 7,062 5,645 ----------------- ----------------- ----------------- ----------------- Total other non-interest income $ 4,027 $ 2,751 $ 12,515 $ 9,778 ================= ================= ================= =================8. Other ExpenseComponents of other expense are as follows:Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------(amounts in thousands) Data processing expense $ 3,571 $ 1,886 $ 8,070 $ 5,854 Postage and communications 1,936 2,203 6,881 5,871 Ad valorem and franchise taxes 519 1,066 2,680 2,570 Legal and professional services 3,702 2,391 9,625 8,295 Stationery and supplies 519 376 1,604 1,326 Advertising 1,985 916 5,091 3,763 Deposit insurance and regulatory fees 257 161 550 656 Training expenses 106 60 418 325 Other fees 1,144 453 3,396 1,879 Annuity expense 1,075 1,512 3,826 3,116 Claims paid 560 563 1,564 1,827 Other expense 1,930 1,458 7,536 5,450 ----------------- ----------------- ----------------- ----------------- Total non-interest expense $ 17,304 $ 13,045 $ 51,241 $ 40,932 ================= ================= ================= =================
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):
Hancock Holding Company and Subsidiaries Notes to Condensed Consolidated Financial Statements - (Continued) (Unaudited)Three Months Ended September 30, 2006 MS LA FL Other Eliminations Consolidated ------------- ------------- ------------ ----------- ------------ --------------Interest income $ 49,909 $ 35,789 $ 2,044 $ 5,935 $ (4,444) $ 89,233 Interest expense 19,515 14,434 739 1,628 (4,328) 31,988 ------------- ------------- ------------ ----------- ------------ -------------- Net interest income 30,394 21,355 1,305 4,307 (116) 57,245 Provision for (reversal of) loan losses (15,294) (4,706) - - - (20,000) Non-interest income 11,681 8,179 117 5,776 (16) 25,737 Depreciation and amortization 1,474 609 76 124 - 2,283 Other non-interest expense 22,984 15,404 1,429 8,248 (11) 48,054 ------------- ------------- ------------ ----------- ------------ -------------- Net income before income taxes 32,911 18,227 (83) 1,711 (121) 52,645 Income tax expense (benefit) 10,931 5,195 (96) 584 - 16,614 ------------- ------------- ------------ ----------- ------------ -------------- Net income $ 21,980 $ 13,032 $ 13 $ 1,127 $ (121) $ 36,031 ============= ============= ============ =========== ============ ============== Total assets $ 3,655,470 $2,405,757 $ 139,009 $ 780,778 $(859,349) $ 6,121,665 ============= ============= ============ =========== ============ ============== Total interest income from affiliates $ 4,262 $ - $ 66 $ 116 $ (4,444) $ - Total interest income from external customers $ 45,647 $ 35,789 $ 1,978 $ 5,819 $ - $ 89,233 Amortization & (accretion) of securities $ (2,529) $ (284) $ 13 $ 13 $ - $ (2,787)Three Months Ended September 30, 2005 MS LA FL Other Eliminations Consolidated ------------- ------------- ------------ ----------- ------------- --------------Interest income $ 34,386 $ 27,855 $ 1,986 $ 4,509 $ (3,092) $ 65,644 Interest expense 11,927 9,103 558 1,070 (2,999) 19,659 ------------- ------------- ------------ ----------- ------------ -------------- Net interest income 22,459 18,752 1,428 3,439 (93) 45,985 Provision for loan losses 24,106 11,636 11 1,152 - 36,905 Non-interest income 21,239 6,298 49 6,298 (26) 33,858 Depreciation and amortization 1,413 633 105 (144) (3) 2,004 Other non-interest expense 17,695 13,897 1,121 8,067 (14) 40,766 ------------- ------------- ------------ ----------- ------------ -------------- Net income (loss) before income taxes 484 (1,116) 240 662 (102) 168 Income tax expense (benefit) (642) (922) 92 205 - (1,267) ------------- ------------- ------------ ----------- ------------ -------------- Net income (loss) $ 1,126 $ (194) $ 148 $ 457 $ (102) $ 1,435 ============= ============= ============ =========== ============ ============== Total assets $ 2,749,607 $2,019,761 $ 119,227 $ 695,033 $(670,138) $ 4,913,490 ============= ============= ============ =========== ============ ============== Total interest income from affiliates $ 2,981 $ 18 $ - $ 93 $ (3,092) $ - Total interest income from external customers $ 31,405 $ 27,837 $ 1,986 $ 4,416 $ - $ 65,644 Amortization & (accretion) of securities $ 415 $ 309 $ 20 $ 15 $ - $ 759
Hancock Holding Company and Subsidiaries Notes to Condensed Consolidated Financial Statements - (Continued) (Unaudited)Nine Months Ended September 30, 2006 MS LA FL Other Eliminations Consolidated ------------- ------------- ------------ ----------- ------------ --------------Interest income $ 144,840 $ 100,812 $ 5,633 $ 15,611 $ (9,670) $ 257,226 Interest expense 51,682 37,521 1,777 4,273 (9,356) 85,897 ------------- ------------- ------------ ----------- ------------ -------------- Net interest income 93,158 63,291 3,856 11,338 (314) 171,329 Provision for (reversal of) loan losses (16,705) (4,188) 43 145 - (20,705) Non-interest income 33,931 23,551 337 18,961 (93) 76,687 Depreciation and amortization 4,600 1,866 225 351 - 7,042 Other non-interest expense 68,118 47,005 3,741 24,801 (33) 143,632 ------------- ------------- ------------ ----------- ------------ -------------- Net income before income taxes 71,076 42,159 184 5,002 (374) 118,047 Income tax expense (benefit) 23,751 12,415 (17) 1,857 - 38,006 ------------- ------------- ------------ ----------- ------------ -------------- Net income $ 47,325 $ 29,744 $ 201 $ 3,145 $ (374) $ 80,041 ============= ============= ============ =========== ============ ============== Total assets $ 3,655,470 $2,405,757 $ 139,009 $ 780,778 $(859,349) $ 6,121,665 ============= ============= ============ =========== ============ ============== Total interest income from affiliates $ 9,091 $ 6 $ 259 $ 314 $ (9,670) $ - Total interest income from external customers $ 135,749 $ 100,806 $ 5,374 $ 15,297 $ - $ 257,226 Amortization & (accretion) of securities $ (8,192) $ (944) $ 40 $ 46 $ - $ (9,050)Nine Months Ended September 30, 2005 MS LA FL Other Eliminations Consolidated ------------- ------------- ------------ ----------- ------------ --------------Interest income $ 100,536 $ 79,464 $ 4,829 $ 12,663 $ (7,290) $ 190,202 Interest expense 33,244 23,645 1,306 2,751 (7,038) 53,908 ------------- ------------- ------------ ----------- ------------ -------------- Net interest income 67,292 55,819 3,523 9,912 (252) 136,294 Provision for loan losses 24,868 14,462 228 1,998 - 41,556 Non-interest income 41,924 21,814 277 17,083 (127) 80,971 Depreciation and amortization 4,240 1,876 350 378 - 6,844 Other non-interest expense 54,824 41,038 3,362 20,786 63 120,073 ------------- ------------- ------------ ----------- ------------ -------------- Net income (loss) before income taxes 25,284 20,257 (140) 3,833 (442) 48,792 Income tax expense (benefit) 7,126 5,563 (53) 1,256 (68) 13,824 ------------- ------------- ------------ ----------- ------------ -------------- Net income (loss) $ 18,158 $ 14,694 $ (87) $ 2,577 $ (374) $ 34,968 ============= ============= ============ =========== ============ ============== Total assets $ 2,749,607 $2,019,761 $ 119,227 $ 695,033 $(670,138) $ 4,913,490 ============= ============= ============ =========== ============ ============== Total interest income from affiliates $ 6,937 $ - $ 101 $ 252 $ (7,290) $ - Total interest income from external customers $ 93,599 $ 79,464 $ 4,728 $ 12,411 $ - $ 190,202 Amortization & (accretion) of securities $ 1,182 $ 1,054 $ 60 $ 45 $ - $ 2,341
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 and we have applied for a bank charter in 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 September 30, 2006, we had total assets of $6.1 billion and employed on a full-time equivalent basis 1,212 persons in Mississippi, 536 persons in Louisiana and 40 persons in Florida.
Selected Financial Data(amounts in thousands, except per share data)Three Months Ended September 30, Nine Months Ended Sepember 30, 2006 2005 2006 2005 -------------- --------------- --------------- ---------------Per Common Share DataEarnings per share: Basic $1.11 $0.04 $2.46 $1.08 Diluted $1.08 $0.04 $2.41 $1.06 Cash dividends per share $0.240 $0.195 $0.655 $0.525 Book value per share (period end) $16.64 $14.52 $16.64 $14.52 Weighted average number of shares: Basic 32,566 32,308 32,500 32,388 Diluted (1) 33,333 32,940 33,274 32,959 Period end number of shares 32,584 32,309 32,584 32,309 Market data: High closing price $56.79 $37.84 $57.19 $37.84 Low closing price $49.71 $29.93 $37.75 $28.25 Period end closing price $53.55 $34.14 $53.55 $34.14 Trading volume 8,135 8,760 20,883 15,575 (1) There were 31,925 and 67,911 anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2006, respectively. There were no anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2005.
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 --------------- -------------- --------------- --------------Performance Ratios (dollar amounts in thousands) Return on average assets 2.36% 0.12% 1.77% 0.98% Return on average common equity 27.58% 1.18% 21.42% 9.81% Earning asset yield (Tax Equivalent ("TE")) 6.60% 6.19% 6.36% 6.06% Total cost of funds 2.30% 1.80% 2.08% 1.67% Net interest margin (TE) 4.29% 4.40% 4.28% 4.39% Common equity (period end) as a percent of total assets (period end) 8.86% 9.55% 8.86% 9.55% Leverage ratio (period end) 8.15% 8.64% 8.15% 8.64% FTE Headcount 1,788 1,590 1,788 1,590Asset Quality InformationNon-accrual loans $5,179 $10,373 $5,179 $10,373 Foreclosed assets $970 $2,973 $970 $2,973 Total non-performing assets $6,149 $13,346 $6,149 $13,346 Non-performing assets as a percent of loans and foreclosed assets 0.20% 0.45% 0.20% 0.45% Accruing loans 90 days past due $3,626 $6,156 $3,626 $6,156 Accruing loans 90 days past due as a percent of loans 0.12% 0.21% 0.12% 0.21% Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets 0.31% 0.65% 0.31% 0.65% Net charge-offs $2,608 $1,704 $5,501 $5,655 Net charge-offs as a percent of average loans 0.34% 0.23% 0.24% 0.27% Allowance for loan losses $48,352 $76,584 $48,352 $76,584 Allowance for loan losses as a percent of period end loans 1.54% 2.57% 1.54% 2.57% Allowance for loan losses to NPAs + accruing loans 90 days past due 494.65% 392.70% 494.65% 392.70% Provision for (reversal of) loan losses ($20,000) $36,905 ($20,705) $41,556Average Balance SheetTotal loans $3,080,441 $2,918,709 $3,015,434 $2,844,003 Securities 2,334,242 1,364,219 2,254,068 1,388,143 Short-term investments 94,026 52,933 255,265 77,300 --------------- -------------- --------------- -------------- Earning assets 5,508,709 4,335,861 5,524,767 4,309,446 Allowance for loan losses (61,525) (41,765) (69,840) (41,217) Other assets 602,833 487,866 590,642 496,812 --------------- -------------- --------------- -------------- Total assets $6,050,017 $4,781,962 $6,045,569 $4,765,041 =============== ============== =============== ============== Non-interest bearing deposits $1,098,716 $729,216 $1,158,844 $720,413 Interest bearing transaction deposits 1,590,318 1,311,779 1,666,689 1,321,105 Interest bearing public fund deposits 791,825 617,017 780,947 670,477 Time deposits 1,571,129 1,143,691 1,494,748 1,116,876 --------------- -------------- --------------- -------------- Total interest bearing deposits 3,953,272 3,072,487 3,942,384 3,108,458 --------------- -------------- --------------- -------------- Total deposits 5,051,988 3,801,703 5,101,228 3,828,871 Other borrowed funds 304,686 335,758 267,666 304,192 Other liabilities 175,093 160,232 177,183 155,436 Common stockholders' equity 518,250 484,269 499,492 476,542 --------------- -------------- --------------- -------------- Total liabilities & common stockholders' equity $6,050,017 $4,781,962 $6,045,569 $4,765,041 =============== ============== =============== ==============
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 -------------- --------------- --------------- ---------------Period end Balance Sheet (dollar amounts in thousands) Commercial/real estate loans $1,800,643 $1,637,011 $1,800,643 $1,637,011 Mortgage loans 430,086 441,512 430,086 441,512 Direct consumer loans 477,142 501,704 477,142 501,704 Indirect consumer loans 350,013 339,822 350,013 339,822 Finance company loans 83,278 64,121 83,278 64,121 -------------- --------------- --------------- --------------- Total loans 3,141,162 2,984,170 3,141,162 2,984,170 Securities 2,303,396 1,323,166 2,303,396 1,323,166 Short-term investments 74,903 141,270 74,903 141,270 -------------- --------------- --------------- --------------- Earning assets 5,519,461 4,448,606 5,519,461 4,448,606 Allowance for loan losses (48,352) (76,584) (48,352) (76,584) Other assets 650,556 541,468 650,556 541,468 -------------- --------------- --------------- --------------- Total assets $6,121,665 $4,913,490 $6,121,665 $4,913,490 ============== =============== =============== =============== Non-interest bearing deposits $1,062,348 $909,585 $1,062,348 $909,585 Interest bearing transaction deposits 1,510,785 1,369,886 1,510,785 1,369,886 Interest bearing public funds deposits 795,927 574,602 795,927 574,602 Time deposits 1,631,504 1,171,080 1,631,504 1,171,080 -------------- --------------- --------------- --------------- Total interest bearing deposits 3,938,216 3,115,568 3,938,216 3,115,568 -------------- --------------- --------------- --------------- Total deposits 5,000,564 4,025,153 5,000,564 4,025,153 Other borrowed funds 430,827 249,229 430,827 249,229 Other liabilities 148,173 170,049 148,173 170,049 Common stockholders' equity 542,101 469,059 542,101 469,059 -------------- --------------- --------------- --------------- Total liabilities & common stockholders' equity $6,121,665 $4,913,490 $6,121,665 $4,913,490 ============== =============== =============== ===============Net Charge-Off InformationNet charge-offs (recoveries): Commercial/real estate loans $522 ($17) ($628) $955 Mortgage loans 367 7 576 70 Direct consumer loans 1,003 861 3,264 1,853 Indirect consumer loans 294 342 1,338 1,420 Finance company loans 422 511 951 1,357 -------------- --------------- --------------- --------------- Total net charge-offs $2,608 $1,704 $5,501 $5,655 ============== =============== =============== =============== Net charge-offs to average loans: Commercial/real estate loans 0.12% 0.00% -0.05% 0.08% Mortgage loans 0.34% 0.01% 0.19% 0.02% Direct consumer loans 0.85% 0.68% 0.93% 0.49% Indirect consumer loans 0.34% 0.40% 0.51% 0.59% Finance company loans 2.11% 3.17% 1.77% 2.91% -------------- --------------- --------------- --------------- Total net charge-offs to average net loans 0.34% 0.23% 0.24% 0.27% ============== =============== =============== ===============
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 -------------- --------------- --------------- ---------------Average Balance Sheet Composition (dollar amounts in thousands) Percentage of earning assets/funding sources: Loans 55.92% 67.32% 54.58% 65.99% Securities 42.37% 31.46% 40.80% 32.22% Short-term investments 1.71% 1.22% 4.62% 1.79% -------------- --------------- --------------- --------------- Earning assets 100.00% 100.00% 100.00% 100.00% ============== =============== =============== =============== Non-interest bearing deposits 19.95% 16.82% 20.98% 16.72% Interest bearing transaction deposits 28.87% 30.25% 30.17% 30.66% Interest bearing public funds deposits 14.37% 14.23% 14.14% 15.56% Time deposits 28.52% 26.38% 27.06% 25.92% -------------- --------------- --------------- --------------- Total deposits 91.71% 87.68% 92.35% 88.85% Other borrowed funds 5.53% 7.74% 4.84% 7.06% Other net interest-free funding sources 2.76% 4.58% 2.81% 4.09% -------------- --------------- --------------- --------------- Total funding sources 100.00% 100.00% 100.00% 100.00% ============== =============== =============== =============== Loan mix: Commercial/real estate loans 57.11% 54.28% 56.76% 53.91% Mortgage loans 13.75% 14.75% 13.75% 14.71% Direct consumer loans 15.28% 17.29% 15.53% 17.79% Indirect consumer loans 11.28% 11.49% 11.58% 11.40% Finance company loans 2.58% 2.19% 2.38% 2.19% -------------- --------------- --------------- --------------- Total loans 100.00% 100.00% 100.00% 100.00% ============== =============== =============== =============== Average dollars Loans $3,080,441 $2,918,709 $3,015,434 $2,844,003 Securities 2,334,242 1,364,219 2,254,068 1,388,143 Short-term investments 94,026 52,933 255,265 77,300 -------------- --------------- --------------- --------------- Earning assets $5,508,709 $4,335,861 $5,524,767 $4,309,446 ============== =============== =============== =============== Non-interest bearing deposits $1,098,716 $729,216 $1,158,844 $720,413 Interest bearing transaction deposits 1,590,318 1,311,779 1,666,689 1,321,105 Interest bearing public funds deposits 791,825 617,017 780,947 670,477 Time deposits 1,571,129 1,143,691 1,494,748 1,116,876 -------------- --------------- --------------- --------------- Total deposits 5,051,988 3,801,703 5,101,228 3,828,871 Other borrowed funds 304,686 335,758 267,666 304,192 Other net interest-free funding sources 152,035 198,400 155,873 176,383 -------------- --------------- --------------- --------------- Total funding sources 5,508,709 $4,335,861 5,524,767 $4,309,446 ============== =============== =============== =============== Loans: Commercial/real estate loans $1,759,173 $1,584,244 $1,711,525 $1,533,208 Mortgage loans 423,610 430,615 414,768 418,479 Direct consumer loans 470,771 504,362 468,196 505,899 Indirect consumer loans 347,404 335,482 349,076 324,122 Finance company loans 79,483 64,006 71,869 62,295 -------------- --------------- --------------- --------------- Total average loans $3,080,441 $2,918,709 $3,015,434 $2,844,003 ============== =============== =============== ===============
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 September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 compare certain assets and liabilities to total deposits or total assets:
September 30, June 30, March 31, December 31, 2006 2006 2006 2005 ---------------- ---------------- --------------- ----------------Total securities to total deposits 46.06% 40.66% 42.84% 39.27% Total loans (net of unearned income) to total deposits 62.82% 58.01% 55.86% 59.91% Interest-earning assets to total assets 90.16% 90.85% 90.58% 90.06% Interest-bearing deposits to total deposits 78.76% 77.01% 76.96% 73.45%
We continue to maintain an adequate capital position. The ratios as of September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 are as follows:
September 30, June 30, March 31, December 31, 2006 2006 2006 2005 ---------------- ---------------- --------------- ----------------Common equity (period-end) as a percent of total assets (period-end) 8.86% 8.00% 8.13% 8.72% Regulatory ratios: Total capital to risk-weighted assets (1) 13.44% 11.95% 12.88% 12.73% Tier 1 capital to risk-weighted assets (2) 12.27% 10.72% 11.60% 11.47% Leverage capital to average total assets (3) 8.15% 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 third quarter of 2006 totaled $36.0 million, an increase of $34.6 million from the third quarter of 2005. Diluted earnings per share for the third quarter of 2006 were $1.08, an increase of $1.04 from the same quarter a year ago.
Our net income for the third quarter of 2006 included a $20.0 million negative provision for loan losses, which included a partial reversal of the Company’s storm-related allowance for loan losses. In the third quarter of 2005, we established a $35.2 million allowance for loan losses related to projected credit losses associated with the impact of Hurricane Katrina. Through the third quarter of 2006, we have experienced storm-related charge-offs of about $4.4 million. While management has determined that the potential for further storm-related charge-offs is present, the levels are projected to be lower than originally anticipated. We reviewed the asset quality of significant credits included in the original $35.2 million storm-related allowance and determined that this partial reversal was appropriate.
Net income for the first nine months of 2006 was $80.0 million, an increase of $45.1 million compared to the first nine months of 2005. Diluted earnings per share for the first nine months of 2006 were $2.41, an increase of $1.35 from the first nine months of 2005.
Net interest income (te) for the third quarter increased $11.4 million, or 24%, from the third quarter of 2005. Our net interest margin (te) was 4.29 percent in the third quarter, 11 basis points narrower than the same quarter a year ago.
Compared to the same quarter a year ago, the primary driver of the $11.4 million increase in net interest income (te) was a $1.2 billion, or 27 percent, increase in average earning assets mainly from average deposit inflows of $1.3 billion, or 33 percent. The increase in deposits was related to insurance settlements for businesses and consumers, as well as other forms of federal aid to customers impacted by Hurricane Katrina. Of the $1.2 billion increase in average earning assets, $161.7 million was deployed into loans and $1.0 billion into securities and other short-term investments. The net interest margin (te) narrowed 11 basis points as the increase in the average earning asset yield (40 basis points) did not offset the increase in total funding costs (51 basis points).
The following tables detail the components of our net interest spread and net interest margin.Three Months Ended September 30, Three Months Ended September 30, -------------------------------------- -------------------------------------- 2006 2005 -------------------------------------- --------------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate -------------------------------------- --------------------------------------Average Earning Assets Commercial & real estate loans (TE) $32,520 $1,759,173 7.34% $25,770 $1,584,244 6.46% Mortgage loans 6,411 423,610 6.05% 5,921 430,615 5.50% Consumer loans 19,547 897,658 8.64% 17,772 903,850 7.80% Loan fees & late charges 2,710 - 0.00% 2,183 - 0.00% ------------------------------------------------------------------------------ Total loans (TE) $61,188 $3,080,441 7.89% 51,646 2,918,709 7.03% US treasury securities 855 67,966 4.99% 62 11,296 2.17% US agency securities 16,456 1,356,478 4.85% 4,834 464,450 4.16% CMOs 1,439 145,494 3.96% 2,251 229,934 3.92% Mortgage backed securities 6,231 511,372 4.87% 4,773 436,733 4.37% Municipals (TE) 2,935 174,744 6.72% 2,792 160,502 6.96% Other securities 1,042 78,188 5.33% 733 61,304 4.78% ------------------------------------------------------------------------------ Total securities (TE) 28,958 2,334,242 4.96% 15,444 1,364,219 4.53% Total short-term investments 1,128 94,026 4.76% 416 52,933 3.12% Average earning assets yield (TE) $91,275 $5,508,709 6.60% $67,506 $4,335,861 6.19% Interest-Bearing Liabilities Interest-bearing transaction deposits $3,955 $1,590,318 0.99% $2,317 $1,311,779 0.70% Time deposits 16,353 1,571,129 4.13% 10,222 1,143,691 3.55% Public Funds 8,629 791,825 4.32% 4,740 617,017 3.05% ------------------------------------------------------------------------------ Total interest bearing deposits $28,936 $3,953,272 2.90% 17,279 3,072,487 2.23% Customer repos 2,785 271,582 4.07% 1,467 248,505 2.34% Other borrowings 267 33,104 3.20% 913 87,253 4.15% ------------------------------------------------------------------------------ Total borrowings 3,052 304,686 3.97% 2,380 335,758 2.81% Total interest bearing liability cost $31,988 $4,257,959 2.98% $19,659 $3,408,246 2.29% Noninterest-bearing deposits 1,098,716 729,216 Other net interest-free funding sources 152,035 198,399 Total Cost of Funds $31,988 $5,508,709 2.30% $19,659 $4,335,861 1.80% Net Interest Spread (TE) $59,286 3.62% $47,847 3.91% Net Interest Margin (TE) $59,286 $5,508,709 4.29% $47,847 $4,335,861 4.40%
Nine Months Ended September 30, Nine Months Ended September 30, ------------------------------------- --------------------------------------- 2006 2005 ------------------------------------- ---------------------------------------(dollars in thousands) Interest Volume Rate Interest Volume Rate ------------------------------------- ---------------------------------------Average Earning Assets Commercial & real estate loans (TE) $91,770 $1,711,525 7.17% $71,847 $1,533,208 6.26% Mortgage loans 18,289 414,768 5.88% 17,504 418,479 5.58% Consumer loans 55,376 889,140 8.33% 51,200 892,316 7.67% Loan fees & late charges 7,506 - 0.00% 6,510 - 0.00% ------------------------------------------------------------------------------ Total loans (TE) $172,941 $3,015,434 7.66% 147,061 2,844,003 6.91% US treasury securities 1,936 56,722 4.56% 182 11,144 2.19% US agency securities 46,196 1,299,845 4.74% 14,096 459,784 4.09% CMOs 4,874 164,723 3.95% 7,546 253,121 3.97% Mortgage backed securities 17,393 491,177 4.72% 14,490 439,270 4.40% Municipals (TE) 8,344 165,533 6.72% 8,504 162,160 6.99% Other securities 2,859 76,068 5.01% 2,189 62,664 4.66% ------------------------------------------------------------------------------ Total securities (TE) 81,602 2,254,068 4.83% 47,008 1,388,143 4.52% Total short-term investments 8,684 255,265 4.55% 1,507 77,300 2.61% Average earning assets yield (TE) $263,226 $5,524,767 6.36% $195,576 $4,309,446 6.06% Interest-Bearing Liabilities Interest-bearing transaction deposits $11,001 $1,666,689 0.88% $6,367 $1,321,105 0.64% Time deposits 43,809 1,494,748 3.92% 29,151 1,116,876 3.49% Public Funds 24,036 780,947 4.11% 12,900 670,477 2.57% ------------------------------------------------------------------------------ Total interest bearing deposits $78,845 $3,942,384 2.67% 48,417 3,108,457 2.08% Customer repos 5,999 234,576 3.42% 3,226 231,736 1.86% Other borrowings 1,053 33,090 4.25% 2,265 72,455 4.18% ------------------------------------------------------------------------------ Total borrowings 7,051 267,666 3.52% 5,491 304,192 2.41% Total interest bearing liability cost $85,897 $4,210,050 2.73% $53,908 $3,412,649 2.11% Noninterest-bearing deposits 1,158,844 720,413 Other net interest-free funding sources 155,873 176,384 Total Cost of Funds $85,897 $5,524,767 2.08% $53,908 $4,309,446 1.67% Net Interest Spread (TE) $177,329 3.64% $141,667 3.95% Net Interest Margin (TE) $177,329 $5,524,767 4.28% $141,667 $4,309,446 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.
During the third quarter of 2006, we recorded a $20.0 million negative provision, primarily as a result of a better than expected credit loss experience related to Hurricane Katrina; 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 third quarter of 2006 were 0.34%, compared to 0.23% in the third quarter of 2005. Storm-related net charge-offs for the third quarter of 2006 were $0.3 million and have totaled $4.4 million since the third quarter of 2005.
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 September 30, Nine Months Ended September 30, 2006 2005 2006 2005 -------------- -------------- -------------- --------------Annualized net charge-offs to average loans 0.34% 0.23% 0.24% 0.27% Annualized provision (recovery) for loan losses to average loans -2.60% 5.06% -2.75% 5.84% Average allowance for loan losses to average loans 1.57% 2.62% 1.60% 2.69% Gross charge-offs $ 6,358 $ 3,699 $ 15,022 $ 11,264 Gross recoveries $ 3,750 $ 1,996 $ 9,521 $ 5,610 Non-accrual loans $ 5,179 $ 10,373 $ 5,179 $ 10,373 Accruing loans 90 days or more past due $ 3,626 $ 6,156 $ 3,626 $ 6,156
Accruing loans 90 days or more past due decreased $2.5 million from September 30, 2005. Since December 31, 2005, accruing loans 90 days or more past due, net of deferrals, have decreased $13.8 million to $3.6 million at September 30, 2006. This decrease is related to improved ability of certain borrowers to meet their regular payments after Hurricane Katrina.
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 storm-related gains/(losses) and securities transactions, non-interest income for the third quarter was up $4.0 million, or 19 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 service charge fees (up $1.7 million, or 22 percent). In addition, debit card and merchant fees were up $0.7 million, when compared to the same quarter a year ago. However, insurance fees were down $0.7 million.
The components of non-interest income for the three and nine months ended September 30, 2006 and 2005 are presented in the following table:
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------(dollars in thousands) Service charges on deposit accounts $ 9,719 $ 7,975 $ 26,826 $ 27,924 Trust fees 3,174 2,761 9,662 8,161 Credit card merchant discount fees 1,744 1,055 5,316 3,160 Income from insurance operations 4,145 4,883 13,900 12,262 Investment & annuity fees 1,595 1,304 4,450 4,039 ATM fees 1,223 871 3,790 3,397 Secondary mortgage market operations 1,018 377 2,583 1,552 Other income 3,009 2,374 9,932 8,226 ----------------- ----------------- ----------------- ----------------- Total other non-interest income 25,627 21,600 76,459 68,721 Net storm-related gain - 12,276 - 12,276 Securities transactions gains (losses), net 110 (18) 228 (26) ----------------- ----------------- ----------------- ----------------- Total non-interest income $ 25,737 $ 33,858 $ 76,687 $ 80,971 ================= ================= ================= =================
Operating expenses for the third quarter were $7.6 million, or 18 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 $2.8 million), data processing expense (up $1.7 million), professional services expense (up $1.3 million) and all other expenses (up $1.8 million).
The following table presents the components of non-interest expense for the three and nine months ended September 30, 2006 and 2005.
Three Months Ended September 30, Nine Months Ended September 30, 2006 2005 2006 2005 ----------------- ----------------- ----------------- -----------------(dollars in thousands) Employee compensation $ 21,790 $ 19,799 $ 64,429 $ 55,854 Employee benefits 5,269 4,476 15,232 13,725 ----------------- ----------------- ----------------- ----------------- Total personnel expense 27,059 24,275 79,661 69,579 ----------------- ----------------- ----------------- ----------------- Equipment and data processing expense 6,218 4,205 16,201 12,896 Net occupancy expense 2,882 2,617 10,015 7,688 Postage and communications 1,936 2,203 6,881 5,871 Ad valorem and franchise taxes 519 1,066 2,680 2,570 Legal and professional services 3,702 2,391 9,625 8,295 Stationery and supplies 519 376 1,604 1,326 Amortization of intangible assets 445 514 1,626 1,676 Advertising 1,985 916 5,091 3,763 Deposit insurance and regulatory fees 257 161 550 656 Training expenses 106 60 418 325 Other expense 4,709 3,986 16,322 12,272 ----------------- ----------------- ----------------- ----------------- Total non-interest expense $ 50,337 $ 42,770 $ 150,674 $ 126,917 ================= ================= ================= =================
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 nine months ended September 30, 2006 and 2005, the effective federal income tax rate was approximately 32% and 28%, respectively. The total amount of tax-exempt income earned during the first nine months of 2006 was $10.9 million compared to $9.5 million for the comparable period in 2005. Tax-exempt income for nine months ended September 30, 2006 consisted of $5.0 million from securities and $5.9 million from loans and leases. Tax-exempt income for the first nine months of 2005 consisted of $5.3 million from securities and $4.2 million from loans and leases.
In the normal course of business, we enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. Such instruments are not reflected in the accompanying condensed consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the condensed consolidated balance sheets. The contract amounts of these instruments reflect our exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. We undertake the same credit evaluation in making commitments and conditional obligations as we do for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At September 30, 2006, we had $858.6 million in unused loan commitments outstanding, of which approximately $461.1 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 September 30, 2006, we had $55.4 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2006 according to expiration date.
Expiration Date Less than 1-3 3-5 More than Total 1 year years years 5 years --------------- -------------- ------------ ------------ --------------(dollars in thousands) Commitments to extend credit $ 858,649 $ 544,373 $ 38,667 $ 41,064 $ 234,545 Letters of credit 55,354 27,738 18,673 8,943 - --------------- -------------- ------------ ------------ -------------- Total $ 914,003 $ 572,111 $ 57,340 $ 50,007 $ 234,545 =============== ============== ============ ============ ==============
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 No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”), 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 03-1 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 include accounting considerations subsequent to the recognition of an other-than-temporary impairment and require 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) 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 provides 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 No. 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) 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 nine months ended September 30, 2006 is an increase in compensation expense of $438,000 and $2,019,000, respectively, or a reduction in diluted earnings per share of $0.01 and $0.06, respectively.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. 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 its results of operations and financial position.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements in accordance with SFAS No.109,Accounting for Income Taxes, when it is more likely than not that the position will be sustained based on its technical merits. FIN 48 also prescribes how to measure the tax benefit recognized and provides guidance on when a tax benefit should be derecognized as well as various other accounting, presentation and disclosure matters. This interpretation is effective for us beginning in fiscal year 2007. We do not believe the adoption of FIN 48 will have a material impact on our results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R). This pronouncement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, this statement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. Application of this standard at December 31, 2005 would have required adjustment to our accrued pension liability relating to our pension plan and our post-retirement benefit plans, resulting in an increase to accrued employee benefit liabilities of approximately $18.0 million and decrease in stockholders’ equity of approximately $18.0 million. However, the effect at December 31, 2006, the adoption date, or any other future date could significantly differ depending on the measurement of pension assets and obligations at such date. We are currently evaluating the requirements of SFAS No. 158 and have not yet determined the impact on our consolidated financial statements.
In September 2006, the FASB ratified the consensus the EITF reached regarding EITF No.06-5, Accounting for Purchases of Life Insurance — Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin 85-4 (“EITF 06-5”). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract.” For group policies with multiple certificates or multiple policies with a group rider, the Task Force also tentatively concluded that the amount that could be realized should be determined at the individual policy or certificate level, i.e., amounts that would be realized only upon surrendering all of the policies or certificates would not be included when measuring the assets. This interpretation is effective for us beginning in fiscal year 2007. We do not believe the adoption of EITF 06-5 will have a material impact on our results of operations and financial position.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. We are currently evaluating the impact of SAB 108 on its consolidated financial statements.
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This Act provides a safe harbor for such disclosures that protects the companies from unwarranted litigation if the actual results are different from management expectations. This report contains forward-looking statements and reflects management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause our actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
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. Interest rate risk sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. In an attempt to manage our exposure to changes in interest rates, management monitors interest rate risk and administers an interest rate risk management policy designed to produce a relatively stable net interest margin in periods of interest rate fluctuations.
Notwithstanding our interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income and the fair value of our investment securities. As of quarter close, the effective duration of the securities portfolio was 2.00. A rate increase of 100 basis points would move the effective duration to 1.98, while a reduction in rates of 100 basis points would result in an effective duration of 1.07.
In adjusting our asset/liability position, the Board and management attempt to manage our interest rate risk while enhancing net interest margins. This measurement is done primarily by running net interest income simulations. The net interest income simulations run at September 30, 2006 indicate that the Company is to some extent asset sensitive as compared to the stable rate environment. Exposure to instantaneous changes in interest rate risk for the current quarter is presented in the following table.
Net Interest Income (te) at Risk --------------------------------------------------- Change in Estimated interest rate increase (decrease) (basis point) in net interest income --------------------- -------------------------100 -2.52% Stable 0.00% +100 0.90%
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 nine month period ended September 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 ----------------- ----------------- -------------------- -------------------July 1, 2006 - July 31, 2006 - (2) $ - - 551,008 August 1, 2006 - August 31, 2006 - (3) - 551,008 Sept. 1, 2006 - Sept. 30, 2006 - (4) - 551,008 ----------------- ----------------- -------------------- Total as of Sept. 30, 2006 - $ - - ================= ================= ==================== (1) The Company publicly announced its stock buy-back program on July 18, 2000. (2) 0 shares were purchased on the open market during July in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (3) 0 shares were purchased on the open market during August in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996. (4) 0 shares were purchased on the open market during September in order to satisfy obligations pursuant to the Company's long term incentive plan that was established in 1996.
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: November 8, 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.