UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIESEXCHANGE ACT OF 1934For the quarterly period ended June 30, 2008
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from _____________________ to ________________________
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 incorporation or organization)
(I.R.S. Employer Identification Number)
One Hancock Plaza, P.O. Box 4019, Gulfport, Mississippi
39502
(Address of principal executive offices)
(Zip Code)
(228) 868-4000
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant 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 o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
31,407,603 common shares were outstanding as of July 31, 2008 for financial statement purposes.
Hancock Holding Company
Index
Page Number
Part I. Financial Information
ITEM 1.
Financial Statements
Condensed Consolidated Balance Sheets —June 30, 2008 (unaudited) and December 31, 2007
1
Condensed Consolidated Statements of Income (unaudited) —Three and six months ended June 30, 2008 and 2007
2
Condensed Consolidated Statements of Stockholders’ Equity(unaudited) – Six months ended June 30, 2008 and 2007
3
Condensed Consolidated Statements of Cash Flows (unaudited) —Six months ended June 30, 2008 and 2007
4
Notes to Condensed Consolidated Financial Statements (unaudited) —June 30, 2008
5-21
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22-34
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
35
ITEM 4.
Controls and Procedures
Part II. Other Information
ITEM 1A.
Risk Factors
36
Unregistered Sales of Equity Securities and Use of Proceeds
Submission of Matters to a Vote of Security Holders
ITEM 6.
Exhibits
Signatures
37
Item 1. Financial Statements
Hancock Holding Company and SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except share data)
June 30,2008(unaudited)
December 31,2007
ASSETS
Cash and due from banks (non-interest bearing)
$
180,755
182,615
Interest-bearing time deposits with other banks
9,816
8,560
Federal funds sold
32
117,721
Trading securities
2,272
197,425
Securities available for sale, at fair value (amortized cost of $1,819,172 and $1,479,963)
1,805,323
1,480,196
Loans held for sale
28,808
18,957
Loans
3,802,346
3,612,883
Less: allowance for loan losses
(53,300
)
(47,123
unearned income
(14,542
(16,326
Loans, net
3,734,504
3,549,434
Property and equipment, net of accumulated depreciation of $94,444 and $87,160
205,601
200,566
Other real estate, net
1,549
2,172
Accrued interest receivable
32,182
35,117
Goodwill, net
62,277
Other intangible assets, net
7,175
8,298
Life insurance contracts
143,510
139,421
Reinsurance receivables
30,555
34,827
Deferred tax asset, net
11,104
3,976
Other assets
14,653
14,417
Total assets
6,270,116
6,055,979
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand
894,544
907,874
Interest-bearing savings, NOW, money market and time
4,126,264
4,101,660
Total deposits
5,020,808
5,009,534
Federal funds purchased
19,495
4,100
Securities sold under agreements to repurchase
543,678
371,604
Long-term notes
717
793
Policy reserves and liabilities
51,218
58,489
Other liabilities
60,795
57,272
Total liabilities
5,696,711
5,501,792
Stockholders’ Equity
Common stock-$3.33 par value per share; 350,000,000 shares authorized, 31,385,870 and 31,294,607 issued and outstanding, respectively
104,515
104,211
Capital surplus
89,501
87,122
Retained earnings
402,543
377,481
Accumulated other comprehensive loss, net
(23,154
(14,627
Total stockholders’ equity
573,405
554,187
Total liabilities and stockholders’ equity
See notes to unaudited condensed consolidated financial statements.
Hancock Holding Company and SubsidiariesCondensed Consolidated Statements of Income(Unaudited)(In thousands, except per share amounts)
Three Months Ended June 30,
Six Months Ended June 30,
2008
2007
Interest income:
Loans, including fees
59,529
63,202
122,023
124,054
Securities - taxable
20,616
19,397
40,079
39,723
Securities - tax exempt
1,304
1,550
2,699
3,198
263
722
1,708
3,588
Other investments
42
66
58
83
Total interest income
81,754
84,937
166,567
170,646
Interest expense:
Deposits
25,556
31,884
56,173
64,714
Federal funds purchased and securities sold under agreements to repurchase
3,997
1,827
7,759
3,684
Long-term notes and other interest expense
40
10
51
21
Capitalized interest
(20
(327
(66
(717
Total interest expense
29,573
33,394
63,917
67,702
Net interest income
52,181
51,543
102,650
102,944
Provision for loan losses, net
2,787
1,238
11,605
2,449
Net interest income after provision for loan losses
49,394
50,305
91,045
100,495
Noninterest income:
Service charges on deposit accounts
10,879
10,471
21,669
19,662
Other service charges, commissions and fees
16,202
15,221
31,758
28,930
Securities gains, net
426
34
6,078
Other income
4,309
5,018
8,691
8,575
Total noninterest income
31,816
30,744
68,196
57,207
Noninterest expense:
Salaries and employee benefits
27,031
24,837
52,662
51,401
Net occupancy expense
4,702
4,469
9,303
8,542
Equipment rentals, depreciation and maintenance
2,785
2,768
5,694
5,041
Amortization of intangibles
364
384
729
807
Other expense
17,307
19,916
33,935
36,290
Total noninterest expense
52,189
52,374
102,323
102,081
Net income before income taxes
29,021
28,675
56,918
55,621
Income tax expense
8,037
8,352
15,877
16,068
Net income
20,984
20,323
41,041
39,553
Basic earnings per share
0.67
0.63
1.31
1.22
Diluted earnings per share
0.66
0.62
1.29
1.20
Dividends paid per share
0.240
0.480
Weighted avg. shares outstanding-basic
31,382
32,233
31,366
32,447
Weighted avg. shares outstanding-diluted
31,814
32,749
31,779
33,024
Hancock Holding Company and SubsidiariesCondensed Consolidated Statements of Stockholders’ Equity(Unaudited)(In thousands, except share and per share data)
CapitalSurplus
RetainedEarnings
AccumulatedOtherComprehensiveLoss, net
Total
Common Stock
Shares
Amount
Balance, January 1, 2007
32,666,052
108,778
139,099
334,546
(24,013
558,410
Comprehensive income
Net income per consolidated statements of income
—
Net change in unfunded accumulated benefit obligation, net of tax
443
Net change in fair value of securities available for sale, net of tax
(7,785
32,211
Cash dividends declared ($0.480 per common share)
(15,654
Common stock issued, long-term incentive plan, including income tax benefit of $96
88,826
296
433
Compensation expense, long-term incentive plan
1,070
Repurchase/retirement of common stock
(661,020
(2,201
(24,867
(27,068
Balance, June 30, 2007
32,093,858
106,873
115,735
358,445
(31,355
549,698
Balance, January 1, 2008
31,294,607
475
(9,002
32,514
SFAS 158, change in measurement date
(815
(15,164
Common stock issued, long-term incentive plan, including income tax benefit of $150
91,263
304
1,066
1,370
1,313
Balance, June 30, 2008
31,385,870
Hancock Holding Company and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
7,899
6,034
Provision for loan losses
Provision for losses on other real estate owned, net
(7
Loss/(gain) on sales of other real estate owned
121
(754
Deferred tax benefit
(2,334
(773
Increase in cash surrender value of life insurance contracts
(4,089
(2,531
Gain on sales/paydowns of securities available for sale, net
(2,695
(40
Gain on disposal of other assets
(663
(16
Gain on sale of loans held for sale
(224
(198
Gain on trading securities
(3,383
Amortization/(accretion) of securities premium/discount, net
843
(1,973
Amortization of mortgage servicing rights
111
179
Amortization of intangible assets
Stock-based compensation expense
Decrease (increase) in accrued interest receivable
2,935
(1,461
Increase (decrease) in accrued expenses
6,866
(2,602
Increase in other liabilities
504
986
Decrease in interest payable
(2,892
(1,047
Decrease in policy reserves and liabilities
(7,271
(11,204
Decrease in reinsurance receivable
4,272
3,545
Increase in other assets
(236
(2,137
Proceeds from sale of loans held for sale
100,290
129,892
Originations of loans held for sale
(109,917
(137,946
Proceeds from paydowns of securities held for trading
7,635
Excess tax benefit from share based payments
(92
(96
Other, net
18
691
Net cash provided by operating activities
52,388
22,421
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing time deposits
(1,256
(2,419
Proceeds from sales of securities available for sale
3,045
8,969
Proceeds from maturities of securities available for sale
699,584
650,546
Purchases of securities available for sale
(849,081
(382,845
Net decrease (increase) in federal funds sold
117,689
27,914
Net increase in loans
(199,514
(170,422
Purchases of property and equipment
(14,730
(44,261
Proceeds from sales of property and equipment
1,802
204
Proceeds from sales of other real estate
3,340
1,180
Net cash (used in) provided by investing activities
(239,121
88,866
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
11,274
(53,321
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
187,469
(22,752
Repayments of long-term notes
(76
(5
Dividends paid
Proceeds from exercise of stock options
1,278
633
Excess tax benefit from stock option exercises
92
96
Net cash (used in) provided by financing activities
184,873
(118,071
NET DECREASE IN CASH AND DUE FROM BANKS
(1,860
(6,784
CASH AND DUE FROM BANKS, BEGINNING
190,114
CASH AND DUE FROM BANKS, ENDING
183,330
SUPPLEMENTAL INFORMATION:
Income taxes paid
11,307
17,033
Interest paid, including capitalized interest of $66 and $717, respectively
66,809
68,750
Restricted stock issued to employees of Hancock
445
137
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
3,240
915
Financed sale of foreclosed property
400
Transfers from trading securities to available for sale securities
190,802
Hancock Holding Company and SubsidiariesNotes to Condensed Consolidated Financial Statements(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements of Hancock Holding Company and all majority-owned subsidiaries (the “Company”) included herein are unaudited; however, they include all adjustments all of which are of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Company’s Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007, the Company’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007. 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 and the notes thereto included in the Company’s 2007 Annual Report on Form 10-K. The results of operations for the six months ended June 30, 2008 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 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 unaudited condensed consolidated financial statements.
Critical Accounting Policies
There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K, for the year ended December 31, 2007.
5
2. Fair Value of Assets
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (“SFAS No. 157”), on January 1, 2008. SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 defines a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value giving preference to quoted prices in active markets (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, observable inputs other than quoted prices, such as interest rates and yield curves, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. In addition, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment SFAS No. 115 (“SFAS No. 159”), on January 1, 2008. The Company did not elect to fair value any additional items under SFAS No. 159. The Company, in accordance with Financial Accounting Standards Board Staff Position No. 157-2 “The Effective Date of FASB Statement No. 157”, will defer application of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until January 1, 2009.
Fair Value of Assets Measured on a Recurring Basis
The following table presents for each of the fair-value hierarchy levels the Company’s financial assets and liabilities that are measured at fair value (in thousands) on a recurring basis at June 30, 2008.
Level 1
Level 2
Net Balance
Assets
U.S. agency securities
391,496
Mortgage backed securities
1,086,592
CMOs
145,475
Municipal bonds available for sale
181,760
Swaps
(1,042
Loans carried at fair value
24,400
393,768
1,437,185
1,830,953
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a non-recurring basis and therefore are not included in the table above. Impaired loans are level 2 assets measured using appraisals from external parties of the collateral less any prior liens. As of June 30, 2008, the fair value of impaired loans was $30.8 million.
6
Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)
3. Securities
Available for Sale Securities
For the six months ended June 30, 2008, the Company sold securities for a net gain of $2.7 million. Included in the net gain was a $2.8 million gross gain for the sale of securities as a result of the VISA IPO that occurred in the first quarter of 2008 and a gross loss of $99,468 that occurred in the second quarter of 2008 from Magna Insurance Company, a subsidiary of the Company, due to deterioration of the credit quality of an investment. For the six months ended June 30, 2007, Magna Insurance Company, sold thirty available for sale securities out of its portfolio to provide liquidity for surrenders of annuities for Magna Insurance Company. These securities had a gross loss of $37,164.
Trading Securities
For the six months ended June 30, 2008, the Company recognized $3.3 million in net gains, including a net gain of $3.2 million for the fair value adjustment at the date of the transfer of trading securities from trading to available for sale in the first quarter of 2008 because the Company intends to hold them for a longer period of time. There were no trading gains or losses in the first six months of 2007.
4. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $3.8 billion at June 30, 2008 and $3.6 billion at December 31, 2007. The Company also held $28.8 million and $19.0 million in loans held for sale at June 30, 2008 and December 31, 2007, respectively, carried at lower of cost or fair value. These loans are originated on a best-efforts basis, whereby a commitment by a third party to purchase the loan has been received concurrent with the Banks’ commitment to the borrower to originate the loan.
In some instances, loans are placed on 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 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. Nonaccrual loans and foreclosed assets, which make up total non-performing assets, amounted to approximately 0.52% and 0.43% of total loans at June 30, 2008 and December 31, 2007, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three and six months ended June 30, 2008 was approximately $276,000 and $537,000, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three and six months ended June 30, 2007 was immaterial.
The Company’s investments in impaired loans at June 30, 2008 and December 31, 2007 were $42.8 million and $43.5 million, respectively.
7
4. Loans and Allowance for Loan Losses (continued)
The following table sets forth, for the periods indicated, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off (in thousands):
Balance of allowance for loan losses at beginning of period
53,008
46,517
47,123
46,772
Loans charged-off:
Commercial, real estate and mortgage
981
978
2,016
1,481
Direct and indirect consumer
1,361
1,179
2,670
2,394
Finance company
945
648
2,197
1,281
Demand deposit accounts
681
716
1,282
1,441
Total charge-offs
3,968
3,521
8,165
6,597
Recoveries of loans previously charged-off:
320
1,064
521
1,375
544
383
954
929
234
123
438
267
375
423
824
1,032
Total recoveries
1,473
1,993
2,737
3,603
Net charge-offs
2,495
1,528
5,428
2,994
Balance of allowance for loan losses at end of period
53,300
46,227
The following table presents the makeup of allowance for loan losses by:
June 30, 2008
December 31, 2007
(In thousands)
Balance of allowance for loan losses
Non-impaired
41,282
38,146
Impaired
12,018
8,977
Total allowance for loan losses
As of June 30, 2008 and December 31, 2007, the Company had $24.4 million and $18.8 million, respectively, in loans carried at fair value.
8
Hancock Holding Company and SubsidiariesNotes to Condensed Consolidated Financial Statements – (Continued)(Unaudited)
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:
Ratios:
Net charge-offs to average net loans (annualized)
0.27
%
0.18
0.30
Net charge-offs to period-end net loans (annualized)
0.26
0.29
Allowance for loan losses to average net loans
1.44
1.37
1.45
1.39
Allowance for loan losses to period-end net loans
1.41
1.35
Net charge-offs to loan loss allowance
4.68
3.31
10.18
6.48
Provision for loan losses to net charge-offs
111.70
81.02
213.80
81.80
5. Goodwill and Other Intangible Assets
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 (“SFAS No. 142”), the Company tests its goodwill for impairment annually. No impairment charges were recognized as of June 30, 2008. The carrying amount of goodwill was $62.3 million as of June 30, 2008 and December 31, 2007.
The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated (in thousands):
As ofJune 30, 2008
As ofDecember 31, 2007
Gross CarryingAmount
AccumulatedAmortization
Net
Amortizable intangible assets:
Core deposit intangibles
14,137
9,065
5,072
8,500
5,637
Value of insurance business acquired
2,752
1,158
1,594
3,757
1,807
1,950
Non-compete agreements
322
266
56
368
252
116
Trade name
100
60
50
17,311
10,549
6,762
18,362
10,609
7,753
Aggregate amortization expense for:
283
331
565
605
Value of insurance businesses acquired
77
29
140
155
(1
19
14
9
5. Goodwill and Other Intangible Assets (continued)
The amortization period used for core deposit intangibles and value of insurance business acquired is 10 years. The amortization period used for non-compete agreements and trade name intangibles is 5 years. The following table shows estimated amortization expense of other intangible assets for the remainder of 2008, four succeeding years and thereafter, calculated based on current amortization schedules (in thousands):
721
2009
1,435
2010
1,400
2011
1,161
2012
946
Thereafter
1,099
6. Mortgage Banking (including Mortgage Servicing Rights)
The Company adopted SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”) on January 1, 2007 without material impact. 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. Under SFAS No. 156, the Company decided to continue to use the amortization method instead of adopting the fair value measurement method. Management has determined that it has one class of servicing rights – mortgage servicing rights – which are based on the type of loan. The following are the risk characteristics of the underlying financial assets used to stratify servicing assets for purposes of measuring impairment: interest rate, type of product (fixed versus variable), duration and asset quality. The fair values of the mortgage servicing rights were $1.5 million and $1.8 million as of June 30, 2008 and December 31, 2007, respectively. The fair value was based upon Bloomberg prepayment speeds for the performing portion of the portfolio and actual prepayment speeds for the watch list portion of the portfolio. The following table shows the amounts (in thousands) of contractually specified fees for the three and six months ended June 30, 2008 and 2007, respectively:
Servicing fees
160
280
326
Late fees
16
22
33
Ancillary fees
149
178
306
369
The gross carrying amount of mortgage servicing rights is equal to the net carrying amount. There were no valuation allowances on the mortgage servicing rights portfolio as of June 30, 2008 or December 31, 2007.
6. Mortgage Banking (including Mortgage Servicing Rights) (continued)
The changes in the carrying amounts of mortgage servicing rights as of June 30, 2008 and as of December 31, 2007 are as follows (in thousands):
Net CarryingAmount
Balance as of December 31, 2006
941
Additions
Disposals
(60
Amortization
(345
Balance as of December 31, 2007
545
(21
(111
Balance as of June 30, 2008
413
The following table shows estimated amortization expense of mortgage servicing rights for the remainder of 2008, the four succeeding years and thereafter, calculated based on current amortization schedules (in thousands):
101
145
95
15
7. Earnings Per Share
Following is a summary of the information used in the computation of earnings per common share (in thousands):
Net income - used in computation of earnings per share
Weighted average number of shares outstanding - used in computation of basic earnings per share
Effect of dilutive securities Stock options and restricted stock awards
432
516
577
Weighted average number of shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per share
There were no anti-dilutive share-based incentives outstanding for the three and six months ended June 30, 2008. There were 60,585 and 42,347 anti-dilutive share-based incentives outstanding for the three and six months ened June 30, 2007, respectively.
11
8. Share-Based Payment Arrangements
Stock Option Plans
At June 30, 2008, the Company had two stock option plans. 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% of the market price. Option 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 upon restricted stock award vesting. The 1996 Long-Term Incentive Plan expired in 2006 and no additional awards may be granted under the 1996 Plan.
In March of 2005, the stockholders of the Company approved Hancock Holding Company’s 2005 Long-Term Incentive Plan (the “2005 Plan”). The 2005 Plan is designed to enable employees and directors to obtain a proprietary interest in the Company and to attract and retain outstanding personnel. The 2005 Plan provides that awards for up to an aggregate of five million (5,000,000) shares of the Company’s common stock may be granted during the term of the 2005 Plan. The 2005 Plan limits the number of shares for which awards may be granted during any calendar year to two percent (2%) of the outstanding Company’s common stock as reported for the fiscal year ending immediately prior to such plan year.
The fair value of each option award is estimated on the date of grant using Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Six Months Ended June 30,2008
Expected volatility
29.53
Expected dividends
2.60
Expected term (in years)
6.42
Risk-free rates
3.32
12
8. Share-Based Payment Arrangements (continued)
A summary of option activity under the plans for the six months ended June 30, 2008, and changes during the six months then ended is presented below:
Options
Number ofShares
Weighted-AverageExercisePrice ($)
Weighted-AverageRemainingContractualTerm(Years)
AggregateIntrinsicValue ($000)
Outstanding at January 1, 2008
1,345,333
29.04
6.1
Granted
4,289
36.88
Exercised
(53,756
23.65
861
Forfeited or expired
(7,625
32.28
Outstanding at June 30, 2008
1,288,241
29.27
5.8
13,598
Exercisable at June 30, 2008
1,004,136
26.09
5.1
13,546
Share options expected to vest
231,971
40.46
8.4
46
The total intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $.9 million and $3.5 million, respectively.
A summary of the status of the Company’s nonvested shares as of June 30, 2008, and changes during the six months ended June 30, 2008, is presented below:
Weighted-AverageGrant-DateFair Value ($)
Nonvested at January 1, 2008
589,090
23.78
18,223
30.21
Vested
(99,084
17.15
Forfeited
(5,116
23.01
Nonvested at June 30, 2008
503,113
23.03
As of June 30, 2008, there was $7.1 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 2.82 years. The total fair value of shares which vested during the six months ended June 30, 2008 and 2007 was $1.7 million and $1.2 million, respectively.
13
9. Retirement Plans
Net periodic benefits cost includes the following components for the three and six months ended June 30, 2008 and 2007:
Pension Benefits
Other Post-retirement Benefits
Service cost
656,542
663,956
40,500
68,500
Interest cost
1,129,247
958,450
122,500
102,000
Expected return on plan assets
(1,207,550
(1,051,435
Amortization of prior service cost
(13,250
Amortization of net loss
236,869
280,549
36,500
148,651
Amortization of transition obligation
1,250
Net periodic benefit cost
815,108
851,520
187,500
307,151
1,313,084
1,327,912
81,000
137,000
2,258,494
1,916,900
245,000
204,000
(2,415,100
(2,102,870
(26,500
473,738
561,098
73,000
168,151
2,500
1,630,216
1,703,040
375,000
485,151
The Company anticipates that it will contribute $4.6 million to its pension plan and approximately $750,000 to its post-retirement benefits in 2008. During the first six months of 2008, the Company contributed approximately $2.0 million to its pension plan and approximately $306,000 for post-retirement benefits.
10. Other Service Charges, Commission and Fees, and Other Income
Components of other service charges, commission and fees are as follows:
Trust fees
4,575
4,124
8,751
7,816
Credit card merchant discount fees
2,884
2,618
5,423
4,909
Income from insurance operations
4,259
5,033
8,600
9,402
Investment and annuity fees
2,727
2,018
5,536
3,995
ATM fees
1,757
1,428
3,448
2,808
Total other service charges, commissions and fees
Components of other income are as follows:
Secondary mortgage market operations
753
1,116
1,531
2,027
Income from bank owned life insurance
1,580
1,317
3,024
2,508
Outsourced check income
52
637
1,289
Other
1,924
1,948
3,902
2,751
Total other income
11. Other Expense
Components of other expense are as follows:
Data processing expense
4,635
4,352
8,838
8,596
Postage and communications
2,285
2,688
4,599
4,947
Ad valorem and franchise taxes
1,010
827
2,125
1,648
Legal and professional services
3,083
4,672
5,828
8,425
Stationery and supplies
551
640
1,132
Advertising
1,446
2,033
3,250
3,595
Deposit insurance and regulatory fees
689
253
1,014
509
Training expenses
167
161
353
335
Other fees
872
549
1,982
1,376
Annuity expense
141
339
1,114
802
Claims paid
235
470
392
898
2,193
2,932
3,462
4,027
Total other expense
12. Income Taxes
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007 and determined that there was no need to make an adjustment to retained earnings due to the adoption of this Interpretation. There were no material uncertain tax positions as of June 30, 2008 and December 31, 2007. The Company does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.
It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. The interest accrual is considered immaterial to the Company’s consolidated balance sheet as of June 30, 2008 and December 31, 2007.
The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various returns in the states where its banking offices are located. Its filed income tax returns are no longer subject to examination by taxing authorities for years before 2004.
13. Segment Reporting
The Company’s primary segments are geographically divided into the Mississippi (MS), Louisiana (LA), Florida (FL) and Alabama (AL) 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.
13. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
Three Months Ended June 30, 2008
MS
LA
FL
AL
Eliminations
Consolidated
Interest income
38,745
35,790
2,275
1,076
6,593
(2,725
Interest expense
17,371
11,787
1,173
552
1,300
(2,610
21,374
24,003
1,102
524
5,293
(115
214
1,074
195
912
Noninterest income
14,501
9,835
318
184
6,986
(8
2,626
908
122
91
146
3,893
Other noninterest expense
21,307
16,720
1,598
7,620
(23
48,296
11,728
15,136
(495
(849
3,601
(100
Income tax expense (benefit)
3,121
4,160
(325
(313
1,394
Net income (loss)
8,607
10,976
(170
(536
2,207
3,449,989
2,743,175
197,230
101,095
820,843
(1,042,216
Total interest income from affiliates
2,710
Total interest income from external customers
36,035
6,578
Amortization & (accretion) of securities
359
84
814
Three Months Ended June 30, 2007
44,117
37,306
2,347
316
6,464
(5,613
19,005
16,765
1,260
23
1,839
(5,498
25,112
20,541
1,087
293
4,625
Provision for (reversal of) loan losses
2,003
(1,161
(238
513
14,267
9,565
230
6,693
(12
2,237
741
110
114
3,208
23,385
16,435
1,341
361
7,949
(305
49,166
11,754
14,091
104
(194
2,742
3,338
(75
1,104
8,416
10,094
(119
1,638
3,307,456
2,523,738
172,904
17,066
799,179
(945,537
5,874,806
5,613
(24
(5,589
38,504
340
(172
(124
(273
17
Six Months Ended June 30, 2008
80,998
71,261
4,442
1,838
13,404
(5,376
37,130
25,603
2,400
974
2,956
(5,146
43,868
45,658
2,042
864
10,448
(230
4,896
3,981
271
646
1,811
27,240
25,619
563
14,486
5,358
1,806
226
221
287
7,898
41,538
31,865
3,114
2,200
15,775
(67
94,425
19,316
33,625
(1,006
(1,899
7,061
(179
4,880
9,622
(677
(689
2,741
14,436
(329
(1,210
4,320
5,320
45
75,678
71,254
4,438
13,359
74
119
Six Months Ended June 30, 2007
90,431
72,798
4,848
434
12,423
(10,288
38,957
32,502
2,494
26
3,781
(10,058
51,474
40,296
2,354
408
8,642
491
1,047
(322
1,112
25,334
17,721
13,774
4,136
1,464
224
43,630
33,307
2,716
403
16,303
(312
96,047
28,551
22,199
156
(121
4,777
59
8,483
5,889
(87
(46
1,829
20,068
16,310
243
2,948
10,288
49
(10,337
80,143
385
(1,048
(968
14. New Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of earnings per share pursuant to the two-class method. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data including any amounts related to interim periods, summaries of earnings and selected financial data. The Company is assessing the impact of adopting EITF 03-6-1, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In May 2008, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 162, The Hierarchy of Generally Accepted Principles (“SFAS No. 162”) which is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company will adopt the provisions of SFAS No. 162, when required, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In April 2008, the FASB has issued FASB Staff Position (FSP) 142-3, Determination of the Useful Life of Intangible Asset, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142.) The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is assessing the impact of FSP 142-3, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB 133 (“SFAS No. 161”) which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounting for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is assessing the impact of SFAS No. 161, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”) which applies to all business combinations. The statement requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” All business combinations will be accounted for by applying the acquisition method (previously referred to as the purchase method.) Companies will have to identify the acquirer; determine the acquisition date and purchase price; recognize at their acquisition-date fair values of the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, and recognize goodwill or, in the case of a bargain purchase, a gain.
14. New Accounting Pronouncements (continued)
SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and early adoption is prohibited. It will be applied to business combinations occurring after the effective date. The Company will adopt the provisions of SFAS No. 141R in the first quarter of 2009, as required, and the impact on the Company’s financial condition or results of operations is dependent on the extent of future business combinations.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (“SAB No. 109”). SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 also applies to any loan commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB No. 109 during the first quarter of 2008 did not have a material impact on the Company’s results of operations and financial position.
In June 2007, the FASB ratified EITF No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. The objective of this issue is to determine the accounting for the income tax benefits of dividend or dividend equivalents when the dividends or dividend equivalents are: (a) linked to equity-classified nonvested shares or share units or equity-classified outstanding share options and (b) charged to retained earnings under FASB Statement No. 123 (Revised 2004), Share-Based Payment. The Task Force reached a consensus that EITF No. 06-11 should be applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after September 15, 2007. The adoption of EITF No. 06-11 during the first quarter of 2008 did not have a material impact on the Company’s results of operations and financial position.
In March 2007, the FASB ratified EITF No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements. One objective of EITF No. 06-10 is to determine whether a liability for future benefits under a collateral assignment split-dollar life insurance arrangement that provides a benefit to an employee that extends into postretirement periods should be recognized in accordance with SFAS No. 106 or APB Opinion 12, as appropriate, based on the substantive agreement with the employee. Another objective of EITF No. 06-10 is to determine how the asset arising from a collateral assignment split-dollar life insurance arrangement should be recognized and measured. EITF No. 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF No. 06-10 during the first quarter of 2008 did not have a material impact on the Company’s results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment SFAS No. 115 (“SFAS No. 159”) which permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective. The FASB’s stated objective in issuing this standard is as follows: “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.” The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The adoption of SFAS No. 159 during the first quarter of 2008 did not have a material impact on the Company’s results of operations and financial position.
20
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”). This pronouncement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet. 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 effective for fiscal years ending after December 15, 2006. In addition, this statement requires an employer to measure the funded status of a plan as of its year-end balance sheet date effective for fiscal years ending after December 15, 2008. The Company adopted the requirement to recognize the funded status of the benefit plans and related disclosure requirements as of December 31, 2006. In the first quarter of 2008, the Company changed the measurement date of the funded status of the pension plan from September 30 to December 31. With the change in measurement date, the Company recorded an $815,107 adjustment to decrease beginning retained earnings and increase liabilities.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The disclosure provisions of SFAS No. 157 are included in Note 2. The adoption of SFAS No. 157 during the first quarter of 2008 did not have a material impact on the Company’s results of operations and financial position.
15. VISA IPO and Litigation
In the fourth quarter of 2007, the Company recorded a $2.5 million pretax charge pursuant to FASB Interpretation No. 45 “Guarantors Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”) for liabilities related to VISA USA’s antitrust settlement with American Express and other pending VISA litigation (reflecting its share as a VISA member.) In the first quarter of 2008 as part of VISA’s initial public offering, VISA redeemed 37.5% of shares held by the Company resulting in proceeds of $2.8 million in a realized security gain. The remaining 62.5% of the Class B shares are restricted and must be held for the longer period of 3 years or until all settlements are complete. At that time, the Company can keep the Class B shares or convert them to Class A publicly tradeable shares at a conversion rate to be determined. These shares are recorded at historical cost. The realized securities gain is included in the securities gain line of the noninterest income section of the Condensed Consolidated Statements of Income and the cash received is recorded in cash and due from banks in the assets section of the Condensed Consolidated Balance Sheets. In addition, VISA lowered its estimate of pending litigation settlements. Consequently, $1.3 million of the $2.5 million FIN No. 45 liability that was recorded in the fourth quarter was reversed in the first quarter of 2008. The reduction in the litigation liability is recorded in the other liabilities section of the Condensed Consolidated Balance Sheets and the reduction in litigation expense is recorded in the other expense line of the noninterest expense section of the Condensed Consolidated Statements of Income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
General
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 included in our 2007 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 160 banking and financial services offices and more than 130 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida and Alabama through four wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA), Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL) and Hancock Bank of Alabama, Mobile, Alabama (Hancock Bank AL). Hancock Bank MS, Hancock Bank LA, Hancock Bank FL and Hancock Bank AL are referred to collectively as the “Banks.”
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At June 30, 2008, we had total assets of $6.3 billion and employed on a full-time equivalent basis 1,261 persons in Mississippi, 551 persons in Louisiana, 54 persons in Florida and 37 persons in Alabama.
RESULTS OF OPERATIONS
Net income for the second quarter of 2008 totaled $21.0 million, an increase of $0.7 million, or 3.3%, from the second quarter of 2007. Diluted earnings per share for the second quarter of 2008 were $0.66, an increase of $0.04 from the same quarter a year ago. Return on average assets for the second quarter of 2008 was 1.36% compared to 1.42% for the second quarter of 2007. Return on average common equity was 14.51% compared to 14.53% for the same quarter a year ago. Net income for the first six months of 2008 was $41.0 million, an increase of $1.5 million, or 3.8%, from the first half of 2007. Diluted earnings per share were $1.29 for the first half of 2008, an increase of $0.09 compared to the prior year.
Net Interest Income
Net interest income (te) for the second quarter increased $0.8 million, or 1.5%, from the second quarter of 2007. The net interest margin (te) of 3.90% was 27 basis points narrower than the same quarter a year ago. Growth in average earning asset levels were strong compared to the same quarter a year ago with an increase of $435.8 million, or 8.4%, mostly reflected in higher average loans (up $340.5 million, or 10.1%). With short-term interest rates down significantly from a year ago, the Company’s loan yield fell 106 basis points, with the yield on average earning assets down 74 basis points. However, total funding costs were down 47 basis points as the severity of the recent rate cuts by the Federal Reserve over the course of the past year were difficult to immediately be reflected in lower deposit rates.
Provision for Loan Losses
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. 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. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with our loan portfolio. The Company recorded a provision for loan losses of $2.8 million in the second quarter of 2008 compared to $1.2 million in the second quarter of 2007 due to growth in our loan portfolio and a weakening in the local real estate markets.
Allowance for Loan Losses and Asset Quality
At June 30, 2008, the allowance for loan losses was $53.3 million compared with $47.1 million at December 31, 2007, an increase of $6.2 million. The increase in the allowance for loan losses through the first six months of 2008 is attributed to increases in delinquency and non-accrual balances primarily within the real estate segment across all markets and an increase in specific commercial and real estate credits as measured within our SFAS No. 114 analysis across each market. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses. Management believes the June 30, 2008 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 0.27% for the second quarter of 2008, compared to 0.18% in the second quarter of 2007. The majority of the increase in net charge-offs, as compared to the second quarter of 2007, was caused by the weakening local real estate markets mostly in commercial real estate loans.
Non-accrual loans increased $10.6 million from the same quarter a year ago. This increase is due to the weakening real estate markets and to one builder in the Tallahassee market. The relationship in question is adequately reserved. Accruing loans 90 days or more past due increased 10 basis points as a percent of total loans from June 30, 2007 due to weakening local real estate markets.
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 (amounts in thousands).
At and for the
Net charge-offs to average loans (annualized)
Provision for loan losses to average loans (annualized)
0.15
Allowance for loan losses to average loans
Gross charge-offs
Gross recoveries
Non-accrual loans
18,106
7,544
Accruing loans 90 days or more past due
6,449
2,558
Noninterest Income
Noninterest income (excluding securities transactions) for the second quarter of 2008 was up $0.7 million, or 2%, compared to the same quarter a year ago. The primary factors impacting the higher levels of noninterest income (excluding securities transactions) as compared to the same quarter a year ago, were higher levels of investment and annuity fees (up $0.7 million, or 35%), trust fees (up $0.5 million, or 11%), service charge income (up $0.4 million, or 4%) and ATM fees (up $0.3 million, or 23%). Offsetting decreases to noninterest income for the second quarter of 2008 were insurance fees (down $0.8 million, or 15%) and secondary mortgage market operations (down $0.4 million, or 33%).
The components of noninterest income for the three and six months ended June 30, 2008 and 2007 are presented in the following table:
3,556
7,160
6,548
Total other noninterest income
31,390
30,710
62,118
57,167
Securities transactions gains, net
24
Noninterest Expense
Operating expenses for the second quarter were $0.2 million, or 0.4%, lower compared to the same quarter a year ago. The decrease from the same quarter a year ago was reflected in lower levels of legal and professional services (down $1.6 million) and other expense (down $0.6 million). These decreases were offset by higher levels of personnel expense (up $2.2 million) and occupancy expense (up $0.2 million) reflective of our on-going rebuilding efforts in the wake of the storm of 2005 and due to the recent facilities opened in our expansion markets (Mobile, AL, Pensacola, FL and New Orleans, LA).
The following table presents the components of noninterest expense for the three and six months ended June 30, 2008 and 2007.
Employee compensation
21,565
20,086
41,183
40,620
Employee benefits
5,466
4,751
11,479
10,781
Total personnel expense
Equipment and data processing expense
7,420
7,120
14,532
13,637
Other real estate owned expense, net
(79
126
132
(640
3,520
4,164
6,818
7,743
VISA IPO and Litigation
In the fourth quarter of 2007, we recorded a $2.5 million pretax charge pursuant to FASB Interpretation No. 45 “Guarantors Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”) for liabilities related to VISA USA’s antitrust settlement with American Express and other pending VISA litigation (reflecting our share as a VISA member.) In the first quarter of 2008 as part of VISA’s initial public offering, VISA redeemed 37.5% of shares held by us resulting in proceeds of $2.8 million in a realized security gain. The remaining 62.5% of the Class B shares are restricted and must be held for the longer period of 3 years or until all settlements are complete. At that time, we can keep the Class B shares or convert them to Class A publicly tradeable shares at a conversion rate to be determined. These shares are recorded at historical cost. The realized securities gain is included in the securities gain line of the noninterest income section of the Condensed Consolidated Statements of Income and the cash received is recorded in cash and due from banks in the assets section of the Condensed Consolidated Balance Sheets. In addition, VISA lowered its estimate of pending litigation settlements. Consequently, $1.3 million of the $2.5 million FIN No. 45 liability that was recorded in the fourth quarter was reversed in the first quarter of 2008. The reduction in the litigation liability is recorded in the other liabilities section of the Condensed Consolidated Balance Sheets and the reduction in litigation expense is recorded in the other expense line of the noninterest expense section of the Condensed Consolidated Statements of Income.
25
Income Taxes
Our effective federal income tax rate continues to be less than the statutory rate of 35% due primarily to tax-exempt interest income. For the six months ended June 30, 2008 and 2007, the effective federal income tax rates were approximately 28% and 29%, respectively. The decrease in the effective rate in 2008 is due to a shifting of the Company’s income into jurisdictions with lower tax rates. The total amount of tax-exempt income earned during the first six months of 2008 remained constant at $8.8 million compared to $8.4 million the comparable period in 2007. Tax-exempt income for the six months ended June 30, 2008 consisted of $2.7 million from securities and $6.1 million from loans and leases. Tax-exempt income for the first six months of 2007 consisted of $3.2 million from securities and $5.2 million from loans and leases.
Selected Financial Data
The following tables contain selected financial data comparing our consolidated results of operations for the three and six months ended June 30, 2008 and 2007.
(amounts in thousands, except per share data)
Per Common Share Data
Earnings per share:
Basic
Diluted
Cash dividends per share
Book value per share (period-end)
18.27
17.13
Weighted average number of shares:
Diluted (1)
Period-end number of shares
31,386
32,094
Market data:
High price
45.68
44.37
54.09
Low price
38.38
37.50
33.45
Period-end closing price
39.29
37.55
Trading volume
14,527
11,614
31,731
20,195
(1)
There were no anti-dilutive share-based incentives outstanding for the three and six months ended June 30, 2008, respectively. There were 60,585 and 42,347 anti-dilutive share-based incentives outstanding for the three and six months ended June 30, 2007, respectively.
(dollar amounts in thousands)
Performance Ratios
Return on average assets
1.36
1.42
1.33
Return on average common equity
14.51
14.53
14.32
14.15
Earning asset yield (tax equivalent (“TE”))
6.02
6.76
6.15
6.70
Total cost of funds
2.12
2.59
2.30
Net interest margin (TE)
3.90
4.17
3.85
4.11
Common equity (period-end) as a percent of total assets (period-end)
9.15
9.36
Leverage ratio (period-end)
8.57
9.01
FTE headcount
1,903
1,944
Asset Quality Information
Foreclosed assets
1,693
1,146
Total non-performing assets
19,799
8,690
Non-performing assets as a percent of loans and foreclosed assets
0.52
0.25
Accruing loans 90 days past due
Accruing loans 90 days past due as a percent of loans
0.17
0.07
Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets
0.69
0.33
Net charge-offs as a percent of average loans
Allowance for loan losses
Allowance for loan losses as a percent of period-end loans
Allowance for loan losses to NPAs + accruing loans 90 days past due
203.06
410.98
Average Balance Sheet
Total loans
3,712,005
3,371,540
3,675,306
3,332,285
Securities
1,839,225
1,733,869
1,791,216
1,781,946
Short-term investments
57,518
67,520
128,502
149,086
Earning assets
5,608,748
5,172,929
5,595,024
5,263,317
(53,012
(46,511
(50,198
(46,607
667,497
607,941
672,855
602,972
6,223,233
5,734,359
6,217,681
5,819,682
Noninterest bearing deposits
880,375
950,637
869,541
967,218
Interest bearing transaction deposits
1,447,301
1,461,092
1,412,006
1,476,661
Interest bearing public fund deposits
946,411
775,431
954,290
797,916
Time deposits
1,687,218
1,655,322
1,768,022
1,676,651
Total interest bearing deposits
4,080,930
3,891,845
4,134,318
3,951,228
4,961,305
4,842,482
5,003,859
4,918,446
Other borrowed funds
567,151
197,261
525,847
201,476
113,096
133,783
111,781
136,261
Common stockholders’ equity
581,681
560,833
576,194
563,499
Total liabilities & common stockholders’ equity
27
Period-end Balance Sheet
Commercial/real estate loans
2,348,816
2,094,018
Mortgage loans
410,469
370,494
Direct consumer loans
520,230
481,565
Indirect consumer loans
393,625
364,375
Finance company loans
114,664
105,700
3,787,804
3,416,152
25,198
1,807,595
1,617,204
9,848
196,944
5,634,055
5,255,498
(46,227
689,361
665,535
938,702
1,460,848
1,412,123
Interest bearing public funds deposits
1,003,415
891,803
1,662,001
1,735,105
4,039,031
4,977,733
574,981
208,938
100,922
138,437
Net Charge-Off Information
Net charge-offs:
600
(63
1,434
105
61
(22
442
617
1,031
972
471
1,143
902
711
525
1,759
Total net charge-offs
Net charge-offs to average loans:
0.11
-0.01
0.13
0.01
0.06
-0.02
0.03
0.00
0.34
0.51
0.40
0.71
0.59
2.52
2.08
3.12
2.11
Total net charge-offs to average net loans
28
Average Balance Sheet Composition
Percentage of earning assets/funding sources:
66.18
65.17
65.69
63.31
32.79
33.52
32.01
33.86
1.03
2.83
100.00
15.70
18.38
15.54
18.37
25.80
28.24
25.23
28.06
16.87
14.99
17.06
15.16
30.09
31.60
31.86
88.46
93.62
89.43
93.45
10.11
3.81
9.40
3.83
Other net interest-free funding sources
1.43
2.57
1.17
2.72
Total funding sources
Loan mix:
61.21
60.51
61.19
60.34
11.13
11.35
11.05
11.40
14.19
14.45
14.16
14.59
10.41
10.69
10.52
10.77
3.06
3.00
3.08
2.90
Average dollars
80,292
133,186
65,318
143,395
Loans:
2,272,057
2,040,088
2,248,375
2,010,572
413,076
382,642
406,225
380,007
526,752
487,267
520,597
486,239
386,565
360,451
386,775
358,739
113,555
101,092
113,334
96,728
Total average loans
The following table details the components of our net interest spread and net interest margin.
(dollars in thousands)
Interest
Volume
Rate
Average earning assets
Commercial & real estate loans (TE)
34,223
6.05
37,762
7.42
6,124
5.93
5,604
5.86
Consumer loans
20,960
1,026,872
8.21
20,978
948,810
8.87
Loan fees & late charges
(48
291
Total loans (TE)
61,259
6.63
64,635
7.69
US treasury securities
73
11,364
414
34,141
4.87
US agency securities
3,728
335,607
4.44
10,987
866,747
5.07
1,843
149,640
4.93
948
93,145
4.07
14,060
1,101,270
5.11
5,847
469,500
4.98
Municipals (TE)
2,361
182,571
5.17
2,653
196,861
5.39
Other securities
557
58,773
3.79
932
73,475
Total securities (TE)
22,622
4.92
21,781
5.03
Total short-term investments
305
2.13
788
Average earning assets yield (TE)
84,186
87,204
Interest bearing liabilities
3,273
0.91
4,913
16,089
3.84
18,555
4.50
Public funds
6,170
2.62
8,439
4.37
25,532
31,907
3.29
Total borrowings
4,061
2.88
1,814
3.65
Total interest bearing liability cost
4,648,081
2.56
4,089,106
3.28
Total Cost of Funds
Net Interest Spread (TE)
54,613
3.46
53,810
3.48
Net Interest Margin (TE)
LIQUIDITY
Liquidity Management
Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring that we have adequate cash flow to meet our various needs, including operating, strategic and capital. In addition, our principal source of liquidity is dividends from our subsidiary banks.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest-bearing deposits with other banks are additional sources of funding.
30
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and non-interest-bearing deposit accounts. Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity and represent our incremental borrowing capacity. Our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $279 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $100 million.
The following liquidity ratios at June 30, 2008 and December 31, 2007 compare certain assets and liabilities to total deposits or total assets:
June 30,2008
Total securities to total deposits
36.00%
33.49%
Total loans (net of unearned income) to total deposits
76.02%
72.17%
Interest-earning assets to total assets
89.86%
89.49%
Interest-bearing deposits to total deposits
82.18%
81.88%
CONTRACTUAL OBLIGATIONS
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, 2007. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities. There have been no material changes since year end.
CAPITAL RESOURCES
We continue to maintain an adequate capital position. The ratios as of June 30, 2008 and December 31, 2007 are as follows:
Regulatory ratios:
Total capital to risk-weighted assets (1)
12.62
12.07
Tier 1 capital to risk-weighted assets (2)
11.46
11.03
Leverage capital to average total assets (3)
8.51
31
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.
BALANCE SHEET ANALYSIS
Earnings Assets
Earning assets serve as the primary revenue streams for the Company and are comprised of securities, loans, federal funds sold, and securities purchased under resale agreements. At June 30, 2008, average earning assets were $5.6 billion, or 89.9% of total assets, compared with $5.3 billion or 90.4% of total assets at June 30, 2007. This increase resulted mostly from modest increases in the securities and loan portfolios.
Our investment in securities was $1.8 billion at June 30, 2008, compared to $1.7 billion at December 31, 2007. The vast majority of securities in our portfolio are U.S. Treasury and U.S. government agency securities and mortgage-backed securities issued or guaranteed by U.S. government agencies. We also maintain portfolios of securities consisting of CMOs and tax-exempt obligations of states and political subdivisions. The portfolios are designed to enhance liquidity while providing acceptable rates of return. Therefore, we invest only in high quality securities of investment grade quality and with a target duration, for the overall portfolio, generally between two to five years. Our policies limit investments to securities having a rating of no less than “Baa”, or its equivalent by a Nationally Recognized Statistical Rating Agency, except for certain obligations of Mississippi, Louisiana, Florida or Alabama counties, parishes and municipalities.
At June 30, 2008, we held $3.8 billions in loans, compared to $3.6 billion at December 31, 2007. Our primary lending focus is to provide commercial, consumer, commercial leasing and real estate loans to consumers and to small and middle market businesses in their respective market areas. Each loan file is reviewed by the Bank’s loan operations quality assurance function, a component of its loan review system, to ensure proper documentation and asset quality. At June 30, 2008, Hancock’s average total loans were $3.7 billion, compared to $3.3 billion at June 30, 2007. The $343 million, or 10.3%, increase resulted from growth mostly in commercial and real estate loans and due to branch expansions. Commercial and real estate loans comprised 61.2% of the average loan portfolio at June 30, 2008 compared to 60.3% at June 30, 2007. Included in this category are commercial real estate loans, which are secured by properties, used in commercial or industrial operations.
Other Earning Assets
Federal funds sold and CDs in banks averaged $128.5 at June 30, 2008, compared to $149.1 million at June 30, 2007. We utilize these products as a short-term investment alternative whenever we have excess liquidity.
Interest Bearing Liabilities
Interest bearing liabilities include our interest bearing deposits as well as borrowings. Deposits represent our primary funding source. We continue our focus on multiple account, core deposit relationships and strategic placement of time deposit campaigns to stimulate overall deposit growth. Borrowings consist primarily of sales of securities under repurchase agreements.
Total deposits remained stable at $5.0 billion at June 30, 2008 and December 31, 2007, respectively. Average interest bearing deposits at June 30, 2008 were $4.1 billion, an increase of $183.1 million over June 30, 2007. The increase was primarily in public fund deposits. We have several programs designed to attract depository accounts offered to consumers and to small and middle market businesses at interest rates generally consistent with market conditions. We traditionally price our deposits to position themselves competitively with the local market. Deposit flows are controlled primarily through pricing, and to a certain extent, through promotional activities.
Borrowings
Our borrowings consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and other borrowings. Total borrowings at June 30, 2008 were $564.0 million compared to $376.0 million at December 31, 2007. The increase was primarily in securities sold under agreements to repurchase.
Off-Balance Sheet Arrangements
Loan Commitments and Letters of Credit
In the normal course of business, we enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. Such instruments are not reflected in the accompanying condensed consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the condensed consolidated balance sheets. The contract amounts of these instruments reflect our exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. We undertake the same credit evaluation in making commitments and conditional obligations as we do for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At June 30, 2008, we had $969.9 million in unused loan commitments outstanding, of which approximately $582.1 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 June 30, 2008, we had $99.9 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at June 30, 2008 according to expiration date.
Expiration Date
Less than1 year
1-3years
3-5years
More than5 years
Commitments to extend credit
969,935
618,052
30,387
67,218
254,278
Letters of credit
99,906
40,831
34,353
24,722
1,069,841
658,883
64,740
91,940
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
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. 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, 2007.
We adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), on January 1, 2008. SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 defines a fair value hierarchy that prioritizes the inputs to these valuation techniques used to measure fair value giving preference to quoted prices in active markets (level 1) and the lowest priority to unobservable inputs such as a reporting entity’s own data (level 3). SFAS No. 157 does not require any new fair value measurements. There have been no changes in valuation techniques used to measure fair value as disclosed in our Form 10-K for the year ended December 31, 2007. See Note 2to our Condensed Consolidated Financial Statements included elsewhere in this report. In addition, we adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment SFAS No. 115 (“SFAS No. 159”) on January 1, 2008. We did not elect to fair value any additional items under SFAS No. 159.
New Accounting Pronouncements
See Note 14 to our Condensed Consolidated Financial Statements included elsewhere in this report.
Forward Looking 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our net income is 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 June 30, 2008, the effective duration of the securities portfolio was 3.42 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 4.04 years, while a reduction in rates of 100 basis points would result in an effective duration of 1.77 years.
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 June 30, 2008 indicate that we are liability sensitive to some extent 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 ininterest rate(basis point)
Estimatedincrease (decrease)in net interest income
-100
-4.20%
Stable
0.00%
+100
-0.63%
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, 2007 included in our 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
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 Officers 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 Officers 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 Officers and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the six month period ended June 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
There were no purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities for the six months ended June 30, 2008.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits.
(a) Exhibits:
ExhibitNumber
Description
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ Carl J. Chaney
Carl J. Chaney
Chief Executive Officer
/s/ John M. Hairston
John M. Hairston
/s/ Michael M. Achary
Michael M. Achary
Chief Financial Officer
Date:
August 6, 2008
Index to Exhibits