UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For 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 (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 o
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.
31,740,660 common shares were outstanding as of October 31, 2008 for financial statement purposes.
Hancock Holding Company
Index
Page Number
Part I. Financial Information
ITEM 1.
Financial Statements
Condensed Consolidated Balance Sheets —September 30, 2008 (unaudited) and December 31, 2007
1
Condensed Consolidated Statements of Income (unaudited) —Three and nine months ended September 30, 2008 and 2007
2
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Nine months ended September 30, 2008 and 2007
3
Condensed Consolidated Statements of Cash Flows (unaudited) —Nine months ended September 30, 2008 and 2007
4
Notes to Condensed Consolidated Financial Statements (unaudited) — September 30, 2008
5-22
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23-36
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
37
ITEM 4.
Controls and Procedures
Part II. Other Information
ITEM 1A.
Risk Factors
38
Unregistered Sales of Equity Securities and Use of Proceeds
Submission of Matters to a Vote of Security Holders
ITEM 6.
Exhibits
Signatures
39
Item 1. Financial Statements
Hancock Holding Company and SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except share data)
September 30,2008(unaudited)
December 31,2007
ASSETS
Cash and due from banks (non-interest bearing)
$
170,336
182,615
Interest-bearing time deposits with other banks
10,721
8,560
Federal funds sold
162,876
117,721
Other short-term investments
133,270
—
Trading securities
2,505
197,425
Securities available for sale, at fair value (amortized cost of $1,656,875 and $1,472,550)
1,656,918
1,472,783
Loans held for sale
16,565
18,957
Loans
4,087,175
3,612,883
Less: allowance for loan losses
(57,200
)
(47,123
unearned income
(14,231
(16,326
Loans, net
4,015,744
3,549,434
Property and equipment, net of accumulated depreciation of $97,720 and $87,160
206,151
200,566
Other real estate, net
1,998
2,172
Accrued interest receivable
30,364
35,117
Goodwill, net
62,277
Other intangible assets, net
6,759
8,298
Life insurance contracts
144,814
139,421
Reinsurance receivables
28,409
34,827
Deferred tax asset, net
6,952
3,976
Other assets
88,103
21,830
Total assets
6,744,762
6,055,979
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand
866,414
907,874
Interest-bearing savings, NOW, money market and time
4,548,381
4,101,660
Total deposits
5,414,795
5,009,534
Federal funds purchased
1,475
4,100
Securities sold under agreements to repurchase
621,424
371,604
Long-term notes
678
793
Policy reserves and liabilities
48,679
58,489
Other liabilities
56,876
57,272
Total liabilities
6,143,927
5,501,792
Stockholders’ Equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 31,702,106 and 31,294,607 issued and outstanding, respectively
105,568
104,211
Capital surplus
98,589
87,122
Retained earnings
410,936
377,481
Accumulated other comprehensive loss, net
(14,258
(14,627
Total stockholders’ equity
600,835
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 EndedSeptember 30,
Nine Months EndedSeptember 30,
2008
2007
Interest income:
Loans, including fees
62,353
65,911
184,376
189,965
Securities - taxable
20,493
18,771
60,508
58,405
Securities - tax exempt
1,203
1,538
3,902
4,736
52
1,376
1,759
4,964
Other investments
31
13
91
96
Total interest income
84,132
87,609
250,636
258,166
Interest expense:
Deposits
25,523
34,729
81,654
99,452
Federal funds purchased and securities sold under agreements to repurchase
3,772
1,866
11,531
5,550
Long-term notes and other interest expense
62
(128
89
(833
Total interest expense
29,357
36,467
93,274
104,169
Net interest income
54,775
51,142
157,362
153,997
Provision for loan losses, net
8,064
1,554
19,669
4,002
Net interest income after provision for loan losses
46,711
49,588
137,693
149,995
Noninterest income:
Service charges on deposit accounts
11,108
11,085
32,777
30,747
Other service charges, commissions and fees
15,093
14,536
46,851
43,466
Securities gains (losses), net
(79
34
5,999
74
Other income
3,993
5,577
12,747
14,241
Total noninterest income
30,115
31,232
98,374
88,528
Noninterest expense:
Salaries and employee benefits
28,664
28,531
81,326
79,932
Net occupancy expense
5,188
4,731
14,491
13,273
Equipment rentals, depreciation and maintenance
2,711
2,814
8,405
7,855
Amortization of intangibles
360
412
1,089
1,219
Other expense
18,560
19,369
52,495
55,660
Total noninterest expense
55,483
55,857
157,806
157,939
Net income before income taxes
21,343
24,963
78,261
80,584
Income tax expense
5,338
7,224
21,215
23,292
Net income
16,005
17,739
57,046
57,292
Basic earnings per share
0.51
0.55
1.82
1.77
Diluted earnings per share
0.50
1.79
1.74
Dividends paid per share
0.240
0.720
Weighted avg. shares outstanding-basic
31,471
32,005
31,402
32,299
Weighted avg. shares outstanding-diluted
31,905
32,492
31,826
32,847
Hancock Holding Company and SubsidiariesCondensed Consolidated Statements of Stockholders’ Equity(Unaudited)(In thousands, except share and per share data)
AccumulatedOtherComprehensiveLoss, net
Common Stock
CapitalSurplus
RetainedEarnings
Shares
Amount
Total
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
626
Net change in fair value of securities available for sale, net of tax
2,273
60,191
Cash dividends declared ($0.72 per common share)
(23,388
Common stock issued, long-term incentive plan, including income tax benefit of $169
123,629
1,048
1,460
Compensation expense, long-term incentive plan
1,664
Repurchase/retirement of common stock
(1,003,939
(3,343
(37,019
(40,362
Balance, September 30, 2007
31,785,742
105,847
104,792
368,450
(21,114
557,975
Balance, January 1, 2008
31,294,607
639
(270
57,415
SFAS 158, change in measurement date
(815
(22,776
Common stock issued, long-term incentive plan, including income tax benefit of $3,795
407,499
1,357
9,481
10,838
1,986
Balance, September 30, 2008
31,702,106
Hancock Holding Company and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)(In thousands)
Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
11,851
9,484
Provision for loan losses
Loss/(gain) in connection with other real estate owned
103
(727
Deferred tax benefit
(3,437
(2,334
Increase in cash surrender value of life insurance contracts
(5,393
(3,889
Gain on sales/paydowns of securities available for sale, net
(2,646
(57
Loss/(gain) on disposal of other assets
(677
Gain on sale of loans held for sale
(474
(508
Loss/(gain) on trading securities
(3,353
137
Amortization/(accretion) of securities premium/discount, net
1,407
(2,025
Amortization of mortgage servicing rights
161
264
Amortization of intangible assets
Stock-based compensation expense
Decrease (increase) in accrued interest receivable
4,753
(263
Increase in accrued expenses
6,435
227
Increase (decrease) in other liabilities
1,537
(721
Increase (decrease) in interest payable
(3,135
143
Decrease in policy reserves and liabilities
(9,810
(16,793
Decrease in reinsurance receivable
6,418
4,704
Increase in other assets
(5,017
(4,000
Proceeds from sale of loans held for sale
159,076
200,595
Originations of loans held for sale
(156,209
(200,839
Purchase of trading securities, net
(10
Proceeds from paydowns of securities held for trading
7,635
Excess tax benefit from share based payments
(3,795
(169
Other, net
(197
336
Net cash provided by operating activities
85,023
47,794
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing time deposits
(2,161
(1,701
Proceeds from sales of securities available for sale
3,326
8,985
Proceeds from maturities of securities available for sale
800,357
978,181
Purchases of securities available for sale
(857,164
(759,068
Purchase of short term investments
(133,270
Net decrease (increase) in federal funds sold
(45,155
124,964
Net increase in loans
(490,582
(269,876
Purchases of property and equipment
(19,580
(56,217
Proceeds from sales of property and equipment
1,851
55
Proceeds from sales of other real estate
4,673
Net cash (used in) provided by investing activities
(737,705
26,783
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
405,261
(31,442
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
247,195
(15,428
Repayments of long-term notes
(115
(7
Dividends paid
Proceeds from exercise of stock options
7,043
1,291
Excess tax benefit from stock option exercises
3,795
169
Net cash (used in) provided by financing activities
640,403
(109,167
NET DECREASE IN CASH AND DUE FROM BANKS
(12,279
(34,590
CASH AND DUE FROM BANKS, BEGINNING
190,114
CASH AND DUE FROM BANKS, ENDING
155,524
SUPPLEMENTAL INFORMATION:
Income taxes paid
15,089
23,478
Interest paid, including capitalized interest of $59 and $872, respectively
96,408
104,026
Restricted stock issued to employees of Hancock
560
251
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
5,002
1,348
Financed sale of foreclosed property
400
Transfers from trading securities to available for sale securities
190,802
Due from broker for sale of securities
(61,259
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 September 30, 2008 and December 31, 2007, the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 nine months ended September 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. For the periods presented, these reclassifications include the Company’s investment in the stock of the Federal Home Loan Bank (FHLB), that has been reclassed from investment securities to other assets since these equity securities are restricted and do not have a readily determinable fair value. The balance of FHLB stock as of December 31, 2007, was $2.3 million. The Company has also reclassed its investment in an equity method investment from investment securities into other assets. The balance of the equity method investment as of December 31, 2007, was $5.0 million. The dividend income on the FHLB stock has also been reclassed from other investments to other income. The dividend income on FHLB stock for the three and nine months ended September 31, 2007 was $52 thousand and $141 thousand, respectively.
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. Available for sale securities classified as Level 1 within the valuation hierarchy include U.S. Treasury securities, obligations of U.S. Government-sponsored agencies, and other debt and equity securities. Level 2 classified available for sale securities include mortgage-backed debt securities, collateralized mortgage obligations, and state and municipal bonds.
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 September 30, 2008.
Level 1
Level 2
Net Balance
Assets
Available for sale securities
369,176
1,287,742
Swaps
(1,295
Loans carried at fair value
24,125
371,681
1,310,572
1,682,253
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 September 30, 2008, the fair value of impaired loans was $33.3 million.
6
Hancock Holding Company and SubsidiariesNotes to Condensed Consolidated Financial Statements – (Continued)(Unaudited)
3. Securities
Available for Sale Securities
For the nine months ended September 30, 2008, the Company sold securities for a net gain of $2.6 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. This was offset by gross losses of $1.1 million and gross gains of $0.9 million that occurred in the second quarter and third quarter of 2008 due to the sale of certain investments which experienced a deterioration of credit quality. For the nine months ended September 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 nine months ended September 30, 2008, the Company recognized $3.4 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 nine months of 2007.
4. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $4.0 billion at September 30, 2008 and $3.6 billion at December 31, 2007. The Company also held $16.6 million and $19.0 million in loans held for sale at September 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 0.59% and 0.43% of total loans at September 30, 2008 and December 31, 2007, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three and nine months ended September 30, 2008 was approximately $555,000 and $890,000, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three and nine months ended September 30, 2007 was approximately $241,000 and $332,000, respectively.
The Company’s investments in impaired loans at September 30, 2008 and December 31, 2007 were $48.4 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
53,300
46,227
47,123
46,772
Loans charged-off:
Commercial, real estate and mortgage
1,821
602
3,838
2,083
Direct and indirect consumer
1,522
921
4,192
3,315
Finance company
1,100
917
3,297
2,198
Demand deposit accounts
690
1,170
1,972
2,611
Total charge-offs
5,133
3,610
13,299
10,207
Recoveries of loans previously charged-off:
86
659
608
2,034
375
422
1,329
1,351
188
158
425
320
491
1,144
1,524
Total recoveries
969
1,730
3,707
5,334
Net charge-offs
4,164
1,880
9,592
4,873
Balance of allowance for loan losses at end of period
57,200
45,901
The following table presents the makeup of allowance for loan losses by:
September 30, 2008
December 31, 2007
(In thousands)
Balance of allowance for loan losses
Non-impaired
42,075
38,146
Impaired
15,125
8,977
Total allowance for loan losses
As of September 30, 2008 and December 31, 2007, the Company had $24.1 million and $18.8 million, respectively, in loans carried at fair value.
8
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)
0.42
%
0.21
0.34
0.19
Net charge-offs to period-end net loans (annualized)
0.41
0.31
0.18
Allowance for loan losses to average net loans
1.45
1.32
1.52
1.36
Allowance for loan losses to period-end net loans
1.40
1.31
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 September 30, 2008. The carrying amount of goodwill was $62.3 million as of September 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 ofSeptember 30, 2008
As ofDecember 31, 2007
Gross CarryingAmount
AccumulatedAmortization
Net
Amortizable intangible assets:
Core deposit intangibles
14,137
9,348
4,789
8,500
5,637
Value of insurance business acquired
2,752
1,223
1,529
3,757
1,807
1,950
Non-compete agreements
322
273
49
368
252
116
Trade name
100
65
35
50
17,311
10,909
6,402
18,362
10,609
7,753
Aggregate amortization expense for:
283
302
848
907
Value of insurance businesses acquired
87
205
242
18
21
15
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):
361
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 $1.7 million and $1.8 million as of September 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 nine months ended September 30, 2008 and 2007, respectively:
Servicing fees
133
152
413
478
Late fees
11
33
51
Ancillary fees
146
174
452
544
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 September 30, 2008 or December 31, 2007.
10
6. Mortgage Banking (including Mortgage Servicing Rights) (continued)
The changes in the carrying amounts of mortgage servicing rights as of September 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
(28
(161
Balance as of September 30, 2008
357
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):
93
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 securitiesStock options and restricted stock awards
434
487
424
548
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 nine months ended September 30, 2008. There were 0 and 49,852 anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2007, respectively.
8. Share-Based Payment Arrangements
Stock Option Plans
At September 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.
Nine Months EndedSeptember 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 nine months ended September 30, 2008, and changes during the nine 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
(401,019
23.05
10,804
Forfeited or expired
(15,348
37.07
Outstanding at September 30, 2008
933,255
31.52
5.9
18,181
Exercisable at September 30, 2008
653,332
27.67
5.1
15,245
Share options expected to vest
235,329
40.44
8.0
2,485
The total intrinsic value of options exercised during the nine months ended September 30, 2008 and 2007 was $10.8 million and $4.0 million, respectively.
A summary of the status of the Company’s nonvested shares as of September 30, 2008, and changes during the nine months ended September 30, 2008, is presented below:
Weighted-AverageGrant-DateFair Value ($)
Nonvested at January 1, 2008
589,090
21.74
20,620
30.65
Vested
(100,968
16.90
Forfeited
(12,586
24.15
Nonvested at September 30, 2008
496,156
23.04
As of September 30, 2008, there was $6.4 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 2.59 years. The total fair value of shares which vested during the nine months ended September 30, 2008 and 2007 was $1.7 million and $1.3 million, respectively.
9. Retirement Plans
Net periodic benefits cost includes the following components for the three and nine months ended September 30, 2008 and 2007:
Pension Benefits
Other Post-retirement Benefits
Three Months Ended September 30,
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
284,636
36,500
19,550
Amortization of transition obligation
1,250
Net periodic benefit cost
815,108
855,607
187,500
178,050
1,969,626
1,991,869
121,500
205,500
3,387,741
2,875,350
367,500
306,000
(3,622,650
(3,154,305
(39,750
710,607
845,734
109,500
187,701
3,750
2,445,324
2,558,648
562,500
663,201
The Company anticipates that it will contribute $4.6 million to its pension plan and approximately $612,000 to its post-retirement benefits in 2008. During the first nine months of 2008, the Company contributed approximately $3.0 million to its pension plan and approximately $459,000 for post-retirement benefits.
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10. Other Service Charges, Commission and Fees, and Other Income
Components of other service charges, commission and fees are as follows:
Trust fees
4,330
3,892
13,080
11,708
Credit card merchant discount fees
2,805
2,571
8,229
7,480
Income from insurance operations
3,819
4,270
12,419
13,672
Investment and annuity fees
2,421
2,253
7,957
6,249
ATM fees
1,718
1,550
5,166
4,357
Total other service charges, commissions and fees
Components of other income are as follows:
Secondary mortgage market operations
817
935
2,347
2,962
Income from bank owned life insurance
1,472
1,246
4,414
3,665
Outsourced check income
28
550
263
1,839
Other
1,676
2,846
5,723
5,775
Total other income
11. Other Expense
Components of other expense are as follows:
Data processing expense
4,709
5,171
13,547
14,102
Postage and communications
2,396
2,616
6,995
7,564
Ad valorem and franchise taxes
622
1,016
2,746
2,664
Legal and professional services
3,447
3,482
9,275
11,572
Stationery and supplies
366
483
1,344
1,614
Advertising
2,187
1,796
5,437
5,390
Deposit insurance and regulatory fees
880
257
1,895
766
Training expenses
123
112
476
447
Other fees
1,017
1,068
2,999
2,444
Annuity expense
231
420
1,345
1,222
Claims paid
292
2,290
2,501
5,490
6,530
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 September 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 September 30, 2008 and December 31, 2007.
The Company and its subsidiaries, except for its wholly owned subsidiary Magna, 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.
16
13. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
Three Months Ended September 30, 2008
MS
LA
FL
AL
Eliminations
Consolidated
Interest income
39,458
37,316
2,384
1,473
6,574
(3,073
Interest expense
17,474
11,731
1,196
675
1,239
(2,958
21,984
25,585
1,188
798
5,335
1,732
3,686
1,285
355
1,006
Noninterest income
14,551
9,660
176
5,417
(9
2,714
881
78
144
3,950
Other noninterest expense
23,649
18,055
1,917
1,247
6,690
(25
51,533
8,440
12,623
(1,827
(706
2,912
(99
Income tax expense (benefit)
1,964
3,331
(713
(261
Net income (loss)
6,476
9,292
(1,114
(445
3,676,308
2,875,801
229,917
130,568
849,616
(1,017,448
Total interest income from affiliates
3,070
Total interest income from external customers
36,388
6,571
Three Months Ended September 30, 2007
45,260
37,904
2,380
237
6,723
(4,895
20,186
17,703
1,277
151
1,930
(4,780
25,074
20,201
1,103
4,793
Provision for (reversal of) loan losses
(1,043
518
889
1,087
14,527
9,818
247
17
6,633
2,322
873
119
19
117
3,450
24,064
17,822
1,471
388
8,714
(52
52,407
14,258
10,806
(1,129
(407
1,508
(73
4,013
2,854
(382
(126
865
10,245
7,952
(747
(281
643
3,227,798
2,594,664
158,669
28,111
818,740
(921,929
5,906,053
4,895
40,365
Nine Months Ended September 30, 2008
120,392
108,577
6,826
3,311
19,979
(8,449
54,604
37,334
3,596
1,649
4,195
(8,104
65,788
71,243
3,230
1,662
15,784
6,628
7,666
1,556
1,002
2,817
41,855
35,280
883
481
19,900
8,072
2,687
358
299
435
65,186
49,921
5,031
22,461
(91
145,955
27,757
46,249
(2,832
(2,605
9,971
(279
6,844
12,954
(1,391
(950
3,758
20,913
33,295
(1,441
(1,655
6,213
8,389
48
112,003
108,569
6,822
19,931
Nine Months Ended September 30, 2007
135,691
110,702
7,228
671
19,056
(15,182
59,143
50,204
3,771
177
5,711
(14,837
76,548
60,498
3,457
494
13,345
(552
1,565
566
224
2,199
39,862
27,539
647
20,495
(33
6,458
2,337
323
25
341
67,694
51,130
4,188
791
25,015
(363
148,455
42,810
33,005
(973
(528
6,285
(15
12,496
8,743
(469
(172
2,694
30,314
24,262
(504
(356
3,591
15,133
120,558
14. New Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) 157-3, Determining the Fair Value of a Financial Asset in a Market That is Not Active, which clarifies the application of Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, in an inactive market. Application issues clarified include: how management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist; how observable market information in a market that is not active should be considered when measuring fair value; and how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. FSP 157-3 is effective immediately and did not have a material impact on the Company’s financial condition or results of operations.
In June 2008, the 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 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 issued 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 accounted 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
14. New Accounting Pronouncements (continued)
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. 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
20
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.
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
15. VISA IPO and Litigation (continued)
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.
In October 28, 2008, VISA, Discover Financial Services Inc., and MasterCard Inc. announced that they have settled the antitrust lawsuit and that they are working on the specific terms on the settlement. The settlement did not have a material impact on the Company’s results of operations or financial position.
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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 September 30, 2008, we had total assets of $6.7 billion and employed on a full-time equivalent basis 1,291 persons in Mississippi, 553 persons in Louisiana, 59 persons in Florida and 38 persons in Alabama.
RESULTS OF OPERATIONS
Net income for the third quarter of 2008 totaled $16.0 million, a decrease of $1.7 million, or 9.8%, from the third quarter of 2007. Diluted earnings per share for the third quarter of 2008 were $0.50, a decrease of $0.05 from the same quarter a year ago. Return on average assets for the third quarter of 2008 was 1.00% compared to 1.21% for the third quarter of 2007. Return on average common equity was 10.90% compared to 12.58% for the same quarter a year ago. Net income for the first nine months of 2008 was $57.0 million, a decrease of $246 thousand, or 0.4%, from the first nine months of 2007. Diluted earnings per share were $1.79 for the first nine months of 2008, an increase of $0.05 compared to the prior year.
Hurricane Gustav made landfall on the southeastern Louisiana coast on Monday, September 1, 2008 and significantly impacted Hancock’s markets in Baton Rouge and Alexandria, Louisiana. By Tuesday, September 2, Hancock was the first bank to open in Louisiana with over 25 percent of the Company’s Louisiana branch offices open. By Saturday, September 6, Hancock had 100 percent of the Company’s 50 Louisiana branch offices open. In dealing with Hurricane Gustav, the Company incurred $560 thousand in operating expenses (clean up and repair costs, fuel, lodging and other miscellaneous costs) and also rebated to customers $294 thousand in return item fees and other service charges. The Company incurred no major damage to any of our facilities and will not be filing a property and casualty insurance claim. The total pretax impact of the costs and fees rebated was $854 thousand, or approximately $0.02 per diluted share.
23
Net Interest Income
Net interest income (te) for the third quarter increased $3.9 million, or 7.3%, from the third quarter of 2007. The net interest margin (te) of 3.99% was 7 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 $495.9 million, or 9.4%, mostly reflected in higher average loans (up $483.0 million, or 13.9%). With short-term interest rates down significantly from a year ago, the Company’s loan yield fell 124 basis points, with the yield on average earning assets down 80 basis points. Total funding costs were down 9 basis points compared to the previous quarter with rates on time deposits down 33 basis points. The higher levels of net interest income (te) from the prior quarter and wider net interest margin were due, in part, to the continued re-pricing of the Company’s CD book ($411 million of maturing time deposits were re-priced into lower costing CDs) as well as $241.2 million in average loan growth. The quarter’s loan growth was funded by a combination of higher deposits and maturing securities.
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 $8.1 million in the third quarter of 2008 compared to $1.6 million in the third 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 September 30, 2008, the allowance for loan losses was $57.2 million compared with $47.1 million at December 31, 2007, an increase of $10.1 million. The increase in the allowance for loan losses through the first nine 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 September 30, 2008 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 0.42% for the third quarter of 2008, compared to 0.21% in the third quarter of 2007. For the nine months ended September 30, 2008, net charge-offs, as a percent of average loans, were 0.34%, compared to 0.19% for the nine months ended September 30, 2007. The majority of the increase in net charge-offs, as compared to the same time last year, was caused by the weakening local real estate markets mostly in commercial real estate loans.
Non-accrual loans were $21.9 million at September 30, 2008, an increase of $13.4 million, from $8.5 million at September 30, 2007. This increase is due to the weakening real estate markets and approximately half of the increase is related to two separate real estate relationships in our Louisiana and Tallahassee markets. Management believes the relationships in question were adequately reserved at September 30, 2008.
24
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)
0.81
0.70
0.16
Allowance for loan losses to average loans
1.33
1.38
Gross charge-offs
Gross recoveries
Non-accrual loans
21,875
Accruing loans 90 days or more past due
6,082
Noninterest Income
Noninterest income (excluding securities transactions) for the third quarter of 2008 was down $1.0 million, or 3%, compared to the same quarter a year ago. The primary factors impacting the lower levels of noninterest income (excluding securities transactions) as compared to the same quarter a year ago, were lower levels of insurance fees (down $0.5 million, or 11%) and other income that consisted of mainly other miscellaneous income (down $0.9 million, or 29%) and noninterest loan fees (down $0.5 million, or 57%). Included in the lower level of service charges for the third quarter were $294 thousand in customer rebates related to Hurricane Gustav. Increases to noninterest income for the third quarter of 2008 were in trust fees (up $0.4 million, or 11%), debit card and merchant fees (up $0.2 million, or 9%) and ATM fees (up $0.2 million, or 11%).
The components of noninterest income for the three and nine months ended September 30, 2008 and 2007 are presented in the following table:
3,176
4,642
10,400
11,279
Total other noninterest income
30,194
31,198
92,375
88,454
Securities transactions gains (losses), net
Noninterest Expense
Operating expenses for the third quarter were $0.4 million, or 0.7%, lower compared to the same quarter a year ago. The decrease from the same quarter a year ago was reflected in lower levels of other expense (down $0.9 million), equipment and data processing expense (down $0.6 million) and ad valorem and franchise taxes (down
$0.4 million) which were offset by higher levels of deposit insurance and regulatory fees (up $0.6 million), advertising expense (up $0.4 million) and occupancy expense (up $0.5 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). Included in operating expense during the third quarter was approximately $560 thousand of increased expense related to Hurricane Gustav.
The following table presents the components of noninterest expense for the three and nine months ended September 30, 2008 and 2007.
Employee compensation
24,392
22,575
65,575
63,195
Employee benefits
4,272
5,956
15,751
16,737
Total personnel expense
Equipment and data processing expense
7,420
7,985
21,952
21,956
Other real estate owned expense, net
265
397
(633
3,565
4,429
10,383
12,175
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.
26
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 nine months ended September 30, 2008 and 2007, the effective federal income tax rates were approximately 27% and 29%, respectively. The decrease in the effective rate in 2008 is due to an increase of the Company’s income from jurisdictions with lower tax rates. The total amount of tax-exempt income earned during the first nine months of 2008 was $13.5 million compared to $12.7 million in the comparable period in 2007. Tax-exempt income for the nine months ended September 30, 2008 consisted of $4.4 million from securities and $9.1 million from loans and leases. Tax-exempt income for the first nine months of 2007 consisted of $4.8 million from securities and $7.9 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 nine months ended September 30, 2008 and 2007.
(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)
18.95
17.55
Weighted average number of shares:
Diluted (1)
Period-end number of shares
31,702
31,786
Market data:
High price
68.42
43.90
54.09
Low price
33.34
32.78
Period-end closing price
51.00
40.08
Trading volume
23,562
10,290
55,296
30,485
(1)
There were no anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2008, respectively. There were 0 and 49,852 anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2007, respectively.
27
(dollar amounts in thousands)
Performance Ratios
Return on average assets
1.00
1.21
1.22
Return on average common equity
10.90
12.58
13.16
13.63
Earning asset yield (tax equivalent (“TE”))
6.02
6.82
6.11
6.74
Total cost of funds
2.03
2.76
2.21
2.65
Net interest margin (TE)
3.99
4.06
3.90
4.09
Common equity (period-end) as a percent of total assets (period-end)
8.91
9.45
Leverage ratio (period-end)
8.66
8.82
FTE headcount
1,941
1,966
Asset Quality Information
Foreclosed assets
2,197
1,374
Total non-performing assets
24,072
9,874
Non-performing assets as a percent of loans and foreclosed assets
0.59
0.28
Accruing loans 90 days past due
Accruing loans 90 days past due as a percent of loans
0.15
0.11
Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets
0.74
0.39
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
189.69
335.22
Average Balance Sheet
Total loans
3,953,235
3,470,282
3,768,626
3,378,789
Securities
1,765,702
1,660,841
1,777,036
1,735,581
Short-term investments
28,161
120,116
94,810
139,323
Earning assets
5,747,098
5,251,239
5,640,472
5,253,693
(54,786
(46,216
(51,739
(46,475
682,316
632,004
681,645
618,309
6,374,628
5,837,027
6,270,378
5,825,527
Noninterest bearing deposits
869,881
893,455
869,655
942,360
Interest bearing transaction deposits
1,408,013
1,383,851
1,410,665
1,445,384
Interest bearing public fund deposits
1,062,127
823,316
990,498
806,476
Time deposits
1,763,609
1,837,292
1,766,541
1,730,787
Total interest bearing deposits
4,233,749
4,044,459
4,167,704
3,982,647
5,103,630
4,937,914
5,037,359
4,925,007
Other borrowed funds
587,939
206,072
546,695
203,025
98,913
133,695
107,460
135,396
Common stockholders’ equity
584,146
559,346
578,864
562,099
Total liabilities & common stockholders’ equity
Period-end Balance Sheet
Commercial/real estate loans
2,549,906
2,141,217
Mortgage loans
421,254
381,929
Direct consumer loans
554,374
494,667
Indirect consumer loans
430,414
380,561
Finance company loans
116,995
114,919
4,072,943
3,513,293
17,698
1,659,423
1,674,706
306,866
99,176
6,055,797
5,304,873
(45,901
746,165
647,081
891,842
1,371,400
1,357,835
Interest bearing public funds deposits
1,231,529
837,073
1,945,452
1,912,799
4,107,707
4,999,549
635,069
216,481
94,063
132,048
Net Charge-Off Information
Net charge-offs:
($
58
2,990
47
179
240
650
864
1,680
1,835
867
314
2,011
1,216
912
760
2,671
1,774
Total net charge-offs
Net charge-offs to average loans:
0.25
-0.01
0.17
0.00
0.08
0.47
0.84
0.33
0.68
0.45
3.12
2.74
2.35
Total net charge-offs to average net loans
29
Average Balance Sheet Composition
Percentage of earning assets/funding sources:
68.79
66.08
66.81
64.31
30.72
31.63
31.51
33.04
0.49
2.29
1.68
100.00
15.14
17.01
15.42
17.94
24.50
26.36
25.01
27.51
18.48
15.68
17.56
15.35
30.68
34.99
31.32
32.95
88.80
94.04
89.31
93.75
10.23
3.92
9.69
3.86
Other net interest-free funding sources
0.97
2.04
2.39
Total funding sources
Loan mix:
62.06
60.71
61.49
60.47
10.82
11.20
10.97
11.33
13.81
14.16
14.04
14.44
10.37
10.77
10.47
2.94
3.16
3.03
2.99
Average dollars
55,529
107,253
56,418
125,661
Loans:
2,453,154
2,106,778
2,317,134
2,042,992
427,752
388,603
413,453
382,904
546,079
491,417
529,153
487,985
410,110
373,677
394,610
363,773
116,140
109,807
114,276
101,135
Total average loans
30
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)
36,289
5.89
39,555
7.45
6,366
5.95
5,773
5.94
Consumer loans
21,237
1,072,329
7.88
21,871
974,901
8.90
Loan fees & late charges
455
Total loans (TE)
64,347
6.48
67,456
7.72
US treasury securities
53
11,334
1.86
128
11,169
4.53
US agency securities
3,751
333,434
4.50
10,223
801,585
5.10
CMOs
1,786
141,355
5.05
830
80,989
4.10
Mortgage backed securities
13,917
1,066,233
5.22
6,557
513,545
5.11
Municipals (TE)
2,280
163,796
5.57
2,634
195,956
5.38
Other securities
557
49,550
765
57,597
5.32
Total securities (TE)
22,344
5.06
21,137
5.09
Total short-term investments
83
1.18
1,389
4.59
Average earning assets yield (TE)
86,774
89,982
Interest bearing liabilities
3,193
0.90
4,682
1.34
15,579
3.51
21,295
4.60
Public funds
6,750
2.53
8,753
4.22
25,522
2.40
34,730
3.41
Total borrowings
3,835
2.59
1,737
3.34
Total interest bearing liability cost
4,821,688
2.42
4,250,531
3.40
Total Cost of Funds
Net Interest Spread (TE)
57,417
3.60
53,515
Net Interest Margin (TE)
(dollars in thousands )
107,094
6.17
113,567
7.43
18,451
16,866
5.87
63,737
1,038,039
8.20
63,045
952,893
8.85
523
992
189,805
6.73
194,470
7.69
243
11,361
2.86
1,278
35,083
4.87
13,118
382,046
4.58
32,966
869,107
5,356
144,882
4.93
2,882
93,941
39,002
1,008,197
5.16
17,887
476,077
5.01
7,141
179,992
5.29
8,148
197,200
5.51
1,650
50,558
4.35
2,530
64,173
5.26
66,510
4.99
65,691
1,850
2.61
5,060
4.86
258,165
265,221
10,418
0.99
14,360
52,123
3.94
58,871
4.55
19,112
2.58
26,221
81,653
2.62
11,621
2.84
4,717
3.11
4,714,399
2.64
4,185,672
3.33
164,891
3.47
161,052
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.
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
32
capacity. Our short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $308 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $100 million.
The following liquidity ratios at September 30, 2008 and December 31, 2007 compare certain assets and liabilities to total deposits or total assets:
September 30,2008
Total securities to total deposits
33.49
Total loans (net of unearned income) to total deposits
75.52
72.17
Interest-earning assets to total assets
89.79
89.49
Interest-bearing deposits to total deposits
83.99
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 September 30, 2008 and December 31, 2007 are as follows:
9.15
Regulatory ratios:
Total capital to risk-weighted assets (1)
11.90
12.07
Tier 1 capital to risk-weighted assets (2)
11.03
Leverage capital to average total assets (3)
8.51
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 September 30, 2008, average earning assets were $5.6 billion, or 90.0% of total assets, compared with $5.3 billion or 90.2% of total assets at September 30, 2007. This increase resulted mostly from modest increases in the loan portfolios.
Our investment in securities was $1.7 billion at September 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 September 30, 2008, we held $4.1 billion 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 September 30, 2008, Hancock’s average total loans were $3.8 billion, compared to $3.4 billion at September 30, 2007. The $390 million, or 11.5%, increase resulted from growth mostly in commercial and real estate loans and due to branch expansions. Commercial and real estate loans comprised 61.5% of the average loan portfolio at September 30, 2008 compared to 60.5% at September 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, CDs in banks, and other short-term investments averaged $94.8 million at September 30, 2008, compared to $139.3 million at September 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 were $5.4 billion at September 30, 2008 and $5.0 billion at December 31, 2007. Average interest bearing deposits at September 30, 2008 were $4.2 billion, an increase of $189 million over September 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 September 30, 2008 were $623.6 million compared to $376.5 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 September 30, 2008, we had $880.0 million in unused loan commitments outstanding, of which approximately $620.7 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, 2008, we had $93.1 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2008 according to expiration date.
Expiration Date
Less than1 year
1-3years
3-5years
More than5 years
Commitments to extend credit
879,998
510,802
42,825
70,381
255,990
Letters of credit
93,083
46,048
18,310
28,725
973,081
556,850
61,135
99,106
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 2 to 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.
36
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 September 30, 2008, the effective duration of the securities portfolio was 3.20 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 3.94 years, while a reduction in rates of 100 basis points would result in an effective duration of 1.70 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 September 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
-5.70%
Stable
0.00%
+100
0.65%
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 nine month period ended September 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 nine months ended September 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: November 5, 2008
Index to Exhibits