FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company 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.
31,814,169 common shares were outstanding as of April 28, 2009 for financial statement purposes.
Hancock Holding Company
Index
Page Number
Part I. Financial Information
ITEM 1.
Financial Statements
Condensed Consolidated Balance Sheets —March 31, 2009 (unaudited) and December 31, 2008
1
Condensed Consolidated Statements of Income (unaudited) —Three months ended March 31, 2009 and 2008
2
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) —Three months ended March 31, 2009 and 2008
3
Condensed Consolidated Statements of Cash Flows (unaudited) —Three months ended March 31, 2009 and 2008
4
Notes to Condensed Consolidated Financial Statements (unaudited) —March 31, 2009
5-16
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17-29
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
30
ITEM 4.
Controls and Procedures
Part II. Other Information
ITEM 1A.
Risk Factors
31
Unregistered Sales of Equity Securities and Use of Proceeds
Submission of Matters to a Vote of Security Holders
ITEM 6.
Exhibits
Signatures
32
Item 1.
Hancock Holding Company and SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except share data)
March 31,2009(unaudited)
December 31,2008
ASSETS
Cash and due from banks (non-interest bearing)
$
189,316
199,775
Interest-bearing time deposits with other banks
11,745
11,355
Federal funds sold
12,824
175,166
Other short-term investments
428,671
362,895
Trading securities
1,728
2,201
Securities available for sale, at fair value (amortized cost of $1,673,676 and $1,651,499)
1,713,812
1,679,756
Loans held for sale
27,447
22,115
Loans
4,248,011
4,264,324
Less: allowance for loan losses
(62,950
)
(61,725
unearned income
(13,341
(14,859
Loans, net
4,171,720
4,187,740
Property and equipment, net of accumulated depreciation of $104,614 and $101,050
205,537
205,912
Other real estate, net
5,875
5,195
Accrued interest receivable
30,102
33,067
Goodwill
62,277
Other intangible assets, net
6,053
6,363
Life insurance contracts
145,979
144,959
Deferred tax asset, net
1,282
5,819
Other assets
83,116
62,659
Total assets
7,097,484
7,167,254
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing demand
954,101
962,886
Interest-bearing savings, NOW, money market and time
4,849,905
4,968,051
Total deposits
5,804,006
5,930,937
Federal funds purchased
1,950
—
Securities sold under agreements to repurchase
548,952
505,932
Long-term notes
598
638
Other liabilities
116,635
120,248
Total liabilities
6,472,141
6,557,755
Stockholders’ Equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 31,813,142 and 31,769,679 issued and outstanding, respectively
105,938
105,793
Capital surplus
102,665
101,210
Retained earnings
417,916
411,579
Accumulated other comprehensive loss, net
(1,176
(9,083
Total stockholders’ equity
625,343
609,499
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 March 31,
2009
2008
Interest income:
Loans, including fees
59,462
62,494
Securities - taxable
19,046
19,422
Securities - tax exempt
1,069
1,394
5
1,445
Other investments
1,866
17
Total interest income
81,448
84,772
Interest expense:
Deposits
25,354
30,599
Federal funds purchased and securities sold under agreements to repurchase
2,654
3,762
Long-term notes, capitalized interest and other interest expense
(6
(16
Total interest expense
28,002
34,345
Net interest income
53,446
50,427
Provision for loan losses, net
8,342
8,818
Net interest income after provision for loan losses
45,104
41,609
Noninterest income:
Service charges on deposit accounts
10,503
10,789
Other service charges, commissions and fees
13,987
15,557
Securities gains (losses), net
5,652
Other income
4,565
4,423
Total noninterest income
29,055
36,421
Noninterest expense:
Salaries and employee benefits
30,775
25,631
Net occupancy expense
5,055
4,601
Equipment rentals, depreciation and maintenance
2,534
2,909
Amortization of intangibles
354
365
Other expense
17,120
16,628
Total noninterest expense
55,838
50,134
Net income before income taxes
18,321
27,896
Income tax expense
4,290
7,839
Net income
14,031
20,057
Basic earnings per share
0.44
0.64
Diluted earnings per share
0.63
Dividends paid per share
0.24
Weighted avg. shares outstanding-basic
31,805
31,346
Weighted avg. shares outstanding-diluted
31,937
31,790
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, 2008
31,294,607
104,211
87,122
377,481
(14,627
554,187
Comprehensive income
Net income per consolidated statements of income
Net change in unfunded accumulated benefit obligation, net of tax
312
Net change in fair value of securities available for sale, net of tax
9,783
30,152
SFAS 158, change in measurement date
(815
Cash dividends declared ($0.24 per common share)
(7,578
Common stock issued, long-term incentive plan, including income tax benefit of $92
77,294
257
580
837
Compensation expense, long-term incentive plan
645
Balance, March 31, 2008
31,371,901
104,468
88,347
389,145
(4,532
577,428
Balance, January 1, 2009
31,769,679
435
7,472
21,938
(7,694
Common stock issued, long-term incentive plan, including income tax benefit of $25
43,463
145
513
658
942
Balance, March 31, 2009
31,813,142
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
3,755
4,006
Provision for loan losses
Loss (gain) in connection with other real estate owned
315
(15
Deferred tax benefit
(129
(2,044
Increase in cash surrender value of life insurance contracts
(1,020
(2,035
Gain on sales/paydowns of securities available for sale, net
(2,792
Gain on disposal of other assets
(283
(231
Gain on sale of loans held for sale
(343
(120
Gain on trading securities
(2,860
Net amortization of securities premium/discount, net
1,042
106
Amortization of mortgage servicing rights
39
57
Amortization of intangible assets
Stock-based compensation expense
Increase in accrued interest receivable
2,965
4,638
Increase (decrease) in accrued expenses
(130
4,544
Increase (decrease) in other liabilities
522
(1,731
Decrease in interest payable
(1,395
(2,013
Decrease in policy reserves and liabilities
(2,528
(5,508
Decrease in reinsurance receivable
1,174
3,129
(Increase) decrease in other assets
(21,631
485
Proceeds from sale of loans held for sale
78,859
49,942
Originations of loans held for sale
(83,848
(53,617
Proceeds from paydowns of securities held for trading
7,257
Excess tax benefit from share based payments
(25
(92
Other, net
391
(5
Net cash provided by operating activities
1,399
30,986
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing time deposits
(390
(162
Proceeds from sales of securities available for sale
2,789
Proceeds from maturities of securities available for sale
112,298
585,918
Purchases of securities available for sale
(134,775
(662,612
Proceeds from maturities of short term investments
373,500
Purchase of short term investments
(439,276
Net (increase) decrease in federal funds sold
162,342
(240,365
Net (increase) decrease in loans
6,329
(47,744
Purchases of property and equipment
(3,697
(7,514
Proceeds from sales of property and equipment
494
243
Proceeds from sales of other real estate
1,071
Net cash (used in) provided by investing activities
77,179
(368,376
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
(126,931
134,051
Net increase in federal funds purchased and securities sold under agreements to repurchase
44,970
216,861
Repayments of long-term notes
(40
(37
Dividends paid
Proceeds from exercise of stock options
633
745
Excess tax benefit from stock option exercises
25
92
Net cash (used in) provided by financing activities
(89,037
344,134
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
(10,459
6,744
CASH AND DUE FROM BANKS, BEGINNING
182,615
CASH AND DUE FROM BANKS, ENDING
189,359
SUPPLEMENTAL INFORMATION:
Restricted stock issued to employees of Hancock
93
417
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
1,419
2,308
Financed sale of foreclosed property
70
Transfers from trading securities to available for sale securities
187,641
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 March 31, 2009 and December 31, 2008, the Company’s Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008. 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 2008 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results expected for the full year.
Use of Estimates
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The accounting principles we follow and the methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry which requires management to make estimates and assumptions about future events. 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 not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, intangible assets and goodwill, income taxes, pension and postretirement benefit plans and contingent liabilities. These estimates and assumptions are based on our best estimates and judgments. We evaluate estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, rising unemployment levels and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Allowance for loan losses, deferred income taxes, and goodwill are potentially subject to material changes in the near term. Actual results could differ significantly 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, 2008.
2. Fair Value of Assets
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (“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 Financial Accounting Standards Board Staff Position No. 157-2 “The Effective Date of FASB Statement No. 157” for nonfinancial assets and nonfinancial liabilities on 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 March 31, 2009 and December 31, 2008.
As of March 31, 2009
Level 1
Level 2
Net Balance
Assets
Available for sale securities
266,217
1,447,595
Loans carried at fair value
40,871
267,945
1,488,466
1,756,411
Liabilities
Swaps
4,018
As of December 31, 2008
290,374
1,389,382
Short-term investments
Interest rate lock commitments
10
29,232
655,470
1,418,624
2,074,094
4,123
6
Hancock Holding Company and SubsidiariesNotes to Condensed Consolidated Financial Statements – (Continued)(Unaudited)
2. Fair Value of Assets (continued)
Fair Value of Assets Measured on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis and, therefore, are not included in the above table. Impaired loans are level 2 assets measured using appraisals from external parties of the collateral less any prior liens or based on recent sales activity for similar assets in the property’s market. Other real estate owned are level 2 properties recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values are determined by sales agreement or appraisal. Inputs include appraisal values on the properties or recent sales activity for similar assets in the property’s market. Therefore, other real estate owned is classified within level 2 of the hierarchy. The following table presents for each of the fair value hierarchy levels the Company’s financial assets that are measured at fair value (in thousands) on a nonrecurring basis at March 31, 2009.
Impaired loans
34,972
Other real estate owned
40,847
3. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $4.2 billion at March 31, 2009 and December 31, 2008. The Company also held $27.4 million and $22.1 million in loans held for sale at March 31, 2009 and December 31, 2008, 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 1.04% and 0.83% of total loans at March 31, 2009 and December 31, 2008, respectively. The amount of interest that would have been recognized on nonaccrual loans for the three months ended March 31, 2009 was approximately $0.9 million. Interest recovered on nonaccrual loans that were recorded in net income for the quarter ended March 31, 2009 was $0.2 million.
7
3. Loans and Allowance for Loan Losses (continued)
The following table presents information on loans evaluated for possible impairment loss:
March 31, 2009
December 31, 2008
(In thousands)
Requiring a loss allowance
28,587
15,089
Not requiring a loss allowance
11,501
7,015
Total recorded investment in impaired loans
40,088
22,104
Impairment loss allowance required
5,116
7,317
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
61,725
47,123
Loans charged-off:
Commercial, real estate and mortgage
4,828
1,035
Direct and indirect consumer
1,632
1,309
Finance company
1,151
1,252
Demand deposit accounts
666
601
Total charge-offs
8,277
4,197
Recoveries of loans previously charged-off:
115
201
450
410
193
204
402
449
Total recoveries
1,160
1,264
Net charge-offs
7,117
2,933
Balance of allowance for loan losses at end of period
62,950
53,008
8
4. 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
132
444
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 months ended March 31, 2009 and March 31, 2008.
5. Share-Based Payment Arrangements
Stock Option Plans
Hancock maintains incentive compensation plans that incorporate share-based compensation. These plans have been approved by the Company’s shareholders. Detailed descriptions of these plans were included in note 10 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2008. No options were granted in the first quarter of 2009.
9
5. Share-Based Payment Arrangements (continued)
A summary of option activity under the plans for the three months ended March 31, 2009, and changes during the three months then ended is presented below:
Options
Number ofShares
Weighted-AverageExercisePrice ($)
Weighted-AverageRemainingContractualTerm(Years)
AggregateIntrinsicValue ($000)
Outstanding at January 1, 2009
1,014,979
33.77
6.2
Granted
Exercised
(2,159
18.80
40
Forfeited or expired
(3,250
30.76
Outstanding at March 31, 2009
1,009,570
33.81
6.0
2,617
Exercisable at March 31, 2009
675,990
30.28
4.8
Share options expected to vest
333,580
40.95
8.6
The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008 was $40 thousand and $662 thousand, respectively.
A summary of the status of the Company’s nonvested shares as of March 31, 2009, and changes during the three months ended March 31, 2009, is presented below:
Weighted-AverageGrant-DateFair Value ($)
Nonvested at January 1, 2009
622,686
22.59
25,275
42.35
Vested
(88,491
20.37
Forfeited
(700
43.81
Nonvested at March 31, 2009
558,770
23.81
As of March 31, 2009, there was $10.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 3.63 years. The total fair value of shares which vested during the three months ended March 31, 2009 and 2008 was $1.8 million and $2.5 million, respectively.
6. Retirement Plans
Net periodic benefits cost includes the following components for the three months ended March 31, 2009 and 2008:
Pension Benefits
Other Post-retirement Benefits
Service cost
776,685
656,542
47,725
40,500
Interest cost
1,208,293
1,129,247
118,508
122,500
Expected return on plan assets
(968,210
(1,207,550
Amortization of prior service cost
(13,259
(13,250
Amortization of net loss
662,085
236,869
44,545
36,500
Amortization of transition obligation
1,288
1,250
Net periodic benefit cost
1,678,853
815,108
198,807
187,500
The Company anticipates that it will contribute $6.6 million to its pension plan and approximately $0.7 million to its post-retirement benefits in 2009. During the first three months of 2009, the Company contributed approximately $1.3 million to its pension plan and approximately $0.5 million for post-retirement benefits.
7. Other Service Charges, Commission and Fees, and Other Income
Components of other service charges, commission and fees are as follows:
Trust fees
3,327
4,176
Credit card merchant discount fees
2,568
2,540
Income from insurance operations
3,452
4,340
Investment and annuity fees
2,861
2,810
ATM fees
1,779
1,691
Total other service charges, commissions and fees
Components of other income are as follows:
Secondary mortgage market operations
1,158
778
Income from bank owned life insurance
1,213
1,444
Outsourced check income
(11
182
Other
2,205
2,019
Total other income
11
8. Other Expense
Components of other expense are as follows:
Data processing expense
4,645
3,507
Postage and communications
1,686
2,314
Ad valorem and franchise taxes
886
1,114
Legal and professional services
2,692
3,442
Stationery and supplies
464
427
Advertising
1,172
1,803
Deposit insurance and regulatory fees
1,983
326
Training expenses
98
187
Other fees
963
1,111
Annuity expense
278
972
Claims paid
241
270
2,012
1,155
Total other expense
9. 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 March 31, 2009 and December 31, 2008. 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 March 31, 2009 and December 31, 2008.
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 2005.
10. 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.
12
10. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
Three Months Ended March 31, 2009
MS
LA
FL
AL
Eliminations
Consolidated
Interest income
35,361
35,370
3,975
1,912
6,272
(1,442
Interest expense
16,617
9,071
1,656
807
1,178
(1,327
18,744
26,299
2,319
1,105
5,094
(115
Provision for (reversal of) loan losses
(351
3,968
563
2,793
1,369
Noninterest income
12,292
9,583
226
6,648
(9
2,539
878
127
78
3,754
Other noninterest expense
21,246
19,583
1,902
1,523
7,855
52,084
7,602
11,453
42
(3,063
2,386
(99
Income tax expense (benefit)
2,925
(241
(1,137
1,455
Net income (loss)
6,314
8,528
283
(1,926
931
3,747,904
2,895,631
471,372
164,592
887,005
(1,069,020
Total interest income from affiliates
1,423
Total interest income from external customers
33,938
3,966
6,262
Three Months Ended March 31, 2008
42,211
35,471
2,167
762
6,812
(2,651
19,760
13,816
1,227
422
(2,536
22,451
21,655
940
340
5,156
4,681
2,907
76
255
899
12,780
15,784
245
121
7,499
(8
2,732
898
103
129
143
4,005
20,230
15,146
1,516
1,126
8,154
(43
46,129
7,588
18,488
(510
(1,049
3,459
(80
1,758
5,462
(352
(376
1,347
5,830
13,026
(158
(673
2,112
3,598,477
2,628,934
175,335
73,367
834,751
(885,751
6,425,113
2,610
39,601
35,464
2,163
6,782
13
11. New Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction; includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market is inactive; eliminates the presumption that all transactions are distressed unless proven otherwise requiring an entity to base its conclusion on the weight of evidence; and requires an entity to disclose a change in valuation technique resulting from application of the FSP and to quantify its effects, if practicable. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is assessing the provisions of FSP 157-4, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In April 2009, the FASB issued FSP 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP changes existing guidance for determining whether an impairment is other than temporary to debt securities; replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis; requires that an entity recognize noncredit losses on held-to-maturity debt securities in other comprehensive income and amortize the amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are credit losses; requires an entity to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income; and at adoption, requires an entity to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery. FSP 115-2 and 124-2 are effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is assessing the provisions of FSP 115-2 and 124-2, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In April 2009, the FASB issued FSP-107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. Under this FSP, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. FSP 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The Company is assessing the provisions of FSP 115-2 and 124-2, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In February 2009, the FASB issued FSP 141(R)-a, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies, that amends provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact on the Company’s financial condition or results of operations is dependent on the extent of future business combinations.
14
11. New Accounting Pronouncements (continued)
In January 2009, FASB issued Emerging Issues Task Force (“EITF”) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. EITF No. 99-20-1 replaces the requirement to use market participant assumptions when determining future cash flows and, instead, requires an assessment of whether it is probable that there has been an adverse change in estimated cash flows. It requires an entity to consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts when developing estimates of future cash flows. EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. The adoption of EITF 99-20-1 did not have a material impact on the Company’s financial condition or results of operations.
In December 2008, the FASB issued FSP No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures are to provide users of financial statements with an understanding of how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure fair value of plan assets; the effect of fair value measurements using significant unobservable inputs (level 3) on changes in plan assets for the period; and significant concentrations on risk within plan assets. FAS No. 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company is assessing the impact of adopting FSP No. 132(R)-1, but does not expect the impact to be material to the Company’s financial condition or results of operations.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset in a Market That is Not Active, which clarifies the application of 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 was 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 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 adoption of EITF 03-6-1 during the first quarter of 2009 did not have a material impact on 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 for fiscal periods after July 1, 2009. 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.
15
In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets, 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 adoption of FSP 142-3, during the first quarter of 2009, did not have a material impact on the Company’s financial condition or results of operations.
In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157, which deferred the effective date for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) and was effective January 1, 2009. The adoption of FSP 157-2 during the first quarter of 2009 did not have a material impact on the Company’s financial condition or results of operations.
16
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 2008 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 150 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.” Hancock Bank subsidiaries include Hancock Investment Services, Hancock Insurance Agency, and Harrison Finance Company.
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At March 31, 2009, we had total assets of $7.1 billion and employed on a full-time equivalent basis 1,272 persons in Mississippi, 570 persons in Louisiana, 56 persons in Florida and 40 persons in Alabama.
RESULTS OF OPERATIONS
Net income for the first quarter of 2009 totaled $14.0 million, a decrease of $6.0 million, or 30.0%, from the first quarter of 2008. Diluted earnings per share for the first quarter of 2009 were $0.44, a decrease of $0.19 from the same quarter a year ago. Return on average assets for the first quarter of 2009 was 0.79% compared to 1.30% for the first quarter of 2008. Return on average common equity was 9.12% compared to 14.13% for the same quarter a year ago.
Our first quarter results were significantly impacted by the ongoing financial crisis and national economic recession. The continued rise in unemployment levels impacted our charge-off levels and resulted in a higher allowance for loans losses from the first quarter of 2008. Net charge-offs were 0.67% of average loans in the first quarter, or 35 basis points higher than the 0.32% charge-off in the same quarter a year ago. Our allowance for loan losses increased to $63.0 million, a $9.9 million increase from March 31, 2008. In an effort to continue our proactive stance in recognizing asset quality issues, we increased nonaccrual loans to $38.3 million at March 31, 2009, a $25.3 million increase from the first quarter of 2008. The majority of this increase was concentrated in construction and land development loans and in commercial real estate.
Our balance sheet showed strong growth this quarter compared to the same quarter a year ago. Total assets increased $0.7 billion, or 10.5% compared to March 31, 2008. The aforementioned growth in assets was organic as we did not record any acquisitions in the past twelve months. Period-end loans increased $595.6 million, or 16.4%, from the same quarter a year ago. Period-end deposits increased $660.4 million, or 12.8%, from March 31, 2008. We also remain very well capitalized with total equity of $625.3 million at March 31, 2009, up $47.9 million, or 8.3%, from March 31, 2008.
Net Interest Income
Net interest income (te) for the first quarter of 2009 increased $3.5 million, or 6.6%, from the first quarter of 2008. The net interest margin (te) of 3.50% was 30 basis points narrower than the same quarter a year ago. Growth in average earning assets was strong compared to the same quarter a year ago with an increase of $901.0 million, or 16.2%, mostly reflected in higher average loans (up $646.8 million, or 17.8%). With short-term interest rates down significantly from a year ago, the Company’s loan yield fell 125 basis points, with the yield on average earning assets down 102 basis points. However, total funding costs over the same quarter a year ago were down 73 basis points.
Provision for Loan Losses
The amount of the allowance for loan losses equals the cumulative total of the provision 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 incurred losses associated with our loan portfolio. The Company recorded a provision for loan losses of $8.3 million in the first quarter of 2009 compared to $8.8 million in the first quarter of 2008. The provision remains elevated within the current economic crisis.
Allowance for Loan Losses and Asset Quality
At March 31, 2009, the allowance for loan losses was $63.0 million compared with $61.7 million at December 31, 2008, an increase of $1.2 million. The increase in the allowance for loan losses through the first three months of 2009 is primarily attributed to an increased specific reserve for SFAS No. 114 impairment across all markets. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses. Management believes the March 31, 2009 allowance level is adequate.
Net charge-offs, as a percent of average loans, were 0.67% for the first quarter of 2009, compared to 0.32% in the first quarter of 2008. 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.
Nonaccrual loans were $38.3 million at March 31, 2009, an increase of $25.3 million, from $13.0 million at March 31, 2008. This increase is due to the weakening real estate markets across all markets.
18
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 theThree Months Ended March 31,
Net charge-offs to average loans (annualized)
0.67
%
0.32
Provision for loan losses to average loans (annualized)
0.79
0.97
Allowance for loan losses to average loans
1.49
1.46
Gross charge-offs
Gross recoveries
Non-accrual loans
38,327
12,983
Accruing loans 90 days or more past due
8,306
3,340
Noninterest Income
Noninterest income (excluding securities transactions) for the first quarter of 2009 was down $1.7 million, or 6%, compared to the same quarter a year ago. Trust fees were down $0.8 million, or 20%, because of reduced market values of accounts due to poor economic conditions. Income from insurance operations was down $0.9 million, or 20%, because of decreased credit life premium production and service charges on deposit accounts decreased $0.3 million, or 3%, due to a decrease in consumer spending lowering check volumes. Secondary mortgage market operations were up $0.4 million, or 49%, due to increased volume of secondary market loans. Because of the historically low rate environment, the refinancing of current loans increased during the first quarter of 2009.
The components of noninterest income for the three months ended March 31, 2009 and 2008 are presented in the following table:
3,407
3,645
Securities transactions gains (losses), net
19
Noninterest Expense
Operating expenses for the first quarter of 2009 were $5.7 million, or 11.0%, higher compared to the same quarter a year ago. The main increase from the same quarter a year ago was reflected in higher levels of total personnel expense which was up $5.1 million, or 20%, primarily due to a 2% increase in full-time equivalent employees to support increased loan production and a 3% increase in salaries. Deposit insurance and regulatory fees were up $1.7 million, or 509%, due to the expiration of the FDIC special credit in the second quarter of 2008. Occupancy expense was up $0.5 million, or 10%, because of increases in insurance and property taxes. There were also some offsets to the increase in operating expenses over the same quarter a year ago. Postage and communications expense was down $0.6 million, or 42%, due to a $0.5 million credit paid back to us from a vendor for prior year overcharges. Advertising expense was down $0.6 million, or 35%, and equipment expense decreased $0.4 million, or 13%.
The following table presents the components of noninterest expense for the three months ended March 31, 2009 and 2008.
Employee compensation
23,662
19,618
Employee benefits
7,113
6,013
Total personnel expense
Equipment and data processing expense
7,179
6,416
Other real estate owned expense, net
211
3,297
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 three months ended March 31, 2009 and 2008, the effective federal income tax rates were approximately 23% and 28%, respectively. The decrease in the effective rate in 2009 is due to an increase of the Company’s income from state jurisdictions with lower tax rates and an increase in tax-exempt income. The total amount of tax-exempt income earned during the first quarter of 2009 was $5.2 million compared to $4.4 million in the comparable period in 2008. Tax-exempt income for the three months ended March 31, 2009 consisted of $1.3 million from securities and $3.9 million from loans and leases. Tax-exempt income for the first three months of 2008 consisted of $1.4 million from securities and $3.0 million from loans and leases.
20
Selected Financial Data
The following tables contain selected financial data comparing our consolidated results of operations for the three months ended March 31, 2009 and 2008.
(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)
19.66
18.41
Weighted average number of shares:
Diluted (1)
Period-end number of shares
31,813
31,372
Market data:
High price
45.56
44.29
Low price
22.51
33.45
Period-end closing price
31.28
42.02
Trading volume
18,026
17,204
(1)
21
(dollar amounts in thousands)
Performance Ratios
Return on average assets
1.30
Return on average common equity
9.12
14.13
Earning asset yield (tax equivalent (“TE”))
5.26
6.28
Total cost of funds
1.75
2.48
Net interest margin (TE)
3.50
3.80
Common equity (period-end) as a percent of total assets (period-end)
8.81
8.99
Leverage ratio (period-end)
7.85
8.34
FTE headcount
1,938
1,877
Asset Quality Information
Foreclosed assets
5,946
3,619
Total non-performing assets
44,273
16,602
Non-performing assets as a percent of loans and foreclosed assets
1.04
0.46
Accruing loans 90 days past due
Accruing loans 90 days past due as a percent of loans
0.20
0.09
Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets
1.24
0.55
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
119.72
265.81
Average Balance Sheet
Total loans
4,285,376
3,638,608
Securities
1,651,251
1,734,997
537,420
199,484
Earning assets
6,474,047
5,573,089
(62,332
(47,385
772,171
686,425
7,183,886
6,212,129
Noninterest bearing deposits
913,807
858,706
Interest bearing transaction deposits
1,462,801
1,376,712
Interest bearing public fund deposits
1,499,354
962,170
Time deposits
2,033,925
1,848,825
Total interest bearing deposits
4,996,080
4,187,707
5,909,887
5,046,413
Other borrowed funds
536,474
484,542
113,286
110,468
Common stockholders’ equity
624,239
570,706
Total liabilities & common stockholders’ equity
22
Period-end Balance Sheet
Commercial/real estate loans
2,683,684
2,240,823
Mortgage loans
420,798
393,445
Direct consumer loans
595,470
506,372
Indirect consumer loans
423,066
386,614
Finance company loans
111,651
111,806
4,234,669
3,639,060
22,752
1,715,540
1,757,096
453,240
366,809
6,430,896
5,785,717
(53,008
729,538
692,404
881,380
1,513,467
1,431,726
Interest bearing public funds deposits
1,456,286
1,038,119
1,880,152
1,792,360
4,262,205
5,143,585
562,224
604,013
105,911
100,087
Net Charge-Off Information
Net charge-offs:
4,536
834
177
599
588
847
463
958
1,048
Total net charge-offs
Net charge-offs to average loans:
0.68
0.15
0.16
0.40
0.80
0.48
3.40
3.73
Total net charge-offs to average net loans
23
Average Balance Sheet Composition
Percentage of earning assets/funding sources:
66.19
65.29
25.51
31.13
8.30
3.58
100.00
14.11
15.41
24.71
23.16
17.26
31.42
33.17
91.28
90.55
8.29
8.69
Other net interest-free funding sources
0.43
0.76
Total funding sources
Loan mix:
62.74
61.13
10.40
10.98
14.14
10.06
10.64
2.67
3.11
Average dollars
27,686
42,134
Loans:
2,688,557
2,224,695
445,741
399,374
605,685
514,441
430,965
386,985
114,428
113,113
Total average loans
24
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)
34,463
5.18
36,582
6.61
6,455
5.79
5,961
5.97
Consumer loans
20,567
1,151,078
7.26
21,540
1,014,539
8.54
Loan fees & late charges
345
0.00
116
Total loans (TE)
61,830
5.84
64,199
7.09
US treasury securities
51
11,314
1.82
117
11,384
4.12
US agency securities
2,316
226,002
4.10
5,638
477,630
4.72
CMOs
187,901
4.91
143,691
4.81
Mortgage backed securities
13,369
1,045,740
5.11
11,025
856,452
5.15
Municipals (TE)
2,285
154,266
5.93
2,501
193,787
5.16
Other securities
362
26,028
5.56
557
52,053
4.29
Total securities (TE)
20,691
5.01
21,566
4.97
Total short-term investments
1,871
1.41
1,462
2.95
Average earning assets yield (TE)
84,392
87,227
Interest bearing liabilities
2,086
0.58
3,952
1.15
16,706
3.33
20,455
4.45
Public funds
6,562
1.78
6,192
2.59
2.06
2.94
Total borrowings
2,648
2.00
3,746
Total interest bearing liability cost
5,532,554
2.05
4,672,249
2.96
Total Cost of Funds
Net Interest Spread (TE)
56,390
3.21
52,882
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.
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 $315 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $130 million.
For the three months ended March 31, 2009, the Company did not sell any securities.
The following liquidity ratios at March 31, 2009 and December 31, 2008 compare certain assets and liabilities to total deposits or total assets:
March 31,2009
Total securities to total deposits
29.56%
28.36%
Total loans (net of unearned income) to total deposits
72.96%
71.65%
Interest-earning assets to total assets
90.61%
90.73%
Interest-bearing deposits to total deposits
83.56%
83.77%
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, 2008. 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 March 31, 2009 and December 31, 2008 are as follows:
8.50
Regulatory ratios:
Total capital to risk-weighted assets (1)
12.11
11.22
Tier 1 capital to risk-weighted assets (2)
10.88
10.09
Leverage capital to average total assets (3)
8.06
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.
26
(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
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. The last test was conducted as of September 30, 2008. No impairment charges were recognized as of March 31, 2009. The carrying amount of goodwill was $62.3 million as of March 31, 2009 and December 31, 2008.
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 March 31, 2009, average earning assets were $6.5 billion, or 90.1% of total assets, compared with $5.6 billion or 89.7% of total assets at March 31, 2008. This increase resulted mostly from modest increases in the loan portfolios and short-term investments.
Our investment in securities remained constant at $1.7 billion at March 31, 2009 and December 31, 2008. 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.
We held $4.2 billion in loans at March 31, 2009 and at December 31, 2008.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 March 31, 2009, Hancock’s average total loans were $4.3 billion, compared to $3.6 billion at March 31, 2008. The $646.8 million, or 18%, increase resulted from growth mostly in commercial and real estate loans and due to branch expansions. Commercial and real estate loans comprised 62.7% of the average loan portfolio at March 31, 2009 compared to 61.1% at March 31, 2008. 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 $537.4 million at March 31, 2009, compared to $199.5 million at March 31, 2008. We utilize these products as a short-term investment alternative whenever we have excess liquidity.
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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 $5.8 billion at March 31, 2009 and $5.9 billion at December 31, 2008. Average interest bearing deposits at March 31, 2009 were $5.0 billion, an increase of $808.4 million over March 31, 2008. 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 March 31, 2009 were $551.5 million compared to $506.6 million at December 31, 2008. 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 March 31, 2009, we had $889.2 million in unused loan commitments outstanding, of which approximately $646.4 million were at variable rates, with the remainder at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent our future cash requirements. We continually evaluate each customer’s credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in our obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At March 31, 2009, we had $102.7 million in letters of credit issued and outstanding.
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The following table shows the commitments to extend credit and letters of credit at March 31, 2009 according to expiration date.
Expiration Date
Less than1 year
1-3years
3-5years
More than5 years
Commitments to extend credit
889,210
538,791
54,877
61,840
233,702
Letters of credit
102,690
60,134
23,469
18,703
384
991,900
598,925
78,346
80,543
234,086
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
New Accounting Pronouncements
See Note 11 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.
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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 March 31, 2009, the effective duration of the securities portfolio was 1.20 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 2.03 years, while a reduction in rates of 100 basis points would result in an effective duration of 0.99 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 March 31, 2009 indicate that we are asset sensitive as compared to the stable rate environment. Exposure to instantaneous changes in interest rate risk for the current quarter is presented in the following table.
Net Interest Income (te) at Risk
Change ininterest rate(basis point)
Estimatedincrease (decrease)in net interest income
-100
-8.35%
Stable
0.00%
+100
9.29%
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, 2008 included in our 2008 Annual Report on Form 10-K.
Item 4.
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 three month period ended March 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1A.
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2008.
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 three months ended March 31, 2009.
Submission of Matters to a Vote of Security Holders.
A.
The Company’s Annual Meeting was held on March 26, 2009.
B.
The Directors elected at the Annual Meeting held on March 26, 2009 were:
Votes Cast
For
Withheld
1.
Alton G. Bankston
28,085,244
86,666
2.
John M. Hairston
28,031,651
140,973
3.
James H. Horne
27,999,251
172,657
4.
Christine L. Pickering
27,999,367
172,541
5.
George A. Schloegel
21,576,128
6,581,423
C.
PriceWaterhouseCoopers was approved as the independent public accountants of the Company.
Against
Abstained
27,969,679
76,371
125,860
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
President & Chief Executive Officer
/s/ John M. Hairston
Chief Executive Officer & Chief Operating Officer
/s/ Michael M. Achary
Michael M. Achary
Chief Financial Officer
Date:
May 7, 2009
Index to Exhibits