UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
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)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
(228) 868-4000
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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). Yes x No ¨
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
¨
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
36,889,297 common shares were outstanding as of October 31, 2010 for financial statement purposes.
Hancock Holding Company
Index
Part I. Financial Information
ITEM 1.
Financial Statements
Condensed Consolidated Balance Sheets — September 30, 2010 (unaudited) and December 31, 2009
Condensed Consolidated Statements of Income (unaudited) — Three and nine months ended September 30, 2010 and 2009
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) — Nine months ended September 30, 2010 and 2009
Condensed Consolidated Statements of Cash Flows (unaudited) — Nine months ended September 30, 2010 and 2009
Notes to Condensed Consolidated Financial Statements (unaudited) — September 30, 2010
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
ITEM 4.
Controls and Procedures
Part II.
Other Information
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Reserved
ITEM 5.
ITEM 6.
Exhibits
Signatures
Hancock Holding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
Cash and due from banks (non-interest bearing)
Interest-bearing deposits with other banks
Federal funds sold
Other short-term investments
Securities available for sale, at fair value (amortized cost of $1,553,150 and $1,566,403)
Loans held for sale
Loans
Less: allowance for loan losses
unearned income
Loans, net
Property and equipment, net of accumulated depreciation of $123,066 and $113,967
Other real estate, net
Accrued interest receivable
Goodwill
Other intangible assets, net
Life insurance contracts
FDIC loss share receivable
Other assets
Total assets
Deposits:
Non-interest bearing demand
Interest-bearing savings, NOW, money market and time
Total deposits
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
Long-term notes
Deferred tax liability, net
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock - $3.33 par value per share; 350,000,000 shares authorized, 36,883,434 and 36,840,453 issued and outstanding, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive gain, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited condensed consolidated financial statements.
1
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Interest income:
Loans, including fees
Securities - taxable
Securities - tax exempt
Other investments
Total interest income
Interest expense:
Deposits
Federal funds purchased and securities sold under agreements to repurchase
Long-term notes and other interest expense
Total interest expense
Net interest income
Provision for loan losses, net
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Other service charges, commissions and fees
Securities gains, net
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Equipment rentals, depreciation and maintenance
Amortization of intangibles
Other expense
Total noninterest expense
Net income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Dividends paid per share
Weighted avg. shares outstanding-basic
Weighted avg. shares outstanding-diluted
2
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
Balance, January 1, 2009
Comprehensive income
Net income per consolidated statements of income
Net change in unfunded accumulated benefit obligation, net of tax
Net change in fair value of securities available for sale, net of tax
Cash dividends declared ($0.72 per common share)
Common stock issued, long-term incentive plan, including income tax benefit of $390
Compensation expense, long-term incentive plan
Balance, September 30, 2009
Balance, January 1, 2010
Common stock issued, long-term incentive plan, including income tax benefit of $223
Balance, September 30, 2010
3
Condensed Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for loan losses
Loss in connection with other real estate owned
Deferred tax benefit
Increase in cash surrender value of life insurance contracts
Gain on sales/paydowns of securities available for sale, net
Gain on sale or disposal of other assets
Gain on sale of loans held for sale
Discount accretion on acquired FHLB borrowings
Net amortization of securities premium/discount
Amortization of intangible assets
Stock-based compensation expense
Decrease in other liabilities
Increase in FDIC Indemnification Asset
Decrease (increase) in other assets
Proceeds from sale of loans held for sale
Originations of loans held for sale
Excess tax benefit from share based payments
Other, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-bearing time deposits
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Purchases of securities available for sale
Proceeds from maturities of short term investments
Purchase of short term investments
Net decrease in federal funds sold
Net decrease (increase) in loans
Purchases of property and equipment
Proceeds from sales of property and equipment
Proceeds from sales of other real estate
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits
Net increase in federal funds purchased and securities sold under agreements to repurchase
Proceeds from issuance of short-term notes
Repayments of short-term notes
Repayments of long-term notes
Dividends paid
Proceeds from exercise of stock options
Excess tax benefit from stock option exercises
Net cash (used in) financing activities
NET DECREASE IN CASH AND DUE FROM BANKS
CASH AND DUE FROM BANKS, BEGINNING
CASH AND DUE FROM BANKS, ENDING
SUPPLEMENTAL INFORMATION:
Restricted stock issued to employees of Hancock
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate
Financed sale of foreclosed property
Transfers from loans to loans held for sale
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Notes to Condensed Consolidated Financial Statements
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, 2010 and December 31, 2009, the Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010 and 2009, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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 2009 Annual Report on Form 10-K. The results of operations for the nine months ended September 30, 2010 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 the Company follows 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 the Company’s best estimates and judgments. The Company evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. The Company adjusts 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, 2009.
5
Notes to Condensed Consolidated Financial Statements—(Continued)
2. Fair Value
The Financial Accounting Standards Board (FASB) issued authoritative guidance that 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. The guidance 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 invests only in high quality securities of investment grade quality with a target duration, for the overall portfolio, generally between two to five years. The Company 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. There were no transfers between levels.
The Company adopted the provisions of the guidance for nonfinancial assets and nonfinancial liabilities on January 1, 2009.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present 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, 2010 and December 31, 2009.
Assets
Available for sale securities:
Debt securities issued by the U.S. Treasury and other government corporations and agencies
Debt securities issued by states of the United
States and political subdivisions of the states
Corporate debt securities
Residential mortgage-backed securities
Collateralized mortgage obligations
Equity securities
Short-term investments
Loans carried at fair value
Liabilities
Swaps
Total Liabilities
6
2. Fair Value (continued)
Debt securities issued by states of the United States and political subdivisions of the states
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. 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 September 30, 2010 and December 31, 2009.
Impaired loans
Other real estate owned
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The following methods and assumptions were used to estimate the fair value regarding disclosures about fair value of financial instruments of each class of financial instruments for which it is practicable to estimate:
Cash, Short-Term Investments and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities - Estimated fair values for securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.
Loans, Net of Unearned Income - The fair value of loans is estimated by discounting the future cash flows using the current rates for similar loans with the same remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable - The carrying amounts are a reasonable estimate of their fair values.
Deposits - The guidance requires that the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking and savings accounts, be assigned fair values equal to amounts payable upon demand (carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Securities Sold under Agreements to Repurchase, FHLB Borrowings and Federal Funds Purchased - For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Long-Term Notes - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value. The fair value is estimated by discounting the future contractual cash flows using current market rates at which similar notes over the same remaining term could be obtained.
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
Financial assets:
Cash, interest-bearing deposits, federal funds sold, and short-term investments
Securities
Loans, net of unearned income
Financial liabilities:
FHLB Borrowings
Accrued interest payable
8
3. Loans and Allowance for Loan Losses
Loans, net of unearned income, totaled $4.9 billion at September 30, 2010 compared to $5.1 billion at December 31, 2009. The Company also held $54.2 million and $36.1 million in loans held for sale at September 30, 2010 and December 31, 2009, respectively, carried at lower of cost or fair value. At June 30, 2010, the Company transferred $10.6 million of credit card loans to loans held for sale. 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, restructured loans, and foreclosed assets, which make up total non-performing assets, were $175.5 million and $99.8 million and amounted to approximately 3.55% and 1.97% of total loans at September 30, 2010 and December 31, 2009, respectively.
Included in nonaccrual loans is $9.1 million in restructured commercial loans. Total restructured loans for the period were $10.7 million. Loan restructurings occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would otherwise not be considered is granted to the borrower. The concessions involve paying interest only for a period of 6 to 12 months. Hancock does not typically lower the interest rate or forgive principal or interest as part of the loan modification. There have been no commitments to lend additional funds to any borrowers whose loans have been restructured. Troubled debt restructurings can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing to accrue, depending on the individual facts and circumstances of the borrower. The evaluation of the borrower’s financial condition and prospects include consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status. A sustained period of repayment performance generally would be a minimum of six months and would involve payments of cash or cash equivalents. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.
The amount of interest that would have been recognized on nonaccrual loans for the three and nine months ended September 30, 2010 was approximately $2.0 million and $5.1 million, respectively. Interest recovered on nonaccrual loans that were recorded in net income for the three and nine months ended September 30, 2010 was $0.6 million and $0.8 million, respectively.
The following table presents information on loans evaluated for possible impairment loss:
Requiring a loss allowance
Not requiring a loss allowance
Total recorded investment in impaired loans
Impairment loss allowance required
9
3. 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:
Balance of allowance for loan losses at beginning of period
Loans charged-off:
Commercial, real estate and mortgage
Direct and indirect consumer
Finance company
Demand deposit accounts
Total charge-offs
Recoveries of loans previously charged-off:
Total recoveries
Net charge-offs
Balance of allowance for loan losses at end of period
Changes in the carrying amount of covered acquired loans and accretable yield for loans receivable at September 30, 2010 are presented in the following table (in thousands):
Balance at beginning of period
Payments received, net
Accretion
Balance at end of period
The carrying value of loans receivable with deterioration of credit quality accounted for using the cost recovery method was $54.5 million at September 30, 2010, and at December 31, 2009. Each of these loans is on nonaccrual status. Loans with deterioration of credit quality that have an accretable difference are not included in nonperforming balances even though the customer may be contractually past due. These loans will accrete interest income over the remaining life of the loan. There was no provision for loan loss recognized for purchased loans during the three months ended September 30, 2010.
The unpaid principal balance for purchased loans was $1,239 million and $1,462 million at September 30, 2010, and December 31, 2009, respectively.
10
4. Earnings Per Share
The Company adopted the FASB’s authoritative guidance regarding the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance 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. This guidance was effective January 1, 2009.
Following is a summary of the information used in the computation of earnings per common share (in thousands), using the two-class method:
Numerator:
Net income to common shareholders
Net income allocated to participating securities - basic and diluted
Net income allocated to common shareholders - basic and diluted
Denominator:
Weighted-average common shares - basic
Dilutive potential common shares
Weighted average common shares - diluted
Earnings per common share:
Basic
Diluted
There were no anti-dilutive share-based incentives outstanding for the three and nine months ended September 30, 2010 and September 30, 2009.
11
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 11 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2009. No options were granted in the first nine months of 2010.
A summary of option activity under the plans for the nine months ended September 30, 2010, and changes during the nine months then ended is presented below:
Options
Outstanding at January 1, 2010
Granted
Exercised
Forfeited or expired
Outstanding at September 30, 2010
Exercisable at September 30, 2010
Share options expected to vest
The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $0.6 million and $1.1 million, respectively.
A summary of the status of the Company’s nonvested shares as of September 30, 2010, and changes during the nine months ended September 30, 2010, is presented below:
Nonvested at January 1, 2010
Vested
Forfeited
Nonvested at September 30, 2010
As of September 30, 2010, there was $9.9 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 3.2 years. The total fair value of shares which vested during the nine months ended September 30, 2010 and 2009 was $1.6 million and $1.9 million, respectively.
12
6. Retirement Plans
Net periodic benefits cost includes the following components for the three and nine months ended September 30, 2010 and 2009:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Amortization of transition obligation
Net periodic benefit cost
The Company anticipates that it will contribute $6.7 million to its pension plan and approximately $1.3 million to its post-retirement benefits in 2010. During the first nine months of 2010, the Company contributed approximately $5.0 million to its pension plan and approximately $1.0 million for post-retirement benefits.
13
7. Other Service Charges, Commission and Fees, and Other Income
Components of other service charges, commission and fees are as follows:
Trust fees
Credit card merchant discount fees
Income from insurance operations
Investment and annuity fees
ATM fees
Total other service charges, commissions and fees
Components of other income are as follows:
Secondary mortgage market operations
Income from bank owned life insurance
Appraisal fee income
Letter of credit fees
(Loss)/gain on sale of property and equipment
Other
Total other income
8. Other Expense
Components of other expense are as follows:
Data processing expense
Postage and communications
Ad valorem and franchise taxes
Legal and professional services
Stationery and supplies
Advertising
Deposit insurance and regulatory fees
Training expenses
Other fees
Annuity expense
Claims paid
Total other expense
14
9. Income Taxes
There were no material uncertain tax positions as of September 30, 2010 and December 31, 2009. 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, 2010 and December 31, 2009.
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 2007.
10. Segment Reporting
The Company’s primary segments are divided into the Mississippi (MS), Louisiana (LA), Alabama (AL), and Other. Effective January 1, 2010, the Company’s Florida segment was merged into Mississippi. The activity and assets of Peoples First acquired in December 2009 are included in Mississippi. 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, Lighthouse Services Corp., Invest-Sure, Inc., Peoples First Transportation, Inc., Community First and subsidiaries, and three real estate corporations owning land and buildings that house bank branches and other facilities.
15
10. Segment Reporting (continued)
Following is selected information for the Company’s segments (in thousands):
Interest income
Interest expense
Noninterest income
Other noninterest expense
Income tax expense (benefit)
Net income (loss)
Total interest income from affiliates
Total interest income from external customers
16
17
11. New Accounting Pronouncements
In October, 2010, the Financial Accounting Standards Board (FASB) issued guidance on accounting for costs associated with acquiring or renewing insurance contracts. The objective is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The accounting update specifies which costs incurred in the acquisition of new and renewal contracts should be capitalized. The guidance is effective for fiscal years beginning after December 15, 2011. While the guidance is required to be applied prospectively upon adoption, retrospective application is also permitted (to all prior periods presented). Early adoption is also permitted, but only at the beginning of an entity’s annual reporting period. This guidance is not expected to have a material impact on the Company’s financial condition or results of operations.
In July, 2010, the FASB issued guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The new guidance enhances disclosures to provide information for both the finance receivables and the related allowance for credit losses at disaggregated levels presented by portfolio segment which is the level an entity determines its allowance for credit losses and class which is defined as a group of receivables determined based on measurement basis, risk characteristics and the entity’s method for monitoring and assessing credit risk. A rollforward schedule by portfolio segment of the allowance for credit losses and the related ending balance of finance receivables with significant purchases and sales of finance receivables will be required. The following disclosures are required to be presented by class: credit quality of the financing receivables portfolio at the end of the reporting period; the aging of past due financing receivables at the end of the period; the nature and the extent of troubled debt restructurings that occurred during the period and their impact of the allowance for credit losses; the nature and extent of troubled debt restructurings that occurred within the last year that have defaulted in the current reporting period and their impact on the allowance for credit losses; the nonacrrual status of financing receivables; and impaired financing receivables. The new disclosures of information as of the end of the reporting period will become effective for both interim and annual reporting periods ending after December 15, 2010. Specific items regarding activity that occurred before the issuance of the guidance, such as the allowance rollforward and modification disclosures will be required for periods beginning after December 15, 2010. The new disclosure requirements will have no impact on the Company’s financial condition or results of operations.
In May 2010, the FASB issued guidance on receivables regarding the effect of a loan modification when the loan is part of a pool that is accounted for as a single asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This guidance is effective prospectively for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. This guidance did not have a material impact on the Company’s financial condition or results of operations.
In February 2010, the FASB issued guidance removing the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. This amendment was effective immediately and had no impact on the Company’s financial condition or results of operations.
18
11. New Accounting Pronouncements (continued)
In January 2010, the FASB issued guidance on fair value measurements and disclosures that requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, the guidance now requires a reporting entity to disclose separately the amounts of significant transfers in and out of level 1 and level 2 fair value measurements and describe the reasons for the transfers and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, the guidance clarifies the requirements of reporting fair value measurement for each class of assets and liabilities and clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities based on the nature and risks of the investments. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in level 3 fair value measurements which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. The adoption of the guidance did not have a material impact on the Company’s financial condition or results of operations and the adoption of the additional disclosures of level 3 fair value measurements is not expected to have a material impact on the Company’s financial condition or results of operations.
19
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 2009 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 180 banking and financial services offices and more than 160 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida and Alabama through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA) and Hancock Bank of Alabama, Mobile, Alabama (Hancock Bank AL). Hancock Bank MS, Hancock Bank LA, 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 September 30, 2010, we had total assets of $8.2 billion and employed 2,235 persons on a full-time equivalent basis.
RESULTS OF OPERATIONS
Our third quarter 2010 net income was $14.9 million, an increase of $8.4 million, or 129%, compared to the second quarter of 2010 and a decrease of $0.4 million, or 2.4%, from the third quarter of 2009. Diluted earnings per share were $0.40, an increase of $0.23, or 135%, compared to the second quarter of 2010 and a decrease of $0.08, or 17%, from the same quarter a year ago. Return on average assets for the third quarter of 2010 was 0.70% compared to 0.31% in the second quarter of 2010 and compared to 0.87% for the third quarter of 2009. Our 2010 results include the impact of our common stock offering and acquisition of Peoples First Community Bank (Peoples First), both of which were completed in the fourth quarter of 2009.
The most significant driver of the Company’s improved earnings from last quarter was reflected in an $8.3 million reduction in the provision for loan losses. The lower provision resulted from the absence of any need to add to last quarter’s specific reserve related to the Gulf Oil Spill ($5.2 million) and also a lower level of required reserve build related to the Company’s loan portfolio ($2.5 million this quarter versus $5.4 million last quarter). The lower level of required reserve build is due to a lower level of delinquencies. The Company also reduced operating expenses $4.1 million, or 5.6%, from last quarter, with much of that improvement related to the absence of second quarter nonrecurring merger costs related to the Peoples First acquisition, as well as on-going expense efficiencies.
Net charge-offs for 2010’s third quarter were $13.8 million, or 1.10% of average loans, slightly down from the $13.9 million, or 1.11% of average loans reported in the second quarter of 2010, and slightly up from the $13.5 million, or 1.24% of average loans, reported for the third quarter of 2009. Non-performing assets as a percent of total loans and foreclosed assets were 3.55% (2.63% excluding Peoples First) at September 30, 2010, compared to 3.89% at June 30, 2010, but were up from 1.06% at September 30, 2009. Non-performing assets (which includes nonaccrual loans, restructured loans and foreclosed assets) decreased $19.6 million from June 30, 2010, but increased $130 million from September 30, 2009, mostly due to the acquisition of Peoples First. Loans 90 days past due or greater (accruing) as a percent of period-end loans decreased 3 basis points from September 30, 2009 to 0.15% at September 30, 2010. We recorded a provision for loan losses for the third quarter of $16.3 million, a decrease of $8.3 million from the second quarter of 2010 and an increase of $2.8 million from the third quarter of 2009. Our allowance for loan losses was $79.7 million at September 30, 2010, an increase of $2.5 million from June 30, 2010 and an increase of $15.9 million from September 30, 2009. The ratio of the allowance for loan losses as a percent of period-end loans was 1.62% at September 30, 2010, compared to 1.55% at June 30, 2010, and compared to 1.50% at September 30, 2009.
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Total assets at September 30, 2010 were $8.2 billion, down from $8.70 billion at December 31, 2009. Compared to September 30, 2009, total assets increased $1.4 billion, or 21%. Period-end loans were down $206.5 million, or 4.0% from December 31, 2009, and were up $655.5 million, or 15%, from the same quarter a year ago. Period-end deposits decreased $487.0 million, or 7% from December 31, 2009, and increased $1.3 billion, or 24%, from September 30, 2009. The increases in period-end loans and period-end deposits, compared to September 30, 2009, were primarily due to the acquisition of Peoples First. We also remain very well capitalized with total equity of $865.8 million at September 30, 2010, up $28.1 million, or 3% from December 31, 2009 and up $211.0 million, or 32%, from September 30, 2009.
Net Interest Income
Net interest income (taxable equivalent or te) for the third quarter increased $9.0 million, or 15%, while the net interest margin (te) of 3.85% was 1 basis point 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 $929.2 million, or 15%, mostly reflected in higher average loans (up $674.3 million, or 16%) and was due primarily to the fourth quarter 2009 acquisition of Peoples First.
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. There was no provision for loan losses recorded on purchased loans for the period ended September 30, 2010. We recorded a provision for loan losses of $16.3 million in the third quarter which is a $2.8 million, or 20%, increase in the provision for loan losses compared to $13.5 million for the quarter ended September 30, 2009. This increase was necessary to adjust the allowance to the level dictated by our reserving methodologies. The provision remains elevated due to the ongoing stress on commercial real estate values. In addition, we added an additional $5.2 million specific reserve due to the Gulf Oil Spill in the second quarter of 2010 based on a detailed review of potentially impacted credits. While no increase in this specific reserve was necessary in the third quarter, we are continuing to monitor the impact the Gulf Oil Spill is having on our affected markets.
Allowance for Loan Losses and Asset Quality
At September 30, 2010, the allowance for loan losses was $79.7 million compared with $66.1 million at December 31, 2009, an increase of $13.6 million. The increase in the allowance for loan losses through the first nine months of 2010 is primarily attributed to an additional $5.2 million provision designated to the 2010 Gulf Oil Spill based on detailed review of potentially impacted credits. In addition, an increased estimated provision of $5.4 million was added for specific reserve analysis for those loans considered impaired under FAS 114 and $3.0 million was added for loans that are considered non-impaired under FAS 5. We do not offer subprime home mortgage loans, and therefore, our increased reserve is not associated with those high risk loans. The only higher risk loans we offer are through our finance company but those loans are immaterial to our loan portfolio. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses. Within the allowance for loan losses modeling, adequate segregation of geographic and specific loan types are documented and analyzed for appropriate risk metrics. We maintain a continuous credit quality policy that establishes acceptable loan-to-value thresholds on the front end underwriting process. Residential home values are continuously monitored by each market. A detailed description of our methodology was included in our annual report on Form 10-K for the year ended December 31, 2009. Management believes the September 30, 2010 allowance level is adequate.
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Net charge-offs, as a percent of average loans, were 1.10% for the third quarter of 2010, compared to 1.24% in the third quarter of 2009. The percent variance over the one year period is materially impacted by the Peoples First Community Bank FDIC transaction. Of the overall increase in net charge-offs of $0.3 million, $1.5 million was reflected in mortgage loans with offsetting decreases in commercial loans ($1.0 million) and consumer loans ($0.2 million).
Nonaccrual loans were $141.9 million at September 30, 2010, an increase of $106.3 million over $35.6 million at September 30, 2009. $54.5 million of the increase is due to the acquisition of Peoples First. The remainder of the increase, $51.8 million, is due to continued deterioration in our legacy loan portfolio, mostly related to the continued decline in real estate values and overall duration of the current economic recession.
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).
Net charge-offs to average loans (annualized)
Provision for loan losses to average loans (annualized)
Allowance for loan losses as a percent of period-end loans
Gross charge-offs
Gross recoveries
Nonaccrual loans
Accruing loans 90 days or more past due
Noninterest Income
Noninterest income for the third quarter of 2010 was up $4.8 million, or 16%, compared to the same quarter a year ago and was up $8.0 million, or 8%, for the first nine months of 2010 compared to the same period of 2009.
Credit card merchant discount fees were up $0.8 million, or 28%, compared to the third quarter of 2009 and were up $2.9 million, or 34%, compared to the first nine months of 2009, mainly due to increased activity from the Peoples First acquisition.
Service charges on deposit accounts decreased $0.5 million, or 4%, compared to the same quarter a year ago mainly because of lower overdraft and NSF item counts due to new Federal Reserve consumer protection regulations. When comparing the first nine months of 2010 to the same period of 2009, there was an increase of $1.6 million, or 5%. The increase was due to a risk management program that was put in place to better manage risk and from increased deposit accounts from the Peoples First acquisition. Service charges include periodic account maintenance fees for both commercial and personal customers, charges for specific transactions or services, such as processing return items or wire transfers, and other revenue associated with deposit accounts, such as commissions on check sales.
ATM fees increased $0.8 million, or 42%, compared to the third quarter of 2009 and increased $1.4 million, or 25%, compared to the first nine months of 2009, due to increased activity from the Peoples First acquisition and increased growth in our Mississippi and Louisiana markets.
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Investment and annuity fees were up $0.9 million, or 45%, compared to the third quarter of 2009 and were up $1.3 million, or 20%, when compared to the first nine months of 2009, mainly because the third quarter of 2009 presented a large decrease in production due to poor market conditions.
Secondary mortgage market operations income was up $1.1 million, or 73%, compared to the third quarter of 2009 and was up $1.3 million, or 28%, when compared to the first nine months of 2009, primarily due to increased originations and refinancing due to continued low mortgage interest rates.
Compared to the third quarter of 2009, gain on sale of property and equipment was unchanged, but decreased $1.1 million, or 79%, when compared to the first nine months of 2009, mainly due to gains on sales of land in 2009.
Other income was up $1.5 million compared to the third quarter of 2009 mainly due to accretion on the FDIC indemnification asset from our fourth quarter 2009 acquisition of People First. On a year to date basis, other income increased $0.4 million, or 6%, due to the indemnification asset accretion during the third quarter of 2010 that was offset by an increase in other investments and BOLI income for the same period of 2009.
The components of noninterest income for the three and nine months ended September 30, 2010 and 2009 are presented in the following table:
Outsourced check income/(loss)
Gain/(loss) on sale of property and equipment
Securities transactions gains, net
Noninterest Expense
Operating expenses for the third quarter of 2010 were $12.3 million, or 22%, higher compared to the same quarter a year ago and were $38.2 million, or 22%, higher than the first nine months of 2009.
Total personnel expense increased $6.8 million, or 23%, compared to the same quarter last year and increased $17.4 million, or 20% compared to the first nine months of 2009. The increase is mainly due the additional full time equivalent employees from the Peoples First acquisition. Total personnel expense consists of employee compensation and employee benefits. Employee compensation includes base salaries and contract labor costs, compensation earned under sales-based and other employee incentive programs, and compensation expense under management incentive plans. Employee benefits, in addition to payroll taxes, are the cost of providing health benefits for active and retired employees and the cost of providing pension benefits through both the defined-benefit plans and a 401(k) employee savings plan.
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Equipment and data processing expense was up $0.9 million, or 13%, compared to the third quarter of 2009 and was up $4.3 million, or 20%, compared to the first nine months of 2009 due to increased operating activity and the system conversion project associated with Peoples First.
Legal and professional services increased $0.9 million, or 35%, compared to the third quarter of 2009, mostly due to increased indirect dealer fees in Mississippi and increased foreclosure expenses. Compared to the first nine months of 2009, legal and professional services increased $3.8 million, or 49%. The increase was mainly due to the costs associated with the acquisition, valuation and conversion of Peoples First.
Net occupancy expense was up $0.5 million, or 10%, compared to the same quarter a year ago and was up $2.6 million, or 17%, compared to the first nine months of 2009, mainly due to the facilities acquired from Peoples First. Increased expenses related mainly to building rent, utilities, property taxes and building insurance.
Advertising expense increased $1.0 million, or 74%, compared to the third quarter of 2009 and increased $2.1 million, or 56%, compared to the first nine months of 2009 mostly due to increased television, radio and newspaper ads and direct mail activity in our new Florida market areas.
Deposit insurance and regulatory fees increased $0.6 million, or 27%, compared to the same quarter a year ago and was down $1.8 million, or 17%, compared to the first nine months of 2009 mostly due to a special FDIC assessment in the second quarter of 2009.
Other real estate owned expense decreased $0.2 million compared to the third quarter of 2009 and increased $2.0 million compared to the first nine months of 2009. The increase in 2010 was due to two large write downs and assets acquired from Peoples First.
Other expense increased $1.5 million compared to the same quarter a year ago and was up $4.1 million compared to the first nine months of 2009 mostly because of Peoples First valuation adjustments and interest and investment amortization on new market tax credits.
The following table presents the components of noninterest expense for the three and nine months ended September 30, 2010 and 2009.
Employee compensation
Employee benefits
Total personnel expense
Equipment and data processing expense
Other real estate owned expense, net
Insurance expense
Non loan charge-offs
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Income Taxes
For the nine months ended September 30, 2010 and 2009, the effective income tax rates were approximately 13% and 19%, respectively. Because of the reduced level of pretax income in 2010, the tax exempt interest income and the utilization of tax credits had a significant impact on the effective tax rate. The source of the tax credits for 2010 and 2009 resulted from investments in New Market Tax Credits, Qualified Bond Credits and Work Opportunity Tax Credits.
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, 2010 and 2009.
Per Common Share Data
Earnings per share:
Cash dividends per share
Book value per share (period-end)
Weighted average number of shares:
Diluted (1)
Period-end number of shares
Market data:
High price
Low price
Period-end closing price
Trading volume (2)
Trading volume is based on the total volume as determined by NASDAQ on the last day of the quarter.
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Performance Ratios
Return on average assets
Return on average common equity
Earning asset yield (tax equivalent (“TE”))
Total cost of funds
Net interest margin (TE)
Common equity (period-end) as a percent of total assets (period-end)
Leverage ratio (period-end) (a)
FTE headcount
Asset Quality Information
Non-accrual loans
Restructured loans (b)
Foreclosed assets
Total non-performing assets
Non-performing assets as a percent of loans and foreclosed assets
Accruing loans 90 days past due (c)
Accruing loans 90 days past due as a percent of loans
Non-performing assets + accruing loans 90 days past due to loans and foreclosed assets
Net charge-offs as a percent of average loans
Allowance for loan losses
Allowance for loan losses to NPAs + accruing loans
90 days past due
Average Balance Sheet
Total loans
Earning assets
Noninterest bearing deposits
Interest bearing transaction deposits
Interest bearing public fund deposits
Time deposits
Total interest bearing deposits
Other borrowed funds
Common stockholders’ equity
Total liabilities & common stockholders’ equity
Calculated as Tier 1 capital divided by average total assets. Tier 1 capital is total equity less unrealized gain/loss on AFS securities, unfunded pension liability, unrecognized pension gain/loss, net goodwill and core deposit and 10% net mortgage servicing rights. Average total assets is reduced by net goodwill and core deposits and 10% of net mortgage servicing rights.
Included in restructured loans are $9.1 million in non-accrual loans.
Accruing loans past due 90 days or more do not include purchased impaired loans which were written down to their fair value upon acquisition and accrete interest income over the remaining life of the loan.
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Period-end Balance Sheet
Commercial/real estate loans
Mortgage loans
Direct consumer loans
Indirect consumer loans
Finance company loans
Interest bearing public funds deposits
Net Charge-Off Information
Net charge-offs:
Total net charge-offs
Net charge-offs to average loans:
Total net charge-offs to average net loans
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Average Balance Sheet Composition
Percentage of earning assets/funding sources:
Other net interest-free funding sources
Total funding sources
Loan mix:
Average dollars
Loans:
Total average loans
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The following tables detail the components of our net interest spread and net interest margin.
(dollars in thousands)
Average earning assets
Commercial & real estate loans (TE)
Consumer loans
Loan fees & late charges
Total loans (TE)
US treasury securities
US agency securities
CMOs
Mortgage backed securities
Municipals (TE)
Other securities
Total securities (TE)
Total short-term investments
Average earning assets yield (TE)
Interest bearing liabilities
Public funds
Total borrowings
Total interest bearing liability cost
Net interest-free funding sources
Total Cost of Funds
Net Interest Spread (TE)
Net Interest Margin (TE)
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LIQUIDITY
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. 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 $828.4 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $135.6 million. We have FHLB advances of $10 million due September 12, 2011 at a fixed rate 3.455%.
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The following liquidity ratios at September 30, 2010 and December 31, 2009 compare certain assets and liabilities to total deposits or total assets:
Total securities to total deposits
Total loans (net of unearned income) to total deposits
Interest-earning assets to total assets
Interest-bearing deposits to total deposits
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, 2009. 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 be well capitalized. The ratios as of September 30, 2010 and December 31, 2009 are as follows:
Regulatory ratios:
Total capital to risk-weighted assets (1)
Tier 1 capital to risk-weighted assets (2)
Leverage capital to average total assets (3)
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.
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.
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.
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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 FASB authoritative guidance, goodwill is not amortized but tested for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Management reviews goodwill for impairment based on our primary reporting segments. We analyze goodwill using market capitalization to book value comparison. The last test was conducted as of September 30, 2009. No impairment charges were recognized as of September 30, 2010. The carrying amount of goodwill was $61.6 million as of September 30, 2010 and $62.3 million as of December 31, 2009.
Earnings Assets
Earning assets serve as the primary revenue streams for us and are comprised of securities, loans, federal funds sold, and other short-term investments. At September 30, 2010, average earning assets were $7.3 billion, or 86.2% of total assets, compared with $6.4 billion or 90.0% of total assets at September 30, 2009 and at December 31, 2009. The $1.0 billion, or 15.5%, increase from prior year quarter resulted mostly from an increase in the loan portfolios due to the acquisition of Peoples First in the fourth quarter of 2009.
Our investment in securities was $1.6 billion at September 30, 2010 and at December 31, 2009. 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 $4.9 billion in loans at September 30, 2010 and $5.1 billion at December 31, 2009. 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, 2010, our average total loans were $5.0 billion, compared to $4.3 billion at September 30, 2009 and at December 31, 2009. The $0.7 million, or 17.2%, increase from prior year quarter resulted from our acquisition of Peoples First in the fourth quarter of 2009. Commercial and real estate loans comprised 61.7% of the average loan portfolio at September 30, 2010 compared to 63.2% at September 30, 2009 and at December 31, 2009. 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, interest-bearing deposits in banks, and other short-term investments averaged $728.7 million at September 30, 2010, compared to $497.0 million at December 31, 2009 and compared to $496.4 million at September 30, 2009. The increase of $232.3 million, or 46.8%, from prior year quarter was caused by an increase of $505.7 million in interest-bearing deposits in banks that was offset by a decrease of $267.9 million in other short-term investments and a decrease in fed funds sold of $5.4 million. 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 $6.7 billion at September 30, 2010 and $7.2 billion at December 31, 2009. Average interest bearing deposits at September 30, 2010 were $5.9 billion compared to $4.8 billion at September 30, 2009 and December 31, 2009. The increase of $1.1 billion, or 23.7%, over September 30, 2009 was primarily attributable to our Peoples First acquisition in the fourth quarter of 2009. We continue to see positive results in retaining deposits for our acquired Peoples First deposit relationships. 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 competitively within 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, 2010 were $527.1 million compared to $516.2 million at December 31, 2009. The increase of $10.9 million, or 2.1%, was due to a $28.8 million increase in securities sold under agreements to repurchase and a $2.9 million increase in federal funds purchased offset by a $20.6 million decrease in FHLB borrowings and a $0.2 million decrease in long term notes.
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, 2010, we had $867.1 million in unused loan commitments outstanding, of which approximately $712.6 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.
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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, 2010, we had $101.0 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2010 according to expiration date.
Commitments to extend credit
Letters of credit
Total
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND 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. We base our 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, we evaluate our 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.
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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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, 2010, the effective duration of the securities portfolio was 2.1 years. A rate increase (aged, over 1 year) of 100 basis points would move the effective duration to 3.2 years, while a reduction in rates of 100 basis points would result in an effective duration of 1.0 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, 2010 indicate that we are slightly 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
Stable
+100
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, 2009 included in our 2009 Annual Report on Form 10-K.
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive 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 September 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
We are continuing to monitor the oil spill developments in the Gulf of Mexico. We are assessing how this situation may impact our customers and the areas in which they operate. In the second quarter of 2010, we established a specific reserve for potential losses of $5.2 million. Still, much of the ultimate impact related this to event is unknown. Much work remains to be done in terms of the environmental clean-up and business recovery from this event. We do expect there to be a significant and potentially lasting impact to the coastal regions in the four U.S. states (Louisiana, Mississippi, Alabama, and Florida) that comprise our footprint.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact our business. Among other requirements, the Dodd-Frank Act includes provisions affecting corporate governance and executive compensation at all publicly-traded companies; provisions that would broaden the base for FDIC insurance assessments and permanently increase FDIC deposit insurance to $250,000; and new restrictions on how mortgage brokers and loan originators may be compensated. These provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply, and could therefore also materially adversely affect our business, financial condition, and results of operations.
There have been no other material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2009. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.
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, 2010.
None
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(a) Exhibits:
ExhibitNumber
Description
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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.
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Index to Exhibits