UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
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Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
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For Quarter Ending September 30, 2004
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Commission File Number 0-13089
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HANCOCK HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
MISSISSIPPI 64-0693170
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
ONE HANCOCK PLAZA, P.O. BOX 4019, GULFPORT, MISSISSIPPI 39502
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(Address of principal executive offices) (Zip Code)
(228) 868-4872
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable
date.
32,471,478 common shares were outstanding as of October 31, 2004 for financial statement purposes.
HANCOCK HOLDING COMPANY
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INDEX
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PART I. FINANCIAL INFORMATION PAGE NUMBER
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ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) --
September 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Earnings (Unaudited) --
Three and Nine months Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Common Stockholders' Equity
Equity (Unaudited) -- Nine months Ended September 2004 and
2003 5
Condensed Consolidated Statements of Cash Flows (Unaudited) --
Nine months Ended September 30, 2004 and 2003 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 29
ITEM 4. Controls and Procedures 32
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 33
ITEM 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
PART I FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(amounts in thousands, except share data)
(Unaudited)
September 30, December 31,
2004 2003*
------------------- -------------------
ASSETS:
Cash and due from banks (non-interest bearing) $ 158,550 $ 178,082
Interest-bearing time deposits with other banks 7,403 5,554
Federal funds sold - 5,734
Securities available for sale, at fair value
(amortized cost of $1,163,340 and $1,115,404) 1,165,210 1,118,066
Securities held to maturity, at amortized cost
(fair value of $192,239 and $169,451) 184,384 159,983
Loans 2,689,174 2,459,143
Less: Allowance for loan losses (38,725) (36,750)
Unearned income (11,684) (10,499)
------------- ----------------
Loans, net 2,638,765 2,411,894
Property and equipment, net of accumulated
depreciation of $76,349 and $72,034 74,351 73,332
Other real estate, net 3,589 5,439
Accrued interest receivable 21,559 23,125
Goodwill, net 56,474 49,100
Other intangible assets, net 12,774 8,131
Life insurance contracts 78,761 51,165
Other assets 89,829 60,753
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TOTAL ASSETS $ 4,491,649 $ 4,150,358
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand $ 650,484 $ 636,745
Interest-bearing savings, NOW, money market
and time 2,951,820 2,811,102
------------- ----------------
Total deposits 3,602,304 3,447,847
Federal funds purchased 4,209 -
Securities sold under agreements to repurchase 228,423 150,096
Short-term notes - 9,400
Long-term notes 50,280 50,428
Other liabilities 146,490 57,706
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TOTAL LIABILITIES 4,031,706 3,715,477
CONVERTIBLE PREFERRED STOCK:
Preferred Stock - $20 par value, 50,000,000 shares authorized
and 1,658,187 issued at December 31, 2003; converted to
common stock February 2004 - 37,067
COMMON STOCKHOLDERS' EQUITY:
Common Stock-$3.33 par value per share; 75,000,000
shares authorized, 33,216,240 and 33,216,240 issued,
respectively 110,610 55,305
Capital surplus 137,419 145,125
Retained earnings 224,206 247,001
Accumulated other comprehensive loss, net (6,688) (6,304)
Unearned compensation (1,831) (957)
Treasury stock, at cost, (130,328 and 2,191,102 shares, respectively) (3,773) (42,356)
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TOTAL COMMON STOCKHOLDERS' EQUITY 459,943 397,814
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TOTAL LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY $ 4,491,649 $ 4,150,358
============= ================
* The balance sheet at December 31, 2003 has been derived from the audited balance sheet at that date.
See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------
(UNAUDITED)
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(amounts in thousands except per share data)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
INTEREST INCOME:
Loans, including fees $ 42,834 $ 40,885 $ 124,691 $ 118,628
U. S. Treasury securities 149 77 312 889
Obligations of U. S. government agencies 4,757 4,705 13,250 15,076
Obligations of states and political subdivisions 2,009 2,320 6,250 7,152
Mortgage-backed securities 4,388 3,708 12,582 8,549
Collateralized mortgage obligations (CMOs) 2,815 3,134 8,857 11,641
Federal funds sold 27 64 232 513
Other investments 445 315 1,410 1,004
---------- ---------- ----------- -----------
Total interest income 57,424 55,208 167,584 163,452
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INTEREST EXPENSE:
Deposits 13,333 13,010 39,006 41,635
Federal funds purchased and securities sold
under agreements to repurchase 609 408 1,307 1,131
Long-term notes and other interest expense 625 471 1,942 1,666
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Total interest expense 14,567 13,889 42,255 44,432
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NET INTEREST INCOME 42,857 41,319 125,329 119,020
Provision for loan losses 3,388 3,988 10,741 10,974
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 39,469 37,331 114,588 108,046
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NON-INTEREST INCOME
Service charges on deposit accounts 11,567 11,117 32,568 31,474
Other service charges, commissions and fees 7,101 5,490 22,120 16,433
Securities gains/(losses), net (2) - 159 1,114
Gain on sale of assets - - 5,258 -
Other income 2,305 2,484 8,135 5,525
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Total non-interest income 20,971 19,091 68,240 54,546
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NON-INTEREST EXPENSE
Salaries and employee benefits 20,664 21,290 64,698 62,167
Net occupancy expense of premises 2,470 2,512 7,288 6,923
Equipment rentals, depreciation and maintenance 2,419 2,459 7,121 6,766
Amortization of intangibles 558 352 1,407 708
Other expense 12,195 9,739 36,492 28,076
---------- ---------- ----------- -----------
Total non-interest expense 38,306 36,352 117,006 104,640
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EARNINGS BEFORE INCOME TAXES 22,134 20,070 65,822 57,952
Income tax expense 6,738 6,409 19,909 18,245
---------- ---------- ----------- -----------
NET EARNINGS 15,396 13,661 45,913 39,707
PREFERRED DIVIDEND REQUIREMENT - 663 - 1,990
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NET EARNINGS AVAILABLE TO COMMON STOCKHOLDERS $ 15,396 $ 12,998 $ 45,913 $ 37,717
========== ========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.47 $ 0.42 $ 1.42 $ 1.22
========== ========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.47 $ 0.41 $ 1.39 $ 1.19
========== ========== =========== ===========
DIVIDENDS PAID PER COMMON SHARE $ 0.165 $ 0.115 $ 0.415 $ 0.325
========== ========== =========== ===========
WEIGHTED AVG. COMMON SHARES OUTSTANDING-BASIC 32,495 30,624 32,365 30,782
========== ========== =========== ===========
WEIGHTED AVG. COMMON SHARES OUTSTANDING-DILUTED 33,054 33,298 33,039 33,434
========== ========== =========== ===========
See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
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UNAUDITED
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(amounts in thousands, except per share data)
Accumulated
Other
Common Stock Comprehensive
------------ Capital Retained Income Unearned Treasury
Shares Amount Surplus Earnings (Loss), net Compensation Stock
----------- ----------- ------------ ------------ ------------- ------------- ------------
Balance, January 1, 2003 16,608,120 $ 55,305 $ 145,949 $ 208,253 $ 10,049 $ (552) $ (31,492)
Net earnings 39,707
Cash dividends -
$0.325 per common share (10,031)
Cash dividends -
$1.20 per preferred share (1,990)
Change in unrealized gain on
securities available for sale, net (15,253)
Transactions relating to
restricted stock grants, net (520)
Common stock buyback program, net (9,102)
Other treasury stock
transactions, net (534) 1,274
----------- ----------- ------------ ------------ ------------- ------------- ------------
Balance, September 30, 2003 16,608,120 $ 55,305 $ 145,415 $ 235,939 $ (5,204) $ (1,072) $ (39,320)
=========== =========== ============ ============ ============= ============= ============
Balance, January 1, 2004 16,608,120 $ 55,305 $ 145,125 $ 247,001 $ (6,304) $ (957) $ (42,356)
Net earnings 45,913
Cash dividends -
$0.415 per common share (13,403)
100% stock dividend 16,608,120 55,305 (55,305)
Preferred stock conversion (5,521) 42,624
Change in unrealized loss on
securities available for
sale, net (384)
Transactions relating to
restricted stock grants, net (874)
Common stock buyback program, net (3,732)
Other treasury stock
transactions, net (2,185) (309)
----------- ----------- ------------ ------------ ------------- ------------- ------------
Balance, September 30, 2004 33,216,240 $ 110,610 $ 137,419 $ 224,206 $ (6,688) $ (1,831) $ (3,773)
=========== =========== ============ ============ ============= ============= ============
See notes to unaudited condensed consolidated financial statements
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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UNAUDITED
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(amounts in thousands)
Nine Months Ended September 30,
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2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,913 $ 39,707
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 5,086 5,345
Amortization of software 1,802 2,036
Provision for loan losses 10,741 10,974
Provision for losses on other real estate owned 198 595
Increase in cash surrender value of bank owned
life insurance contracts (2,596) (524)
Gain on sales of securities available for sale, net (159) (1,114)
Gain on sale of assets (5,258) -
Amortization of intangible assets 1,407 708
Amortization of securities premium/discount 4,382 9,413
Decrease (increase) in deferred tax asset 407 (8,307)
Decrease in interest receivable 1,779 2,334
Increase in accrued expenses 5,322 10,871
Increase in other liabilities 3,084 (2,899)
Decrease in interest payable (574) (1,765)
Increase in unearned premiums 80,952 -
Decrease (increase) in miscellaneous receivable 13,628 (6)
(Increase) decrease in other assets, net (42,006) 989
Other, net 15,231 (1,383)
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Net cash provided by operating activities 139,339 66,974
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing time deposits (1,849) (2,301)
Proceeds from maturities, calls or prepayments of
securities held to maturity 17,693 49,667
Proceeds from sales and maturities of securities
available for sale 504,297 948,473
Purchase of securities held to maturity (40,483) -
Purchase of securities available for sale (556,383) (965,120)
Net decrease in federal funds sold 19,232 42,989
Net increase in loans (224,121) (252,552)
Purchases of property, equipment and software, net (6,523) (7,783)
Proceeds from sales of other real estate 4,120 3,694
Proceeds from sale of merchant services business 3,000 -
Premiums paid on bank owned life insurance contracts (25,000) (50,000)
Net cash paid in connection with sale transaction (22,999) -
Net cash (paid) received in connection purchase transaction (15,364) 38,933
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Net cash used in investing activities (344,380) (194,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 132,147 60,117
Dividends paid (13,403) (12,021)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 82,536 60,813
Treasury stock transactions, net (6,223) (8,362)
Repayment of short-term note (9,400) -
Reductions of long-term notes (148) (489)
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Net cash provided by financing activities 185,509 100,058
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NET DECREASE IN CASH AND DUE FROM BANKS (19,532) (26,968)
CASH AND DUE FROM BANKS, BEGINNING 178,082 187,786
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CASH AND DUE FROM BANKS, ENDING $ 158,550 $ 160,818
============= ==============
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 21,165 $ 12,485
Interest paid 42,829 46,197
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate $ 3,867 $ 5,706
Financed sale of foreclosed property 947 2,558
See notes to unaudited condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements include the accounts of Hancock Holding Company, its wholly-owned banks, Hancock Bank, Hancock Bank of Louisiana, Hancock Bank of Florida and other subsidiaries. All material intercompany profits, transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and notes thereto of Hancock Holding Company’s 2003 Annual Report to Shareholders.
COMPREHENSIVE EARNINGSFollowing is a summary of the Company’s comprehensive earnings for the three months and nine months ended September 30, 2004 and 2003.
(Amounts in thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2004 2003 2004 2003
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Net earnings $ 15,396 $13,661 $45,913 $39,707
Other comprehensive income
(net of income tax):
Net unrealized holding gains/(losses) on
securities available for sale, net of tax
of $9,343 and $5,580, $151
and $7,823, respectively 17,350 (10,362) (281) (14,529)
Reclassification adjustments for gains/
(losses) included in earnings, net of tax
of $-1 and $0, $56 and $390,
respectively 1 - (103) (724)
----------- ---------- ---------- -----------
Total Comprehensive Earnings $32,747 $3,299 $45,529 $24,454
=========== ========== ========== ===========
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized. The Company has adopted the disclosure-only option under Statement of Financial Accounting Standards (SFAS) No. 123. Had compensation costs for the Company’s stock options been determined based on the fair value at the grant date, consistent with the method under SFAS No. 123, the Company’s net earnings and earnings per share would have been as indicated below:
(Amounts in thousands, except per share data)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------- --------------------------
2004 2003 2004 2003
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Net earnings available to common
stockholders:
As reported $ 15,396 $ 12,998 $ 45,913 $ 37,717
Deduct total stock based compensation
determined under the fair value method,
net of tax (145) (300) (435) (900)
------------- ------------ ----------- ------------
Pro forma net earnings available
tof common stockholders $ 15,251 $ 12,698 $ 45,478 $ 36,817
============= ============ =========== ============
Basic earnings per share:
As reported $ 0.47 $ 0.42 $ 1.42 $ 1.22
Pro forma $ 0.47 $ 0.41 $ 1.41 $ 1.20
Diluted earnings per share:
As reported $ 0.47 $ 0.41 $ 1.39 $ 1.19
Pro forma $ 0.46 $ 0.40 $ 1.38 $ 1.16
ACQUISITIONS
During March 2004, the Company acquired the majority of loans, securities and deposits of the former Guaranty National Bank of Tallahassee, Florida. The Office of the Comptroller of Currency closed all locations of Guaranty National on March 12, 2004. With the transaction, the Company acquired five locations with approximately $40.0 million in performing loans and approximately $69.1 million in deposits from the Federal Deposit Insurance Corporation (FDIC) for a premium of $13.6 million, or 20% of acquired deposits. In accounting for the transaction, management considered it to be an “acquisition of business” and, accordingly, accounted for it under the purchase method of accounting pursuant to SFAS No. 141. Final allocations of asset fair values have been recorded based on an analysis, performed by an independent third party, of deposit balances acquired in this transaction.
SALE OF BRANCHESOn March 8, 2004, the Company completed the sale of four Louisiana branches to Sabine State Bank, resulting in a $2.3 million pre-tax gain. The branches that were sold were acquired in the 1999 American Security Bank purchase. The Company made a cash payment of approximately $20 million whereby approximately $19.7 million in loans were transferred and $42.9 million in deposits liabilities assumed by Sabine State Bank in this transaction.
PENDING PURCHASEOn October 11, 2004, the Company announced the agreement to acquire Ross-King-Walker, Inc. (RKW), a well-known Hattiesburg, MS based property and casualty insurance agency, as a division of Hancock Insurance Agency.
According to the terms of the agreement, Hancock Bank was to acquire (and subsequently acquired) RKW in an all cash transaction. The post-purchase entity will retain the RKW name and become an affiliate of Hancock Insurance Agency. The transaction closed and became effective during the fourth quarter of 2004 as described in Hancock Holding Company's Form 8-K dated November 5, 2004.
On February 4, 2004, the Company completed the redemption/conversion of substantially all $37.1 million of its 8% Cumulative Convertible Preferred Stock which had been originally issued in partial payment for the acquisition of Lamar Capital Corporation in July, 2001. The conversion factor was .6666 shares of Hancock Holding Company common stock for each share of the preferred stock. A total of 7,304 shares of the preferred stock was redeemed for cash at the contract price of $20.00 per share plus pro rated dividends of $0.1511 per share.
STOCK SPLITOn February 26, 2004 the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% common stock dividend. The additional shares were payable March 18, 2004 to shareholders of record at the close of business on March 8, 2004.
All information concerning earnings per share, dividends per share, and number of shares outstanding has been adjusted to give retroactive effect to this split.
MERCHANT SERVICES SALEOn May 25, 2004 the Company announced the sale of its merchant services business to First Data Corporation (First Data). The agreement established Hancock Merchant Services under which First Data provides all merchant payment processing services on behalf of Hancock Bank. The arrangement further advances the technology offered to Hancock merchant customers through an expanded portfolio of electronic products and services and augments a merchant support network with additional relationship managers throughout Hancock’s Gulf South markets.
In accordance with the First Data agreement, Hancock Holding Company received a one-time pre-tax cash payment of $3.0 million that increased second quarter 2004 after-tax earnings by $1.95 million, or $.06 per share. In addition, the agreement stipulates that Hancock participates in revenue related to both the existing book of business, as well as new business.
SEGMENT REPORTINGThe Company’s primary segments are geographically divided into the Mississippi (MS), Louisiana (LA) and Florida (FL) markets. Each segment offers the same products and services but is managed separately due to different pricing, product demand, and consumer markets. Each segment offers commercial, consumer and mortgage loans and deposit services. In the following tables, the column “Other” includes additional consolidated subsidiaries of the Company: Hancock Mortgage Corporation, Hancock Investment Services, Inc., Hancock Insurance Agency, Inc., Harrison Finance Company, Magna Insurance Company and three real estate corporations owning land and buildings that house bank branches and other facilities. Following is selected information for the Company’s segments:
Three Months Ended,
(amounts in thousands) September 30, 2004
MS LA FL Other * Consolidated
-------------- --------------- ---------------- --------------- ---------------
Interest income $ 30,374 $ 23,094 $ 925 $ 3,031 $ 57,424
Interest expense 9,585 5,292 271 (581) 14,567
-------------- --------------- ---------------- --------------- ---------------
Net interest income 20,789 17,802 654 3,612 42,857
Provision for loan losses 949 1,688 24 727 3,388
Non-interest income 10,026 7,156 156 3,633 20,971
Depreciation and amortization 1,476 641 25 136 2,278
Other non-interest expense 16,519 12,463 983 6,063 36,028
-------------- --------------- ---------------- --------------- ---------------
Earnings before income taxes 11,871 10,166 (222) 319 22,134
Income tax expense 3,627 3,069 (85) 127 6,738
-------------- --------------- ---------------- --------------- ---------------
Net earnings $ 8,244 $ 7,097 $ (137) $ 192 $ 15,396
============== =============== ================ =============== ===============
Total assets $2,615,879 $1,825,524 $ 80,490 $(30,244) $4,491,649
============== =============== ================ =============== ===============
Three Months Ended,
(amounts in thousands) September 30, 2003
MS LA FL Other * Consolidated
-------------- --------------- ---------------- --------------- ---------------
Interest income $ 30,234 $ 20,947 $ - $ 4,027 $ 55,208
Interest expense 9,323 4,610 - (44) 13,889
-------------- --------------- ---------------- --------------- ---------------
Net interest income 20,911 16,337 - 4,071 41,319
Provision for loan losses 1,860 1,761 - 367 3,988
Non-interest income 9,225 6,574 - 3,292 19,091
Depreciation and amortization 1,634 813 - 135 2,582
Other non-interest expense 16,657 12,899 - 4,214 33,770
-------------- --------------- ---------------- --------------- ---------------
Earnings before income taxes 9,985 7,438 - 2,647 20,070
Income tax expense 3,079 2,287 - 1,043 6,409
-------------- --------------- ---------------- --------------- ---------------
Net earnings $ 6,906 $ 5,151 $ - $ 1,604 $ 13,661
============== =============== ================ =============== ===============
Total assets $2,531,263 $1,617,449 $ - $ (6,192) $4,142,520
============== =============== ================ =============== ===============
* Includes eliminations
Nine Months Ended,
(amounts in thousands) September 30, 2004
MS LA FL Other * Consolidated
------------- ------------- -------------- -------------- -------------
Interest income $ 89,122 $ 67,178 $ 1,962 $ 9,322 $ 167,584
Interest expense 28,256 14,627 627 (1,255) 42,255
------------- ------------- -------------- -------------- -------------
Net interest income 60,866 52,551 1,335 10,577 125,329
Provision for loan losses 3,775 4,202 387 2,377 10,741
Non-interest income 29,556 26,084 306 12,294 68,240
Depreciation and amortization 4,434 2,010 25 419 6,888
Other non-interest expense 51,372 38,101 2,085 18,560 110,118
------------- ------------- -------------- -------------- -------------
Earnings before income taxes 30,841 34,322 (856) 1,515 65,822
Income tax expense 9,052 10,532 (330) 655 19,909
------------- ------------- -------------- -------------- -------------
Net earnings $ 21,789 $ 23,790 $ (526) $ 860 $ 45,913
============= ============= ============== ============== =============
Total assets $2,615,879 $1,825,524 $ 80,490 $ (30,244) $4,491,649
============= ============= ============== ============== =============
Nine Months Ended,
(amounts in thousands) September 30, 2003
MS LA FL Other * Consolidated
------------- ------------- -------------- -------------- -------------
Interest income $ 91,583 $ 61,818 $ - $ 10,051 $ 163,452
Interest expense 29,876 14,832 - (276) 44,432
------------- ------------- -------------- -------------- -------------
Net interest income 61,707 46,986 - 10,327 119,020
Provision for loan losses 5,802 3,970 - 1,202 10,974
Non-interest income 26,459 19,542 - 8,545 54,546
Depreciation and amortization 4,769 2,235 - 377 7,381
Other non-interest expense 48,057 37,885 - 11,317 97,259
------------- ------------- -------------- -------------- -------------
Earnings before income taxes 29,538 22,438 - 5,976 57,952
Income tax expense 9,145 6,879 - 2,221 18,245
------------- ------------- -------------- -------------- -------------
Net earnings $ 20,393 $ 15,559 $ - $ 3,755 $ 39,707
============= ============= ============== ============== =============
Total assets $2,531,263 $1,617,449 $ - $ (6,192) $4,142,520
============= ============= ============== ============== =============
* Includes eliminations
GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 were as follows:
Total
in thousands)
----------------
Balance as of December 31, 2003 $ 49,100
Goodwill on acquired bank 12,374
(Guaranty National Bank)
Goodwill allocated to CDI during the period (5,000)
(American Security Bank)
----------------
Balance as of September 30, 2004 $ 56,474
================
The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated:
As of As of
(amounts in thousands) September 30, 2004 December 31, 2003
----------------------------------- ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- --------------- --------------- ---------------
Amortized Intangible Assets:
Core deposit intangibles $ 14,642 $ 3,790 $ 7,922 $ 2,546
Mortgage servicing rights 4,078 2,156 4,314 1,559
--------------- --------------- --------------- ---------------
Total $ 18,720 $ 5,946 $ 12,236 $ 4,105
=============== =============== =============== ===============
(amounts in thousands) Three months ended Sept. 30, Nine months ended Sept. 30,
----------------------------------- ------------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Aggregate amortization expense for:
Core deposit intangibles $ 558 $ 352 $ 1,407 $ 708
Mortgage servicing rights 254 312 808 868
--------------- --------------- --------------- ---------------
Total $ 812 $ 664 $ 2,215 $ 1,576
=============== =============== =============== ===============
The core deposit intangible has a weighted average life of 10 years. Amortization is estimated to be approximately $1.7 million in 2005, $1.4 million in 2006, $1.2 million in 2007, $1.1 million in 2008, $1.1 million in 2009 and the remainder of $6.4 million thereafter.
In December 2003, the FASB issued SFAS No.132 (revised 2003), which revises employers’ disclosures about pension plans and other postretirement benefits. Net periodic benefits cost includes the following components for the three and nine months ended September 30, 2004 and 2003:
Three months ended September 30,
Pension Benefits Other Postretirement Benefits
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------ -------------
Service Cost $ 514,357 $ 452,125 $ 64,750 $ 56,619
Interest Cost 787,772 744,178 87,250 83,778
Expected return on plan assets (760,753) (677,836) - -
Amortization of prior service cost 20,712 22,937 (13,250) (13,259)
Amortization of net loss 234,478 200,998 13,750 5,927
Amortization of transition obligation - - 1,250 1,288
------------- ------------- ------------ -------------
Net periodic benefit cost $ 796,566 $ 742,402 $ 153,750 $ 134,353
============= ============= ============ =============
Nine months ended September 30,
Pension Benefits Other Postretirement Benefits
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------ -------------
Service Cost $1,543,071 $1,356,375 $ 194,250 $ 169,857
Interest Cost 2,363,316 2,232,534 261,750 251,335
Expected return on plan assets (2,282,259) (2,033,508) - -
Amortization of prior service cost 62,138 68,811 (39,750) (39,777)
Amortization of net loss 703,434 602,994 41,250 17,781
Amortization of transition obligation - - 3,750 3,864
------------- ------------- ------------ -------------
Net periodic benefit cost $2,389,700 $2,227,206 $ 461,250 $ 403,060
============= ============= ============ =============
The Company anticipates that it will contribute $3.1 million to its pension plan in 2004. During the first, second and third quarter of 2004, the Company contributed $754,000, $571,000 and $652,000, respectively.
LOANS AND ALLOWANCE FOR LOAN LOSSESThe following table sets forth, for the periods indicated, average net loans outstanding, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- ------------ -------------- ------------
(amounts in thousands)
Balance of allowance for loan losses
at beginning of period $ 38,300 $ 35,240 $ 36,750 $ 34,740
Provision for loan losses 3,388 3,988 10,741 10,974
Loans charged-off:
Commercial, Real Estate & Mortgage 880 1,156 4,501 4,037
Direct & Indirect Consumer 1,306 1,743 4,644 5,362
Finance Company 721 427 1,987 1,389
Demand Deposit Accounts 1,574 1,212 3,734 3,309
-------------- ------------ -------------- ------------
Total charge-offs 4,481 4,538 14,866 14,097
-------------- ------------ -------------- ------------
Recoveries of loans previously
charged-off:
Commercial, Real Estate & Mortgage 167 276 1,868 772
Direct & Indirect Consumer 398 450 1,339 1,454
Finance Company 94 60 310 188
Demand Deposit Accounts 859 774 2,583 2,219
-------------- ------------ -------------- ------------
Total recoveries 1,518 1,560 6,100 4,633
-------------- ------------ -------------- ------------
Net charge-offs 2,963 2,978 8,766 9,464
-------------- ------------ -------------- ------------
Balance of allowance for loan losses
at end of period $ 38,725 $ 36,250 $ 38,725 $ 36,250
============== ============ ============== ============
The following table sets forth, for the periods indicated, certain ratios related to the Company’s charge-offs, allowance for loan losses and outstanding loans:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
-------------- --------------- --------------- ---------------
Ratios :
Net charge-offs to average net loans 0.45% 0.52% 0.46% 0.58%
Net charge-offs to period-end net loans 0.44% 0.50% 0.44% 0.54%
Allowance for loan losses to average net loans 1.47% 1.58% 1.51% 1.66%
Allowance for loan losses to period-end net loans 1.45% 1.54% 1.45% 1.54%
Net charge-offs to loan loss allowance 7.65% 8.22% 22.64% 26.11%
Provision for loan losses to net charge-offs 114.34% 133.92% 122.53% 115.96%
Following is a summary of the information used in the computation of earnings per common share (in thousands).
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
Net earnings - used in computation of diluted
earnings per common share $ 15,396 $ 13,661 $ 45,913 $ 39,707
Preferred dividend requirement - 663 - 1,990
------------- ----------- ------------ ------------
Net earnings available to common stockholders -
used in computation of basic earnings
per common share $ 15,396 $ 12,998 $ 45,913 $ 37,717
============= =========== ============ ============
Weighted average number of common shares
outstanding - used in computation of
basic earnings per common share 32,495 30,624 32,365 30,782
Effect of dilutive securities
Stock options 559 462 674 440
Convertible preferred stock - 2,212 - 2,212
------------- ----------- ------------ ------------
Weighted average number of common shares
outstanding plus effect of dilutive
securities - used in computation of
diluted earnings per common share 33,054 33,298 33,039 33,434
============= =========== ============ ============
There were no anti-dilutive shares outstanding for the three and nine months ended September 30, 2004 and 2003.
The following tables present selected comparative financial data. All share and per share data have been restated to reflect the 100% stock dividend made March 18, 2004.
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------- ------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------ ------------ ----------- ------------
Per Common Share Data
Earnings per share:
Basic $0.47 $0.42 $1.42 $1.22
Diluted $0.47 $0.41 $1.39 $1.19
Cash dividends per share $0.165 $0.115 $0.415 $0.325
Book value per share (period end) $14.16 $12.81 $14.16 $12.81
Weighted average number of shares:
Basic 32,495 30,624 32,365 30,782
Diluted (1) 33,054 33,298 33,039 33,434
Period end number of shares 32,472 30,522 32,472 30,522
Market data:
High closing price $34.27 $25.85 $34.27 $25.85
Low closing price $27.32 $23.01 $25.00 $21.00
Period end closing price $31.79 $24.68 $31.79 $24.68
Trading volume 2,792 3,032 8,789 8,448
(1) There were no anti-dilutive shares outstanding for the three months and nine months ended
September 30, 2004 and 2003.
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------- ------------ ------------- ------------
Performance Ratios
Return on average assets 1.37% 1.31% 1.40% 1.29%
Return on average common equity 13.67% 13.79% 13.88% 13.42%
Earning asset yield (Tax Equivalent ("TE")) 5.86% 5.99% 5.84% 6.00%
Total cost of funds 1.44% 1.46% 1.43% 1.58%
Net interest margin (TE) 4.42% 4.54% 4.41% 4.42%
Average common equity as a percent of average total assets 10.00% 9.49% 10.06% 9.63%
Leverage ratio (period end) 8.86% 9.10% 8.86% 9.10%
FTE Headcount 1,731 1,751 1,731 1,751
Asset Quality Information
Non-accrual loans $7,770 $13,988 $7,770 $13,988
Foreclosed assets $4,151 $6,187 $4,151 $6,187
Total non-performing assets $11,921 $20,175 $11,921 $20,175
Non-performing assets as a percent of loans and foreclosed assets 0.44% 0.86% 0.44% 0.86%
Accruing loans 90 days past due $5,277 $4,439 $5,277 $4,439
Accruing loans 90 days past due as a percent of loans 0.20% 0.19% 0.20% 0.19%
Non-performing assets + accruing loans 90 days past due
to loans and foreclosed assets 0.64% 1.05% 0.64% 1.05%
Net charge-offs $2,963 $2,978 $8,766 $9,464
Net charge-offs as a percent of average loans 0.45% 0.52% 0.46% 0.58%
Allowance for loan losses $38,725 $36,250 $38,725 $36,250
Allowance for loan losses as a percent of period end loans 1.45% 1.54% 1.45% 1.54%
Allowance for loan losses to NPAs + accruing loans 90 days past due 225.17% 147.27% 225.17% 147.27%
Provision for loan losses $3,388 $3,988 $10,741 $10,974
Provision for loan losses to net charge-offs 114.34% 133.92% 122.53% 115.96%
Average Balance Sheet
Total loans $2,640,689 $2,288,917 $2,561,148 $2,185,694
Securities 1,368,701 1,461,532 1,353,685 1,501,077
Short-term investments 15,667 32,870 40,080 73,103
Earning assets 4,025,057 3,783,319 3,954,913 3,759,873
Allowance for loan losses (38,455) (35,534) (37,753) (35,065)
Other assets 495,787 393,706 474,770 382,016
Total assets $4,482,388 $4,141,490 $4,391,930 $4,106,824
Non-interest bearing deposits $654,780 $616,689 $642,836 $599,697
Interest bearing transaction deposits 1,815,933 1,689,865 1,816,094 1,676,010
Time deposits 1,143,143 1,120,946 1,141,611 1,128,773
Total interest bearing deposits 2,959,075 2,810,811 2,957,705 2,804,784
Total deposits 3,613,856 3,427,499 3,600,541 3,404,481
Other borrowed funds 282,796 243,219 250,608 233,018
Other liabilities 137,665 40,646 95,995 36,754
Preferred stock - 37,069 2,992 37,069
Common stockholders' equity 448,072 393,057 441,795 395,503
Total liabilities, preferred stock & common equity $4,482,388 $4,141,490 $4,391,930 $4,106,824
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------- ------------ ------------ -------------
Period end Balance Sheet
Commercial/real estate loans $1,414,104 $1,196,393 $1,414,104 $1,196,393
Mortgage loans 404,697 366,073 404,697 366,073
Direct consumer loans 495,357 494,466 495,357 494,466
Indirect consumer loans 302,897 238,503 302,897 238,503
Finance Company loans 60,436 53,635 60,436 53,635
Total loans 2,677,490 2,349,070 2,677,490 2,349,070
Securities 1,349,594 1,420,923 1,349,594 1,420,923
Short-term investments 7,403 6,569 7,403 6,569
Earning assets 4,034,487 3,776,562 4,034,487 3,776,562
Allowance for loan losses (38,725) (36,250) (38,725) (36,250)
Other assets 495,887 402,208 495,887 402,208
Total assets $4,491,649 $4,142,520 $4,491,649 $4,142,520
Non-interest bearing deposits $650,484 $616,515 $650,484 $616,515
Interest bearing transaction deposits 1,804,949 1,690,499 1,804,949 1,690,499
Time deposits 1,146,871 1,093,777 1,146,871 1,093,777
Total interest bearing deposits 2,951,821 2,784,276 2,951,821 2,784,276
Total deposits 3,602,304 3,400,791 3,602,304 3,400,791
Other borrowed funds 283,112 273,160 283,112 273,160
Other liabilities 146,289 40,436 146,289 40,436
Preferred stock - 37,069 - 37,069
Common stockholders' equity 459,943 391,063 459,943 391,063
Total liabilities, preferred stock & common equity $4,491,649 $4,142,520 $4,491,649 $4,142,520
Net Charge-Off Information
Net charge-offs:
Commercial/real estate loans $734 $880 $2,682 $3,226
Mortgage loans (22) - (49) 39
Direct consumer loans 1,222 1,094 3,040 3,439
Indirect consumer loans 402 637 1,417 1,559
Finance company loans 627 367 1,676 1,201
------------- ------------ ------------ -------------
Total net charge-offs $2,963 $2,978 $8,766 $9,464
============= ============ ============ =============
Net charge-offs to average loans:
Commercial/real estate loans 0.21% 0.30% 0.27% 0.39%
Mortgage loans -0.02% 0.00% -0.02% 0.02%
Direct consumer loans 1.00% 0.88% 0.84% 0.93%
Indirect consumer loans 0.54% 1.12% 0.67% 1.02%
Finance Company loans 4.16% 2.77% 3.88% 3.23%
Total net charge-offs to average net loans 0.45% 0.52% 0.46% 0.58%
(amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
-------------------------- -------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
------------ ------------- ------------ ------------
Average Balance Sheet Composition
Percentage of earning assets/funding sources:
Loans 65.61% 60.50% 64.76% 58.13%
Securities 34.00% 38.63% 34.23% 39.92%
Short-term investments 0.39% 0.87% 1.01% 1.94%
Earning assets 100.00% 100.00% 100.00% 100.00%
Non-interest bearing deposits 16.27% 16.30% 16.25% 15.95%
Interest bearing transaction deposits 45.12% 44.67% 45.92% 44.58%
Time deposits 28.40% 29.63% 28.87% 30.02%
Total deposits 89.78% 90.60% 91.04% 90.55%
Other borrowed funds 7.03% 6.43% 6.34% 6.20%
Other net interest-free funding sources 3.19% 2.98% 2.62% 3.25%
Total funding sources 100.00% 100.00% 100.00% 100.00%
Loan mix:
Commercial/real estate loans 52.87% 50.65% 52.69% 50.67%
Mortgage loans 15.17% 15.71% 15.09% 15.01%
Direct consumer loans 18.45% 21.51% 18.97% 22.66%
Indirect consumer loans 11.24% 9.84% 10.99% 9.38%
Finance Company loans 2.27% 2.29% 2.26% 2.28%
Total loans 100.00% 100.00% 100.00% 100.00%
Average dollars (in thousands)
Loans $2,640,689 $2,288,917 $2,561,148 $2,185,694
Securities 1,368,701 1,461,532 1,353,685 1,501,077
Short-term investments 15,667 32,870 40,080 73,103
------------ ------------- ------------ ------------
Earning assets $4,025,057 $3,783,319 $3,954,913 $3,759,873
============ ============= ============ ============
Non-interest bearing deposits $654,780 $616,689 $642,836 $599,697
Interest bearing transaction deposits 1,815,933 1,689,865 1,816,094 1,676,010
Time deposits 1,143,143 1,120,946 1,141,611 1,128,773
------------ ------------- ------------ ------------
Total deposits 3,613,856 3,427,499 3,600,541 3,404,481
Other borrowed funds 282,796 243,219 250,608 233,018
Other net interest-free funding sources 128,405 112,601 103,764 122,375
------------ ------------- ------------ ------------
Total funding sources $4,025,057 $3,783,319 $3,954,913 $3,759,873
============ ============= ============ ============
Loans:
Commercial/real estate loans $1,396,149 $1,159,338 $1,349,498 $1,107,455
Mortgage loans 400,710 359,563 386,485 328,141
Direct consumer loans 487,139 492,307 485,918 495,313
Indirect consumer loans 296,755 225,199 281,488 205,048
Finance Company loans 59,935 52,509 57,759 49,737
------------ ------------- ------------ ------------
Total average loans $2,640,689 $2,288,917 $2,561,148 $2,185,694
============ ============= ============ ============
The following discussion provides management’s analysis of certain factors that have affected the Company’s consolidated financial condition and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements. Hancock Holding Company (the Company), organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is headquartered in Gulfport, Mississippi. At September 30, 2004 the Company operated 103 banking offices and more than 140 automated teller machines (ATMs) in the states of Mississippi, Louisiana and Florida through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA) and Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL). Hancock Bank MS also operates a loan production office in the State of Alabama. Hancock Bank MS, Hancock Bank LA, and Hancock Bank FL are referred to collectively as the “Banks”.
The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. The Company’s operating strategy is to provide its 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, 2004, the Company had total assets of $4.5 billion and employed on a full-time equivalent basis 1,234 persons in Mississippi, 466 persons in Louisiana and 31 persons in Florida.
CRITICAL ACCOUNTING POLICIESCertain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If the financial condition of its borrowers were to deteriorate, resulting in an impairment of their ability to make payments, its estimates would be updated, and additional provisions for loan losses may be required.
CHANGES IN FINANCIAL CONDITIONThe Company manages liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and securities held to maturity and sales and maturities of securities available for sale.
The following liquidity ratios at September 30, 2004, June 30, 2004, March 31, 2004 and December 31, 2003 compare certain assets and liabilities to total deposits or total assets:
September 30, June 30, March 31, December 31,
2004 2004 2004 2003
--------------- ---------------- ---------------- ---------------
Total securities to total deposits 37.46% 38.10% 37.17% 37.07%
Total loans (net of unearned
income) to total deposits 74.33% 72.53% 69.49% 71.02%
Interest-earning assets
to total assets 89.82% 89.47% 90.49% 90.06%
Interest-bearing deposits
to total deposits 81.94% 82.10% 82.07% 81.53%
The Company continues to maintain an adequate capital position. The ratios as of September 30, 2004, June 30, 2004, March 31, 2004 and December 31, 2003 are as follows:
September 30, June 30, March 31, December 31,
2004 2004 2004 2003
---------------- ---------------- ---------------- ---------------
Average equity to average assets 10.00% 9.95% 10.24% 9.63%
Average equity to average assets (1) 10.14% 10.13% 10.11% 9.62%
Total capital to risk-weighted assets (2) 13.76% 13.73% 14.30% 14.88%
Tier 1 capital to risk-weighted
assets (3) 12.56% 12.52% 13.05% 13.65%
Leverage capital to average total assets (4) 8.86% 8.76% 8.73% 9.29%
(1) Equity capital consists of stockholders' equity (excluding unrealized gains/(losses)).
(2) 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.
(3) 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.
(4) 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.
Net earnings increased $1.7 million, or 13%, for the third quarter of 2004 compared to the third quarter of 2003. Net earnings increased $6.2 million, or 16%, for the first nine months of 2004 compared to the first nine months of 2003. The primary driver of the increase in earnings for the first nine months of 2004 compared to the same period in 2003 was the $5.3 million gain on sale of assets. In addition, net interest income increased $6.3 million and non-interest income increased $9.4 million. Partially offsetting these increases was an increase in operating expenses of $12.4 million. Following is selected information for quarterly and year-to-date comparison:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -----------
Results of Operations:
Return on average assets 1.37 % 1.31 % 1.40 % 1.29 %
Return on average equity 13.67 % 13.79 % 13.88 % 13.42 %
Net Interest Income:
Yield on average interest-earning assets (TE) 5.86 % 5.99 % 5.84 % 6.00 %
Cost of average interest-bearing funds 1.79 % 1.80 % 1.76 % 1.96 %
------------- ------------- ------------- -------------
Net interest spread (TE) 4.07 % 4.19 % 4.08 % 4.04 %
============= ============= ============= =============
Net interest margin (TE)
(net interest income on a tax-equivalent basis
divided by average interest-earning assets) 4.42 % 4.54 % 4.41 % 4.42 %
============= ============= ============= =============
Net Interest Income
Net interest income (te) for the third quarter of 2004 increased $1.5 million, or 4%, from the third quarter of 2003, and was $720,000, or 2% higher than the previous quarter. The Company’s net interest margin (te) was 4.42% in the third quarter of 2004, 2 basis points wider than the previous quarter and 12 basis points narrower than the same quarter a year ago.
Compared to the same quarter a year ago, the primary driver of the $1.5 million increase in net interest income (te) was a $242 million, or 6%, increase in average earning assets mainly from average loan growth of $352 million, or 15%. The Company’s loan growth and overall increase in earning assets was primarily funded by average deposit growth of $186 million, or 5%, together with a net decrease in the securities portfolio of $93 million or 6%. This overall improvement in earning asset mix enabled the Company to increase its loan to deposit ratio to approximately 73%. In addition, loans now comprise 66% of the Company’s earning asset base, as compared to 61% for the same quarter a year ago. The net interest margin (te) narrowed 12 basis points primarily due to the decline in the yield on average earning assets (13 basis points), which was partially offset by a reduction in total funding costs (1 basis point).
The higher level of net interest income (te) (up $720,000, or 2%) and the higher net interest margin (up 2 basis points) as compared to the previous quarter was primarily due to a larger earning asset base (average earning assets were up $27 million from the prior quarter). Average loans grew $77 million, or 3%, from the previous quarter and were funded largely through short-term borrowings and cash flows from the securities portfolio. Average deposits were down $42 million, or 1%, from the prior quarter primarily due to a $42 million decrease in public funds. In addition to the impact of a better earning asset mix, the net interest margin expanded by 2 basis points due to an increase in the yield on average earning assets (3 basis points), which was partially offset by a 1 basis point increase in funding costs.
The following tables detail the components of the Company’s net interest spread and net interest margin.
Three Months Ended Sept. 30, Three Months Ended Sept. 30,
---------------------------------- ----------------------------------
2004 2003
---------------------------------- ---------- -------------- --------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
----------- ------------- -------- ---------- -------------- --------
Average Earning Assets
Commercial & real estate loans (TE) $19,650 $1,396,149 5.60% $16,695 $1,159,338 5.71%
Mortgage loans 5,753 400,710 5.74% 5,443 359,563 6.06%
Consumer loans 15,991 843,830 7.54% 16,011 770,015 8.25%
Loan fees & late charges 2,179 - 0.00% 3,341 - 0.00%
----------- ------------- -------- ---------- -------------- --------
Total loans (TE) 43,573 2,640,689 6.57% 41,490 2,288,917 7.20%
US treasury securities 149 11,391 5.19% 77 10,194 2.98%
US agency securities 4,757 445,886 4.27% 4,705 468,048 4.02%
CMOs 2,815 285,862 3.94% 3,134 364,045 3.44%
Mortgage backed securities 4,388 399,959 4.39% 3,708 393,160 3.77%
Municipals (TE) 3,030 169,812 7.14% 3,483 198,557 7.02%
Other securities 434 55,790 3.11% 303 27,528 4.40%
----------- ------------- -------- ---------- -------------- --------
Total securities (TE) 15,572 1,368,701 4.55% 15,410 1,461,532 4.22%
Fed funds sold 27 7,807 1.36% 64 26,105 0.98%
Cds with banks 13 7,860 0.66% 12 6,766 0.68%
Other short-term investments - - 0.00% - - 0.00%
----------- ------------- -------- ---------- -------------- --------
Total short-term investments 40 15,667 1.01% 76 32,870 0.91%
Average earning assets yield (TE) $59,184 $4,025,057 5.86% $56,975 $3,783,319 5.99%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $3,905 $1,815,933 0.86% $4,060 $1,689,865 0.95%
Time deposits 9,428 1,143,143 3.28% 8,950 1,120,946 3.17%
----------- ------------- -------- ---------- -------------- --------
Total interest bearing deposits 13,333 2,959,075 1.79% 13,010 2,810,811 1.84%
Customer repos 532 212,573 1.00% 394 187,033 0.84%
Other borrowings 702 70,223 3.98% 485 56,186 3.42%
----------- ------------- -------- ---------- -------------- --------
Total borrowings 1,234 282,796 1.74% 879 243,219 1.43%
Total interest bearing liability cost $14,567 $3,241,871 1.79% $13,889 $3,054,030 1.80%
Noninterest-bearing deposits 654,780 616,689
Other net interest-free funding sources 128,405 112,601
Total Cost of Funds $14,567 $4,025,057 1.44% $13,889 $3,783,319 1.46%
Net Interest Spread (TE) $44,617 4.07% $43,087 4.19%
Net Interest Margin (TE) $44,617 $4,025,057 4.42% $43,087 $3,783,319 4.54%
Nine Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
2004 2003
---------------------------------- ----------- ------------- --------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
----------- ------------- -------- ----------- ------------- --------
Average Earning Assets
Commercial & real estate loans (TE) $56,185 $1,349,498 5.56% $49,137 $1,107,455 5.93%
Mortgage loans 16,538 386,485 5.71% 15,218 328,141 6.18%
Consumer loans 47,458 825,165 7.68% 47,453 750,098 8.46%
Loan fees & late charges 6,755 - 0.00% 8,645 - 0.00%
----------- ------------- -------- ----------- ------------- --------
Total loans (TE) 126,936 2,561,148 6.62% 120,453 2,185,694 7.36%
US treasury securities 312 10,857 3.84% 889 36,040 3.30%
US agency securities 13,250 424,328 4.16% 15,076 480,172 4.19%
CMOs 8,857 305,801 3.86% 11,641 479,343 3.24%
Mortgage backed securities 12,582 390,539 4.30% 8,549 275,934 4.13%
Municipals (TE) 9,416 175,975 7.13% 10,731 200,747 7.13%
Other securities 1,365 46,185 3.94% 906 28,841 4.19%
----------- ------------- -------- ----------- ------------- --------
Total securities (TE) 45,782 1,353,685 4.51% 47,791 1,501,077 4.25%
Fed funds sold 232 31,106 1.00% 513 59,591 1.15%
Cds with banks 32 7,150 0.60% 33 6,280 0.69%
Other short-term investments 13 1,824 0.97% 65 7,231 1.21%
----------- ------------- -------- ----------- ------------- --------
Total short-term investments 277 40,080 0.92% 611 73,103 1.12%
Average earning assets yield (TE) $172,996 $3,954,913 5.84% $168,855 $3,759,873 6.00%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $11,600 $1,816,094 0.85% $13,847 $1,676,010 1.10%
Time deposits 27,406 1,141,611 3.21% 27,788 1,128,773 3.29%
----------- ------------- -------- ----------- ------------- --------
Total interest bearing deposits 39,006 2,957,705 1.76% 41,635 2,804,784 1.98%
Customer repos 1,186 185,946 0.85% 1,103 178,550 0.83%
Other borrowings 2,063 64,662 4.26% 1,694 54,468 4.16%
----------- ------------- -------- ----------- ------------- --------
Total borrowings 3,249 250,608 1.73% 2,798 233,018 1.61%
Total interest bearing liability cost $42,255 $3,208,313 1.76% $44,432 $3,037,801 1.96%
Noninterest-bearing deposits 642,836 599,697
Other net interest-free funding sources 103,764 122,375
Total Cost of Funds $42,255 $3,954,913 1.43% $44,432 $3,759,873 1.58%
Net Interest Spread (TE) $130,740 4.08% $124,422 4.04%
Net Interest Margin (TE) $130,740 $3,954,913 4.41% $124,422 $3,759,873 4.42%
The amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by allowances acquired in acquisitions and recoveries of loans previously charged-off. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with the bank’s loan portfolio. A specific loan is charged-off when management believes, after considering, among other things, the borrower’s financial condition and the value of any collateral, that collection of the loan is unlikely.
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 shown are in thousands.)
At and for the
----------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------ -----------------------------
2004 2003 2004 2003
------------- ---------------- --------------- -----------
Annualized net charge-offs to average loans 0.45% 0.52% 0.46% 0.58%
Annualized provision for loan losses to average
loans 0.51% 0.69% 0.56% 0.67%
Average allowance for loan losses to average loans 1.47% 1.55% 1.51% 1.60%
Gross charge-offs $ 4,481 $ 4,538 $ 14,866 $ 14,097
Gross recoveries $ 1,518 $ 1,560 $ 6,100 $ 4,633
Non-accrual loans $ 7,770 $ 13,988 $ 7,770 $ 13,988
Accruing loans 90 days or more past due $ 5,277 $ 4,439 $ 5,277 $ 4,439
Non-Interest Income
Non-interest income (excluding the gain on sale of branches, merchant services and securities transactions) for the third quarter of 2004 was up $1.9 million, or 10%, compared to the same quarter a year ago and was down $646,000, or 3%, compared to the second quarter of 2004. Impacting the change from the same quarter a year ago were higher levels of insurance fees (up $1.2 million), primarily related to the December 31, 2003 purchase of Magna Insurance Company. In addition, increases were reflected in service charges on deposit accounts (up $450,000), trust fees (up $505,000) and debit card and merchant fees (up $315,000). However, investment and annuity fees were down $532,000. The decreases from the prior quarter were concentrated in insurance fees (down $772,000) and other income (down $674,000), but were partially offset by an increase in service charges on deposit accounts (up $796,000).
The components of non-interest income for the three months and nine months ended September 30, 2004 and 2003 are presented in the following table.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -------------------------------
(dollars in thousands) 2004 2003 2004 2003
------------- ------------- ------------- -------------
Service charges on deposit accounts $ 11,567 $ 11,117 $ 32,568 $ 31,474
Trust fees 2,281 1,776 6,544 5,748
Credit card merchant discount fees 1,197 882 3,100 2,773
Insurance fees 2,056 841 7,369 2,193
Investment & annuity fees 438 970 1,714 2,741
ATM fees 1,129 1,021 3,393 2,978
Secondary mortgage market operations 529 710 1,445 1,146
Other income 1,776 1,774 6,690 4,379
Gain on sale of assets - - 5,258 -
Securities transactions gains/(losses) (2) - 159 1,114
------------- ------------- ------------- -------------
Total non-interest income $ 20,971 $ 19,091 $ 68,240 $ 54,546
============= ============= ============= =============
Non-Interest Expense
Non-Interest expenses for the third quarter of 2004 were $2.0 million, or 5%, higher compared to the same quarter a year ago and were $1.1 million, or 3%, lower than the previous quarter. The decrease from the prior quarter was from the Company’s reversal of approximately $1.0 million of pretax operating expense items in the third quarter of 2004. About $400,000 related to incentive compensation that will not be paid in 2004, while $600,000 related to the Company’s medical insurance, which was reversed due to favorable claims experience over the past year. The increase from the same quarter a year ago was due primarily to higher expenses associated with the Company’s recent (March 2004) expansion into Florida, as well as the acquisition of Magna Insurance Company (December 2003).
The following table presents the components of non-interest expense for the three months and nine months ended September 30, 2004 and 2003.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-------------------------------- --------------------------------
(dollars in thousands) 2004 2003 2004 2003
-------------- -------------- -------------- --------------
Employee compensation $ 17,298 $ 16,955 $ 50,945 $ 49,906
Employee benefits 3,366 4,335 13,753 12,261
-------------- -------------- -------------- --------------
Total personnel expense 20,664 21,290 64,698 62,167
-------------- -------------- -------------- --------------
Equipment and data processing expense 4,303 4,356 12,924 12,048
Net occupancy expense 2,470 2,512 7,288 6,923
Postage and communications 2,079 2,020 6,222 6,293
Ad valorem and franchise taxes 652 840 2,302 2,265
Legal and professional services 2,177 946 6,054 2,735
Stationery and supplies 436 400 1,374 1,355
Amortization of intangible assets 558 352 1,407 708
Advertising 898 1,394 3,023 3,047
Deposit insurance and regulatory fees 218 222 643 653
Training expenses 60 117 311 368
Other real estate owned expense 215 527 513 1,062
Other expense 3,576 1,376 10,247 5,016
-------------- -------------- -------------- --------------
Total non-interest expense $ 38,306 $ 36,352 $ 117,006 $ 104,640
============== ============== ============== ==============
The effective federal income tax rate of the Company continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income. For the nine months ended September 30, 2004 and 2003, the effective federal income tax rate was approximately 30% and 31%, respectively. The amount of tax-exempt income earned during the first nine months of 2004 was $9.7 million compared to $10.1 million for the comparable period in 2003.
Off Balance Sheet TransactionsIn the normal course of business, the Company enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the consolidated balance sheets. The contract amounts of these instruments reflect the Company’s exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. The Company undertakes the same credit evaluation in making commitments and conditional obligations as it does for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At September 30, 2004 the Company had $565.1 million in unused loan commitments outstanding, of which approximately $325.9 million were at variable rates and the remainder was 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 future cash requirements of the Company. The Company continually evaluates 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 the Company obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by the Company 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, 2004 the Company had $44.4 million in letters of credit issued and outstanding.
In January 2003, the Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The effect of adoption of this Interpretation did not have a material impact on the Company’s financial statements.
Tabular Disclosure of Contractual ObligationsThe following table shows all significant contractual obligations of the Company at September 30, 2004 according to payments due by period.
Payment due by period
------------------------------------------
(dollars in thousands) Less than 1-3 3-5 More than
Total 1 year years years 5 years
------------- ----------- -------------- ----------- -----------
Certificates of Deposit $1,146,871 $508,783 $375,006 $263,076 $6
Short-Term Debt Obligations 232,632 232,632 - - -
Long-Term Debt Obligations 50,280 10 17 50,027 226
Operating Lease Obligations 17,342 3,261 4,291 3,056 6,734
------------- ----------- ------------ ---------- -----------
Total $1,447,125 $744,686 $379,314 $316,159 $6,966
============= =========== ============ ========== ===========
In December 2003, the FASB issued SFAS 132 (revised 2003), which revises employers’ disclosures about pension plans and other postretirement benefits. It does not change the measurement or recognition of those plans required by SFAS 87, Employers’ Accounting for Pensions, SFAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in SFAS 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original SFAS No.132 about the assets, obligations, cash flows, investment strategy, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements ending after December 15, 2003. The Company adopted SFAS No.132 as prescribed. The required interim disclosure is located in Item 1 of the Unaudited Condensed Consolidated Financial Statements.
FASB Interpretation ("FIN") 46 and 46R - Consolidation of Variable Interest EntitiesIn January 2003, the FASB issued FIN 46, which clarifies the application of Accounting Research Bulletin (“ARB”) 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation were effective for all financial statements issued after January 31, 2003. The consolidation requirements applied to all variable interest entities created after January 31, 2003. This Interpretation was amended in October 2003 by FASB Staff Position (“FSP”) 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This FSP deferred the effective date for applying the provisions of FIN 46 for interests held by public companies in variable interest entities or potential variable interest entities created before February 1, 2003. As amended, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the end of annual or interim periods ending after December 15, 2003. In December 2003, FIN 46R was issued, which again deferred the effective date for interests held by public companies in special-purpose entities for periods ending after December 15, 2003, and for all other types of entities for periods ending after March 15, 2004. The Company adopted FIN 46 and its amendment as prescribed. The effect of this Interpretation on the Unaudited Condensed Consolidated Financial Statements was not material.
Statement of Position (“SOP”) 03-3 - Accounting for Loans or Certain Debt Securities Acquired in a TransferIn October 2003, the American Institute of Certified Public Accountants (“AICPA”) issued SOP 03-3, which addresses accounting for differences between contractual cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (“accretable yield”) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (“nonaccretable difference”) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally would be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected would be recognized as impairment. This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Management is currently assessing the potential impact of this SOP to the Consolidated Financial Statements.
During the first quarter of 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 105, “Loan Commitments Accounted for as Derivative Instruments”. This SAB addresses the accounting for loan commitments entered into after March 31, 2004, and certain disclosure requirements relevant in the context of mortgage banking activities. The effects of SAB 105 are not material to the Company’s operations or financial position.
Emerging Issues Task Force ("EITF") Issue 03-1, "Meaning of Other Than Temporary Impairment"In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, “Meaning of Other Than Temporary Impairment” (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2: Evaluate whether the impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. In September 2004, the FASB approved a Staff Position to delay the requirement to record impairment losses under Issue 03-01. The approved delay will apply to all securities within the scope of Issue 03-01 and is expected to end when new guidance is issued and comes into effect. The Staff Position did not effect the disclosure requirements of Issue 03-01. The Company will continue to monitor changes to Issue 03-01, but does not consider it, or related Staff Position to have a material impact on the Company’s financial position or results of operations.
Forward Looking InformationCongress 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 the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe Company’s net earnings are dependent, in part, on its 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. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage its exposure to changes in interest rates, management monitors the Company’s interest rate risk. The Company’s interest rate management policy is designed to produce a relatively stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company’s securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner.
Notwithstanding the Company’s 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 the Company’s investment securities. As of quarter close, the effective duration of the securities portfolio was 2.76. A rate increase of 100 basis points would move the effective duration to 3.74, while a 200 basis point rise would result in an effective duration of 4.16.
In adjusting the Company’s asset/liability position, the Board and management attempt to manage the Company’s interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values are well positioned for a rising interest rate environment. The cumulative gap at 12 months is +6%; indicating the balance sheet is asset sensitive. Exposure to interest rate risk is presented in the following table.
Net Interest Income (te) at Risk
--------------------------------
Estimated increase
Change in interest (decrease)
rates (basis points) in net interest income
- ----------------------------- -----------------------------
- 100 - 6.57%
Stable 0.00%
+ 100 + 4.44%
+ 200 + 7.68%
+ 300 + 10.35%
The Company also controls interest rate risk by emphasizing the core relationship aspects of non-certificate depositor accounts and selected maturity targets for certificate of deposit accounts. As of September 30, 2004, regular savings and club accounts represented $263.3 million and money market accounts and now accounts totaled $1.1 billion. Excluding public fund accounts, this represents 57.0% total interest bearing deposit accounts.
Over the past 18 months, the interest rate sensitivity of the depositor accounts has been effectively mitigated by strategically increasing the percentage of variable rate loans. From January 2003 to September 2004, this ratio has grown from 31% to 40%. During the same period, the Company’s loan-to-deposit ratio has risen from 64% to 73%. The resulting impact of these balances sheet strategies can be seen in the Company’s static gap report as of September 30, 2004.
Analysis of Interest Sensitivity at September 30, 2004
Within 6 months 1 to 3 Non-Sensitive
Overnight 6 months to 1 year years > 3 years Balance Total
----------- ---------- ----------- ---------- ---------- ---------- ------------
(amounts in thousands)
Assets
Securities $ - $ 292,770 $ 151,879 $ 359,052 $ 545,893 $ - $1,349,594
Federal funds sold & Short-term
investments 6,130 - 1,273 - - - 7,403
Loans 37,560 1,296,065 209,205 561,806 534,129 - 2,638,765
Other assets - - - - - 495,887 495,887
----------- ---------- ----------- ---------- ---------- ---------- ------------
Total Assets $ 43,690 $1,588,835 $ 362,357 $ 920,858 $1,080,022 $ 495,887 $4,491,649
=========== ========== =========== ========== ========== ========== ============
Liabilities
Interest bearing transaction
deposits $ - $ 708,440 $ 286,292 $ 746,160 $ 64,057 $ - $1,804,949
Time deposits - 304,138 204,645 375,006 263,082 - 1,146,871
Non-interest bearing deposits - - - - 650,484 - 650,484
Federal funds purchased 4,209 - - - - - 4,209
Borrowings 228,243 6 3 17 50,435 200 278,904
Other liabilities - - - - - 146,289 146,289
Shareholders' Equity - - - - - 459,943 459,943
----------- ---------- ----------- ---------- ---------- ---------- ------------
Total Liabilities & Equity $232,452 $1,012,584 $ 490,940 $1,121,183 $1,028,058 $ 606,432 $4,491,649
=========== ========== =========== ========== ========== ========== ============
Interest sensitivity gap $(188,762) $ 576,251 $(128,583) $(200,325) $ 51,964 $(110,545)
Cumulative interest rate sensitivity
gap $(188,762) $ 387,489 $ 258,906 $ 58,581 $ 110,545 $ -
Cumulative interest rate
sensitivity gap as a percentage
of total earning assets (5.0)% 10.0 % 6.0 % 1.0 % 3.0 %
Analysis of Interest Sensitivity at December 31, 2003
Within 6 months 1 to 3 Non-Sensitive
Overnight 6 months to 1 year years > 3 years Balance Total
----------- ---------- ----------- ---------- ---------- ---------- ------------
(amounts in thousands)
Assets
Securities $ - $ 222,439 $ 184,857 $ 415,614 $ 455,139 $ - $1,278,049
Federal funds sold & Short-term
investments 11,138 - 150 - - - 11,288
Loans 31,477 1,190,556 213,713 514,248 498,650 - 2,448,644
Other assets - - - - - 412,377 412,377
----------- ---------- ----------- ---------- ---------- ---------- ------------
Total Assets $ 42,615 $1,412,995 $ 398,720 $ 929,862 $ 953,789 $ 412,377 $4,150,358
=========== ========== =========== ========== ========== ========== ============
Liabilities
Interest bearing transaction
deposits $ - $ 811,256 $ 212,119 $ 612,678 $ 62,661 $ - $1,698,714
Time deposits - 351,459 118,889 330,758 311,281 - 1,112,387
Non-interest bearing deposits - - - - 636,745 - 636,745
Federal funds purchased - - - - - - -
Borrowings 159,496 78 77 15 50,258 234 210,158
Other liabilities - - - - - 57,473 57,473
Shareholders' Equity - 37,067 - - - 397,814 434,881
----------- ---------- ----------- ---------- ---------- ---------- ------------
Total Liabilities & Equity $ 159,496 $1,199,860 $ 331,085 $ 943,451 $1,060,945 $ 455,521 $4,150,358
=========== ========== =========== ========== ========== ========== ============
Interest sensitivity gap $(116,881) $ 213,135 $ 67,635 $ (13,589) $ (107,156) $ (43,144)
Cumulative interest rate sensitivity
gap $(116,881) $ 96,254 $ 163,889 $ 150,300 $ 43,144 $ -
Cumulative interest rate
sensitivity gap as a percentage
of total earning assets (3.0)% 3.0 % 4.0 % 4.0 % 1.0 %
Certain assumptions in assessing interest rate risk were employed in preparing data for the Company included in the preceding tables portraying the Company’s interest rate risk sensitivity. These assumptions relate to interest rates, loan and deposit growth, pricing, loan prepayment speeds, deposit decay rates, securities portfolio strategy and market value of certain assets under the various interest rate scenarios. Even if interest rates change in the designated amounts, there can be no assurance that the Company’s assets and liabilities would perform as anticipated. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to the net interest income than indicated above.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.
Even though permissible under the Asset Liability Management Policy approved by the Board of Directors, the Company is not currently engaged in the use of derivatives to control interest rate risk. Management and the Board of Directors review the need for such activities on a regular basis as part of its monthly interest rate risk analysis.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.
The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis for the year ended December 31, 2003 included in the Company’s 2003 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURESThe Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2004, (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.
On February 4, 2004 the Company completed the redemption/conversion of substantially all $37.1 million of the 8% Cumulative Convertible Preferred Stock issued in partial payment for the acquisition of Lamar Capital Corporation in July, 2001. The conversion factor was .6666 shares of Hancock Holding Company common stock for each share of the preferred stock. A total of 7,304 shares of the preferred stock was redeemed for cash at the contract price of $20.00 per share plus pro rated dividends of $0.1511 per share.
In July 2000, the Company announced the execution of a stock buyback program that provides for the repurchase of up to 10 % of the Company’s issued common stock. The program authorizes the repurchase of approximately 3,320,000 shares of the Company’s issued common stock.
On February 26, 2004 the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% common stock dividend. The additional shares were payable March 18, 2004 to shareholders of record at the close of business on March 8, 2004.
All information concerning earnings per share, dividends per share, and number of shares outstanding has been adjusted to give effect to this split.
Issuer Purchases of Equity SecuritiesThe following table provides information with respect to purchases made by the issuer or any affiliated purchaser of the issuer’s equity securities.
(a) (b) (c) (d)
Total number of
shares purchased Maximum nunmber
as a part of of shares
Total number publicly that may yet be
of shares or Average Price announced plans purchased under
units purchased Paid per Share or programs (1) Plans or Programs
---------------- ---------------- ------------------ ------------------
Total as of June 30, 2004 235,003 $ 29.4462 151,754 838,870
================ ================ ==================
Jul. 1, 2004 - Jul. 31, 2004 33,243 (2) $ 29.6796 31,000 807,870
Aug. 1, 2004 - Aug. 31, 2004 40,328 (3) 25.9346 39,900 767,970
Sep. 1, 2004 - Sep. 30, 2004 15,818 (4) 32.5170 13,380 754,590
---------------- ---------------- ------------------
Total as of Sept. 30, 2004 89,389 $ 29.3771 84,280
================ ================ ==================
(1) The Company publicly announced its stock buy-back program on July 18, 2000.
(2) 2,243 shares were purchased on the open market during July in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
(3) 428 shares were purchased on the open market during August in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
(4) 2,438 shares were purchased on the open market during September in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
1. Exhibit 31 - Rule 13a-14(a) / 15d-14(a) Certifications
2. Exhibit 32 - Section 1350 Certifications
Reports on Form 8-K:
1. A Form 8-K was filed on July 12, 2004 for the purpose of announcing, by press release, the Company's
earnings for the six months ended June 30, 2004.
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.
HANCOCK HOLDING COMPANY
----------------------------------------
Registrant
November 8, 2004 By: /s/ George A. Schloegel
- -------------------- ----------------------------------
Date George A. Schloegel
Vice-Chairman of the Board &
Chief Executive Officer
November 8, 2004 By: /s/ Carl J. Chaney
- -------------------- ----------------------------------
Date Carl J. Chaney
Executive Vice President &
Chief Financial Officer