Our net earnings are 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. 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 our exposure to changes in interest rates, management monitors our interest rate risk. Our interest rate risk 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 our 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 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 quarter close, the effective duration of the securities portfolio was 2.28. A rate increase of 100 basis points would move the effective duration to 2.65, while a 200 basis point rise would result in an effective duration of 2.73.
In adjusting our asset/liability position, the Board and management attempt to manage our 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 our interest rate risk position somewhat in order to increase our net interest margin. Our results of operations and net portfolio values are well positioned for a rising interest rate environment. The cumulative gap at 12 months is -2% primarily driven by the increase in interest bearing transaction balances related to the hurricane. Exposure to interest rate risk is presented in the following table.
Analysis of Interest Sensitivity at March 31, 2006
Within 6 months 1 to 3 > 3 Non-Sensitive
Overnight 6 months to 1 year years years Balance Total
---------- ----------- ------------- ---------- ----------- ---------- -----------
(amounts in thousands)
Assets
Securities $ - $ 521,006 $ 349,506 $ 713,790 $ 682,103 $ 12,208 $2,278,613
Federal funds sold & Short-term
investments 409,488 - 7,886 - - - 417,374
Loans 47,554 1,399,970 215,797 643,109 590,780 - 2,897,210
Other assets - - - - - 663,392 663,392
---------- ----------- ------------- ---------- ----------- ---------- -----------
Total Assets $457,042 $1,920,976 $ 573,189 $1,356,899 $1,272,883 $ 675,600 $6,256,589
========== =========== ============= ========== =========== ========== ===========
Liabilities
Interest bearing transaction
deposits $ - $ 809,525 $ 376,577 $1,082,251 $ 185,177 $ - $2,453,530
Time deposits - 604,332 526,438 403,733 105,172 - 1,639,675
Non-interest bearing deposits - 392,431 146,642 491,047 195,623 - 1,225,744
Federal funds purchased 2,750 - - - - - 2,750
Borrowings 215,850 4 5 22 50,233 - 266,114
Other liabilities - - - - - 179,333 179,333
Shareholders' Equity - - - - - 489,443 489,443
---------- ----------- ------------- ---------- ----------- ---------- -----------
Total Liabilities & Equity $218,600 $1,806,292 $1,049,662 $1,977,053 $ 536,206 $ 668,776 $6,256,589
========== =========== ============= ========== =========== ========== ===========
Interest sensitivity gap $238,442 $ 114,684 $ (476,473) $ (620,154) $ 736,677 $ 6,824
Cumulative interest rate sensitivity
gap $238,442 $ 353,126 $ (123,347) $ (743,501) $ (6,824) $ -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets 4.0% 6.0% (2.0)% (13.0)% 0.0%
Analysis of Interest Sensitivity at December 31, 2005
Within 6 months 1 to 3 > 3 Non-Sensitive
Overnight 6 months to 1 year years years Balance Total
---------- ----------- ------------- ---------- ----------- ---------- -----------
(amounts in thousands)
Assets
Securities $ - $ 321,224 $ 396,374 $ 544,557 $ 685,504 $ 11,602 $1,959,261
Federal funds sold & Short-term
investments 402,968 - 7,258 - - - 410,226
Loans 43,145 1,413,210 240,200 634,416 583,657 - 2,914,628
Other assets - - - - - 666,072 666,072
---------- ----------- ------------- ---------- ----------- ---------- -----------
Total Assets $446,113 $1,734,434 $ 643,832 $1,178,973 $1,269,161 $677,674 $5,950,187
========== =========== ============= ========== =========== ========== ===========
Liabilities
Interest bearing transaction
deposits $ - $ 776,515 $ 309,737 $ 923,166 $ 155,417 $ - $2,164,835
Time deposits - 410,815 495,558 452,356 141,318 - 1,500,047
Non-interest bearing deposits - 425,444 159,876 533,352 206,266 - 1,324,938
Federal funds purchased 1,475 - - - - - 1,475
Borrowings 250,807 9 3 21 50,233 - 301,073
Other liabilities - - - - - 180,404 180,404
Shareholders' Equity - - - - - 477,415 477,415
---------- ----------- ------------- ---------- ----------- ---------- -----------
Total Liabilities & Equity $252,282 $1,612,783 $ 965,174 $1,908,895 $ 553,234 $657,819 $5,950,187
========== =========== ============= ========== =========== ========== ===========
Interest sensitivity gap $193,831 $ 121,651 $(321,342) $ (729,922) $ 715,927 $ 19,855
Cumulative interest rate sensitivity
gap $193,831 $ 315,482 $ (5,860) $ (735,782) $ (19,855) $ -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets 4.0% 6.0% (0.1)% (14.0)% (0.4)%
33
We also control 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 March 31, 2006, regular savings and club accounts represented $401.5 million and money market accounts and now accounts totaled $1.3 billion. Excluding public fund accounts, this represents 51.3% of total interest bearing deposit accounts.
We have controlled the interest rate sensitivity of our depositor accounts through targeted changes in deposit rates that fit the overall rate sensitivity profile of the balance sheet. Excluding public funds, interest-bearing transaction yields have gone up by 6 basis points as compared to the fourth quarter of 2005. Consumer time deposits have gone up 8 basis points during the quarter. Average interest-bearing transaction deposit balances were up 8.99%, while time deposits increased by 12.99%. During the quarter, the Federal Reserve increased rates by 50 basis points. Our loan-to-deposit ratio down 59% (down 7%), and the average earning asset yield improved 3 basis points. The impact of our growth is displayed in its static gap report as of March 31, 2006.
Certain assumptions in assessing interest rate risk were employed in preparing our data included in the preceding tables portraying our 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 our 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. We consider all of these factors in monitoring our exposure to interest rate risk.
Even though permissible under the Asset Liability Management Policy approved by the Board of Directors, we are 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 our monthly interest rate risk analysis.
Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities.
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, 2005 included in our 2005 Annual Report on Form 10-K.
34
Item 4. Controls and ProceduresAt 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 Officer 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 Officer 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 Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three months period ended March 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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 Maximum number
shares purchased of shares
Total number as a part of 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
------------------- ------------------ --------------------- ---------------------
Jan. 1, 2006 - Jan. 31, 2006 - (2) $ - - 573,401
Feb. 1, 2006 - Feb. 28, 2006 - (3) - - 573,401
Mar. 1, 2006 - Mar. 31, 2006 17,000 (4) 45.1100 17,000 556,401
------------------- ------------------ ---------------------
Total as of Mar. 31, 2006 17,000 $ 32.3294 17,000
=================== ================== =====================
(1) The Company publicly announced its stock buy-back program on July 18, 2000.
(2) 0 shares were purchased on the open market during January in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
(3) 0 shares were purchased on the open market during February in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
(4) 0 shares were purchased on the open market during March in order to satisfy obligations
pursuant to the Company's long term incentive plan that was established in 1996.
35
Item 4. Submission of Matters to a Vote of Security Holders.
A. The Company's Annual Meeting was held on March 30, 2006.
B. The Directors elected at the Annual Meeting held on March 30, 2006 were:
Votes Cast
----------
For Withheld
--- --------
1. Alton G. Bankston 28,880,366 34,972
2. James H. Horne 28,897,401 17,637
3. George A. Schloegel 28,848,877 66,491
4. Christine L. Smilek 28,896,761 52,534
Continuing Directors:
5. Frank E. Bertucci
6. Joseph F. Boardman, Jr.
7. Don P. Descant
8. James B. Estabrook, Jr.
9. Charles H. Johnson, Sr.
10. John H. Pace
11. Robert W. Roseberry
12. Leo W. Seal, Jr.
C. KPMG was approved as the independent public accountants of the Company.
For Against Abstained
--- ------- ---------
28,818,293 52,534 44,256
Item 6. Exhibits.
(a) Exhibits:
Exhibit
Number Description
- -------------- ---------------------------------------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
36
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.
Hancock Holding Company
By: /s/ George A. Schloegel
-------------------------------------------
George A. Schloegel
Vice-Chairman of the Board &
Chief Executive Officer
/s/ Carl J. Chaney
-------------------------------------------
Carl J. Chaney
Executive Vice President &
Chief Financial Officer
Date: May 9, 2006
37
Index to Exhibits
Exhibit
Number Description
- -------------- ---------------------------------------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
