Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
--------------- -------------- --------------- --------------
Performance Ratios (dollar amounts in thousands)
Return on average assets 2.36% 0.12% 1.77% 0.98%
Return on average common equity 27.58% 1.18% 21.42% 9.81%
Earning asset yield (Tax Equivalent ("TE")) 6.60% 6.19% 6.36% 6.06%
Total cost of funds 2.30% 1.80% 2.08% 1.67%
Net interest margin (TE) 4.29% 4.40% 4.28% 4.39%
Common equity (period end) as a percent of total assets
(period end) 8.86% 9.55% 8.86% 9.55%
Leverage ratio (period end) 8.15% 8.64% 8.15% 8.64%
FTE Headcount 1,788 1,590 1,788 1,590
Asset Quality Information
Non-accrual loans $5,179 $10,373 $5,179 $10,373
Foreclosed assets $970 $2,973 $970 $2,973
Total non-performing assets $6,149 $13,346 $6,149 $13,346
Non-performing assets as a percent of loans and
foreclosed assets 0.20% 0.45% 0.20% 0.45%
Accruing loans 90 days past due $3,626 $6,156 $3,626 $6,156
Accruing loans 90 days past due as a percent of loans 0.12% 0.21% 0.12% 0.21%
Non-performing assets + accruing loans 90 days past due
to loans and foreclosed assets 0.31% 0.65% 0.31% 0.65%
Net charge-offs $2,608 $1,704 $5,501 $5,655
Net charge-offs as a percent of average loans 0.34% 0.23% 0.24% 0.27%
Allowance for loan losses $48,352 $76,584 $48,352 $76,584
Allowance for loan losses as a percent of period end loans 1.54% 2.57% 1.54% 2.57%
Allowance for loan losses to NPAs + accruing loans
90 days past due 494.65% 392.70% 494.65% 392.70%
Provision for (reversal of) loan losses ($20,000) $36,905 ($20,705) $41,556
Average Balance Sheet
Total loans $3,080,441 $2,918,709 $3,015,434 $2,844,003
Securities 2,334,242 1,364,219 2,254,068 1,388,143
Short-term investments 94,026 52,933 255,265 77,300
--------------- -------------- --------------- --------------
Earning assets 5,508,709 4,335,861 5,524,767 4,309,446
Allowance for loan losses (61,525) (41,765) (69,840) (41,217)
Other assets 602,833 487,866 590,642 496,812
--------------- -------------- --------------- --------------
Total assets $6,050,017 $4,781,962 $6,045,569 $4,765,041
=============== ============== =============== ==============
Non-interest bearing deposits $1,098,716 $729,216 $1,158,844 $720,413
Interest bearing transaction deposits 1,590,318 1,311,779 1,666,689 1,321,105
Interest bearing public fund deposits 791,825 617,017 780,947 670,477
Time deposits 1,571,129 1,143,691 1,494,748 1,116,876
--------------- -------------- --------------- --------------
Total interest bearing deposits 3,953,272 3,072,487 3,942,384 3,108,458
--------------- -------------- --------------- --------------
Total deposits 5,051,988 3,801,703 5,101,228 3,828,871
Other borrowed funds 304,686 335,758 267,666 304,192
Other liabilities 175,093 160,232 177,183 155,436
Common stockholders' equity 518,250 484,269 499,492 476,542
--------------- -------------- --------------- --------------
Total liabilities & common stockholders' equity $6,050,017 $4,781,962 $6,045,569 $4,765,041
=============== ============== =============== ==============
25
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
-------------- --------------- --------------- ---------------
Period end Balance Sheet (dollar amounts in thousands)
Commercial/real estate loans $1,800,643 $1,637,011 $1,800,643 $1,637,011
Mortgage loans 430,086 441,512 430,086 441,512
Direct consumer loans 477,142 501,704 477,142 501,704
Indirect consumer loans 350,013 339,822 350,013 339,822
Finance company loans 83,278 64,121 83,278 64,121
-------------- --------------- --------------- ---------------
Total loans 3,141,162 2,984,170 3,141,162 2,984,170
Securities 2,303,396 1,323,166 2,303,396 1,323,166
Short-term investments 74,903 141,270 74,903 141,270
-------------- --------------- --------------- ---------------
Earning assets 5,519,461 4,448,606 5,519,461 4,448,606
Allowance for loan losses (48,352) (76,584) (48,352) (76,584)
Other assets 650,556 541,468 650,556 541,468
-------------- --------------- --------------- ---------------
Total assets $6,121,665 $4,913,490 $6,121,665 $4,913,490
============== =============== =============== ===============
Non-interest bearing deposits $1,062,348 $909,585 $1,062,348 $909,585
Interest bearing transaction deposits 1,510,785 1,369,886 1,510,785 1,369,886
Interest bearing public funds deposits 795,927 574,602 795,927 574,602
Time deposits 1,631,504 1,171,080 1,631,504 1,171,080
-------------- --------------- --------------- ---------------
Total interest bearing deposits 3,938,216 3,115,568 3,938,216 3,115,568
-------------- --------------- --------------- ---------------
Total deposits 5,000,564 4,025,153 5,000,564 4,025,153
Other borrowed funds 430,827 249,229 430,827 249,229
Other liabilities 148,173 170,049 148,173 170,049
Common stockholders' equity 542,101 469,059 542,101 469,059
-------------- --------------- --------------- ---------------
Total liabilities & common stockholders' equity $6,121,665 $4,913,490 $6,121,665 $4,913,490
============== =============== =============== ===============
Net Charge-Off Information
Net charge-offs (recoveries):
Commercial/real estate loans $522 ($17) ($628) $955
Mortgage loans 367 7 576 70
Direct consumer loans 1,003 861 3,264 1,853
Indirect consumer loans 294 342 1,338 1,420
Finance company loans 422 511 951 1,357
-------------- --------------- --------------- ---------------
Total net charge-offs $2,608 $1,704 $5,501 $5,655
============== =============== =============== ===============
Net charge-offs to average loans:
Commercial/real estate loans 0.12% 0.00% -0.05% 0.08%
Mortgage loans 0.34% 0.01% 0.19% 0.02%
Direct consumer loans 0.85% 0.68% 0.93% 0.49%
Indirect consumer loans 0.34% 0.40% 0.51% 0.59%
Finance company loans 2.11% 3.17% 1.77% 2.91%
-------------- --------------- --------------- ---------------
Total net charge-offs to average net loans 0.34% 0.23% 0.24% 0.27%
============== =============== =============== ===============
26
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
-------------- --------------- --------------- ---------------
Average Balance Sheet Composition (dollar amounts in thousands)
Percentage of earning assets/funding sources:
Loans 55.92% 67.32% 54.58% 65.99%
Securities 42.37% 31.46% 40.80% 32.22%
Short-term investments 1.71% 1.22% 4.62% 1.79%
-------------- --------------- --------------- ---------------
Earning assets 100.00% 100.00% 100.00% 100.00%
============== =============== =============== ===============
Non-interest bearing deposits 19.95% 16.82% 20.98% 16.72%
Interest bearing transaction deposits 28.87% 30.25% 30.17% 30.66%
Interest bearing public funds deposits 14.37% 14.23% 14.14% 15.56%
Time deposits 28.52% 26.38% 27.06% 25.92%
-------------- --------------- --------------- ---------------
Total deposits 91.71% 87.68% 92.35% 88.85%
Other borrowed funds 5.53% 7.74% 4.84% 7.06%
Other net interest-free funding sources 2.76% 4.58% 2.81% 4.09%
-------------- --------------- --------------- ---------------
Total funding sources 100.00% 100.00% 100.00% 100.00%
============== =============== =============== ===============
Loan mix:
Commercial/real estate loans 57.11% 54.28% 56.76% 53.91%
Mortgage loans 13.75% 14.75% 13.75% 14.71%
Direct consumer loans 15.28% 17.29% 15.53% 17.79%
Indirect consumer loans 11.28% 11.49% 11.58% 11.40%
Finance company loans 2.58% 2.19% 2.38% 2.19%
-------------- --------------- --------------- ---------------
Total loans 100.00% 100.00% 100.00% 100.00%
============== =============== =============== ===============
Average dollars
Loans $3,080,441 $2,918,709 $3,015,434 $2,844,003
Securities 2,334,242 1,364,219 2,254,068 1,388,143
Short-term investments 94,026 52,933 255,265 77,300
-------------- --------------- --------------- ---------------
Earning assets $5,508,709 $4,335,861 $5,524,767 $4,309,446
============== =============== =============== ===============
Non-interest bearing deposits $1,098,716 $729,216 $1,158,844 $720,413
Interest bearing transaction deposits 1,590,318 1,311,779 1,666,689 1,321,105
Interest bearing public funds deposits 791,825 617,017 780,947 670,477
Time deposits 1,571,129 1,143,691 1,494,748 1,116,876
-------------- --------------- --------------- ---------------
Total deposits 5,051,988 3,801,703 5,101,228 3,828,871
Other borrowed funds 304,686 335,758 267,666 304,192
Other net interest-free funding sources 152,035 198,400 155,873 176,383
-------------- --------------- --------------- ---------------
Total funding sources 5,508,709 $4,335,861 5,524,767 $4,309,446
============== =============== =============== ===============
Loans:
Commercial/real estate loans $1,759,173 $1,584,244 $1,711,525 $1,533,208
Mortgage loans 423,610 430,615 414,768 418,479
Direct consumer loans 470,771 504,362 468,196 505,899
Indirect consumer loans 347,404 335,482 349,076 324,122
Finance company loans 79,483 64,006 71,869 62,295
-------------- --------------- --------------- ---------------
Total average loans $3,080,441 $2,918,709 $3,015,434 $2,844,003
============== =============== =============== ===============
27
Liquidity Management and Contractual Obligations
Liquidity ManagementWe manage liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and maturities of securities available for sale.
The following liquidity ratios at September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 compare certain assets and liabilities to total deposits or total assets:
September 30, June 30, March 31, December 31,
2006 2006 2006 2005
---------------- ---------------- --------------- ----------------
Total securities to total deposits 46.06% 40.66% 42.84% 39.27%
Total loans (net of unearned
income) to total deposits 62.82% 58.01% 55.86% 59.91%
Interest-earning assets
to total assets 90.16% 90.85% 90.58% 90.06%
Interest-bearing deposits
to total deposits 78.76% 77.01% 76.96% 73.45%
Capital ResourcesWe continue to maintain an adequate capital position. The ratios as of September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 are as follows:
September 30, June 30, March 31, December 31,
2006 2006 2006 2005
---------------- ---------------- --------------- ----------------
Common equity (period-end) as a percent of
total assets (period-end) 8.86% 8.00% 8.13% 8.72%
Regulatory ratios:
Total capital to risk-weighted assets (1) 13.44% 11.95% 12.88% 12.73%
Tier 1 capital to risk-weighted
assets (2) 12.27% 10.72% 11.60% 11.47%
Leverage capital to average total assets (3) 8.15% 7.59% 7.45% 7.85%
(1) Total capital consists of equity capital less intangible assets plus a limited amount of allowance for loan
losses. Risk-weighted assets represent the assigned risk portion of all on and off-balance-sheet assets. Based
on Federal Reserve Board guidelines, assets are assigned a risk factor percentage from 0% to 100%. A minimum
ratio of total capital to risk-weighted assets of 8% is required.
(2) Tier 1 capital consists of equity capital less intangible assets. A minimum ratio of tier 1 capital to
risk-weighted assets of 4% is required.
(3) Leverage capital consists of equity capital less goodwill and core deposit intangibles. Regulations require a
minimum 3% leverage capital ratio for an entity to be considered adequately capitalized.
28
Contractual ObligationsPayments due from us under specified long-term and certain other binding contractual obligations were scheduled in our annual report on Form 10-K for the year ended December 31, 2005. The most significant obligations, other than obligations under deposit contracts and short-term borrowings, were for operating leases for banking facilities.
Results of Operations
Net IncomeNet income for the third quarter of 2006 totaled $36.0 million, an increase of $34.6 million from the third quarter of 2005. Diluted earnings per share for the third quarter of 2006 were $1.08, an increase of $1.04 from the same quarter a year ago.
Our net income for the third quarter of 2006 included a $20.0 million negative provision for loan losses, which included a partial reversal of the Company’s storm-related allowance for loan losses. In the third quarter of 2005, we established a $35.2 million allowance for loan losses related to projected credit losses associated with the impact of Hurricane Katrina. Through the third quarter of 2006, we have experienced storm-related charge-offs of about $4.4 million. While management has determined that the potential for further storm-related charge-offs is present, the levels are projected to be lower than originally anticipated. We reviewed the asset quality of significant credits included in the original $35.2 million storm-related allowance and determined that this partial reversal was appropriate.
Net income for the first nine months of 2006 was $80.0 million, an increase of $45.1 million compared to the first nine months of 2005. Diluted earnings per share for the first nine months of 2006 were $2.41, an increase of $1.35 from the first nine months of 2005.
Net Interest IncomeNet interest income (te) for the third quarter increased $11.4 million, or 24%, from the third quarter of 2005. Our net interest margin (te) was 4.29 percent in the third quarter, 11 basis points narrower than the same quarter a year ago.
Compared to the same quarter a year ago, the primary driver of the $11.4 million increase in net interest income (te) was a $1.2 billion, or 27 percent, increase in average earning assets mainly from average deposit inflows of $1.3 billion, or 33 percent. The increase in deposits was related to insurance settlements for businesses and consumers, as well as other forms of federal aid to customers impacted by Hurricane Katrina. Of the $1.2 billion increase in average earning assets, $161.7 million was deployed into loans and $1.0 billion into securities and other short-term investments. The net interest margin (te) narrowed 11 basis points as the increase in the average earning asset yield (40 basis points) did not offset the increase in total funding costs (51 basis points).
29
The following tables detail the components of our net interest spread and net interest margin.
Three Months Ended September 30, Three Months Ended September 30,
-------------------------------------- --------------------------------------
2006 2005
-------------------------------------- --------------------------------------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
-------------------------------------- --------------------------------------
Average Earning Assets
Commercial & real estate loans (TE) $32,520 $1,759,173 7.34% $25,770 $1,584,244 6.46%
Mortgage loans 6,411 423,610 6.05% 5,921 430,615 5.50%
Consumer loans 19,547 897,658 8.64% 17,772 903,850 7.80%
Loan fees & late charges 2,710 - 0.00% 2,183 - 0.00%
------------------------------------------------------------------------------
Total loans (TE) $61,188 $3,080,441 7.89% 51,646 2,918,709 7.03%
US treasury securities 855 67,966 4.99% 62 11,296 2.17%
US agency securities 16,456 1,356,478 4.85% 4,834 464,450 4.16%
CMOs 1,439 145,494 3.96% 2,251 229,934 3.92%
Mortgage backed securities 6,231 511,372 4.87% 4,773 436,733 4.37%
Municipals (TE) 2,935 174,744 6.72% 2,792 160,502 6.96%
Other securities 1,042 78,188 5.33% 733 61,304 4.78%
------------------------------------------------------------------------------
Total securities (TE) 28,958 2,334,242 4.96% 15,444 1,364,219 4.53%
Total short-term investments 1,128 94,026 4.76% 416 52,933 3.12%
Average earning assets yield (TE) $91,275 $5,508,709 6.60% $67,506 $4,335,861 6.19%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $3,955 $1,590,318 0.99% $2,317 $1,311,779 0.70%
Time deposits 16,353 1,571,129 4.13% 10,222 1,143,691 3.55%
Public Funds 8,629 791,825 4.32% 4,740 617,017 3.05%
------------------------------------------------------------------------------
Total interest bearing deposits $28,936 $3,953,272 2.90% 17,279 3,072,487 2.23%
Customer repos 2,785 271,582 4.07% 1,467 248,505 2.34%
Other borrowings 267 33,104 3.20% 913 87,253 4.15%
------------------------------------------------------------------------------
Total borrowings 3,052 304,686 3.97% 2,380 335,758 2.81%
Total interest bearing liability cost $31,988 $4,257,959 2.98% $19,659 $3,408,246 2.29%
Noninterest-bearing deposits 1,098,716 729,216
Other net interest-free funding sources 152,035 198,399
Total Cost of Funds $31,988 $5,508,709 2.30% $19,659 $4,335,861 1.80%
Net Interest Spread (TE) $59,286 3.62% $47,847 3.91%
Net Interest Margin (TE) $59,286 $5,508,709 4.29% $47,847 $4,335,861 4.40%
30
Nine Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ---------------------------------------
2006 2005
------------------------------------- ---------------------------------------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
------------------------------------- ---------------------------------------
Average Earning Assets
Commercial & real estate loans (TE) $91,770 $1,711,525 7.17% $71,847 $1,533,208 6.26%
Mortgage loans 18,289 414,768 5.88% 17,504 418,479 5.58%
Consumer loans 55,376 889,140 8.33% 51,200 892,316 7.67%
Loan fees & late charges 7,506 - 0.00% 6,510 - 0.00%
------------------------------------------------------------------------------
Total loans (TE) $172,941 $3,015,434 7.66% 147,061 2,844,003 6.91%
US treasury securities 1,936 56,722 4.56% 182 11,144 2.19%
US agency securities 46,196 1,299,845 4.74% 14,096 459,784 4.09%
CMOs 4,874 164,723 3.95% 7,546 253,121 3.97%
Mortgage backed securities 17,393 491,177 4.72% 14,490 439,270 4.40%
Municipals (TE) 8,344 165,533 6.72% 8,504 162,160 6.99%
Other securities 2,859 76,068 5.01% 2,189 62,664 4.66%
------------------------------------------------------------------------------
Total securities (TE) 81,602 2,254,068 4.83% 47,008 1,388,143 4.52%
Total short-term investments 8,684 255,265 4.55% 1,507 77,300 2.61%
Average earning assets yield (TE) $263,226 $5,524,767 6.36% $195,576 $4,309,446 6.06%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $11,001 $1,666,689 0.88% $6,367 $1,321,105 0.64%
Time deposits 43,809 1,494,748 3.92% 29,151 1,116,876 3.49%
Public Funds 24,036 780,947 4.11% 12,900 670,477 2.57%
------------------------------------------------------------------------------
Total interest bearing deposits $78,845 $3,942,384 2.67% 48,417 3,108,457 2.08%
Customer repos 5,999 234,576 3.42% 3,226 231,736 1.86%
Other borrowings 1,053 33,090 4.25% 2,265 72,455 4.18%
------------------------------------------------------------------------------
Total borrowings 7,051 267,666 3.52% 5,491 304,192 2.41%
Total interest bearing liability cost $85,897 $4,210,050 2.73% $53,908 $3,412,649 2.11%
Noninterest-bearing deposits 1,158,844 720,413
Other net interest-free funding sources 155,873 176,384
Total Cost of Funds $85,897 $5,524,767 2.08% $53,908 $4,309,446 1.67%
Net Interest Spread (TE) $177,329 3.64% $141,667 3.95%
Net Interest Margin (TE) $177,329 $5,524,767 4.28% $141,667 $4,309,446 4.39%
------------------------------------------------------------------------------
Provision for Loan LossesThe amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with our 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.
31
During the third quarter of 2006, we recorded a $20.0 million negative provision, primarily as a result of a better than expected credit loss experience related to Hurricane Katrina; this was done after considering current levels of charge-offs, delinquency levels, and loan growth levels, as well as the pace of recovery for the region.
Annualized net charge-offs, as a percent of average loans, for the third quarter of 2006 were 0.34%, compared to 0.23% in the third quarter of 2005. Storm-related net charge-offs for the third quarter of 2006 were $0.3 million and have totaled $4.4 million since the third quarter of 2005.
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. (Dollar amounts shown are in thousands.)
At and for the
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Annualized net charge-offs to average loans 0.34% 0.23% 0.24% 0.27%
Annualized provision (recovery) for loan losses
to average loans -2.60% 5.06% -2.75% 5.84%
Average allowance for loan losses to average loans 1.57% 2.62% 1.60% 2.69%
Gross charge-offs $ 6,358 $ 3,699 $ 15,022 $ 11,264
Gross recoveries $ 3,750 $ 1,996 $ 9,521 $ 5,610
Non-accrual loans $ 5,179 $ 10,373 $ 5,179 $ 10,373
Accruing loans 90 days or more past due $ 3,626 $ 6,156 $ 3,626 $ 6,156
Accruing loans 90 days or more past due decreased $2.5 million from September 30, 2005. Since December 31, 2005, accruing loans 90 days or more past due, net of deferrals, have decreased $13.8 million to $3.6 million at September 30, 2006. This decrease is related to improved ability of certain borrowers to meet their regular payments after Hurricane Katrina.
Management is continuously reviewing the adequacy of the special storm-related allowance due to Hurricane Katrina and views the current level to be adequate based on available information at this time.
Non-Interest IncomeExcluding the impact of storm-related gains/(losses) and securities transactions, non-interest income for the third quarter was up $4.0 million, or 19 percent, compared to the same quarter a year ago. The primary factors impacting the higher levels of non-interest income as compared to the same quarter a year ago, were higher levels of service charge fees (up $1.7 million, or 22 percent). In addition, debit card and merchant fees were up $0.7 million, when compared to the same quarter a year ago. However, insurance fees were down $0.7 million.
32
The components of non-interest income for the three and nine months ended September 30, 2006 and 2005 are presented in the following table:
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
(dollars in thousands)
Service charges on deposit accounts $ 9,719 $ 7,975 $ 26,826 $ 27,924
Trust fees 3,174 2,761 9,662 8,161
Credit card merchant discount fees 1,744 1,055 5,316 3,160
Income from insurance operations 4,145 4,883 13,900 12,262
Investment & annuity fees 1,595 1,304 4,450 4,039
ATM fees 1,223 871 3,790 3,397
Secondary mortgage market operations 1,018 377 2,583 1,552
Other income 3,009 2,374 9,932 8,226
----------------- ----------------- ----------------- -----------------
Total other non-interest income 25,627 21,600 76,459 68,721
Net storm-related gain - 12,276 - 12,276
Securities transactions gains (losses), net 110 (18) 228 (26)
----------------- ----------------- ----------------- -----------------
Total non-interest income $ 25,737 $ 33,858 $ 76,687 $ 80,971
================= ================= ================= =================
Non-Interest ExpenseOperating expenses for the third quarter were $7.6 million, or 18 percent, higher compared to the same quarter a year ago. The increase from the same quarter a year ago was reflected in higher levels of personnel expense (up $2.8 million), data processing expense (up $1.7 million), professional services expense (up $1.3 million) and all other expenses (up $1.8 million).
The following table presents the components of non-interest expense for the three and nine months ended September 30, 2006 and 2005.
Three Months Ended September 30, Nine Months Ended September 30,
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
(dollars in thousands)
Employee compensation $ 21,790 $ 19,799 $ 64,429 $ 55,854
Employee benefits 5,269 4,476 15,232 13,725
----------------- ----------------- ----------------- -----------------
Total personnel expense 27,059 24,275 79,661 69,579
----------------- ----------------- ----------------- -----------------
Equipment and data processing expense 6,218 4,205 16,201 12,896
Net occupancy expense 2,882 2,617 10,015 7,688
Postage and communications 1,936 2,203 6,881 5,871
Ad valorem and franchise taxes 519 1,066 2,680 2,570
Legal and professional services 3,702 2,391 9,625 8,295
Stationery and supplies 519 376 1,604 1,326
Amortization of intangible assets 445 514 1,626 1,676
Advertising 1,985 916 5,091 3,763
Deposit insurance and regulatory fees 257 161 550 656
Training expenses 106 60 418 325
Other expense 4,709 3,986 16,322 12,272
----------------- ----------------- ----------------- -----------------
Total non-interest expense $ 50,337 $ 42,770 $ 150,674 $ 126,917
================= ================= ================= =================
33
Income TaxesOur effective federal income tax rate continues to be less than the statutory rate of 35% due primarily to tax-exempt interest income. For the nine months ended September 30, 2006 and 2005, the effective federal income tax rate was approximately 32% and 28%, respectively. The total amount of tax-exempt income earned during the first nine months of 2006 was $10.9 million compared to $9.5 million for the comparable period in 2005. Tax-exempt income for nine months ended September 30, 2006 consisted of $5.0 million from securities and $5.9 million from loans and leases. Tax-exempt income for the first nine months of 2005 consisted of $5.3 million from securities and $4.2 million from loans and leases.
Off-Balance Sheet TransactionsIn the normal course of business, we enter into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of our customers. Such instruments are not reflected in the accompanying condensed consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the condensed consolidated balance sheets. The contract amounts of these instruments reflect our exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. We undertake the same credit evaluation in making commitments and conditional obligations as we do for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At September 30, 2006, we had $858.6 million in unused loan commitments outstanding, of which approximately $461.1 million were at variable rates, with the remainder at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent our future cash requirements. We continually evaluate each customer’s credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in our obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At September 30, 2006, we had $55.4 million in letters of credit issued and outstanding.
The following table shows the commitments to extend credit and letters of credit at September 30, 2006 according to expiration date.
Expiration Date
Less than 1-3 3-5 More than
Total 1 year years years 5 years
--------------- -------------- ------------ ------------ --------------
(dollars in thousands)
Commitments to extend credit $ 858,649 $ 544,373 $ 38,667 $ 41,064 $ 234,545
Letters of credit 55,354 27,738 18,673 8,943 -
--------------- -------------- ------------ ------------ --------------
Total $ 914,003 $ 572,111 $ 57,340 $ 50,007 $ 234,545
=============== ============== ============ ============ ==============
Our liability associated with letters of credit is not material to our condensed consolidated financial statements.
34
Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. With the exception of the adoption of SFAS No. 123R, as discussed in the Notes to Condensed Consolidated Financial Statements, there have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K for the year ended December 31, 2005.
Recent Accounting PronouncementsThe guidance in Emerging Issues Task Force No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”), was originally effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of EITF 03-1 was delayed by the Financial Accounting Standards Board (“FASB”) Staff Position EITF Issue 03-1-1,The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (“FSP EITF 03-1-1”), posted on September 30, 2004. The disclosure requirements continue to be effective and have been implemented by the Company. In November 2005, the FASB issued Staff Position FAS 115-1 and FAS 124-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP FAS 115-1 and FAS 124-1”), which amends SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, and No. 124,Accounting for Certain Investments Held by Not for Profit Organizations and APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 and FAS 124-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. FSP FAS 115-1 and FAS 124-1 also include accounting considerations subsequent to the recognition of an other-than-temporary impairment and require certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. We adopted FSP FAS 115-1 and FAS 124-1 effective January 1, 2006. The adoption of FSP FAS 115-1 and FAS 124-1 has not had a material impact on our financial condition or results of operations.
In December 2004, the FASB published SFAS No. 123(R),Share-Based Payments. SFAS No. 123(R) is a revision of SFAS No. 123,Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. It provides investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of stock-based payment arrangements for public companies. We adopted SFAS No.123(R) under the modified prospective method and considered the guidance in SAB 107 effective January 1, 2006. The after-tax effect on earnings for the three and nine months ended September 30, 2006 is an increase in compensation expense of $438,000 and $2,019,000, respectively, or a reduction in diluted earnings per share of $0.01 and $0.06, respectively.
In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets. SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to subsequently measure those servicing assets and servicing liabilities at fair value. The effective date of this statement is the first fiscal year that begins after September 15, 2006. We intend on using the amortization method and do not believe the adoption of SFAS No. 156 will have a material impact on its results of operations and financial position.
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In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements in accordance with SFAS No.109,Accounting for Income Taxes, when it is more likely than not that the position will be sustained based on its technical merits. FIN 48 also prescribes how to measure the tax benefit recognized and provides guidance on when a tax benefit should be derecognized as well as various other accounting, presentation and disclosure matters. This interpretation is effective for us beginning in fiscal year 2007. We do not believe the adoption of FIN 48 will have a material impact on our results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R). This pronouncement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its statement of financial position. SFAS No. 158 also requires an employer to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, this statement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. Application of this standard at December 31, 2005 would have required adjustment to our accrued pension liability relating to our pension plan and our post-retirement benefit plans, resulting in an increase to accrued employee benefit liabilities of approximately $18.0 million and decrease in stockholders’ equity of approximately $18.0 million. However, the effect at December 31, 2006, the adoption date, or any other future date could significantly differ depending on the measurement of pension assets and obligations at such date. We are currently evaluating the requirements of SFAS No. 158 and have not yet determined the impact on our consolidated financial statements.
In September 2006, the FASB ratified the consensus the EITF reached regarding EITF No.06-5,Accounting for Purchases of Life Insurance — Determining the Amount that Could Be Realized in Accordance with FASB Technical Bulletin 85-4 (“EITF 06-5”). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract.” For group policies with multiple certificates or multiple policies with a group rider, the Task Force also tentatively concluded that the amount that could be realized should be determined at the individual policy or certificate level, i.e., amounts that would be realized only upon surrendering all of the policies or certificates would not be included when measuring the assets. This interpretation is effective for us beginning in fiscal year 2007. We do not believe the adoption of EITF 06-5 will have a material impact on our results of operations and financial position.
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In September 2006, the SEC issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. We are currently evaluating the impact of SAB 108 on its consolidated financial statements.
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 our 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 RiskOur 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. Interest rate risk sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. In an attempt to manage our exposure to changes in interest rates, management monitors interest rate risk and administers an interest rate risk management policy designed to produce a relatively stable net interest margin in periods of interest rate fluctuations.
Notwithstanding our interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income and the fair value of our investment securities. As of quarter close, the effective duration of the securities portfolio was 2.00. A rate increase of 100 basis points would move the effective duration to 1.98, while a reduction in rates of 100 basis points would result in an effective duration of 1.07.
In adjusting our asset/liability position, the Board and management attempt to manage our interest rate risk while enhancing net interest margins. This measurement is done primarily by running net interest income simulations. The net interest income simulations run at September 30, 2006 indicate that the Company is to some extent asset sensitive as compared to the stable rate environment. Exposure to instantaneous changes in interest rate risk for the current quarter is presented in the following table.
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Net Interest Income (te) at Risk
---------------------------------------------------
Change in Estimated
interest rate increase (decrease)
(basis point) in net interest income
--------------------- ------------------------
-100 -2.52%
Stable 0.00%
+100 0.90%
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.
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 nine month period ended September 30, 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.
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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
----------------- ----------------- -------------------- -------------------
July 1, 2006 - July 31, 2006 - (2) $ - - 551,008
August 1, 2006 - August 31, 2006 - (3) - 551,008
Sept. 1, 2006 - Sept. 30, 2006 - (4) - 551,008
----------------- ----------------- --------------------
Total as of Sept. 30, 2006 - $ - -
================= ================= ====================
(1) The Company publicly announced its stock buy-back program on July 18, 2000.
(2) 0 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) 0 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) 0 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 4. Submission of Matters to a Vote of Security Holders.
None
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
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: November 8, 2006
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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.
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