UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13089
Hancock Holding Company
(Exact name of registrant as specified in its charter)
Mississippi 64-0693170
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
One Hancock Plaza, Gulfport, Mississippi 39501 (228) 868-4727
(Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $3.33 PAR VALUE The NASDAQ Stock Market, LLC
(Title of Class) (Name of Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act. Yes No X
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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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check One):
Large accelerated filer X Accelerated filer Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes No X
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The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 2006 was
$1,502,420,422 based upon the closing market price on NASDAQ as of such date. For purposes of this calculation
only, shares held by nonaffiliates are deemed to consist of (a) shares held by all shareholders other than
directors and executive officers of the registrant plus (b) shares held by directors and officers as to which
beneficial ownership has been disclaimed.
On February 9, 2007, the registrant had outstanding 32,671,196 shares of common stock for financial statement
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year ended December 31, 2006 are incorporated
by reference into Part I and Part II of this report.
Portions of the definitive Proxy Statement used in connection with the Registrant's Annual Meeting of
Shareholders to be held on March 29, 2007 are incorporated by reference into Part III of this report.
Hancock Holding Company
Form 10-K
Index
PART I
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 10
ITEM 1B. UNRESOLVED STAFF COMMENTS 14
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES 15
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 101
ITEM 9A. CONTROLS AND PROCEDURES 101
ITEM 9B. OTHER INFORMATION 101
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 102
ITEM 11. EXECUTIVE COMPENSATION 102
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 102
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE 102
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 102
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 103
PART IITEM 1: BUSINESSORGANIZATION AND RECENT DEVELOPMENTSHancock 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. In 2002, the Company qualified as a financial holding company giving it broader powers. At December 31, 2006, the Company operated more than 140 banking and financial services offices and more than 130 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 December 31, 2006, the Company had total assets of $5.96 billion and 1,848 employees on a full-time equivalent basis.
Hancock Bank MS was originally chartered as Hancock County Bank in 1899. Since its organization, the strategy of Hancock Bank MS has been to achieve a dominant market share on the Mississippi Gulf Coast. Prior to a series of acquisitions begun in 1985, growth was primarily internal and was accomplished by branch expansions in areas of population growth where no dominant financial institution previously served the market area. Economic expansion on the Mississippi Gulf Coast has resulted primarily from growth of military and government-related facilities, tourism, port facility activities, industrial complexes and the gaming industry. Based on the most current available published data, Hancock Bank MS has the largest deposit market share in each of the following five counties: Harrison, Hancock, Jackson, Lamar and Pearl River. In addition, Hancock Bank MS has a presence in the following counties: Forrest and Jefferson Davis. With assets of $3.5 billion at December 31, 2006, Hancock Bank MS was ranked the third largest bank in Mississippi.
In August 1990, the Company formed Hancock Bank LA to assume the deposit liabilities and acquire the consumer loan portfolio, corporate credit card portfolio and non-adversely classified securities portfolio of American Bank and Trust, Baton Rouge, Louisiana, (AmBank), from the Federal Deposit Insurance Corporation (FDIC). Economic expansion in East Baton Rouge Parish has resulted from growth in state government and related service industries, educational and medical complexes, petrochemical industries, port facility activities and transportation and related industries. With assets of $2.4 billion at December 31, 2006, Hancock Bank LA was ranked the fourth largest bank in Louisiana.
CURRENT OPERATIONSLoan Production and Credit ReviewThe Banks’ primary lending focus is to provide commercial, consumer, leasing and real estate loans to consumers and to small and middle market businesses in their respective market areas. The Banks have no significant concentrations of loans to particular borrowers or industries or loans to any foreign entities. Each loan officer has Board approved loan limits on the principal amount of secured and unsecured loans that can be approved for a single borrower without prior approval of a loan committee. All loans, however, must meet the credit underwriting standards and loan policies of the Banks.
All loans over an individual loan officer’s Board approved lending authority must be approved by the Bank’s loan committee, the region’s loan committee or by another loan officer with greater lending authority. Both the regional loan committee and the Bank’s senior loan committee must review and approve any loan for a borrower whose total indebtedness exceeds the region’s approved limit. Each loan file is reviewed by the Bank’s loan operations quality assurance function, a component of its loan review system, to ensure proper documentation and asset quality.
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Loan Review and Asset QualityEach Bank’s portfolio of loan relationships aggregating $500,000 or more is reviewed every 12 to 18 months by the Bank’s Loan Review staff to identify any deficiencies and report them to management to take corrective actions as necessary. Periodically, selected loan relationships aggregating less than $500,000 are also reviewed. As a result of such reviews, each Bank places on its Watch list, loans requiring close or frequent review. All loans over $100,000 classified by a regulatory auditor are also placed on the Watch list. All Watch list and past due loans are reviewed monthly by the Banks’ senior lending officers. All Watch list loans are reviewed monthly by the Bank’s Asset Quality Committee and quarterly by the Banks’ Board of Directors’ Loan Oversight Committee.
In addition, in the approval process, all loans to a particular borrower are considered, regardless of classification, each time such borrower requests a renewal or extension of any loan or requests a new loan. All lines of credit are reviewed before renewal. The Banks currently have mechanisms in place that require borrowers to submit annual financial statements, except borrowers with secured installment and residential mortgage loans.
Consumer loans, which become 30 days delinquent, are reviewed regularly by management. As a matter of policy, loans are placed on a nonaccrual status when the loan is (1) payment in full, of principal or interest is not expected or (2) the principal or interest has been in default for a period of 90 days, unless the loan is well secured and in the process of collection.
The Banks follow the standard FDIC loan classification system. This system provides management with (1) a general view of the quality of the overall loan portfolio (each Bank’s loan portfolio and each commercial loan officer’s loan portfolio) and (2) information on specific loans that may need individual attention.
The Bank’s nonperforming assets, consisting of real property, vehicles and other items held for resale, were acquired generally through the process of foreclosure. At December 31, 2006, the book value of those assets held for resale was approximately $568 thousand.
Securities PortfolioThe Banks maintain portfolios of securities consisting primarily of U.S. Treasury securities, U.S. government agency issues, mortgage-backed securities, CMOs and tax-exempt obligations of states and political subdivisions. The portfolios are designed to enhance liquidity while providing acceptable rates of return. Therefore, the Banks invest only in high quality securities of investment grade quality and with a target duration, for the overall portfolio, generally between two to five years.
The Banks’ policies limit investments to securities having a rating of no less than “Baa”, or its equivalent by a Nationally Recognized Statistical Rating Agency, except for certain obligations of Mississippi, Louisiana or Florida counties, parishes and municipalities.
DepositsThe Banks have several programs designed to attract depository accounts offered to consumers and to small and middle market businesses at interest rates generally consistent with market conditions. Additionally, the Banks operate more than 130 ATMs at the Company’s banking offices as well as free-standing ATMs at other locations. As members of regional and international ATM networks such as “STAR”, “PLUS” and “CIRRUS”, the Banks offer customers access to their depository accounts from regional, national and international ATM facilities. Deposit flows are controlled by the Banks primarily through pricing, and to a certain extent, through promotional activities. Management believes that the rates it offers, which are posted weekly on deposit accounts, are generally competitive with other financial institutions in the Banks’ respective market areas.
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Trust ServicesThe Banks, through their respective Trust Departments, offer a full range of trust services on a fee basis. The Banks act as executor, administrator or guardian in administering estates. Also provided are investment custodial services for individuals, businesses and charitable and religious organizations. In their trust capacities, the Banks provide investment management services on an agency basis and act as trustee for pension plans, profit sharing plans, corporate and municipal bond issues, living trusts, life insurance trusts and various other types of trusts created by or for individuals, businesses and charitable and religious organizations. As of December 31, 2006, the Trust Departments of the Banks had approximately $7.1 billion of assets under administration compared to $5.5 billion as of December 31, 2005. As of December 31, 2006, $3.8 billion of administered assets were corporate accounts and the remaining balances were personal, employee benefit, estate and other trust accounts.
Operating Efficiency StrategyThe primary focus of the Company’s operating strategy is to increase operating income and to reduce operating expense. A Company’s operating efficiency ratio indicates the percentage of each dollar of net revenue that is used to fund operating expenses. Net revenue for a financial institution is the total of net interest income plus non-interest income, excluding securities transactions gains or losses. Operating expenses exclude the amortization of intangibles.
Other ActivitiesHancock Bank MS has 6 subsidiaries through which it engages in the following activities: providing consumer financing services; owning, managing and maintaining certain real property; providing general insurance agency services; holding investment securities; marketing credit life insurance; and providing discount investment brokerage services. The income of these subsidiaries generally accounts for less than 10% of the Company’s total net earnings.
During 2001, the Company began servicing mortgage loans for the Federal National Mortgage Association. At that time the loans serviced were originated and closed by the Company’s mortgage subsidiary. The servicing activity was also performed by this same subsidiary. In the middle of 2003, however, the Company modified its strategy and reverted to selling the majority of its conforming loans with servicing released. In December 2004, the Company’s mortgage subsidiary merged with Hancock Bank MS, its parent. Currently all mortgage activity is being reported by Hancock Bank, Hancock Bank of Louisiana, and Hancock Bank of Florida.
In July 2003, Hancock Bank MS opened a loan production office in Mobile, Alabama. Until September 2005, no deposits were accepted at this location. Subsequent to Hurricane Katrina the State of Alabama allowed Hancock Bank MS to open a temporary branch in Alabama. In January 2007, Hancock Bank of Alabama was granted a charter by the State of Alabama.
Hancock Bank MS also owns approximately 3,700 acres of timberland in Hancock County, Mississippi, most of which was acquired through foreclosure in the 1930's. Timber sales and oil and gas leases on this acreage generate less than 1% of the Company’s annual net income.
CompetitionThe deregulation of the financial services industry, the elimination of many previous distinctions between commercial banks and other financial institutions as well as legislation enacted in Mississippi, Louisiana and other states allowing state-wide branching, multi-bank holding companies and regional interstate banking have all served to foster a highly competitive environment for commercial banking in our market area. The principal competitive factors in the markets for deposits and loans are interest rates and fee structures associated with the various products offered. We also compete through the efficiency, quality, range of services and products it provides, as well as the convenience provided by an extensive network of customer access channels including local branch offices, ATM’s, online banking, and telebanking centers. Access to the bank’s extensive network of customer access points is further enhanced by convenient hours including Saturday banking at selected branch locations and through the bank’s telebanking service center.
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In attracting deposits and in our lending activities, we generally compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, mutual funds and insurance companies and other financial institutions. Many of these institutions have greater available resources than us.
Available InformationWe maintain an internet website at www.hancockbank.com. We make available free of charge on the website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission. Our Annual Report to Stockholders is also available on our website. These reports are made available on our website as soon as reasonably practical after the reports are filed with the Commission. Information on our website is not incorporated into this Form 10-K or our other securities filings and is not part of them.
SUPERVISION AND REGULATIONBank Holding Company RegulationGeneralThe Company is subject to extensive regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act). On January 26, 2002 the Company qualified as a financial holding company, giving it broader powers as discussed below. To date, the Company has exercised its powers as a financial holding company to acquire a non-controlling interest in a third party service provider for insurance companies and, in December 2003, acquired Magna Insurance Company. The Company also is required to file certain reports with, and otherwise complies with the rules and regulations of, the Securities and Exchange Commission (the Commission) under federal securities laws.
Federal RegulationThe Bank Holding Company Act generally prohibits a corporation owning a bank from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries. Acquiring or obtaining control of more than 5% of the voting shares of any company engaged in activities other than those activities determined by the Federal Reserve to be so closely related to banking, managing or controlling banks as to be proper incident thereto is also prohibited. In determining whether a particular activity is permissible, the Federal Reserve considers whether the performance of the activity can reasonably be expected to produce benefits to the public that outweigh possible adverse effects. For example: making, acquiring or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance, and performing certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities. The Bank Holding Company Act does not place territorial limitations on permissible bank-related activities of bank holding companies. Despite prior approval, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when it has reasonable cause to believe that continuation of such activity or control of such subsidiary constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve: (1) before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, such bank holding company will own or control more than 5% of the voting shares of such bank, (2) before it or any of its subsidiaries other than a bank may acquire all of the assets of a bank, (3) before it may merge with any other bank holding company, or (4) before it may engage in permissible non-banking activities. In reviewing a proposed acquisition, the Federal Reserve considers financial, managerial and competitive aspects. The future prospects of the companies and banks concerned and the convenience and needs of the community to be served must also be considered. The Federal Reserve also reviews the indebtedness to be incurred by a bank holding company in connection with the proposed acquisition to ensure that the holding company can service such indebtedness without adversely affecting the capital requirements of the holding company or its subsidiaries. The Bank Holding Company Act further requires that consummation of approved bank holding company or bank acquisitions or mergers must be delayed for a period of not less than 15 or more than 30 days following the date of approval. During such 15 to 30-day period, complaining parties may obtain a review of the Federal Reserve’s order granting its approval by filing a petition in the appropriate United States Court of Appeals petitioning that the order be set aside.
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On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among qualified bank holding companies, commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers;
o Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies;
o Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer information;
o Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and
o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
The Financial Services Modernization Act requires that each bank subsidiary of a financial holding company be well capitalized and well managed as determined by the subsidiary bank’s principal regulator. To be considered well managed, the bank must have received at least a satisfactory composite rating and a satisfactory management rating at its last examination. To be well capitalized, the bank must have a leverage capital ratio of 5%, a Tier 1 Risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. These ratios are discussed further below. In the event a financial holding company becomes aware that a subsidiary bank ceases to be well capitalized or well managed, it must notify the Federal Reserve and enter into an agreement to cure such condition. The consequences of a failure to cure such condition are that the Federal Reserve Board may order divestiture of the bank. Alternatively, a financial holding company may comply with such order by ceasing to engage in the financial holding company activities that are unrelated to banking or otherwise impermissible for a bank holding company.
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The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies and financial holding companies. The regulatory capital of a bank holding company or financial holding company under applicable federal capital adequacy guidelines is particularly important in the Federal Reserve’s evaluation of a holding company and any applications by the bank holding company to the Federal Reserve. If regulatory capital falls below minimum guideline levels, a financial holding company may lose its status as a financial holding company and a bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open additional facilities. In addition, a financial institution’s failure to meet minimum regulatory capital standards can lead to other penalties, including termination of deposit insurance or appointment of a conservator or receiver for the financial institution. There are two measures of regulatory capital presently applicable to bank holding companies, (1) risk-based capital and (2) leverage capital ratios.
The Federal Reserve rates bank holding companies by a component and composite 1-5 rating system. This system is designed to help identify institutions, which require special attention. Financial institutions are assigned ratings based on evaluation and rating of their financial condition and operations. Components reviewed include capital adequacy, asset quality, management capability, the quality and level of earnings, the adequacy of liquidity and sensitivity to interest rate fluctuations.
The leverage ratios adopted by the Federal Reserve require all but the most highly rated bank holding companies to maintain Tier 1 Capital at 4% of total assets. Certain bank holding companies having a composite 1 rating and not experiencing or anticipating significant growth may satisfy the Federal Reserve guidelines by maintaining Tier 1 Capital of at least 3% of total assets. Tier 1 Capital for bank holding companies includes: stockholders’ equity, minority interest in equity accounts of consolidated subsidiaries and qualifying perpetual preferred stock. In addition, Tier 1 Capital excludes goodwill and other disallowed intangibles. The Company’s leverage capital ratio at December 31, 2006 was 8.63% and 7.85% at December 31, 2005.
The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the risk-based capital guidelines, assets are assigned to one of four risk categories: 0%, 20%, 50% and 100%. As an example, U.S. Treasury securities are assigned to the 0% risk category while most categories of loans are assigned to the 100% risk category. A two-step process determines the risk weight of off-balance sheet items such as standby letters of credit. First, the amount of the off-balance sheet item is multiplied by a credit conversion factor of either 0%, 20%, 50% or 100%. The result is then assigned to one of the four risk categories. At December 31, 2006, the Company’s off-balance sheet items aggregated $1.0 billion; however, after the credit conversion these items represented $226.8 million of balance sheet equivalents.
The primary component of risk-based capital is Tier 1 Capital, which for the Company is essentially equal to common stockholders’ equity, less goodwill and other intangibles. Tier 2 Capital, which consists primarily of the excess of any perpetual preferred stock, mandatory convertible securities, subordinated debt and general allowances for loan losses, is a secondary component of risk-based capital. The risk-weighted asset base is equal to the sum of the aggregate dollar values of assets and off-balance sheet items in each risk category, multiplied by the weight assigned to that category. A ratio of Tier 1 Capital to risk-weighted assets of at least 4% and a ratio of Total Capital (Tier 1 and Tier 2) to risk-weighted assets of at least 8% must be maintained by bank holding companies. At December 31, 2006, the Company’s Tier 1 and Total Capital ratios were 12.46% and 13.60%, respectively. At December 31, 2005, the Company’s Tier 1 and Total Capital ratios were 11.47% and 12.73%, respectively.
The prior approval of the Federal Reserve must be obtained before the Company may acquire substantially all the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In no case, however, may the Federal Reserve approve an acquisition of any bank located outside Mississippi unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. The banking laws of Mississippi presently permit out-of-state banking organizations to acquire Mississippi banking organizations, provided the out-of-state banking organization’s home state grants similar privileges to banking organizations in Mississippi. In addition, Mississippi banking organizations were granted similar powers to acquire certain out-of-state financial institutions pursuant to the Interstate Bank Branching Act, which was adopted in 1996.
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With the passage of The Interstate Banking and Branching Efficiency Act of 1994, adequately capitalized and managed bank holding companies are permitted to acquire control of banks in any state, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. Beginning June 1, 1997, federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; except that, mergers may not be approved with respect to banks located in states that, before June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. The legislation further provides that a bank holding company may not, following an interstate acquisition, control more than 10% of nationwide insured deposits or 30% of deposits in the relevant state. States have the right to adopt legislation to lower the 30% limit. Additional provisions require that interstate activities conform to the Community Reinvestment Act.
The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve may disapprove such a transaction if it determines that the proposal constitutes an unsafe or unsound practice, would violate any law, regulation, Federal Reserve order or directive or any condition imposed by, or written agreement with, the Federal Reserve.
In November 1985, the Federal Reserve adopted its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the Policy Statement). The Policy Statement sets forth various guidelines that the Federal Reserve believes that a bank holding company should follow in establishing its dividend policy. In general, the Federal Reserve stated that bank holding companies should pay dividends only out of current earnings. It also stated that dividends should not be paid unless the prospective rate of earnings retention by the holding company appears consistent with its capital needs, asset quality and overall financial condition.
The Company is a legal entity separate and distinct from the Banks. There are various restrictions that limit the ability of the Banks to finance, pay dividends or otherwise supply funds to the Company or other affiliates. In addition, subsidiary banks of holding companies are subject to certain restrictions on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, or leases or sales of property or furnishing of services.
Bank RegulationThe operations of the Banks are subject to state and federal statutes applicable to state banks and the regulations of the Federal Reserve and the FDIC, to the extent states banks are granted parity with national banks. Such statutes and regulations relate to, among other things, required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the Banks’ operations.
Hancock Bank MS is subject to regulation and periodic examinations by the FDIC and the State of Mississippi Department of Banking and Consumer Finance. Hancock Bank LA is subject to regulation and periodic examinations by the FDIC and the Office of Financial Institutions, State of Louisiana. Hancock Bank FL is subject to regulation and periodic examinations by the FDIC and the Florida Department of Financial Services. These regulatory authorities examine such areas as reserves, loan and investment quality, management policies, procedures and practices and other aspects of operations. These examinations are designed for the protection of the Banks’ depositors, rather than their stockholders. In addition to these regular examinations, the Company and the Banks must furnish periodic reports to their respective regulatory authorities containing a full and accurate statement of their affairs.
As a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a financial institution insured by the FDIC can be held liable for any losses incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured financial institution or (2) any assistance provided by the FDIC to a commonly controlled financial institution in danger of default.
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The Banks are members of the FDIC, and their deposits are insured as provided by law by the Bank Insurance Fund (BIF). On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted. The Federal Deposit Insurance Act, as amended by Section 302 of FDICIA, calls for risk-related deposit insurance assessment rates. The risk classification of an institution will determine its deposit insurance premium. Assignment to one of three capital groups, coupled with assignment to one of three supervisory sub-groups, determines which of the nine risk classifications is appropriate for an institution.
Effective in the first quarter of 1996, the FDIC lowered banks’ deposit insurance premiums from 4 to 31 cents per hundred dollars in insured deposits to a rate of 0 to 27 cents. The Banks have received a risk classification of 1A for assessment purposes. In 1997 an assessment for the Financing Corporation’s debt service was added to the FDIC quarterly premium payment. That assessment averaged 1.3 cents per hundred dollars of insured deposits during 2006 and 1.2 (annualized) for the first quarter of 2007. Total assessments paid to the FDIC amounted to $614.6 thousand in 2006.
Under the provisions of the Federal Deposit Insurance Reform Act of 2005, we received a one-time FDIC assessment credit of $3.2 million to be used against future deposit insurance assessments. This credit is not reflected in the accompanying consolidated financial statements. It will be recognized as an offset in future years against the FDIC assessments.
In general, FDICIA subjects banks and bank holding companies to significantly increased regulation and supervision. FDICIA increased the borrowing authority of the FDIC in order to recapitalize the BIF, and the future borrowings are to be repaid by increased assessments on FDIC member banks. Other significant provisions of FDICIA require a new regulatory emphasis linking supervision to bank capital levels. Also, federal banking regulators are required to take prompt regulatory action with respect to depository institutions that fall below specified capital levels and to draft non-capital regulatory measures to assure bank safety.
FDICIA contains a “prompt corrective action” section intended to resolve problem institutions at the least possible long-term cost to the deposit insurance funds. Pursuant to this section, the federal banking agencies are required to prescribe a leverage limit and a risk-based capital requirement indicating levels at which institutions will be deemed to be “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” In the case of a depository institution that is “critically undercapitalized” (a term defined to include institutions which still have positive net worth); the federal banking regulators are generally required to appoint a conservator or receiver.
FDICIA further requires regulators to perform annual on-site bank examinations, places limits on real estate lending and tightens audit requirements. The new legislation eliminated the “too big to fail” doctrine, which protects uninsured deposits of large banks, and restricts the ability of undercapitalized banks to obtain extended loans from the Federal Reserve Board discount window. FDICIA also imposes new disclosure requirements relating to fees charged and interest paid on checking and deposit accounts. Most of the significant changes brought about by FDICIA required new regulations.
In addition to regulating capital, the FDIC has broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC has adopted regulations that restrict preferential loans and loan amounts to “affiliates” and “insiders” of banks, require banks to keep information on loans to major stockholders and executive officers and bar certain director and officer interlocks between financial institutions. The FDIC is also authorized to approve mergers, consolidations and assumption of deposit liability transactions between insured banks and between insured banks and uninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continuing or assumed bank is an insured nonmember state bank, like Hancock Bank MS and Hancock Bank LA.
Although Hancock Bank MS, Hancock Bank LA and Hancock Bank FL are not members of the Federal Reserve System, they are subject to Federal Reserve regulations that require the Banks to maintain reserves against transaction accounts (primarily checking accounts). Because reserves generally must be maintained in cash or in noninterest-bearing accounts, the effect of the reserve requirements is to increase the cost of funds for the Banks. The Federal Reserve regulations currently require that reserves be maintained against net transaction accounts in the amount of 3% of the aggregate of such accounts up to $40.5 million, or, if the aggregate of such accounts exceeds $40.5 million, $1.215 million plus 10% of the total in excess of $40.5 million. This regulation is subject to an exemption from reserve requirements on a limited amount of an institution’s transaction accounts.
8
The Financial Services Modernization Act also permits national banks, and through state parity statutes, state banks, to engage in expanded activities through the formation of financial subsidiaries. A state bank may have a subsidiary engaged in any activity authorized for state banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.
A state bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be “well-capitalized” and “well-managed.” The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank’s total assets, or $50 billion. A state bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank’s assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in “activities as principal that would only be permissible” for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Mississippi permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. Government to detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. The Bank has adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations.
In July 2002, Congress enacted the Sarbanes-Oxley Act of 2002, which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Section 404 of the Sarbanes-Oxley Act requires the Company to include in its Annual Report, a report stating management’s responsibility to establish and maintain adequate internal control over financial reporting and management’s conclusion on the effectiveness of the internal controls at year end. Additionally, the Company’s independent registered public accounting firm is required to attest to and report on management’s evaluation of internal control over financial reporting.
9
SummaryThe foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Banks. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of such entities.
We do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits holding companies, banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Banks face from larger institutions and other types of companies offering financial products, some of which may have substantially more financial resources than us.
Finally, additional bills may be introduced in the future in the United States Congress and state legislatures to alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and what form any of these proposals will be adopted or the extent to which the business of the Company and the Banks may be affected thereby.
Effect of Governmental PoliciesThe difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities comprise most of a bank’s earnings. In order to mitigate the interest rate risk inherent in the industry, the banking business is becoming increasingly dependent on the generation of fee and service charge revenue.
The earnings and growth of a bank will be affected by both general economic conditions and the monetary and fiscal policy of the United States Government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb inflation and combat recession. This is accomplished by its open-market operations in United States government securities, adjustments in the amount of reserves that financial institutions are required to maintain and adjustments to the discount rates on borrowings and target rates for federal funds transactions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits. The nature and timing of any future changes in monetary policies and their potential impact on the Company cannot be predicted.
Impact of InflationOur non-interest income and expenses can be affected by increasing rates of inflation; however, unlike most industrial companies, the assets and liabilities of financial institutions such as the Banks are primarily monetary in nature. Interest rates, therefore, have a more significant impact on the Banks’ performance than the effect of general levels of inflation on the price of goods and services.
ITEM 1A. RISK FACTORSMaking or continuing an investment in securities issued by us, including our common stock, involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on us. Additional risks and uncertainties also could adversely affect our business and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
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We may be vulnerable to certain sectors of the economy.A portion of our loan portfolio is secured by real estate. If the economy deteriorated and depressed real estate values beyond a certain point, that collateral value of the portfolio and the revenue stream from those loans could come under stress and possibly require additional provision to the allowance for loan losses. Our ability to dispose of foreclosed real estate at prices above the respective carrying values could also be impinged, causing additional losses.
General economic conditions in the areas where our operations or loans are concentrated may adversely affect our customers' ability to meet their obligations.
A sudden or severe downturn in the economy in the geographic markets served by us in the states of Mississippi, Louisiana, Alabama, and Florida may affect the ability of our customers to meet loan payment obligations on a timely basis. The local economic conditions in these areas have a significant impact on our commercial, real estate, and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing such loans. Changes resulting in adverse economic conditions of our market areas could negatively impact the financial results of our banking operations and our profitability. Additionally, adverse economic changes may cause customers to withdraw deposit balances, thereby causing a strain on our liquidity.
We are subject to a risk of rapid and significant changes in market interest rates.Our assets and liabilities are primarily monetary in nature, and as a result we are subject to significant risks tied to changes in interest rates. Our ability to operate profitably is largely dependent upon net interest income. Unexpected movement in interest rates markedly changing the slope of the current yield curve could cause our net interest margins to decrease, subsequently decreasing net interest income. In addition, such changes could adversely affect the valuation of our assets and liabilities.
At present our one-year interest rate sensitivity position is moderately asset sensitive, such that a gradual increase in interest rates during the next twelve months should not have a significant impact on net interest income during that period. However, as with most financial institutions, our results of operations are affected by changes in interest rates and our ability to manage this risk. The difference between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market interest rates, changes in relationships between interest rate indices, and/or changes in the relationships between long-term and short-term market interest rates. A change in this difference might result in an increase in interest expense relative to interest income, or a decrease in our interest rate spread.
Certain changes in interest rates, inflation, or the financial markets could affect demand for our products and our ability to deliver products efficiently.
Loan originations, and potentially loan revenues, could be adversely impacted by sharply rising interest rates. Conversely, sharply falling rates could increase prepayments within our securities portfolio lowering interest earnings from those investments. An underperforming stock market could reduce brokerage transactions, therefore reducing investment brokerage revenues; in addition, wealth management fees associated with managed securities portfolios could also be adversely affected. An unanticipated increase in inflation could cause our operating costs related to salaries & benefits, technology, and supplies to increase at a faster pace than revenues.
The fair market value of our securities portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
The results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist attacks and the current military operations in the Middle East, we cannot predict possible future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks or the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
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Natural disasters could affect our ability to operate.Our market areas are susceptible to hurricanes. Natural disasters, such as hurricanes, can disrupt our operations, result in damage to properties and negatively affect the local economies in which we operate.
We cannot predict whether or to what extent damage caused by future hurricanes will affect our operations or the economies in our market areas, but such weather events could cause a decline in loan originations, a decline in the value or destruction of properties securing the loans and an increase in the risk of delinquencies, foreclosures or loan losses.
InsuranceAs a result of Hurricane Katrina and other storms, windstorm insurance costs have increased during the past year regionally, and have also increased for all of our properties. Currently, we have total windstorm coverage on our Mississippi branches with property values of $30.4 million subject to a 2% deductible per location. We also have separate flood coverage on the branches that flooded during Hurricane Katrina. Our corporate headquarters located in downtown Gulfport, MS has a $15 million deductible and the branches have a $100,000 deductible per occurrence for fire and lightning losses. We also maintain business interruption insurance. We rely on our own liquidity during the hurricane season to cover two to three months of overhead costs, and we maintain additional capital to satisfy any emergency repairs before insurance recoveries are received. The future availability and costs of windstorm and flood insurance are unknown, but this factor may result in additional insurance costs to us.
Greater loan losses than expected may adversely affect our earnings.We as lender are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio will relate principally to the creditworthiness of corporations and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.
We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for estimated loan losses based on a number of factors. We believe that our current allowance for loan losses is adequate. However, if our assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. We may have to increase our allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.
The projected benefit obligations of our pension plan exceed the fair market value of the Plan's assets.Investments in the portfolio of our pension plan may not provide adequate returns to fully fund benefits as they come due, thus causing higher annual plan expenses and requiring additional contributions by us.
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We may need to rely on the financial markets to provide needed capital.Our stock is listed and traded on the NASDAQ Global Select. Although we anticipate that our capital resources will be adequate for the foreseeable future to meet our capital requirements, at times we may depend on the liquidity of the NASDAQ market to raise equity capital. If the market should fail to operate, or if conditions in the capital markets are adverse, we may be constrained in raising capital. We maintain a consistent analyst following; therefore, downgrades in our prospects by an analyst(s) may cause our stock price to fall and significantly limit our ability to access the markets for additional capital requirements. Should these risks materialize, our ability to further expand our operations through internal growth may be limited.
We are subject to regulation by various Federal and State entities.We are subject to the regulations of the Securities and Exchange Commission (“SEC”), the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Mississippi Department of Banking and Consumer Finance, the Louisiana Office of Financial Institutions, the Florida Office of Financial Regulation, the Alabama Banking Department and the Mississippi Department of Insurance. New regulations issued by these agencies may adversely affect our ability to carry on our business activities. We are subject to various Federal and State laws and certain changes in these laws and regulations may adversely affect our operations. Non compliance with certain of these regulations may impact our business plans, including ability to branch, offer certain products, or execute existing or planned business strategies.
We are also subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. Changes in accounting rules could adversely affect the reported financial statements or our results of operations and may also require extraordinary efforts or additional costs to implement.
Any of these laws or regulations may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us.
We engage in acquisitions of other businesses from time to time.On occasion, we will engage in acquisitions of other businesses. Inability to successfully integrate acquired businesses can pose varied risks to us, including customer and employee turnover, thus increasing the cost of operating the new businesses. The acquired companies may also have legal contingencies, beyond those that we are aware of, that could result in unexpected costs. Moreover, there can be no assurance that acquired businesses will achieve prior or planned results of operations.
We are subject to industry competition which may have an impact upon our success.Our profitability depends on our ability to compete successfully. We operate in a highly competitive financial services environment. Certain competitors are larger and may have more resources than we do. We face competition in our regional market areas from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of our nonbank competitors are not subject to the same extensive regulations that govern us or the Bank and may have greater flexibility in competing for business.
Another competitive factor is that the financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success may depend, in part, on its ability to use technology competitively to provide products and services that provide convenience to customers and create additional efficiencies in our operations.
Future issuances of additional securities could result in dilution of shareholders' ownership.We may determine from time to time to issue additional securities to raise additional capital, support growth, or to make acquisitions. Further, we may issue stock options or other stock grants to retain and motivate our employees. Such issuances of our securities will dilute the ownership interests of our shareholders.
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Anti-takeover laws and certain agreements and charter provisions may adversely affect share value.Certain provisions of state and federal law and our articles of incorporation may make it more difficult for someone to acquire control of us. Under federal law, subject to certain exemptions, a person, entity, or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including our shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take into account several factors, including the resources of the acquirer and the antitrust effects of the acquisition. There also are Mississippi statutory provisions and provisions in our articles of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer.
Securities issued by us, including our common stock, are not FDIC insured.Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the Bank Insurance Fund, or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.
ITEM 1B. UNRESOLVED STAFF COMMENTSNone
ITEM 2. PROPERTIESOur main office is located at One Hancock Plaza, in Gulfport, Mississippi.
We operate 149 banking and financial services offices and 131 automated teller machines across south Mississippi, Louisiana, south Alabama and the Florida Panhandle. We lease 69 of the 149 locations with the remainder being owned.
In addition to the above, Hancock Bank MS owns land and other properties acquired through foreclosures of loan collateral. The major item is approximately 3,700 acres of timberland in Hancock County, Mississippi, which Hancock Bank MS acquired by foreclosure in the 1930's.
ITEM 3. LEGAL PROCEEDINGSWe are party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on our financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSThere were no matters submitted to a vote of security holders during the quarter ended December 31, 2006.
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PART IIITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationOur common stock trades on the NASDAQ Stock Market under the symbol “HBHC” and is quoted in publications under “HancHd.” The following table sets forth the high and low sale prices of our common stock as reported on the NASDAQ Stock Market. These prices do not reflect retail mark-ups, mark-downs or commissions.
Cash
High Low Dividends
Sale Sale Paid
------------ ------------ --------------
2006
4th quarter $56.00 $50.85 $0.240
3rd quarter 56.79 49.71 0.240
2nd quarter 57.19 44.02 0.220
1st quarter 46.67 37.75 0.195
2005
4th quarter $39.90 $31.08 $0.195
3rd quarter 37.84 29.93 0.195
2nd quarter 34.87 28.25 0.165
1st quarter 34.20 30.25 0.165
There were 5,797 registered holders and approximately 5,500 unregistered holders of common stock of the Company at February 9, 2007 and 32,671,196 shares issued. On February 9, 2007, the high and low sale prices of the Company’s common stock as reported on the NASDAQ Stock Market were $47.25 and $45.94, respectively. The principal source of funds to the Company to pay cash dividends is the dividends received from Hancock Bank, Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana and Hancock Bank of Florida, Tallahassee, Florida. Consequently, dividends are dependent upon earnings, capital needs, regulatory policies and statutory limitations affecting the banks. Federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Dividends paid to the Company by Hancock Bank are subject to approval by the Commissioner of Banking and Consumer Finance of the State of Mississippi and those paid by Hancock Bank of Louisiana are subject to approval by the Commissioner for Financial Institutions of the State of Louisiana. Dividends paid by Hancock Bank of Florida are subject to approval by the Florida Department of Financial Services. The Company’s management does not expect regulatory restrictions to affect its policy of paying cash dividends. Although no assurance can be given that Hancock Holding Company will continue to declare and pay regular quarterly cash dividends on its common stock, the Company has paid regular cash dividends since 1937.
15
Stock Performance Graph
The following is a line graph presentation comparing cumulative, five-year shareholder returns on an indexed basis with a performance indicator of the overall stock market and an index of peer companies selected by us. The broad market index used in the graph is the NASDAQ Market Index. The peer group index is a group of financial institutions in the Southeast with approximate market capitalization ranging from $1.0 billion to $2.0 billion; a list of the Companies included in the index follows the graph.
16
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
----------------- ----------------- -------------------------- -------------------------
Oct. 1, 2006 - Oct. 31, 2006 - $ - - 1,545,378
Nov. 1, 2006 - Nov. 30, 2006 - - - 1,545,378
Dec. 1, 2006 - Dec. 31, 2006 - - - 1,545,378
----------------- ----------------- --------------------------
Total - $ - -
================= ================= ==========================
(1) The Company publicly announced its stock buy-back program on July 18, 2000.
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ITEM 6. SELECTED FINANCIAL DATAThe following table sets forth certain selected historical consolidated financial data and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and results of Operations” and the consolidated Financial Statements and Notes thereto included elsewhere herein. The following information may not be deemed indicative of our future operating results.
At and For the Years Ended December 31,
------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- ------------- ------------- ------------ -------------
(Unaudited, in thousands)
Period-End Balance Sheet Data:
Securities $ 1,903,658 $ 1,959,261 $ 1,302,369 $ 1,278,049 $ 1,486,810
Short-term investments 222,439 410,226 150,261 11,288 47,257
Loans, net of unearned income 3,266,584 2,989,186 2,748,560 2,448,644 2,104,982
Total earning assets 5,392,680 5,358,673 4,201,191 3,737,981 3,639,049
Allowance for loan losses 46,772 74,558 40,682 36,750 34,740
Total assets 5,964,565 5,950,187 4,664,726 4,150,358 3,973,147
Total deposits 5,030,991 4,989,820 3,797,945 3,447,847 3,301,500
Short-term notes - - - 9,400 -
Long-term notes 258 50,266 50,273 50,428 51,020
Total preferred stockholders' equity - - - 37,067 37,069
Total common stockholders' equity 558,410 477,415 464,582 397,814 387,513
Average Balance Sheet Data:
Securities $ 2,228,822 $ 1,434,415 $ 1,345,350 $ 1,466,156 $ 1,493,574
Short-term investments 211,511 137,821 34,911 57,986 83,427
Loans, net of unearned income 3,062,222 2,883,020 2,599,561 2,238,245 1,961,299
Total earning assets 5,502,555 4,455,256 3,979,822 3,762,387 3,538,300
Allowance for loan losses 64,285 50,107 38,117 35,391 33,135
Total assets 6,031,800 4,931,030 4,424,334 4,111,949 3,857,698
Total deposits 5,069,427 4,001,426 3,602,734 3,407,205 3,174,946
Short-term notes 1,068 3,836 2,311 26 -
Long-term notes 13,278 50,275 50,312 50,677 51,299
Total preferred stockholders' equity - - 2,240 37,069 37,069
Total common stockholders' equity 513,656 475,701 447,384 396,034 388,821
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At and For the Years Ended December 31,
---------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- -------------- ------------- ------------ -----------
(Unaudited, in thousands)
Performance Ratios:
Return on average assets 1.69% 1.10% 1.39% 1.34% 1.32%
Return on average common equity 19.82% 11.36% 13.79% 13.88% 13.13%
Net interest margin (te)* 4.23% 4.40% 4.44% 4.45% 4.70%
Average loans to average deposits 60.41% 72.05% 72.16% 65.69% 61.77%
Noninterest income excluding storm-related insurance
gain, gain on sale of branches and credit card
merchant, and securities transactions,
as a percent of total revenue (te) 30.87% 31.86% 33.77% 30.40% 30.11%
Noninterest expense as a percent of total revenue (te)
before amortization of purchased intangibles,
storm-related insurance gain, gains on sale of
branches and credit card merchant, and
securities transactions 58.99% 58.82% 57.33% 57.83% 57.83%
Allowance for loan losses to period-end loans 1.43% 2.49% 1.48% 1.50% 1.65%
Non-performing assets to loans plus other real estate 0.13% 0.42% 0.40% 0.73% 0.84%
Allowance for loan losses to non-performing loans
and accruing loans 90 days past due 694.67% 195.50% 251.85% 169.73% 143.48%
Net charge-offs to average loans 0.23% 0.30% 0.48% 0.59% 0.91%
FTE employees (period-end) 1,848 1,735 1,767 1,734 1,790
Capital Ratios:
Common stockholders' equity to total assets 9.36% 8.02% 9.96% 9.59% 9.75%
Tier 1 leverage 8.63% 7.85% 8.97% 9.29% 9.19%
Tier 1 risk-based 12.46% 11.47% 12.39% 13.65% 14.88%
Total risk-based 13.60% 12.73% 13.58% 14.88% 16.11%
Income Data:
Interest income $ 344,330 $ 263,631 $ 226,774 $ 218,149 $ 230,781
Interest expense 119,863 74,819 57,270 57,961 72,053
Net interest income 224,467 188,812 169,504 160,188 158,728
Net interest income (te) 232,730 196,189 176,777 167,358 166,190
Provision for (reversal of) loan losses (20,762) 42,635 16,537 15,154 18,495
Noninterest income excluding storm-related insurance
gain, gains on sale of branches and credit card
merchant and securities transactions 103,918 91,738 84,860 73,089 71,589
Net storm-related items 5,084 6,584 - - -
Gains/(losses) on sales of securities, net (5,169) (53) 163 1,667 4
Gains on sales of branches - - 2,258 - -
Gain on sale of credit card merchant
services business - - 3,000 - -
Noninterest expense excluding amortization
of intangibles 198,591 169,349 153,006 139,060 137,508
Amortization of intangibles 2,125 2,194 1,945 1,148 750
Net income before income taxes 148,346 72,903 88,297 79,582 73,569
Net income 101,802 54,032 61,704 54,955 51,043
Net income available to common stockholders 101,802 54,032 61,704 52,302 48,390
*Tax Equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.
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At and For the Years Ended December 31,
------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- ----------------- ---------------- --------------- --------------
Per Common Share Data: (Unaudited, in thousands except per share data)
Basic earnings per share $ 3.13 $ 1.67 $ 1.91 $ 1.70 $ 1.54
Diluted earnings per share $ 3.06 $ 1.64 $ 1.87 $ 1.64 $ 1.50
Cash dividends paid $ 0.895 $ 0.72 $ 0.58 $ 0.44 $ 0.40
Book value $ 17.09 $ 14.78 $ 14.32 $ 13.06 $ 12.55
Dividend payout ratio 28.59% 43.11% 30.37% 25.88% 25.97%
Weighted average number of shares outstanding
Basic 32,534 32,365 32,390 30,714 31,486
Diluted 33,304 32,966 33,052 33,410 34,084
Number of shares outstanding (period end) 32,666 32,301 32,440 30,455 30,887
Market data:
High closing price $ 57.19 $ 39.90 $ 34.83 $ 29.25 $ 25.19
Low closing price $ 37.75 $ 28.25 $ 25.00 $ 21.00 $ 13.78
Period-end closing price $ 52.84 $ 37.81 $ 33.46 $ 27.29 $ 22.33
Trading volume 27,275 22,404 11,572 11,410 18,812
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe purpose of this discussion and analysis is to focus on significant changes and events in the financial condition and results of operations of Hancock Holding Company and its subsidiaries (Hancock) during 2006 and selected prior periods. This discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this report, including the preceding consolidated financial statements and related notes. Certain information relating to prior years has been reclassified to conform to the current year’s presentation.
FORWARD-LOOKING STATEMENTSCongress 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 disclosure, which protects us from unwarranted litigation, if actual results are different from management expectations. This discussion and analysis contains forward-looking statements and reflects management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of factors and uncertainties, which could cause our actual results and experience to differ from the anticipated results and expectations, expressed in such forward-looking statements.
EXECUTIVE OVERVIEWDiluted earnings per common share for 2006 were $3.06 on earnings of $101.8 million. Diluted earnings per common share were up 87% and net earnings increased by 88% as compared to 2005. Net income for both 2006 and 2005 was affected by several items related to the impact of Hurricane Katrina, which made landfall in our region on August 29, 2005. In 2005, net income was negatively affected by storm-related items totaling $21.1 million on an after tax basis. The largest of 2005‘s items was the establishment of a $35.2 million (pretax) allowance for loan losses related to the storm. In the third quarter of 2006, we reversed $20.0 million from the storm-related allowance for loan losses due to better than expected loss experience with storm impacted credits. In addition, we negotiated a final settlement with our property and casualty insurance provider and booked a $5.1 million gain in 2006‘s fourth quarter.
Our management team continues to evaluate opportunities for growth and expansion as evidenced by our approval for a charter in the state of Alabama. Strategic management of earning assets and deposit mix, continued focus on efficiency and credit quality, and improved non-interest income drove the increase in operating earnings in 2006.
RESULTS OF OPERATIONSNet Interest IncomeNet interest income (te) is the primary component of Hancock’s earnings and represents the difference, or spread, between revenue generated from interest-earning assets and the interest expense related to funding those assets. For internal analytical purposes, management adjusts net interest income to a “taxable equivalent” basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans). Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income (te).
Another significant statistic in the analysis of net interest income is the effective interest differential (also referred to as the net interest margin), which is the average of net interest earned, net interest income (te) less net interest expense, on Hancock’s average earning assets. The difference between the average yield on earning assets and the effective rate paid for all deposits and borrowed funds, non-interest-bearing as well as interest-bearing is the net interest spread. Since a portion of the Bank’s deposits does not bear interest, such as demand accounts, the rate paid for all funds is lower than the rate on interest-bearing liabilities alone. The net interest margin (te) for the years 2006 and 2005 was 4.23% and 4.40%, respectively.
21
Net interest income (te) of $232.7 million was recorded for the year 2006, an increase of $36.5 million, or 19%, from 2005. We also experienced a significant increase of $19.4 million, or 11%, from 2004 to 2005. The factors contributing to the changes in net interest income (te) for 2006, 2005 and 2004 are presented in Tables 1 and 2. Table 1 is an analysis of the components of Hancock’s average balance sheets, levels of interest income and expense and the resulting earning asset yields and liability rates. Table 2 breaks down the overall changes in the level of net interest income into rate and volume.
When comparing 2006 to 2005, the primary driver of the $36.5 million, or 19% increase, in net interest income (te) was a $1,047.3 million, or 24%, increase in average earning assets mainly from average loan growth of $179.2 million, or 7%. Hancock’s loan growth and overall increase in earning assets was primarily funded by average deposit growth of $1,068.0 million, or 27%. This overall improvement in the earning asset mix enabled us to maintain our average loan-to-deposit ratio at 60% for the year ended December 31, 2006 compared to 72% in 2005. For the years ended December 31, 2006 and 2005, loans comprise 56% of Hancock’s earning asset base. It is not uncommon for loan growth to lag deposit growth in the aftermath of a storm such as Hurricane Katrina in 2005. Loan growth in Hancock’s operating region is expected to continue as inflows of insurance and federal aid funds have begun to subside. The net interest margin (te) narrowed 17 basis points as the overall increase in average earning asset yield (33 basis points) did not offset the increase in total funding costs (50 basis points). Hancock’s ability to effect continuing improvements in the earning asset mix remains a significant positive contributor to future earnings growth.
Average earning assets increased $1,047.3 million, or 24%, during 2006 mainly from average loan growth of $179.2 million, or 6%. Average securities increased $794.4 million, or 55%, over 2005. The increase in average earning assets was funded primarily with total average deposit growth of $1,068.0 million, or 27%. Average interest-bearing deposits increased $761.9 million, or 24%, while average non-interest bearing deposits increased $306.1 million, or 37% resulting primarily from the aforementioned inflows of deposits related to Hurricane Katrina.
Recognizing the importance of interest differential to total earnings, management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional, and area economic differential through appropriate loan and investment policies. These policies are designed to maximize interest differential while maintain sufficient liquidity and availability of funds for purposes of meeting existing commitments and for investment in loans and other investment opportunities that may arise.
22
The following table is a summary of average balance sheets that reflects average interest earned, average
interest paid, average yield and average rate:
TABLE 1. Summary of Average Balance Sheets (w/Net Interest Income (te) & Interest Rates)
- ----------------------------------------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------
(In thousands)
ASSETS
EARNING ASSETS
Loans* (te) $3,062,222 $235,067 7.68% $2,883,020 $201,446 6.99% $2,599,561 $172,868 6.65%
---------------------------------------------------------------------------------
U.S. Treasury securities 63,668 3,018 4.74% 16,838 532 3.16% 11,003 200 1.82%
U.S. agency securities 1,270,128 60,701 4.78% 514,834 21,499 4.18% 424,875 17,755 4.18%
CMOs 154,673 6,142 3.97% 241,473 9,492 3.93% 296,625 11,515 3.88%
Mortgage-backed securities 491,130 23,313 4.75% 437,037 19,407 4.44% 389,871 16,706 4.29%
Obligations of states and political
subdivisions: taxable 20,205 350 1.73% 6,050 428 7.08% 6,777 497 7.33%
nontaxable (te) 151,681 10,416 6.87% 155,414 10,823 6.96% 166,540 11,874 7.13%
FHLB stock and
other corporate securities 77,337 3,826 4.95% 62,769 2,822 4.50% 49,659 2,248 4.53%
---------------------------------------------------------------------------------
Total investment in securities 2,228,822 107,766 4.84% 1,434,415 65,003 4.53% 1,345,350 60,795 4.52%
---------------------------------------------------------------------------------
Federal funds sold and
short-term investments 211,511 9,759 4.61% 137,821 4,559 3.31% 34,911 384 1.10%
---------------------------------------------------------------------------------
Total earning assets (te) 5,502,555 352,592 6.41% 4,455,256 271,008 6.08% 3,979,822 234,047 5.88%
---------------------------------------------------------------------------------
NON-EARNING ASSETS
Other assets 593,530 525,881 482,629
Allowance for loan losses (64,285) (50,107) (38,117)
----------- ----------- -----------
Total assets $6,031,800 $4,931,030 $4,424,334
=========== =========== ===========
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing transaction deposits $1,623,597 14,931 0.92% $1,384,605 9,203 0.66% $1,360,198 8,191 0.60%
Time deposits 1,545,834 62,807 4.06% 1,149,239 40,654 3.54% 1,018,165 35,056 3.44%
Public funds 771,146 32,354 4.20% 644,849 17,724 2.75% 574,266 9,323 1.62%
----------------------------------------------------------------------------------
Total interest-bearing deposits 3,940,577 110,092 2.79% 3,178,693 67,581 2.13% 2,952,629 52,570 1.78%
----------------------------------------------------------------------------------
Customer repurchase agreements 250,603 9,060 3.62% 224,842 4,351 1.94% 195,470 1,909 0.98%
Other interest-bearing liabilities 30,580 711 2.32% 69,057 2,887 4.18% 69,960 2,791 3.99%
----------------------------------------------------------------------------------
Total interest-bearing liabilities 4,221,760 119,863 2.84% 3,472,592 74,819 2.15% 3,218,059 57,270 1.78%
----------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Demand deposits 1,128,850 822,733 650,106
Other liabilities 167,534 160,004 106,545
Preferred stockholders' equity - - 2,240
Common stockholders' equity 513,656 475,701 447,384
----------------------------------------------------------------------------------
Total liabilities, preferred stock &
common stockholders' equity $6,031,800 2.18% $4,931,030 1.68% $4,424,334 1.44%
=========== =================== ================== =======
Net interest income and margin (te) $232,729 4.23% $196,189 4.40% $176,777 4.44%
Net earning assets and spread $1,280,795 3.57% $982,664 3.93% $761,763 4.10%
=========== =================== ================== =======
*Loan interest income includes loan fees of $8.6 million, $9.2 million and $11.1 million for each of the three years ended
December 31, 2006. Non-accrual loans in average balances and income on such loans, if recognized, is recorded on a cash basis.
Tax equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.
23
The following table presents the change in interest income and the change in interest expense:
TABLE 2. Summary of Changes in Net Interest Income (te)
- --------------------------------------------------------------------------------------------------------------------------
2006 Compared to 2005 2005 Compared to 2004
-----------------------------------------------------------------------------------
Due to Due to
Change in Total Change in Total
-------------------------- Increase ------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-----------------------------------------------------------------------------------
(In thousands)
INTEREST INCOME (te)
Loans* $14,008 $19,612 $33,620 $16,913 $11,665 $28,578
-----------------------------------------------------------------------------------
U.S. Treasury securities 2,107 379 2,486 139 193 332
U.S. agency securities 35,684 3,517 39,201 3,735 9 3,744
CMOs (3,273) (76) (3,349) (1,918) (105) (2,023)
Mortgage-backed securities 2,504 1,402 3,906 2,072 629 2,701
Obligations of states and
political subdivisions:
taxable 271 (349) (78) (29) (40) (69)
nontaxable (te) (252) (155) (407) (143) (908) (1,051)
FHLB stock and
other corporate securities 701 304 1,005 589 (15) 574
-----------------------------------------------------------------------------------
Total investment in securities 37,742 5,022 42,764 4,445 (237) 4,208
-----------------------------------------------------------------------------------
Federal funds and short-term investments 2,991 2,209 5,200 2,483 1,692 4,175
-----------------------------------------------------------------------------------
Total interest income (te) $54,741 $26,843 $81,584 $23,841 $13,120 $36,961
-----------------------------------------------------------------------------------
Interest-bearing transaction deposits $1,777 $3,951 $5,728 $149 $863 $1,012
Time deposits 15,486 6,668 22,154 4,615 983 5,598
Public funds 3,967 10,663 14,630 1,266 7,135 8,401
-----------------------------------------------------------------------------------
Total interest-bearing deposits 21,230 21,282 42,512 6,030 8,981 15,011
-----------------------------------------------------------------------------------
Customer repurchase agreements 550 4,159 4,709 324 2,118 2,442
Other interest-bearing liabilities (2,175) (2) (2,177) 65 31 96
-----------------------------------------------------------------------------------
Total interest expense $19,605 $25,439 $45,044 6,419 $11,130 $17,549
-----------------------------------------------------------------------------------
Change in net interest income (te) $35,136 $1,404 $36,540 $17,422 $1,990 $19,412
===================================================================================
Provision for Loan LossesIn 2005 Hancock established a $35.2 million allowance for loan losses related to Hurricane Katrina. In 2006, Hancock reversed $20.0 million of this related allowance for loan losses due to better than expected loss experience with storm impacted credits. Net charge-offs decreased $1.7 million, or 20%, from 2005 to 2006 and were $7.0 million for 2006. The provision for loan losses reflects management’s assessment of the adequacy of the allowance for loan losses to absorb probable losses in the loan portfolio. The amount of provision for each period is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, identified loan impairment, management’s assessment of the loan portfolio quality, the value of collateral, as well as, overall economic factors. Hancock’s allowance for loan losses as a percent of period-end loans was 1.43% at December 31, 2006, a decrease of 106 basis points from the 2.49% at December 31, 2005.
24
Noninterest IncomeTable 3 presents a three-year analysis of the components of noninterest income. Overall, noninterest income of $103.8 million was reported in 2006, as compared to $98.3 million for 2005 and $90.3 million for 2004. This represents an increase of $5.5 million, or 6%, from 2005 to 2006 and an increase of $8.0 million, or 9%, from 2004 to 2005. Included in noninterest income in 2006 and 2005 are net storm-related gains of $5.1 and $6.6 million, respectively. These represent gains on involuntary conversions of assets lost in Hurricane Katrina for which insurance proceeds had been received net of certain direct costs. Excluding the impact of net storm-related gains and securities transactions, noninterest income for 2006 was $103.9 million compared to noninterest income in 2005 of $91.7 million. This represents an increase of $12.2 million, or 13% as compared to 2005. During 2004, Hancock sold four Louisiana branches at a $2.3 million pre-tax gain and also sold its credit card merchant services business at a pre-tax gain of $3.0 million.
TABLE 3. Noninterest Income
- ---------------------------------------------------------------------------------------------------------------------------
2006 % Change 2005 % Change 2004
------------------------------------------------------------------------
(In thousands)
Service charges on deposit accounts $36,228 4% $34,773 -20% $43,631
Trust fees 13,286 20% 11,107 23% 9,030
Investment and annuity fees 5,970 18% 5,076 121% 2,295
Insurance commissions and fees 19,246 13% 17,099 86% 9,193
Debit card and merchant fees 7,298 50% 4,878 14% 4,271
ATM fees 5,005 19% 4,202 -7% 4,512
Secondary mortgage market operations 3,528 59% 2,221 -24% 2,934
Other fees and income 13,357 8% 12,382 38% 8,994
------------------------------------------------------------------------
Total recurring non-interest income 103,918 13% 91,738 8% 84,860
Net storm-related gains 5,084 -23% 6,584 N/M* -
Gains on sales of branches and credit
card merchant service business - - - - 5,258
Securities gains/(losses) (5,169) N/M* (53) -133% 163
------------------------------------------------------------------------
Total noninterest income $103,833 6% $98,269 9% $90,281
========================================================================
*Not meaningful
Increases in noninterest income, when comparing 2006 to 2005, were experienced in trust fees, debit card and merchant fees, insurance commission fees, and service charges on deposit accounts. Trust fee income increased $2.2 million, or 20%, when compared to the previous year as a result of increases in the value of assets under care (either managed or in custody). Debit card and merchant fees increased $2.4 million, or 50%, from 2005 to 2006 and there were higher levels of insurance commissions and fees (up $2.1 million or 13%). Securities losses increased $5.1 million from losses of $53,000 in 2005 to losses of $5.2 million in 2006.
Considerable increases in noninterest income, when comparing 2005 to 2004, were experienced in trust fees, investment and annuity fees, insurance commission fees, and other fees and income. Smaller increases were also experienced in debit card and merchant fees. Significantly offsetting the increased noninterest income when compared to 2004 were decreases in service charges on deposit accounts principally due to waived return item fees and other service charges as a result of accommodations to customers impacted by Hurricane Katrina along with changes in customer behavior since many had significant cash available from insurance proceeds.
Trust fee income for 2005 increased $2.1 million, or 23%, when compared to 2004 as a result of increases in the value of asset under care (either managed or in custody). Investment and annuity fees increased $2.8 million, or 121%, from 2004 to 2005. Higher levels of insurance commissions and fees (up $7.9 million or 86%) were mostly related to higher revenues associated with Magna Insurance Company, our wholly owned insurance company. In addition, on July 1, 2005 the Company acquired J. Everett Eaves, Inc. a property and casualty insurance agency, as a division of Hancock Insurance Agency. Other fees and income increased $3.4 million, or 38%, from 2004 to 2005, primarily due to $1.1 million of non refundable purchase option income on real estate.
25
Service charges on deposit accounts decreased $8.9 million, or 20%, when comparing 2005 to 2004, primarily due to aforementioned waived return items and other service charges resulting from the impact of Hurricane Katrina. The level of ATM fees decreased from 2004 to 2005 by $310,000, or 7%, due to decreased volume. Secondary mortgage market operations income decreased $713,000, or 24%, compared to 2004 primarily due to the reversal during 2004 of an $850,000 mortgage servicing rights valuation allowance that had been previously established. Securities transactions gains/losses declined by $216,000, or 133%, from gains of $163,000 in 2004 to losses of $53,000 in 2005.
Noninterest ExpenseTable 4 presents an analysis of the components of noninterest expense for the years 2006, 2005 and 2004. Hancock’s level of operating expenses increased $29.2 million, or 17%, from 2005 to 2006 and $16.6 million, or 11%, from 2004 to 2005.
TABLE 4. Noninterest Expense
- ----------------------------------------------------------------------------------------------------------------------------
2006 % Change 2005 % Change 2004
------------------------------------------------------------------------------
(In thousands)
Employee compensation $84,569 10% $76,602 11% $68,910
Employee benefits 19,184 9% 17,556 0% 17,494
------------------------------------------------------------------------------
Total personnel expense 103,753 10% 94,158 9% 86,404
Equipment and data processing expense 21,301 23% 17,358 0% 17,287
Net occupancy expense 13,350 22% 10,926 10% 9,915
Postage and communications 9,649 23% 7,820 -4% 8,152
Ad valorem and franchise taxes 3,346 -7% 3,607 112% 1,699
Legal and professional services 14,994 44% 10,429 25% 8,322
Printing and supplies 1,997 12% 1,787 5% 1,702
Amortization of intangible assets 2,125 -3% 2,194 13% 1,945
Advertising 6,642 27% 5,232 22% 4,292
Deposit insurance and regulatory fees 946 16% 814 -4% 844
Training expenses 564 57% 359 -13% 412
Other real estate owned expense/(income) (390) 178% (140) -127% 514
Other expense 22,439 32% 16,999 26% 13,463
------------------------------------------------------------------------------
Total noninterest expense $200,716 17% $171,543 11% $154,951
==============================================================================
The significant factors driving the increase in operating expenses from 2005 to 2006 included an increase in personnel expense ($9.6 million, or 10%), net occupancy expense ($2.4 million, or 22%), legal and professional services ($4.5 million, or 44%), equipment and data processing expense ($3.9 million, or 23%), postage and communication expense, ($1.8 million, or 23%) and advertising expense ($1.4 million, or 27%).
In 2005, operating expenses increased $16.6 million, or 11%, over 2004. Increases were reflected in personnel expense ($7.8 million, or 9%), net occupancy expense ($1.0 million, or 10%), legal and professional services ($2.1 million, or 25%), ad valorem and franchise taxes ($1.9 million, or 112%), amortization of intangible assets ($249,000, or 13%), and other expenses ($3.5 million, or 26%).
Income TaxesIncome tax expense was $46.5 million in 2006, $18.9 million in 2005 and $26.6 million in 2004. Income tax expense increased because of the higher level of pretax income in 2006. Our effective income tax rate continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income and tax credits. The effective tax rates for 2006, 2005 and 2004 were 31%, 26% and 30%, respectively. The 5% increase in Hancock’s effective tax rate was due primarily to the decrease in the percentage of tax-exempt income as it relates to pre-tax book income. We expect our effective tax rate to be approximately 31% for 2007.
26
SEGMENT REPORTINGHancock’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 table, the column “Other” includes our additional consolidated subsidiaries: 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 Hancock’s segments:
TABLE 5. Segment Reporting
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2006
------------------------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
-------------- ----------- ------------ ----------- ------------ ------------
(In thousands)
Interest income $ 193,698 $ 136,844 $ 8,108 $ 20,270 $ (14,590) $ 344,330
Interest expense 72,154 52,833 2,934 6,103 (14,161) 119,863
-------------- ----------- ------------ ----------- ------------ ------------
Net interest income 121,544 84,011 5,174 14,167 (429) 224,467
Provision (recovery) for loan losses (19,811) (4,446) 834 2,661 - (20,762)
Noninterest income 47,844 29,782 346 25,966 (105) 103,833
Depreciation and amortization 6,986 2,611 319 527 - 10,443
Other noninterest expense 89,978 61,688 5,172 33,479 (44) 190,273
-------------- ----------- ------------ ----------- ------------ ------------
Income before income taxes 92,235 53,940 (805) 3,466 (490) 148,346
Income tax expense (benefit) 23,074 24,035 (603) (796) 834 46,544
-------------- ----------- ------------ ----------- ------------ ------------
Net income (loss) $ 69,161 $ 29,905 $ (202) $ 4,262 $ (1,324) $ 101,802
============== =========== ============ =========== ============ ============
Total assets $ 3,454,274 $2,365,422 $158,836 $ 807,912 $(821,879) $5,964,565
Total interest income from affiliates $ 13,895 $ 6 $ 260 $ - $ (14,161) $ -
Total interest income from external
customers $ 179,803 $ 136,838 $ 7,848 $ 20,270 $ (429) $ 344,330
(Amortization) & accretion of securities $ 10,287 $ 1,123 $ (51) $ (59) $ - $ 11,300
27
TABLE 5. Segment Reporting (continued)
- ------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2005
-------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
----------- ----------- --------- --------- ------------ ------------
(In thousands)
Interest income $ 140,583 $ 109,248 $ 6,563 $ 17,037 $ (9,800) $ 263,631
Interest expense 45,392 33,184 1,796 3,902 (9,455) 74,819
----------- ----------- --------- --------- ------------ ------------
Net interest income 95,191 76,064 4,767 13,135 (345) 188,812
Provision for loan losses 24,744 14,836 494 2,561 - 42,635
Noninterest income 46,197 28,061 476 23,671 (135) 98,270
Depreciation and amortization 5,299 2,467 453 498 - 8,717
Other noninterest expense 73,725 56,065 4,349 28,819 (131) 162,827
----------- ----------- --------- --------- ------------ ------------
Income before income taxes 37,620 30,757 (53) 4,928 (349) 72,903
Income tax expense (benefit) 16,673 (191) 170 2,260 (41) 18,871
----------- ----------- --------- --------- ------------ ------------
Net income (loss) $ 20,947 $ 30,948 $ (223) $ 2,668 $ (308) $ 54,032
=========== =========== ========= ========= ============ ============
Total assets $3,546,748 $2,138,894 $ 122,845 $ 697,548 $ (555,848) $5,950,187
Total interest income from affiliates $ 9,334 $ - $ 121 $ - $ (9,455) $ -
Total interest income from
external customers $ 131,249 $ 109,248 $ 6,442 $ 17,037 $ (345) $ 263,631
(Amortization) & accretion of securities $ (477) $ (1,228) $ (81) $ (61) $ - $ (1,847)
Year Ended
December 31, 2004
-------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
----------- ----------- --------- --------- ------------ ------------
(In thousands)
Interest income $ 120,197 $ 91,148 $ 3,089 $ 17,189 $ (4,849) $ 226,774
Interest expense 37,953 20,385 922 2,581 (4,571) 57,270
----------- ----------- --------- --------- ------------ ------------
Net interest income 82,244 70,763 2,167 14,608 (278) 169,504
Provision for loan losses 5,564 6,429 928 3,616 - 16,537
Noninterest income 39,894 33,255 445 19,084 (2,397) 90,281
Depreciation and amortization 5,879 2,648 67 563 - 9,157
Other noninterest expense 67,370 51,348 3,047 24,157 (128) 145,794
----------- ----------- --------- --------- ------------ ------------
Income before income taxes 43,325 43,593 (1,430) 5,356 (2,547) 88,297
Income tax expense (benefit) 12,808 13,213 (547) 1,913 (794) 26,593
----------- ----------- --------- --------- ------------ ------------
Net income (loss) $ 30,517 $ 30,380 $ (883) $ 3,443 $ (1,753) $ 61,704
=========== =========== ========= ========= ============ ============
Total assets $2,628,221 $1,895,832 $ 88,070 $703,844 $(651,241) $4,664,726
Total interest income from affiliates $ 4,496 $ - $ 75 $ - $ (4,571) $ -
Total interest income from
external customers $ 115,701 $ 91,148 $ 3,014 $ 17,189 $ (278) $ 226,774
(Amortization) & accretion of securities $ (2,579) $ (2,795) $ (46) $ (44) $ - $ (5,464)
28
BALANCE SHEET ANALYSISSecurities Available for SaleHancock’s investment in securities was $1.90 billion at December 31, 2006, compared to $1.96 billion at December 31, 2005. At December 31, 2006 and 2005, the composition of the securities portfolio was 100% classified as available for sale and none were held to maturity. Average investment securities were $2.23 billion for 2006 as compared to $1.43 billion for 2005.
During 2005, securities classified as held to maturity in the portfolio of one of Hancock’s subsidiaries were sold. A determination was made that this action tainted the investment portfolio of the entire company. As a result of this action and determination, all securities held by us have been reclassified to available for sale and the carrying value of those securities are adjusted to market as prescribed in Statement of Financial Accounting Standard (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities.
The vast majority of securities in the Banks’ portfolios are fixed rate and there were no investments in securities of a single issuer, other than U.S. Treasury and U.S. Government agency securities and mortgage-backed securities issued or guaranteed by U.S. government agencies that exceeded 10% of stockholders’ equity. At December 31, 2006, the average life of the portfolio was 3.57 years with an effective duration of 2.04 and an average yield of 4.56%.
Hancock’s securities portfolio is an important source of liquidity and earnings for us. A stated objective in managing the securities portfolio is to provide consistent liquidity to support balance sheet growth but also to provide a safe and consistent stream of earnings. To that end, management is open to opportunities that present themselves which enables us to improve the structure and earnings potential of the securities portfolio. During the fourth quarter, the current economic environment, the slope of the yield curve and the expectations of future interest rate movements presented Hancock with an opportunity to sell $162.9 million in certain U.S. Agency securities. The bonds were sold at a pretax book loss of $5.5 million and had a book yield of 3.81 percent. The proceeds were immediately reinvested in a combination of federal funds and other short-term instruments. We have no intention and do not expect to incur any other significant security sales in the immediate future. The net securities losses in 2006 of $5.2 million were composed primarily of the aforementioned $5.5 million bond loss. We recorded net securities losses during 2005 of $53,000 and net securities gains in 2004 of $163,000.
The amortized costs of securities classified as available for sale at December 31, 2006, 2005 and 2004, were as follows (in thousands):
TABLE 6. Securities by Type
- --------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
2006 2005 2004
------------- --------------- ---------------
U.S. Treasury $ 60,231 $ 50,883 $ 9,985
U.S. government agencies 1,016,811 1,029,656 413,419
Municipal obligations 200,891 165,180 60,956
Mortgage-backed securities 443,410 484,131 352,510
CMOs 116,161 194,899 263,471
Other debt securities 44,664 48,476 7,056
Equity securities 34,677 7,520 11,225
------------- --------------- ---------------
$ 1,916,845 $ 1,980,745 $ 1,118,622
============= =============== ===============
29
The amortized cost, yield and fair value of debt securities classified as available for sale at December 31, 2006, by contractual maturity, were as follows (amounts in thousands):
TABLE 7. Securities Maturities by Type
- ---------------------------------------------------------------------------------------------------------------------------
Over One Over Five
One Year Year Years Over Weighted
or Through Through Ten Fair Average
Less Five Years Ten Years Years Total Value Yield
----------- ------------ ----------- ---------- ------------- ------------- -----------
U.S. Treasury $ 59,032 $ 799 $ 400 $ - $ 60,231 $ 60,191 4.98%
U.S. government agencies 567,771 276,537 171,371 1,132 1,016,811 1,010,929 4.89%
Municipal obligations 28,211 122,757 42,065 7,858 200,891 204,017 4.61%
Other debt securities 930 7,717 25,608 10,409 44,664 44,020 5.73%
----------- ----------- ----------- ---------- ------------- -------------
$ 655,944 $ 407,810 $ 239,444 $ 19,399 $ 1,322,597 $ 1,319,157 4.88%
=========== =========== =========== ========== ============= =============
Fair Value $ 654,732 $ 406,557 $ 238,429 $ 19,439 $ 1,319,157
=========== =========== =========== ========== =============
Weighted Average Yield 4.92% 4.80% 4.85% 5.19% 4.88%
Mortgage-backed securities & CMOs $ 559,571 $ 548,597 4.95%
============= =============
Loan PortfolioWe experienced an increase in loan growth during 2006 as our efforts to generate loan volume continue. As indicated by Table 8, commercial and real estate loans increased $182.4 million, or 12%, from 2005. Included in this category are commercial real estate loans, which are secured by properties, used in commercial or industrial operations. We originate commercial and real estate loans to a wide variety of customers in many different industries and, as such, no single industry concentrations existed at December 31, 2006.
Mortgage loans of $418.3 million were $6.4 million, or 2%, lower than in 2005. We originate both fixed-rate and adjustable-rate mortgage loans. Certain types of mortgage loans are sold in the secondary mortgage market, while Hancock retains other types. Hancock also originates home equity loans. This product offers customers the opportunity to leverage rising home values and equity to obtain tax-advantaged consumer financing.
Direct consumer loans, which include loans and revolving lines of credit made directly to consumers, were down $30.7 million, or 6%, from 2005. We also originate indirect consumer loans, which consist primarily of consumer loans originated through third parties such as automobile dealers or other point-of-sale channels.
Indirect consumer loans of $349.5 million for 2006 were up $20.8 million, or 6%, from 2005. Hancock owns a finance company subsidiary, which originates both direct and indirect consumer loans. Finance company loans increased approximately $13 million, or 21%, at December 31, 2006, compared to the subsidiary’s outstanding loans on December 31, 2005. The loan growth in the finance company was mainly due to continued growth in direct consumer loans.
30
The following table shows average loan growth for the three-year period ended December 31, 2006:
TABLE 8. Average Loans
- -----------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------------------------------------------------------------------------------------
Balance TE Yield Mix Balance TE Yield Mix Balance TE Yield Mix
(In thousands)
Commercial & R.E. Loans $1,747,816 7.21% 57.0% $1,565,369 6.40% 54.3% $1,372,014 5.65% 52.8%
Mortgage loans 418,273 5.93% 13.7% 424,654 5.56% 14.7% 392,028 5.68% 15.1%
Direct consumer loans 470,942 8.17% 15.4% 501,677 7.51% 17.4% 489,040 7.25% 18.8%
Indirect consumer loans 349,518 6.21% 11.4% 328,679 5.91% 11.4% 288,005 6.03% 11.1%
Finance company loans 75,673 19.98% 2.5% 62,640 19.03% 2.2% 58,474 18.88% 2.2%
----------------------------------- ---------------------------------- --------------------------------
Total average loans
(net of unearned) $3,062,222 7.68% 100.0% $2,883,020 6.99% 100.0% $2,599,561 6.65% 100.0%
=================================== ================================== ================================
The following table sets forth, for the periods indicated, the composition of our loan portfolio:
TABLE 9. Loans Outstanding by Type
- ---------------------------------------------------------------------------------------------------------------------------
Loan Portfolio
Years Ended December 31,
--------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- ------------- --------------- ------------- -------------
(In thousands)
Real estate:
Residential mortgages 1-4 family $ 714,126 $ 703,769 $ 713,266 $ 645,123 $ 539,808
Residential mortgages multifamily 69,296 40,678 25,544 22,803 20,305
Home equity lines/loans 133,540 133,823 134,405 110,634 86,609
Construction and development 534,460 391,194 296,114 235,049 197,166
Nonresidential 666,593 609,647 595,013 536,389 445,733
Commercial, industrial and other 551,483 546,635 437,670 395,678 346,808
Consumer 530,756 512,549 496,926 463,642 434,407
Lease financing and depository institutions 69,487 48,007 44,357 34,388 29,565
Credit cards and other revolving credit 14,262 14,316 16,970 15,437 14,085
------------- ------------- --------------- ------------- -------------
3,284,003 3,000,618 2,760,265 2,459,143 2,114,486
Less, unearned income 17,420 11,432 11,705 10,499 9,504
------------- ------------- --------------- ------------- -------------
Net loans $ 3,266,583 $2,989,186 $ 2,748,560 $ 2,448,644 $ 2,104,982
============= ============= =============== ============= =============
31
The following table sets forth, for the periods indicated, the approximate contractual maturity by type of
the loan portfolio:
TABLE 10. Loans Maturities by Type
- ------------------------------------------------------------------------------------------------------
December 31, 2006
Maturity Range
After One
Within Through After Five
One Year Five Years Years Total
-----------------------------------------------------------------------
(In thousands)
Commercial, industrial
and other $ 246,010 $ 217,470 $ 88,003 $ 551,483
Real estate -
construction 336,599 158,466 39,395 534,460
All other loans 289,354 1,054,496 854,210 2,198,060
---------------- --------------- --------------- ----------------
Total loans $ 871,963 $ 1,430,432 $ 981,608 $ 3,284,003
================ =============== =============== ================
The sensitivity to interest rate changes of that portion of Hancock's loan portfolio that matures after one
year is shown below:
TABLE 11. Loans Sensitivity to Changes in Interest Rates
- -----------------------------------------------------------------------------------------------------------------
December 31,
2006
--------------------
(In thousands)
Commercial, industrial, and real estate construction maturing after one year:
Fixed rate $ 379,896
Floating rate 123,438
Other loans maturing after one year:
Fixed rate 1,402,914
Floating rate 505,792
--------------------
Total $ 2,412,040
====================
32
Nonperforming AssetsThe following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, restructured loans and real estate owned. Loans past due 90 days or more and still accruing are also disclosed:
TABLE 12. Non-Performing Assets
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------
(In thousands)
Loans accounted for on a non-accrual basis $3,500 $10,617 $7,480 $12,161 $11,870
Restructured loans - - - - -
--------------------------------------------------------------------
Total non-performing loans 3,500 10,617 7,480 12,161 11,870
Foreclosed assets 681 1,898 3,513 5,809 5,936
--------------------------------------------------------------------
Total non-performing assets $4,181 $12,515 $10,993 $17,970 $17,806
--------------------------------------------------------------------
Loans 90 days past due still accruing $2,552 $25,622 $5,160 $3,682 $6,407
--------------------------------------------------------------------
Ratios
Non-performing assets to loans plus
other real estate 0.13% 0.42% 0.40% 0.73% 0.84%
Allowance for loan losses to non-performing
loans and accruing loans 90 days past due 695% 196% 252% 170% 143%
Loans 90 days past due still accruing to loans 0.08% 0.86% 0.19% 0.15% 0.30%
The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as “nonaccrual” was $759,000, $747,000, $574,000, $762,000 and $662,000 for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively.
Interest actually received on nonaccrual loans was not material. The amount of interest recorded on restructured loans did not differ significantly from the interest that would have been recorded under the original terms of those loans.
Nonperforming assets consist of loans accounted for on a nonaccrual basis, restructured loans and foreclosed assets. Table 12 presents information related to nonperforming assets for the five years ended December 31, 2006. Total nonperforming assets at December 31, 2006 were $4.2 million, a decrease of $8.3 million, or 67%, from December 31, 2005. Loans that are over 90 days past due but still accruing were $2.6 million at December 31, 2006. This compares to $25.6 million at December 31, 2005. This increase was due primarily to accommodations granted to certain loan customers related to Hurricane Katrina. In the aftermath of Hurricane Katrina, we recognized that many of our credit customers (mostly residential mortgage holders) were in a position where time would be needed to recover sufficiently from the storm before they could resume payments on their loans. Accommodations in the form of loan payment extensions (most for 90 days) were granted on a customer by customer basis. Efforts on the part of management to reduce the levels of non-performing assets, as well as past due loans, will continue in 2007.
Allowance for Loan and Lease LossesAt December 31, 2006, the allowance for loan losses was $46.8 million, or 1.43%, of year-end loans, compared to $74.6 million, or 2.49%, of year-end loans for 2005. In 2005, Hancock established a $35.2 million specific allowance for estimated credit losses related to the impact of Hurricane Katrina on our loan portfolio. In 2005, we reduced the allowance by $2.4 million for storm-related net charge-offs. As a result, the storm-related allowance was $32.9 million as of December 31, 2005. During 2006 we reversed $20.0 million from the storm-related allowance for loan losses due to better than expected loss experience with storm impacted credits.
33
Net charge-offs amounted to $7.0 million in 2006, as compared to $8.8 million in 2005. The $1.8 million decrease in net charge-offs from 2005 was related primarily to decreases in the commercial and commercial real estate category. Overall, the allowance for loan losses was 695% of non-performing loans and accruing loans 90 days past due at year-end 2006, compared to 196% at year-end 2005. Management utilizes quantitative methodologies and modeling to determine the adequacy of the allowance for loan and lease losses and is of the opinion that the allowance at December 31, 2006 is adequate.
The 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:
TABLE 13. Summary of Activity in the Allowance for Loan Losses
- ---------------------------------------------------------------------------------------------------------------------------
At and For The Years Ended December 31,
---------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- -------------- ------------- -------------- -------------
(In thousands)
Net loans outstanding at end of period $ 3,266,583 $ 2,989,186 $ 2,748,560 $ 2,448,644 $ 2,104,982
============= ============== ============= ============== =============
Average net loans outstanding $ 3,062,222 $ 2,883,020 $ 2,599,561 $ 2,238,245 $ 1,961,299
============= ============== ============= ============== =============
Balance of allowance for loan losses
at beginning of period $ 74,558 $ 40,682 $ 36,750 $ 34,740 $ 34,417
------------- -------------- ------------- -------------- -------------
Loans charged-off:
Real estate 758 226 403 291 109
Commercial 3,676 4,001 5,381 4,868 9,143
Consumer, credit cards and other
revolving credit 14,712 11,537 14,383 14,311 14,291
Lease financing 369 47 261 73 10
------------- -------------- ------------- -------------- -------------
Total charge-offs 19,515 15,811 20,428 19,543 23,553
------------- -------------- ------------- -------------- -------------
Recoveries of loans previously
charged-off:
Real estate 263 33 179 180 7
Commercial 4,729 2,757 1,957 1,112 639
Consumer, credit cards and other
revolving credit 7,489 4,258 5,687 5,103 5,135
Lease financing 10 4 - 4 -
------------- -------------- ------------- -------------- -------------
Total recoveries 12,491 7,052 7,823 6,399 5,781
------------- -------------- ------------- -------------- -------------
Net charge-offs 7,024 8,759 12,605 13,144 17,772
Provision for (recovery of) loan losses (20,762) 42,635 16,537 15,154 18,495
Balance acquired through acquisition & other - - - - (400)
------------- -------------- ------------- -------------- -------------
Balance of allowance for loan losses
at end of period $ 46,772 $ 74,558 $ 40,682 $ 36,750 $ 34,740
============= ============== ============= ============== =============
Ratios
Gross charge-offs to average loans 0.64% 0.55% 0.79% 0.87% 1.20%
Recoveries to average loans 0.41% 0.24% 0.30% 0.29% 0.29%
Net charge-offs to average loans 0.23% 0.30% 0.48% 0.59% 0.91%
Allowance for loan losses to year end loans 1.43% 2.49% 1.48% 1.50% 1.65%
Net charge-offs to period-end net loans 0.22% 0.29% 0.46% 0.54% 0.84%
Allowance for loan losses to average net loans 1.53% 2.59% 1.56% 1.64% 1.77%
Net charge-offs to loan loss allowance 15.02% 11.75% 30.98% 35.77% 51.16%
34
An allocation of the loan loss allowance by major loan category is set forth in the following table. There were no relevant variations in loan concentrations, quality or terms, except for an increase in the outstanding loan portfolio balance and in the unallocated amount. The unallocated portion of the allowance represents supportable estimates of probable losses inherent in the loan portfolio but not specifically related to one category of the portfolio. The allocation is not necessarily indicative of the category of future losses, and the full allowance at December 31, 2006 is available to absorb losses occurring in any category of loans.
TABLE 14. Allocation of Loan Loss by Category
- --------------------------------------------------------------------------------------------------------------------------------
For Years Ended December 31,
2006 2005 2004 2003 2002
-------------------- -------------------- -------------------- ------------------- --------------------
Allowance % of Allowance % of Allowance % of Allowance % of Allowance % of
for Loans for Loans for Loans for Loans for Loans
Loan to Total Loan to Total Loan to Total Loan to Total Loan to Total
Losses(1) Loans(2) Losses(1) Loans(2) Losses(1) Loans(2) Losses(1) Loans(2) Losses(1) Loans(2)
--------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- ---------
(In thousands)
Real estate $1,697 64.84 $23,042 62.86 $11,253 64.19 $9,711 63.30 $7,664 61.26
Commercial, industrial
and other 27,838 18.77 34,128 19.74 14,974 17.37 15,311 17.41 11,610 17.72
Consumer and other
revolving credit 15,363 16.39 15,812 17.40 11,453 18.44 10,718 19.29 10,174 21.02
Unallocated 1,874 - 1,576 - 3,002 - 1,010 - 5,292 -
--------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- ---------
$46,772 100.00 $74,558 100.00 $40,682 100.00 $36,750 100.00 $34,740 100.00
========= ======== ========== ======== ========== ======== ========== ======== ========== =========
(1) Loans used in the calculation of "allowance for loan losses" are grouped according to loan purpose.
(2) Loans used in the calculation of "% of loans to total loans" are grouped by collateral type.
DepositsHancock’s deposit base experienced significant growth since Hurricane Katrina impacted its market area. Deposits increased to $5.03 billion at December 31, 2006 from $4.99 billion at December 31, 2005, an increase of $41.2 million, or approximately 0.83%. The year-end deposit increase from 2004 to 2005 was primarily driven by non-interest bearing deposit growth of $627.6 million and time deposit growth of $564.3 million. Total average deposits increased by $399.0 million, or 11%, from $3.60 billion during 2004 to $4.00 billion during 2005.
Over the course of 2006, we increased our focus on multiple accounts, core deposit relationships and strategic placement of time deposit campaigns to stimulate overall deposit growth. We continue to keep as our highest priority continued customer demand for safety and liquidity of deposit products. Interest-bearing accounts, which include NOW accounts, money market investment accounts, savings accounts and time deposits increased more than $761.9 million on an average basis during 2006. Additionally, non-interest-bearing deposits were up almost $306.1 million for the period January through December 2006. The vast majority of the aforementioned net growth occurred as a result of deposit inflows from the impact of Hurricane Katrina, but the inflows were not limited to the immediate aftermath of the storm. The composition of deposit inflows since August 31, 2005 has been favorable to Hancock’s funding mix and consisted of 22% non-interest bearing demand accounts, 44% low cost interest-bearing transaction accounts and 34% time deposits.
Borrowings consist primarily of purchases of federal funds, sales of securities under repurchase agreements and borrowings from the FHLB. In total, borrowings were down over $79.9 million from December 31, 2005 to December 31, 2006, driven primarily by a decrease in FHLB borrowings. Sales of securities under repurchase agreements decreased $32.2 million from year-end 2005, while a $50 million long-term note from the FHLB was paid off in 2006. At December 31, 2006, federal funds purchased totaled $3.8 million while purchases of federal funds outstanding at year-end 2005 totaled $1.5 million.
35
The Banks traditionally price their deposits to position themselves competitively with the local market.
The Banks' policy is not to accept brokered deposits.
Table 15 shows average deposits for a three-year period.
TABLE 15. Average Deposits
- -----------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------------------------------------------------------------------------------------
Balance Rate Mix Balance Rate Mix Balance Rate Mix
(In thousands)
Non-interest bearing
demand deposits $1,128,850 0.00% 22% $822,733 0.00% 21% $650,106 0.00% 18%
NOW account deposits 1,167,047 2.45% 23% 893,521 1.55% 22% 798,286 1.01% 22%
Money market deposits 517,542 1.74% 10% 445,134 0.96% 11% 444,390 0.69% 12%
Savings deposits 564,177 0.63% 11% 521,502 0.70% 13% 562,976 0.79% 16%
Time deposits 1,691,811 4.08% 34% 1,318,536 3.47% 33% 1,146,976 3.23% 32%
---------------------------------- --------------------------------- ---------------------------------
Total average deposits $5,069,427 100% $4,001,426 100% $3,602,734 100%
============== ========= =============== ======== =============== =========
Time certificates of deposit of $100,000 and greater at December 31, 2006 had maturities as follows:
TABLE 16. Maturity of Time Deposits greater than or equal to $100,000
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2006
-------------------------
(In thousands)
$ 278,543
Over three through six months 211,708
Over six months through one year 157,109
Over one year 88,277
-------------------------
Total $ 735,637
=========================
Short-Term Borrowings
The following table sets forth certain information concerning Hancock's short-term borrowings, which consist
of federal funds purchased and securities sold under agreements to repurchase.
TABLE 17. Short-Term Borrowings
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------
2006 2005 2004
---------------- ----------------- ----------------
(In thousands)
Federal funds purchased:
Amount outstanding at period-end $ 3,800 $ 1,475 $ 800
Weighted average interest at period-end 4.95% 3.95% 2.15%
Maximum amount at any month-end during period $ 49,160 $ 55,120 $ 41,852
Average amount outstanding during period $ 11,557 $ 10,262 $ 14,181
Weighted average interest rate during period 5.38% 3.27% 1.64%
Securities sold under agreements to repurchase:
Amount outstanding at period-end $ 218,591 $ 250,807 $ 195,478
Weighted average interest at period-end 3.72% 4.29% 1.13%
Maximum amount at any month-end during period $ 425,753 $ 258,508 $ 243,101
Average amount outstanding during period $ 250,603 $ 224,842 $ 195,470
Weighted average interest rate during period 3.62% 1.94% 0.98%
36
Return on Equity and AssetsInformation regarding performance and equity ratios is as follows:
TABLE 18. Return on Equity and Assets
- --------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------
2006 2005 2004
--------------- -------------- ------------
Return on average assets 1.69% 1.10% 1.39%
Return on average common equity 19.82% 11.36% 13.79%
Dividend payout ratio 28.59% 43.11% 30.37%
Average common equity to average
assets ratio 8.52% 9.65% 10.11%
OFF-BALANCE SHEET ARRANGEMENTSLoan Commitments and Letters of CreditIn the normal course of business, Hancock enters 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 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 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 December 31, 2006, Hancock had $963.1 million in unused loan commitments outstanding, of which approximately $455.6 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 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 Hancock 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 December 31, 2006, we had $69.5 million in letters of credit issued and outstanding.
37
The following table shows the commitments to extend credit and letters of credit at December 31, 2006 according to expiration date.
TABLE 19. Commitments and Letters of Credit
- -----------------------------------------------------------------------------------------------------------------------------------
Expiration Date
------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
---------------- ----------------- ----------------- ---------------- -----------------
December 31, 2006 (In thousands)
Commitments to extend credit $ 963,098 $ 648,802 $ 38,204 $ 38,164 $ 237,928
Letters of credit 69,468 20,235 40,174 9,059 -
---------------- ----------------- ----------------- ---------------- -----------------
Total $ 1,032,566 $ 669,037 $ 78,378 $ 47,223 $ 237,928
================ ================= ================= ================ =================
Expiration Date
------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
---------------- ----------------- ----------------- ---------------- -----------------
December 31, 2005 (In thousands)
Commitments to extend credit $ 550,948 $ 284,249 $ 34,999 $ 25,815 $ 205,885
Letters of credit 57,427 34,261 1,287 21,397 483
---------------- ----------------- ----------------- ---------------- -----------------
Total $ 608,375 $ 318,510 $ 36,286 $ 47,212 $ 206,368
================ ================= ================= ================ =================
FDIC One-Time AssessmentUnder the provisions of the Federal Deposit Insurance Reform Act of 2005, we received, in October 2006, a one-time FDIC assessment credit of $3.2 million to be used against future deposit insurance assessments. This credit is not reflected in the accompanying consolidated financial statements. It will be recognized as an offset in future years against the FDIC assessments.
RISK MANAGEMENTCredit RiskThe Banks’ primary lending focus is to provide commercial, consumer and real estate loans to consumers and to small and middle market businesses in their respective market areas. Diversification in the loan portfolio is a means of reducing the risks associated with economic fluctuations. The Banks have no significant concentrations of loans to particular borrowers or loans to any foreign entities. Loan underwriting standards reduces the impact of credit risk to us. Loans are underwritten on the basis of cash flow capacity and collateral fair value. Generally, real estate mortgage loans are made when the borrower produces sufficient cash flow capacity and equity in the property to offset historical market devaluations.
Allowance for Loan and Lease LossesThe allowance for loan and lease losses (ALLL) is a valuation account available to absorb losses on loans. The ALLL is established and maintained at an amount sufficient to cover the estimated credit loss associated with the loan and lease portfolios of the Banks as of the date of the determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operational risk, concentration risk, and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan and lease losses. Quarterly, management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on Hancock’s past loan loss and delinquency experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, and the estimated value of any underlying collateral and current economic conditions. The analysis and methodology include three primary segments. These segments include a pool analysis of various retail loans based upon loss history, a pool analysis of commercial and commercial real estate loans based upon loss history by loan type, and a specific reserve analysis for those loans considered impaired under SFAS No. 114. All commercial and commercial real estate loans with an outstanding balance of $100,000 or greater are individually reviewed for impairment; substandard mortgage loans with balances of $100,000 or greater are also included in the analysis. All losses are charged to the allowance for loan and lease losses when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the allowance for loan losses at the time of receipt.
38
Commercial loans are considered impaired when it is probable (the future event or events are likely to occur) that the bank will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the loan agreement. In order to ensure consideration of all possible impairments, for purposes of the model the Banks consider all loans that are risk rated substandard as impaired. When a loan is determined to be impaired, the amount of that impairment must be measured by either the loan’s observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by calculating the present value of expected future cash flows discounted at the loan’s effective interest rate. If the value of the impaired loan is less than the current balance of the loan, the impairment is recognized by creating a specific reserve allowance for the shortfall. If the value is greater or equal to the loan balance, then no reserve allocation may be made for the loan. In addition, any loans included in the impairment review should not be incorporated into the pool analysis to avoid double counting.
Pool analysis is applied for all retail loans. The retail loans are subdivided into three groups, which currently include: mortgage real estate, indirect loans and direct consumer loans. A historical loss rate is calculated for each group over the twelve prior quarters to determine the three year average loss rate. As circumstances dictate, management will make adjustments to the loss history to reflect significant changes in the Bank’s loss history. Adjustments will also be made to historical loss rates to cover risks associated with trends in delinquencies, non-accruals, current economic conditions and credit administration/ underwriting practices and policies.
A historical loss ratio is applied to all commercial loans, commercial real estate loans and leases grouped by product type for which SFAS No. 5 exposure can best be evaluated collectively due to similar attributes. A historical loss rate is calculated for each group over the twelve prior quarters to determine the three year average loss rate. As circumstances dictate, management will make adjustments to the loss history to reflect significant changes in the Bank’s loss history. Adjustments will also be made to historical loss rates to cover risks associated with trends in delinquencies, non-accruals, current economic conditions and credit administration/ underwriting practices and policies and borrower concentrations.
Asset/Liability ManagementOur asset liability management (ALM) process consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain stability in net interest income (NII) under varying interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of liquidity.
Hancock’s net earnings are dependent on our net interest income. Net interest income is susceptible to IRR to the degree that interest-bearing liabilities mature or reprice on a different basis and timing than interest-earning assets. This timing difference represents a potential risk to Hancock’s future earnings. 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 and the subsequent impact on customer behavior could adversely affect NII. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates and changes in customer behavior could result in a decrease in NII.
Management and the Asset/Liability Committee (ALCO) direct Hancock’s IRR management through a Risk Management policy that is designed to produce a stable net interest margin (NIM) in periods of interest rate fluctuation. In adjusting Hancock’s asset/liability position, the board of directors and management attempt to direct Hancock’s IRR while enhancing the NIM. At times, depending on the general level of interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, management may determine strategies that could add to the level of IRR in order to increase its NIM. Not withstanding Hancock’s IRR management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net earnings.
39
To control interest rate risk, management regularly monitors the volume of interest sensitive assets compared with interest sensitive liabilities over specific time intervals. Interest-sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also administers this sensitivity through the development and implementation of investment, lending, funding and pricing strategies designed to achieve NII performance goals while minimizing the potential negative variations in NII under different interest rate scenarios. Investment strategies, including portfolio durations and cash flows, are formulated and continually adjusted during the implementation to assure attainment of objectives in the most effective manner. Loan and deposit pricing are adjusted weekly to reflect current interest rate and competitive market environments, with duration targets on both reviewed monthly.
The static gap report shown in Table 20 measures the net amounts of assets and liabilities that reprice within a given time period over the remaining lives of those instruments. At December 31, 2006, Hancock’s cumulative repricing gap in the one year interval was 4%. The asset sensitive position represents a balance in our loan growth (fixed versus floating and duration targets) and the strategic management of securities portfolio cash flows and deposit mix. Management believes it is well positioned for the current rate environment.
To further control IRR, we structure our loan portfolio to provide appropriate investment opportunities while minimizing potential volatility in earnings from extension risk. Deposit strategies continue to emphasize a mix of non-certificate of deposit core accounts and consumer time deposits. Management believes that core deposit accounts carry a lower interest cost, and that a material portion of such accounts may be more resistant to changes in interest rates. Management further believes that mixing these accounts with targeted maturities for certificates of deposit provides the customer with a wider array of deposit opportunities while being beneficial to our duration and rate sensitivity profile.
The following table sets forth the scheduled re-pricing or maturity of our assets and liabilities at December 31, 2006 and December 31, 2005. The assumed prepayment of investments and loans were based on Hancock’s assessment of current market conditions on such dates. Estimates have been made for the re-pricing of savings, NOW and money market accounts. Actual prepayments and deposit withdrawals will differ from the following analysis due to variable economic circumstances and consumer behavior. Although assets and liabilities may have similar maturities or re-pricing periods, reactions will vary as to timing and degree of interest rate change.
TABLE 20. Analysis of Interest Sensitivity
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 2006
Non-
Within 6 months 1 to 3 > 3 Sensitive
Overnight 6 months to 1 year years years Balance Total
---------------------------------------------- ---------- ------------ -----------
(In thousands)
Assets
Securities $ - $ 531,640 $ 325,198 $ 424,694 $ 586,372 $ 35,754 $1,903,658
Federal funds sold & short-term
investments 222,122 - 317 - - - 222,439
Loans 60,762 1,563,794 297,791 671,158 626,307 - 3,219,812
Other assets - - - - - 618,656 618,656
---------- ----------- ---------- ----------- ----------- ------------ ----------
Total Assets $ 282,884 $ 2,095,434 $ 623,306 $ 1,095,852 $1,212,679 $ 654,410 $5,964,565
========== =========== ========== =========== =========== ============ ==========
Liabilities
Interest bearing transaction
deposits $ - $ 694,677 $ 315,933 $ 926,668 $ 155,172 $ - $2,092,450
Time deposits - 1,071,192 464,663 281,425 63,903 - 1,881,183
Non-interest bearing deposits - - - 52,868 1,004,490 - 1,057,358
Federal funds purchased 3,800 - - - - - 3,800
Borrowings 222,976 - - 24 227 - 223,227
Other liabilities - - - - - 148,137 148,137
Stockholders' Equity - - - - - 558,410 558,410
---------- ----------- ---------- ----------- ----------- ------------ ----------
Total Liabilities & Equity $ 226,776 $ 1,765,869 $ 780,596 $ 1,260,985 $ 1,223,792 $ 706,547 $5,964,565
========== =========== ========== =========== =========== ============ ==========
Interest sensitivity gap $ 56,108 $ 329,565 $(157,290) $ (165,133) $ (11,113) $ (52,137)
Cumulative interest rate sensitivity
gap $ 56,108 $ 385,673 $ 228,383 $ 63,250 $ 52,137 $ -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets 1.0 % 7.2 % 4.2 % 1.2 % 1.0 %
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TABLE 20. Analysis of Interest Sensitivity (continued)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2005
Within 6 months 1 to 3 > 3 Non-Sensitive
Overnight 6 months to 1 year years years Balance Total
---------- ----------- ---------- ----------- ----------- -------------- ----------
(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
Stockholders' 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)%
Net Interest Income at RiskNII at risk measures the risk of a decline in earnings due to changes in interest rates. Table 21 presents an analysis of Hancock’s IRR as measured by the estimated changes in NII resulting from an instantaneous and sustained parallel shift in the yield curve at December 31, 2006. Shifts are measured in 100 basis point increments (+ 300 through — 300 basis points) from base case. Base case encompasses key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, securities portfolio cash flows and reinvestment strategy, and the market value of certain assets under the various interest rate scenarios. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period; the instantaneous shocks are performed against that yield curve.
TABLE 21. Net Interest Income (te) at Risk
- ------------------------------------------------------------------------------------------------------
Change in Estimated Increase
Interest (Decrease) in NII
Rates December 31, 2006
------------------------- ---------------------------------------
(basis points)
-300 -13.7%
-200 -7.7%
-100 -2.9%
Stable 0.0%
+ 100 1.4%
+ 200 2.5%
+ 300 3.3%
Most Likely -0.7%
- ------------------------------------------------------------------------------------------------------
41
Additionally, we have forecast a Most Likely NII scenario based on its conservative projection of yield curve changes for the coming 12 month period. This scenario utilizes all base case assumptions, applying those assumptions against a yield curve forecast that incorporates the current interest rate environment and projects certain strategic pricing changes over the forecast period. Table 21 indicates that Hancock’s level of NII increases under rising rates and declines under falling rates. The most likely scenario for interest rates projects net interest income to be relatively flat with base case falling by 0.7% indicating that the balance sheet is appropriately structured for the current rate environment.
The increasing rate scenarios show increased levels of net interest income while the decreasing scenarios show higher levels of volatility and subsequently lower levels of NII. These scenarios are instantaneous shocks that assume balance sheet management will mirror base case. Should the yield curve begin to rise or fall, management has several strategies available to maximize earnings opportunities or offset the negative impact to earnings. For example, in a falling rate environment, deposit pricing strategies could be adjusted to further incent customer behavior to non-contractual or short term (less than 12 months) contractual deposit products which would reset downward with the changes in the yield curve and prevailing market rates. Another opportunity at the start of such a cycle would be reinvesting the securities portfolio cash flows into longer term, non-callable bonds that would lock in higher yields. Finally, there are a number of hedge strategies by which management could use derivatives, including swaps and purchased floors, to lock in net interest margin protection; to date, management has not entered into any hedge transactions for the purpose of earnings protection.
Even if interest rates change in the designated amounts, there can be no assurance that Hancock’s assets and liabilities would perform as anticipated. Additionally, a change in the 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 NII than indicated above. Strategic management of Hancock’s balance sheet and earnings is fluid and would be adjusted to accommodate these movements. As with any method of measuring IRR, certain shortcomings are inherent in the methods of analysis presented above. 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. Also, 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 its exposure to interest rate risk.
LIQUIDITYLiquidity ManagementLiquidity management encompasses the Company’s ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring that the Company has adequate cash flow to meet its various needs, including operating, strategic and capital. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would not be able to meet the needs of the communities in which it has a presence and serves. In addition, the parent holding company’s principal source of liquidity is dividends from its subsidiary banks. Liquidity is required at the parent holding company level for the purpose of paying dividends to stockholders, servicing of any debt the Company may have, business combinations as well as general corporate expenses.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest-bearing deposits with other banks are additional sources of liquidity funding. As shown in Table 22 below, our liquidity ratios as of December 31, 2006 and 2005 for free securities stood at 35% or $661.3 million and 42% or $819.0 million, respectively.
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TABLE 22. Liquidity Ratios
- -----------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------
(In thousands)
Free securities 34.50% 41.80%
Free securities-net wholesale funds/core deposits 5.40% 11.10%
------------------------------------------------
Wholesale funding diversification
Certificate of deposits > $100,000 (excluding public funds) 9.80% 6.90%
Brokered certificate of deposits 4.00% 0.40%
Public fund certificate of deposits $126,493 $149,612
------------------------------------------------
Net wholesale funding maturity concentrations
Overnight 0.10% 0.00%
Up to 3 months 3.50% 1.40%
Up to 6 months 3.70% 1.70%
Over 6 months 6.60% 5.20%
------------------------------------------------
Net wholesale funds $826,082 $514,003
Core deposits $4,242,726 $4,303,561
------------------------------------------------
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and non-interest-bearing deposit accounts. Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity and represent the Company’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company’s short-term borrowing capacity includes an approved line of credit with the Federal Home Loan Bank of $346.8 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $100 million. As of December 31, 2006 and 2005, the Company’s core deposits were $4.242 billion and $4.304 billion, respectively, and Net Wholesale Funding stood at $826.1 million and $514.0 million, respectively.
The Consolidated Statements of Cash Flows provide an analysis of cash from operating, investing, and financing activities for each of the three years in the period ended December 31, 2006. Cash flows from operations are a significant part of liquidity management, contributing significant levels of funds in 2006, 2005 and 2004.
Cash flows from operations increased to $74.9 million in 2006 from $71.1 million in 2005. Net cash used by investing activities decreased to $97.6 million in 2006 from $1.172 billion in 2005 due to securities transactions in the amount of $97.1 million. In 2006, securities transaction activity resulted in a net use of funds, while in 2005 proceeds from the sales and maturities of securities resulted in a net use of funds in the amount of $1.355 billion. Federal funds sold decreased to $190.7 million during 2006 and increased $260.8 million during 2005. We paid approximately $3.9 million in connection with the acquisition of a business combination in 2005. Cash flows used for financing activities were $58.3 million in 2006 as compared to $1,216 billion provided in 2005 primarily by deposit growth.
Contractual ObligationsHancock has contractual obligations to make future payments on certain debt and lease agreements. Table 23 summarizes all significant contractual obligations at December 31, 2006, according to payments due by period.
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TABLE 23. Contractual Obligations
- ----------------------------------------------------------------------------------------------------------------------------
Payment due by period
---------------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
---------------------------------------------------------------------------
(In thousands)
Certificates of deposit $ 1,881,183 $ 1,535,855 $ 281,425 $ 63,895 $ 8
Short-term debt obligations 222,391 222,391 - - -
Long-term debt obligations 258 10 25 35 188
Operating lease obligations* 16,942 4,137 5,507 3,299 3,999
---------------------------------------------------------------------------
Total $ 2,120,774 $ 1,762,393 $ 286,957 $ 67,229 $ 4,195
===========================================================================
*We have no material capital lease obligations.
CAPITAL RESOURCESA strong capital position, which is vital to the continued profitability of the Company, also promotes depositor and investor confidence and provides a solid foundation for the future growth of the Company. Composite ratings by the respective regulatory authorities of the Company and the Banks establish minimum capital levels. Currently, the Company and the Banks are required to maintain minimum Tier 1 leverage ratios of at least 3%, subject to an increase up to 5%, depending on the composite rating. At December 31, 2006, the Company’s and the Banks’ capital balances were in excess of current regulatory minimum requirements. As indicated in Table 24 below, the regulatory capital ratios of the Company and the Banks far exceed the minimum required ratios, and the Banks have been categorized as “well capitalized” in the most recent notice received from their regulators.
The Company remains very well capitalized. As of December 31, 2006, Hancock’s Leverage (tier one) Ratio stands at 8.63%, while the Tangible Equity Ratio is 8.24% (see below in Table 24). While Hancock remains very well capitalized, so that we maintain flexibility for future capital needs, including acquisitions, the Company may consider raising additional capital at some point in the future.
TABLE 24. Risk-Based Capital and Capital Ratios
- ---------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------------------------------------------------------------
(In thousands)
Tier 1 regulatory capital $510,639 $420,283 $399,320 $378,262 $354,535
Tier 2 regulatory capital 46,583 46,218 38,161 34,175 29,544
----------------------------------------------------------------
Total regulatory capital $557,222 $466,501 $437,481 $412,437 $384,079
----------------------------------------------------------------
Risk-weighted assets $4,097,400 $3,665,722 $3,222,554 $2,770,904 $2,383,423
----------------------------------------------------------------
Ratios
Leverage (Tier 1 capital to average assets) 8.63% 7.85% 8.97% 9.29% 9.19%
Tier 1 capital to risk-weighted assets 12.46% 11.47% 12.39% 13.65% 14.88%
Total capital to risk-weighted assets 13.60% 12.73% 13.58% 14.88% 16.11%
Common stockholders' equity to total assets 9.36% 8.02% 9.96% 9.59% 9.75%
Tangible common equity to total assets 8.24% 6.89% 8.58% 8.32% 8.45%
----------------------------------------------------------------
The Company continued the execution of the common stock buyback program, which provides for the repurchase of up to 10% of the Company’s outstanding common stock. This program was announced in July 2000 and authorized the repurchase of approximately 3,320,000 shares of the Company’s outstanding stock. Over the course of 2006, the Company purchased 33,409 shares of common stock at an aggregate price of $1.7 million, or approximately $50.30 per share. In 2005, the Company purchased 147,909 shares of common stock at an aggregate price of $4.5 million, or approximately $30.45 per share. As of December 31, 2006, the total number of common shares purchased under the current stock buyback program since inception was approximately 2,641,393, or 8.0%, of the outstanding common shares at June 30, 2000.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe accounting principles we follow and the methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Allowance for Loan LossesOur most critical accounting policy relates to our allowance for loan losses, which reflects the estimated losses resulting from the inability of our 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, the estimates of the allowance would be updated, and additional provisions for loan losses may be required.
The allowance for loan and lease losses (ALLL) is a valuation account available to absorb losses on loans. The ALLL is established and maintained at an amount sufficient to cover the estimated credit loss associated with the loan and lease portfolios of the Banks as of the date of the determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operational risk, concentration risk, and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan and lease losses. Quarterly, management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on Hancock’s past loan loss and delinquency experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, and the estimated value of any underlying collateral and current economic conditions. The analysis and methodology include three primary segments. These segments include a pool analysis of various retail loans based upon loss history, a pool analysis of commercial and commercial real estate loans based upon loss history by loan type, and a specific reserve analysis for those loans considered impaired under SFAS No. 114. All commercial and commercial real estate loans with an outstanding balance of $100,000 or greater are individually reviewed for impairment; substandard mortgage loans with balances of $100,000 or greater are also included in the analysis. All losses are charged to the allowance for loan and lease losses when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the allowance for loan losses at the time of receipt.
Retirement Employee Benefit PlansRetirement and employee benefit plan assets, liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods, rate of compensation increases and the long-term return on plan assets. Note 13 — Retirement and Employee Benefit Plans, included in the accompanying Notes to the Consolidated Financial Statements, provides further discussion on the accounting for Hancock’s retirement and employee benefit plans and the estimates used in determining the actuarial present value of the benefit obligations and the net periodic benefit expense.
Fair Value Accounting EstimatesGenerally accepted accounting principles require the use of fair values in determining the carrying values of certain assets and liabilities, as well as for specific disclosures. The most significant include securities, loans held for sale, mortgage servicing rights and net assets acquired in business combinations. Certain of these assets do not have a readily available market to determine fair value and require an estimate based on specific parameters. When market prices are unavailable, Hancock determines fair values utilizing parameters, which are constantly changing, including interest rates, duration, prepayment speeds and other specific conditions. In most cases, these specific parameters require a significant amount of judgment by management.
45
RECENT ACCOUNTING PRONOUNCEMENTSIn May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (“SFAS No. 154”). SFAS No. 154 is a replacement of APB Opinion No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine period-specific effects of an accounting change on one or more individual prior periods presented. Then the new accounting principle is applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather that being reported in an income statement. Further, the accounting principle is to be applied prospectively from the earliest date when it is impracticable to determine the effect to all prior periods. We adopted SFAS No. 154 as of January 1, 2006 as required and its effect on the consolidated financial statements, to date, has not been material. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.
In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB Statement No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The provisions in SOP 05-1 are effective for us beginning in fiscal year 2007. We are currently evaluating the requirements of SOP 05-1 and have not yet determined the impact on our consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets (“SFAS No. 156”). 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. This pronouncement is effective for us beginning in fiscal year 2007. 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.
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 (“SFAS No. 157”). 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) (“SFAS No. 158”). This pronouncement requires an employer to recognize the over funded or under funded 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 effective for fiscal years ending after December 15, 2006. 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 effective for fiscal years ending after December 15, 2008. We adopted the requirement to recognize the funded status of the benefit plans and related disclosure requirements as of December 31, 2006. We are currently evaluating the requirements of SFAS No. 158 related to the measurement date and have not yet determined the impact of adoption on our consolidated financial statements.
46
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.
In fiscal 2006, we adopted SEC Staff Accounting Bulletin No. 108 (“SAB No. 108”). SAB No. 108 requires that registrants assess the impact on both balance sheet and the statement of income when quantifying and evaluating the materiality of a misstatement. Under SAB No. 108, adjustment of financial statements is required when either approach results in quantifying a misstatement that is material to a reporting period presented within the financial statements, after considering all relevant quantitative and qualitative factors. The impact of adopting SAB No. 108 was a $2.9 million adjustment to retained earnings as of December 31, 2005, as disclosed in Note 12.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe information required for this item is included in the section entitled “Asset/Liability Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that appears in Item 7 of this Form 10-K and is incorporated here by reference.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedule
Page
------------
Management's Report on Internal Control Over Financial Reporting 49
Report of Independent Registered Public Accounting Firm 50
Report of Independent Registered Public Accounting Firm 52
Consolidated Balance Sheets as of December 31, 206 and 2005 53
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2006 54
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2006 55
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2006 56
Notes to Consolidated Financial Statements 58
48
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGThe management of Hancock Holding Company has prepared the consolidated financial statements and other information in our Annual Report in accordance with accounting principles generally accepted in the United States of America and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.
In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.
The Company’s management is responsible for establishing and maintaining the adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13(a) — 15(f). Under the supervision and with the participation of management, including the Company’s principal executive officers and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management also conducted an assessment of requirements pertaining to Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). This section relates to management’s evaluation of internal control over financial reporting including controls over the preparation of the schedules equivalent to the basic financial statements and compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on the Company’s evaluation under the framework inInternal Control — Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2006. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by KPMG, LLP, an independent registered public accounting firm, as stated in their report which is contained herein.
Carl J. Chaney John M. Hairston
Chief Executive Officer & Chief Executive Officer &
Chief Financial Officer Chief Operating Officer
February 23, 2007 February 23, 2007
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders
Hancock Holding Company:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Hancock Holding Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Hancock Holding Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because management’s assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of Hancock Holding Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9 C). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Hancock Holding Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, Hancock Holding Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on management’s statement referring to compliance with laws and regulations.
50
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006 and our report dated February 23, 2007 expressed an unqualified opinion on those financial statements.
KPMG LLP
/s/ KPMG LLP
Birmingham, Alabama
February 23, 2007
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders
Hancock Holding Company
We have audited the accompanying consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hancock Holding Company and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2006, in conformity with U. S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hancock Holding Company’s internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share based payments and evaluating prior year misstatements effective January 1, 2006 and, effective December 31, 2006, its method of accounting for defined benefit pension and postretirement benefit plans.
KPMG LLP
/s/ KPMG LLP
Birmingham, Alabama
February 23, 2007
52
Hancock Holding Company and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------------------------
2006 2005
--------------------- ---------------------
(In thousands except share data)
Assets:
Cash and due from banks (non-interest bearing) $ 190,114 $ 271,104
Interest-bearing time deposits with other banks 10,197 7,258
Federal funds sold 212,242 402,968
Securities available for sale, at fair value
(amortized cost of $1,916,845 and $1,980,745) 1,903,658 1,959,261
Loans held for sale 16,946 24,219
Loans 3,267,058 2,976,399
Less: Allowance for loan losses (46,772) (74,558)
Unearned income (17,420) (11,432)
--------------------- ---------------------
Loans, net 3,219,812 2,914,628
Property and equipment, net of accumulated
depreciation of $66,043 and $57,922 140,554 79,386
Other real estate, net 568 1,833
Accrued interest receivable 32,984 35,046
Goodwill, net 62,277 61,418
Other intangible assets, net 10,355 10,781
Life insurance contracts 107,170 83,080
Reinsurance receivables 38,042 49,452
Deferred tax asset, net 16,544 40,380
Other assets 20,048 33,592
--------------------- ---------------------
Total assets $ 5,964,565 $ 5,950,187
===================== =====================
Liabilities and Stockholders' Equity:
Deposits:
Non-interest bearing demand $ 1,057,358 $ 1,324,938
Interest-bearing savings, NOW, money market
and time 3,973,633 3,664,882
--------------------- ---------------------
Total deposits 5,030,991 4,989,820
Federal funds purchased 3,800 1,475
Securities sold under agreements to repurchase 218,591 250,807
Long-term notes 258 50,266
Policy reserves and liabilities 93,669 105,368
Other liabilities 58,846 75,036
--------------------- ---------------------
Total liabilities 5,406,155 5,472,772
Common Stockholders' Equity
Common stock-$3.33 par value per share; 75,000,000
shares authorized, 32,666,052 and 32,301,123 issued,
respectively 108,778 107,563
Capital surplus 139,099 129,222
Retained earnings 334,546 265,039
Accumulated other comprehensive loss, net (24,013) (22,066)
Unearned compensation - (2,343)
--------------------- ---------------------
Total common stockholders' equity 558,410 477,415
--------------------- ---------------------
Total liabilities and common
stockholders' equity $ 5,964,565 $ 5,950,187
===================== =====================
See accompanying notes to consolidated financial statements.
53
Hancock Holding Company and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------------------
2006 2005 2004
--------------- --------------- ---------------
(In thousands, except per share data)
Interest income:
Loans, including fees $ 230,450 $ 197,857 $ 169,750
Securities-taxable 93,525 51,360 46,672
Securities-tax exempt 6,770 7,034 7,719
Federal funds sold 9,657 4,447 297
Other investments 3,928 2,933 2,336
--------------- --------------- ---------------
Total interest income 344,330 263,631 226,774
--------------- --------------- ---------------
Interest expense:
Deposits 110,092 67,581 52,570
Federal funds purchased and securities sold
under agreements to repurchase 9,682 4,687 2,141
Long-term notes and other interest expense 89 2,551 2,559
--------------- --------------- ---------------
Total interest expense 119,863 74,819 57,270
--------------- --------------- ---------------
Net interest income 224,467 188,812 169,504
Provision for (reversal of) loan losses (20,762) 42,635 16,537
--------------- --------------- ---------------
Net interest income after provision for (reversal of) loan losses 245,229 146,177 152,967
--------------- --------------- ---------------
Noninterest income:
Service charges on deposit accounts 36,228 34,773 43,631
Trust fees 13,286 11,107 9,030
Insurance commissions and fees 19,246 17,099 9,193
Investment and annuity fees 5,970 5,076 2,295
Debit card and merchant fees 7,298 4,878 4,271
ATM fees 5,005 4,202 4,512
Secondary mortgage market operations 3,528 2,221 2,934
Securities gains (losses), net (5,169) (53) 163
Gains on sales of branches and credit card merchant
services business - - 5,258
Net storm-related gain 5,084 6,584 -
Other income 13,357 12,382 8,994
--------------- --------------- ---------------
Total noninterest income 103,833 98,269 90,281
--------------- --------------- ---------------
Noninterest expense:
Salaries and employee benefits 103,753 94,158 86,404
Net occupancy expense of premises 13,350 10,926 9,915
Equipment rentals, depreciation and maintenance 10,796 9,553 9,669
Amortization of intangibles 2,125 2,194 1,945
Other expense 70,692 54,712 47,018
--------------- --------------- ---------------
Total noninterest expense 200,716 171,543 154,951
--------------- --------------- ---------------
Income before income taxes 148,346 72,903 88,297
Income taxes 46,544 18,871 26,593
--------------- --------------- ---------------
Net income $ 101,802 $ 54,032 $ 61,704
=============== =============== ===============
Basic earnings per common share $ 3.13 $ 1.67 $ 1.91
=============== =============== ===============
Diluted earnings per common share $ 3.06 $ 1.64 $ 1.87
=============== =============== ===============
See accompanying notes to consolidated financial statements.
54
Hancock Holding Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other Unearned
Common Stock Capital Retained Comprehensive Compen-
Shares Amount Surplus Earnings Loss, net sation Total
----------- --------- ---------- ---------- ------------- -------- ----------
(In thousands, except share and per share data)
Balance January 1, 2004 30,455,358 $ 101,416 $ 111,963 $ 191,696 $ (6,304) $ (957) $397,814
Comprehensive income:
Net income per consolidated
statements of income - - - 61,704 - - 61,704
Net change in fair value of
securities available for sale,
net of tax - - - - (4,375) - (4,375)
Net change in unfunded accumulated
benefit obligation, net of tax - - - - (442) - (442)
-----------
Comprehensive income 56,887
Cash dividends paid ($0.58 per share) - - - (18,977) - - (18,977)
Common stock issued, long - term incentive
plan - - 1,387 - - (1,387) -
Compensation expense, long - term
incentive plan 142,075 473 1,357 - - 695 2,525
Repurchase and retirement of common
stock (370,793) (1,235) (9,733) - - - (10,968)
Preferred stock conversion 2,200,976 7,329 29,886 - - - 37,215
Other stock transactions 12,086 41 45 - - - 86
------------ ------------ ------------ ------------ ----------- ---------- -----------
Balance, December 31, 2004 32,439,702 108,024 134,905 234,423 (11,121) (1,649) 464,582
Comprehensive income:
Net income per consolidated
statements of income - - - 54,032 - - 54,032
Net change in fair value of
securities available for sale,
net of tax - - - - (10,983) - (10,983)
Net change in unfunded accumulated
benefit obligation, net of tax - - - - 38 - 38
-----------
Comprehensive income 43,087
Cash dividends paid ($0.72 per share) - - - (23,416) - - (23,416)
Common stock issued, long - term incentive
plan 142,684 475 2,288 - - (1,425) 1,338
Compensation expense, long - term
incentive plan - - - - - 731 731
Repurchase and retirement of common
stock (295,849) (985) (8,564) - - - (9,549)
Other stock transactions 14,586 49 593 - - - 642
------------ ------------ ------------ ------------ ----------- ---------- -----------
Balance, December 31, 2005 32,301,123 107,563 129,222 265,039 (22,066) (2,343) 477,415
SAB No.108 adjustments, net of tax - - - (2,984) - - (2,984)
------------ ------------ ------------ ------------ ----------- ---------- -----------
Balance, December 31, 2005, as adjusted 32,301,123 107,563 129,222 262,055 (22,066) (2,343) 474,431
Comprehensive income:
Net income per consolidated
statements of income - - - 101,802 - - 101,802
Net change in fair value of
securities available for sale,
net of tax - - - - 4,940 - 4,940
Net change in unfunded accumulated
benefit obligation, net of tax - - - - 1,057 - 1,057
-----------
Comprehensive income 107,799
Adoption of SFAS No. 158, net of tax - - - - (7,944) - (7,944)
Cash dividends paid ($0.895 per share) - - - (29,311) - - (29,311)
Common stock issued, long - term
incentive plan, including income
tax benefit of $3,493 398,338 1,326 10,169 - - - 11,495
Compensation expense, long - term
incentive plan - - 3,690 - - - 3,690
SFAS No. 123(R) reclass of unearned
compensation - - (2,343) - - 2,343 -
Repurchase and retirement of
common stock (33,409) (111) (1,639) - - - (1,750)
------------ ------------ ------------ ------------ ----------- ---------- -----------
Balance, December 31, 2006 32,666,052 $ 108,778 $ 139,099 $ 334,546 $(24,013) $ - $558,410
============ ============ ============ ============ =========== ========== ===========
See accompanying notes to consolidated financial statements.
55
Hancock Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------------
2006 2005 2004
-------------- ------------ ------------
(In thousands)
Cash Flows from Operating Activities:
Net income $ 101,802 $ 54,032 $ 61,704
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,443 8,717 9,157
Provision for (recovery of) loan losses (20,762) 42,635 16,537
Deferred tax (benefit) provision 24,599 (18,401) (3,529)
Provision for losses on other real estate owned 86 - 142
Increase in cash surrender value of life insurance contracts (4,090) (3,450) (3,465)
Securities (gains) losses, net 5,169 53 (163)
Gain on sale of other real estate owned, net (7) (444) -
Gains on sales of branches and credit card merchant service business - - (5,258)
Gain on involuntary conversion of assets, net (5,084) (14,135) -
(Accretion) amortization of securities premium/discount (11,300) (1,847) 5,464
Amortization of intangible assets 2,125 2,194 1,945
Amortization of mortgage servicing rights 549 818 1,048
Stock-based compensation expense 3,690 1,289 679
Excess tax benefit from exercise of stock options (3,493) - -
(Increase) decrease in accrued interest receivable 2,062 (11,263) (445)
(Decrease) increase in accrued expenses (30,133) 28,349 1,025
Increase (decrease) in other liabilities (2,636) 1,625 6,089
Increase (decrease) in interest payable 2,341 521 513
Increase (decrease) in unearned premiums (11,699) (5,739) 90,315
Decrease (increase) in reinsurance receivables 11,410 9,738 (42,893)
(Increase) decrease in other assets, net (2,633) (26,154) 15,214
Other, net (2,790) 2,516 (896)
-------------- ------------ ------------
Net cash provided by operating activities 74,921 71,054 153,183
-------------- ------------ ------------
See accompanying notes to consolidated financial statements.
56
Hancock Holding Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
--------------------------------------
2006 2005 2004
----------- ----------- ----------
(In thousands)
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing time deposits (2,939) 868 (2,572)
Proceeds from maturities, calls or prepayments of securities
held to maturity - 195,599 27,890
Purchases of securities held to maturity - (7,736) (54,216)
Proceeds from sales of securities available for sale 157,300 133,800 20,000
Proceeds from maturities of securities available for sale 1,086,070 378,105 686,237
Purchases of securities available for sale (1,169,592) (1,354,864) (714,750)
Net (increase) decrease in federal funds sold 190,726 (260,833) (122,903)
Net increase in loans (293,117) (248,056) (295,410)
Net (increase) decrease in loans held for sale 7,273 (6,735) (2,469)
Purchase of property, equipment and software (76,943) (15,486) (10,422)
Proceeds from sales of property, equipment and software 4,097 591 1,172
Proceeds from sales of other real estate 1,749 4,338 6,981
Proceeds from insurance settlements 22,469 12,562 -
Proceeds from sale of credit card merchant services business - - 3,000
Premiums paid on life insurance contracts (20,000) - (25,000)
Purchase of interest in unconsolidated joint venture (4,710) - -
Net cash paid in connection with sale of branches - - (22,999)
Net cash paid in business combinations - (3,922) (6,378)
----------- ----------- ----------
Net cash used by investing activities (97,617) (1,171,769) (511,839)
----------- ----------- ----------
Cash Flows from Financing Activities:
Net increase in deposits 41,171 1,191,875 327,788
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (29,891) 56,004 46,182
Repayments of short-term notes - - (9,400)
Repayments of long-term notes (50,008) (7) (155)
Dividends paid (29,311) (23,416) (18,977)
Conversion of preferred stock to cash - - (148)
Proceeds from exercise of stock options 8,002 1,213 1,830
Repurchase/retirement of common stock (1,750) (9,549) (10,968)
Excess tax benefit from the exercise of stock options 3,493 - -
Other stock transactions, net - (98) 219
----------- ----------- ----------
Net cash (used by) provided by financing activities (58,294) 1,216,022 336,371
----------- ----------- ----------
Net (decrease) increase in cash and due from banks (80,990) 115,307 (22,285)
Cash and due from banks, beginning of year 271,104 155,797 178,082
----------- ----------- ----------
Cash and due from banks, end of year $ 190,114 $ 271,104 $ 155,797
=========== =========== ==========
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 55,503 $ 12,500 $26,700
Interest paid, including capitalized interest
of $806 in 2006 $ 112,447 $ 74,300 $56,800
Restricted stock issued to employees of Hancock $ 2,518 $ 1,490 $ 1,391
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
Transfers from loans to other real estate $ 1,304 $ 2,703 $ 4,700
Financed sales of foreclosed property $ 741 $ 1,300 $ 1,200
See accompanying notes to consolidated financial statements.
57
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting PoliciesDescription of BusinessHancock Holding Company (the Company or Hancock) is a financial holding company headquartered in Gulfport, Mississippi operating in the states of Mississippi, Louisiana, Alabama and Florida. Hancock Holding Company, the Parent Company operates through three wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi, Hancock Bank of Louisiana, Baton Rouge, Louisiana and Hancock Bank of Florida, Tallahassee, Florida (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.
Summary of Significant Accounting PoliciesThe accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of the more significant of those policies.
ConsolidationThe consolidated financial statements of the Company include the accounts of the Company, the Banks, Hancock Investment Services, Inc., Hancock Insurance Agency, Inc., Harrison Finance Company, Magna Insurance Company and subsidiary, as well as three real estate corporations owning land and buildings that house bank branches and other facilities. Significant intercompany transactions and balances have been eliminated in consolidation.
Comprehensive IncomeComprehensive income includes net earnings and other comprehensive income which, in the case of the Company, includes unrealized gains and losses on securities available for sale and unfunded pension and post retirement plan liabilities.
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, intangible assets and goodwill, income taxes, pension and postretirement benefit plans and contingent liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results could differ significantly from those estimates.
ReclassificationsCertain reclassifications have been made to prior periods to conform to the current year presentation.
Statements of Cash FlowsCash and cash equivalents are defined as only cash on hand and balances due from financial institutions.
58
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)SecuritiesSecurities have been classified into one of two categories: available for sale or held to maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates this classification periodically. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale.
Held to maturity securities are stated at amortized cost. Available for sale securities are stated at fair value with unrealized gains and losses, net of income taxes, reported as a separate component of stockholders’ equity until realized.
The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security using the constant-yield method. The prepayment speed chosen to determine the estimated life of a mortgage-backed security is the security’s historical 3-month prepayment speed. When prepayment speeds are faster than expected, the average life of the mortgage-backed security is shorter than the original estimate. Amortization, accretion and accrued interest are included in interest income on securities. Realized gains and losses, and declines in value judged to be other than temporary, are included in net securities gains and losses. Gains and losses on the sales of securities available for sale are determined using the specific-identification method. Using this basis results in the most accurate reporting of gains and losses realized on these sales, as well as the appropriate adjustment to Accumulated Other Comprehensive Income. A decline in the fair value of securities below cost that is deemed to be other than temporary results in a charge to earnings and the establishment of a new cost basis for the security.
During 2005, securities classified as held to maturity in the portfolio of one of the Company’s subsidiaries were sold. A determination was made that this action tainted the investment portfolio of the entire Company. As a result of this action and determination, all securities held by the Company have been reclassified to available for sale and the carrying value of those securities are adjusted to fair value as prescribed in Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities.
Derivative InstrumentsThe Company does not have any accounting hedges under the guidelines of SFAS No. 133. The Company does have certain Interest Rate Lock Commitments (IRLC’s) that are carried off balance sheet. These represent forward commitments to fund customer mortgage loans that will be sold, servicing released upon funding. The Company values its position for the outstanding IRLC’s on a quarterly basis versus current market rates and tests its position for exposure to future earnings from the sales of those commitments.
59
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)LoansNon-refundable loan origination fees and certain direct origination costs are recognized as an adjustment to the yield on the related loan. Interest on loans is recorded to income as earned. Where doubt exists as to collectibility of a loan, the accrual of interest is discontinued, all unpaid accrued interest is reversed and payments subsequently received are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings, and performing and non-performing major loans for which full payment of principal or interest is not expected. Categories of non-major homogeneous loans, which are evaluated on an overall basis, generally include all loans under $500,000. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
Generally, loans of all types which become 90 days delinquent are reviewed relative to collectibility. Unless such loans are in the process of terms revision to bring to a current status, collection through repossession or foreclosure, those loans deemed uncollectible are charged off against the allowance account. As a matter of policy, loans are placed on a non-accrual status when doubt exists as to collectibility.
Allowance for Loan LossesThe allowance for loan and lease losses (ALLL) is a valuation account available to absorb losses on loans. The ALLL is established and maintained at an amount sufficient to cover the estimated credit loss associated with the loan and lease portfolios of the Company as of the date of the determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operational risk, concentration risk, and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan and lease losses. Quarterly, management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on the Company’s past loan loss and delinquency experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, and the estimated value of any underlying collateral and current economic conditions. The analysis and methodology include three primary segments. These segments include a pool analysis of various retail loans based upon loss history, a pool analysis of commercial and commercial real estate loans based upon loss history by loan type, and a specific reserve analysis for those loans considered impaired under SFAS No. 114. All commercial and commercial real estate loans with an outstanding balance of $100,000 or greater are individually reviewed for impairment; substandard mortgage loans with balances of $100,000 or greater are also included in the analysis. All losses are charged to the allowance for loan and lease losses when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the allowance for loan losses at the time of receipt.
60
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)Property and EquipmentProperty and equipment are recorded at cost. Costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in the determination of income. Depreciation is computed using multiple methods based on the estimated useful lives of the related assets, which generally range from 7 to 39 years for buildings and improvements and from 3 to 7 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the term of the lease or the asset’s useful life.
GoodwillGoodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. In accordance with the provisions of SFAS No. 142,Goodwill and Other Intangibles, the Company tests its goodwill for impairment annually or more frequently if impairment indicators are present. If indicators of impairment were present and undiscounted future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified.
Other Real EstateOther real estate acquired through foreclosure is stated at fair value at the date of acquisition, net of the costs of disposal. When a reduction to fair value at the time of foreclosure is required, it is charged to the allowance for loan losses. Valuation allowances associated with other real estate amounted to $131,000 and $450,000 at December 31, 2006 and 2005, respectively.
The Company determines the fair value of other real estate utilizing observations of current market conditions, adjusted for contracts existing at the date of valuation. The carrying value of other real estate is adjusted on a quarterly basis.
Any subsequent adjustments, as well as the costs associated with holding the real estate, are charged to expense.
Other Intangible AssetsOther intangible assets consist of core deposit intangibles, value of business acquired, value of insurance expirations, non-compete agreements, trade name and mortgage servicing rights (MSRs). Other intangible assets are being amortized using multiple methods based on the assets estimated useful life and pattern in which the expected benefits are consumed. If indicators of impairment were present in amortizable intangible assets and undiscounted future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified.
MSRs are rights to service mortgage loans for others, on loans not retained by the Company. For loans originated and sold, where the servicing rights have been retained, the Company allocates the cost of the loan and servicing right based on their relative fair values. The Company amortizes MSRs over the estimated lives of the underlying loans in proportion to the resultant servicing income stream. For the valuation of MSRs, management obtains external information, evaluates overall portfolio characteristics and monitors economic conditions to arrive at appropriate prepayment speeds and other assumptions. The company used the loan type and term of the mortgage to stratify the servicing portfolio on which MSRs have been recognized to determine valuation and impairment. Impairment is recognized for the amount by which MSRs for a stratum exceed their fair value.
61
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)Life Insurance ContractsLife insurance contracts represent single premium life insurance contracts on the lives of certain officers of the Company. The Company is the beneficiary of these policies. These contracts are reported at their cash surrender values of $107.2 million and $83.1 million at December 31, 2006 and 2005, respectively. Changes in the cash surrender value are included in other income and amounted to $4.1 million, $3.5 million and $3.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Reinsurance ReceivablesCertain premiums and losses are assumed from and ceded to other insurance companies under various reinsurance agreements. Reinsurance premiums, loss reimbursement, and reserves related to reinsurance business are accounted for on a basis consistent with that used in accounting for the original policies issued and the terms of the reinsurance contract. The Company may receive a ceding commission in connection with ceded reinsurance. If so, the ceding commission is earned on a monthly pro rata basis in the same manner as the premium and is recorded as a reduction of other operating expenses.
Self InsuranceThe Company is self insured for certain risks including employee health insurance and records estimated liabilities for these risks.
Transfers of Financial AssetsThe Company recognizes the financial and servicing assets it controls and the liabilities it incurs, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. All measurements and allocations are based on fair value.
Trust IncomeTrust income is recorded as earned.
Income TaxesProvisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities and loans and earnings on the Company’s bank-owned life insurance policies). Deferred taxes on temporary differences are calculated at the currently enacted tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Pension AccountingThe Company has accounted for its defined benefit pension plan using the actuarial model required by SFAS No. 87,Employers’ Accounting for Pensions. The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes. The Company also sponsors two defined benefit postretirement plans, which provide medical benefits and life insurance benefits. The Company has accounted for these plans using the actuarial computations required by SFAS No. 106,Employers Accounting for Postretirement Benefits Other Than Pensions as amended by SFAS No. 132. The cost of the defined benefit postretirement plan has been recognized on the projected unit credit method over the employee’s approximate service period. Effective December 31, 2006, the Company adopted 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); which requires the recognition of the over funded or under funded status of a defined benefit postretirement plan as an asset or liability on the balance sheet. As a result of adopting SFAS No. 158, unrecognized transition assets and obligations, unrecognized actuarial gains and losses and prior service costs and credits are recognized as a component of accumulated other comprehensive income resulting in a reduction to stockholders’ equity of $7.9 million.
62
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)Policy Reserves and LiabilitiesUnearned premium reserves are based on the assumption that the portion of the original premium applicable to the remaining term and amount of insurance will be adequate to pay future benefits. The reserve is calculated by multiplying the original gross premium times an unearned premium factor. Factors are developed which represent the proportion of the remaining coverage compared to the total coverage provided over the entire term of insurance.
Policy reserves for future life and health claims not yet incurred are based on assumed mortality and interest rates. For disability, the reserves are based upon unearned premium, which is the portion of the original premium applicable to the remaining term and amount of insurance that will be adequate to pay future benefits. Present value of amounts not yet due is an amount for disability claims already reported and incurred and represents the present value of all the future benefits using actuarial disability tables. IBNR (Incurred But Not Reported) is an estimate of claims incurred but not yet reported, and is based upon historical analysis of claims payments.
Stock-Based CompensationThe Company adopted SFAS No. 123(R),Accounting for Stock-Based Compensation, effective January 1, 2006. Under the provisions of this statement, compensation expense is recognized for options granted, modified or settled after January 1, 2006, utilizing the fair value of the grants over the vesting period. The impact of the adoption of SFAS No. 123(R) on the Company’s net income was $2.5 million. (See Note 14).The Company estimates the fair value of each pool of options granted using the Black-Scholes-Merton options pricing model.
Basic and Diluted Earnings Per Common ShareBasic earnings per common share (EPS) excludes dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed by dividing net earnings available to common shareholders by the total of the weighted-average number of shares outstanding plus the “if-converted” effect of outstanding options and other equity based incentives using the treasury stock method.
Off-Balance Sheet Credit Related Financial InstrumentsIn the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Recent Accounting PronouncementsIn May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (“SFAS No. 154”). SFAS No. 154 is a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine period-specific effects of an accounting change on one or more individual prior periods presented. Then the new accounting principle is applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment is made to the opening balance of retained earnings for that period rather that being reported in an income statement. Further, the accounting principle is to be applied prospectively from the earliest date when it is impracticable to determine the effect to all prior periods. The Company adopted SFAS No. 154 as of January 1, 2006 as required and its effect on the consolidated financial statements, to date, has not been material. Adoption of this statement could have an impact if there are future voluntary accounting changes and correction of errors.
63
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB Statement No. 97,Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The provisions in SOP 05-1 are effective for the Company beginning in fiscal year 2007. The Company is currently evaluating the requirements of SOP 05-1 and has not yet determined the impact on the Company’s consolidated financial statements.
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156,Accounting for Servicing of Financial Assets (“SFAS No. 156”). 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. This pronouncement is effective for the Company beginning in fiscal year 2007. The Company intends on using the amortization method and does not believe the adoption of SFAS No. 156 will have a material impact on its results of operations and financial position.
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 the Company beginning in fiscal year 2007. The Company does not believe the adoption of FIN 48 will have a material impact on its results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). 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. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on the Company’s 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) (“SFAS No. 158”). This pronouncement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet. 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 effective for fiscal years ending after December 15, 2006. In addition, this statement requires an employer to measure the funded status of a plan as of its year-end balance sheet date effective for fiscal years ending after December 15, 2008. The Company adopted the requirement to recognize the funded status of the benefit plans and related disclosure requirements as of December 31, 2006. The Company is currently evaluating the requirements of SFAS No. 158 related to the measurement date and has not yet determined the impact of adoption on the Company’s consolidated financial statements.
64
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)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 the Company beginning in fiscal year 2007. The Company does not believe the adoption of EITF 06-5 will have a material impact on its results of operations and financial position.
In fiscal 2006, the Company adopted SEC Staff Accounting Bulletin No. 108 (“SAB No. 108”). SAB No. 108 requires that registrants assess the impact on both balance sheet and the statement of income when quantifying and evaluating the materiality of a misstatement. Under SAB No. 108, adjustment of financial statements is required when either approach results in quantifying a misstatement that is material to a reporting period presented within the financial statements, after considering all relevant quantitative and qualitative factors. The impact of adopting SAB No. 108 was a $2.9 million adjustment to retained earnings as of December 31, 2005, as disclosed in Note 12.
Note 2. Hurricane KatrinaNet income for both 2006 and 2005 was affected by several items related to the impact of Hurricane Katrina, which made landfall in the Company’s operating region on August 29, 2005. In 2005, net income was negatively affected by storm-related items totaling $21.1 million on an after tax basis. The largest of 2005‘s items was the establishment of a $35.2 million (pretax) allowance for loan losses related to the storm. In 2006, the Company reversed $20.0 million from the storm-related allowance for loan losses due to better than expected loss experience with storm impacted credits. In addition, the Company negotiated a final settlement with our primary property and casualty insurance provider and recognized a $5.1 million gain in 2006.
Note 3. Business CombinationsGulf South Technology Center, LLCIn July 2006, the Company purchased a 50% interest in a joint venture partnership for $4.7 million in which no party has a controlling interest. The Company’s vision is to help develop the Mississippi Coast as a center for economic development in the 21st century by creating the Gulf South Technology Center, LLC. Management expects that the center will include a commercial hub offering state of the art technology infrastructure, strategic multimodal transportation access and a network of business support services as well as corporate office complexes, technology and data centers, logistics and distribution facilities, service and convenience retail, residential housing and education campuses.
65
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Business Combinations (continued)J. Everett Eaves, Inc.On July 1, 2005, Hancock Insurance Agency acquired 100% of the stock of J. Everett Eaves, Inc., a well-known commercial insurance agency operating in the New Orleans, Louisiana market for approximately $5.0 million. During 2006, to record the final purchase price of J. Everett Eaves, Inc. and reflect the results of a third-party study which valued the intangible assets, the Company recorded a reallocation of intangibles and final purchase accounting adjustments which resulted in the recording of four separate categories of intangible assets: value of insurance expirations, $1.9 million; non-compete agreements, $0.1 million; trade name, $0.1 million and goodwill of $3.8 million. The value of insurance expirations, non-compete agreements and trade name assets are being amortized over their estimated lives, which are 10, 5 and 5 year lives, respectively, on a straight line basis.
Ross King Walker, Inc.An intangibles valuation relating to the intangibles recorded in the acquisition of Ross King Walker, Inc. in late 2004 was completed during 2005. The reallocation of intangibles resulted in the recording of three separate categories of intangible assets: value of insurance expirations, $1.1 million; non-compete agreements, $0.2 million and goodwill of $1.3 million. The value of insurance expirations and non-compete agreement assets are being amortized over their estimated lives, which are 10 years and 5 years, respectively, on an accelerated basis.
Note 4. SecuritiesThe amortized cost and fair value of securities classified as available for sale follow (in thousands):
December 31, 2006 December 31, 2005
--------------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------------- --------- ------------ ------------- ------------ ---------- ---------- ---------------
U.S. Treasury $ 60,231 $ 17 $ 57 $ 60,191 $ 50,883 $ 22 $ 35 $ 50,870
U.S. government agencies 1,016,811 172 6,054 1,010,929 1,029,656 299 10,695 1,019,260
Municipal obligations 200,891 3,556 430 204,017 165,180 3,548 521 168,207
Mortgage-backed securities 443,410 995 9,978 434,427 484,131 1,064 11,657 473,538
CMOs 116,161 - 1,991 114,170 194,899 6 2,827 192,078
Other debt securities 44,664 282 926 44,020 48,476 288 1,553 47,211
Federal home loan bank stock 3,198 - - 3,198 5,422 - - 5,422
Other equity securities 31,479 1,247 20 32,706 2,098 631 54 2,675
-------------- --------- ------------ ------------- ------------ ---------- ---------- ---------------
$ 1,916,845 $ 6,269 $ 19,456 $ 1,903,658 $ 1,980,745 $ 5,858 $ 27,342 $ 1,959,261
============== ========= ============ ============= ============ ========== ========== ===============
66
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities (continued)The amortized cost and fair value of securities classified as available for sale at December 31, 2006, by contractual maturity, (expected maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties) were as follows (in thousands):
Amortized Fair
Cost Value
---------------- ----------------
Due in one year or less $ 655,944 $ 654,732
Due after one year through five years 407,810 406,557
Due after five years through ten years 239,444 238,429
Due after ten years 19,399 19,439
---------------- ----------------
1,322,597 1,319,157
Mortgage-backed securities & CMOs 559,571 548,597
Equity securities 34,677 35,904
---------------- ----------------
$ 1,916,845 $ 1,903,658
================ ================
The Company held no securities classified as held to maturity at December 31, 2006 and 2005. During 2005, securities classified as held to maturity in the portfolio of one of the Company’s subsidiaries were sold. A determination was made that this action tainted the investment portfolio of the entire Company. As a result of this action and determination, all securities held by the Company have been classified to available for sale and the carrying value of those securities are adjusted to market as prescribed in SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. Investments with a carrying value of approximately $167.0 million were reclassified and resulted in the recording of net unrealized gains of approximately $480,000. There were no associated gains or losses in accumulated other comprehensive income related to any derivative which hedged these securities.
The details concerning securities classified as available for sale with unrealized losses as of December 31, 2006 follow (in thousands):
Losses < 12 months Losses 12 months or > Total
---------------------------- ------------------------------ -----------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------- ------------- -------------- -------------- ------------- -------------
U.S. Treasury $ 59,194 $ 49 $ 500 $ 8 $ 59,694 $ 57
U.S. government agencies 465,684 1,344 440,711 4,710 906,395 6,054
Municipal obligations 2,070 14 36,568 416 38,638 430
Mortgage-backed securities 1,729 1 343,494 9,977 345,223 9,978
CMOs 8 - 114,018 1,991 114,026 1,991
Other debt securities 914 4 32,033 922 32,947 926
Equity securities 3 1 19 19 22 20
------------- ------------- -------------- -------------- ------------- -------------
$ 529,602 $ 1,413 $ 967,343 $ 18,043 $ 1,496,945 $ 19,456
============= ============= ============== ============== ============= =============
67
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities (continued)The details concerning securities classified as available for sale with unrealized losses as of December 31, 2005 were as follows (in thousands):
Losses < 12 months Losses 12 months or > Total
---------------------------- ------------------------------ -----------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------- ------------- -------------- -------------- ------------- -------------
U.S. Treasury $ 49,992 $ 30 $ 193 $ 5 $ 50,185 $ 35
U.S. government agencies 269,754 569 537,172 10,126 806,926 10,695
Municipal obligations 889 3 21,625 518 22,514 521
Mortgage-backed securities 8,767 188 379,133 11,469 387,900 11,657
CMOs - - 191,371 2,827 191,371 2,827
Other debt securities 12,972 583 21,121 970 34,093 1,553
Equity securities 67 54 - - 67 54
------------- ------------- -------------- -------------- ------------- -------------
$ 342,441 $ 1,427 $ 1,150,615 $ 25,915 $ 1,493,056 $ 27,342
============= ============= ============== ============== ============= =============
As of December 31, 2006, the Company had 1,291 investments. Of the total portfolio, 449 securities were in an unrealized loss position. Management and the Asset/Liability Committee continually monitor the securities portfolio and management is able to effectively measure and monitor the unrealized loss position on these securities. The Company has adequate liquidity and therefore has the ability and additionally the intent to hold these securities to recovery. Accordingly, the unrealized loss of these securities has been determined to be temporary.
The Company’s securities portfolio is an important source of liquidity and earnings for the Company. A stated objective in managing the securities portfolio is to provide consistent liquidity to support balance sheet growth but also to provide a safe and consistent stream of earnings. To that end, management is open to opportunities that present themselves which enables the Company to improve the structure and earnings potential of the securities portfolio. During the fourth quarter of 2006, the current economic environment, the slope of the yield curve and the expectations of future interest rate movements presented the Company with an opportunity to sell $162.9 million in certain U.S. Agency securities. The bonds were sold at a pretax book loss of $5.5 million and had a book yield of 3.81 percent. The proceeds were immediately reinvested in a combination of federal funds and other short-term instruments. The Company has no intention and does not expect to incur any other significant security sales in the immediate future.
Proceeds from sales of available for sale securities were approximately $157.3 million in 2006, $133.8 million in 2005 and $20.0 million in 2004. Gross gains of $309,000 in 2006, $781,000 in 2005 and $165,000 in 2004 and gross losses of $5.5 million in 2006, $834,000 in 2005 and $2,000 in 2004 were realized on such sales.
Securities with an amortized cost of approximately $1,212.5 million at December 31, 2006 and $1,030.9 million at December 31, 2005, were pledged primarily to secure public deposits and securities sold under agreements to repurchase. The Company has approximately $10.0 million and $6.7 million of securities pledged with various state regulatory authorities to secure reinsurance receivables as of December 31, 2006 and 2005, respectively.
68
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. LoansLoans, net of unearned income, consisted of the following (in thousands):
December 31,
---------------------------------
2006 2005
--------------- ---------------
Real estate loans $ 2,118,014 $ 1,879,107
Commercial and industrial loans 317,630 364,163
Loans to individuals for household, family
and other consumer expenditures 535,354 520,218
Leases and other loans 295,586 225,698
--------------- ---------------
$ 3,266,584 $ 2,989,186
=============== ===============
The Company generally makes loans in its market areas of South Mississippi, South Alabama, South and Central Louisiana and Northwest Florida. Loans are made in the normal course of business to its directors, executive officers and their associates on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Such loans did not involve more than normal risk of collectibility. Balances of loans to the Company’s directors, executive officers and their affiliates at December 31, 2006 and 2005 were approximately $14.4 million and $15.2 million, respectively, all of which are completely reserved. New loans, repayments and changes of directors and executive officers and their affiliates on these loans for 2006 were $7.0 million, $1.8 million and $6.0 million, respectively. New loans and repayments of directors and executive officers and their affiliates on these loans for 2005 were $4.4 million and $4.0 million, respectively.
Changes in the allowance for loan losses follow (in thousands):
2006 2005 2004
-------------- ------------- -------------
Balance at January 1 $ 74,558 $ 40,682 $ 36,750
Recoveries 12,491 7,052 7,823
Loans charged off (19,515) (15,811) (20,428)
Provision for (reversal of) loan losses (20,762) 42,635 16,537
-------------- ------------- -------------
Balance at December 31 $ 46,772 $ 74,558 $ 40,682
============== ============= =============
In 2005, the Company established a $35.2 million specific allowance for estimated credit losses related to the impact of Hurricane Katrina on its loan portfolio. In 2005, the Company reduced the allowance by $2.4 million for storm-related net charge-offs. As a result, the storm-related allowance was $32.9 million as of December 31, 2005. Of this remaining amount, the Company reversed $20.0 million of the allowance to income in 2006. While management determined that the potential for further storm-related charge-offs is present, the levels are projected to be lower than originally anticipated. The Company reviewed the asset quality of significant credits included in the original $35.2 million storm-related allowance and determined that this reversal was appropriate.
In some instances, loans are placed on nonaccrual status. All accrued but uncollected interest related to the loan is deducted from income in the period the loan is assigned a nonaccrual status. For such period as a loan is in nonaccrual status, any cash receipts are applied first to principal, second to expenses incurred to cause payment to be made and lastly to the recovery of any reversed interest income and interest that would be due and owing subsequent to the loan being placed on nonaccrual status.
69
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Loans (continued)Nonaccrual and renegotiated loans amounted to approximately 0.11% and 0.36% of total loans at December 31, 2006 and 2005, respectively. In addition, the Company’s other individually evaluated impaired loans amounted to approximately 0.08% and 0.86% of total loans at December 31, 2006 and 2005, respectively. The average amounts of impaired loans carried on the Company’s books for 2006, 2005 and 2004 were $7.4 million, $9.3 million and $9.8 million, respectively. Interest recognized on nonaccrual loans is immaterial to the Company’s operating results. Related allowance amounts were not significant during the years ended December 31, 2006, 2005 or 2004. The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual in 2006, 2005 or 2004, was $759,000, $747,000 and $574,000, respectively.
As of December 31, 2006, the Company had $17.2 million in loans carried at fair value. There were no loans carried at fair value as of December 31, 2005.
The Company held $16.9 million and $24.2 million in loans held for sale at December 31, 2006 and 2005 carried at fair value. These loans are originated on a best-efforts basis, whereby a commitment by a third party to purchase the loan has been received concurrent with the Banks’ commitment to the borrower to originate the loan.
Note 6. Property and EquipmentProperty and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following (in thousands):
2006 2005
------------------- --------------------
Land $ 25,203 $ 20,343
Land improvements 1,535 1,296
Buildings and leasehold improvements 72,410 64,392
Construction in progress 47,038 5,894
Furniture, fixtures and equipment 60,411 45,383
------------------- --------------------
206,597 137,308
Accumulated depreciation and amortization (66,043) (57,922)
------------------- --------------------
Property and equipment, net $ 140,554 $ 79,386
=================== ====================
Depreciation and amortization expense was $10.4 million, $8.7 million and $9.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. Capitalized interest was $0.8 million for the year ended December 31, 2006. There was no capitalized interest for the years ended December 31, 2005 and 2004.
Construction in progress is primarily for reconstruction of the corporate headquarters in Gulfport, Mississippi. The remaining construction commitment amount is expected to be approximately $8.3 million. The Company expects completion during the second quarter of 2007.
Note 7. Goodwill and Other Intangible AssetsGoodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. In accordance with the provisions of SFAS No. 142 Goodwill and Other Intangibles, the Company tests its goodwill for impairment annually. No impairment charges were recognized as of December 31, 2006 or 2005. The carrying amounts of goodwill were $62.3 million and $61.4 million as of December 31, 2006 and 2005, respectively.
During 2006, the Company recorded reallocations of goodwill to other intangible assets and to record the final purchase price for the acquisition of J. Everett Eaves, Inc.
70
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Goodwill and Other Intangible Assets (continued)The changes in the carrying amount of goodwill for 2006 and 2005 follow (in thousands):
December 31,
----------------------------
2006 2005
------------ ------------
Balance at January 1 $ 61,418 $ 55,409
Goodwill on business acquisition - 4,715
Reallocation based on subsequent valuation 859 1,304
Goodwill adjustment related to consolidation of branches - (10)
------------ ------------
Balance at December 31 $ 62,277 $ 61,418
============ ============
The following tables present information regarding the components of the Company’s other intangible assets, and related amortization for the dates indicated (in thousands):
December 31, 2006
-----------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
--------------------- --------------------- ----------------------
Core deposit intangibles $ 14,137 $ 7,290 $ 6,847
Value of insurance business acquired 3,767 1,459 2,308
Non-compete agreements 368 179 189
Trade name 100 30 70
--------------------- --------------------- ----------------------
$ 18,372 $ 8,958 $ 9,414
===================== ===================== ======================
December 31, 2005
-----------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
--------------------- --------------------- ----------------------
Core deposit intangibles $ 14,137 $ 5,924 $ 8,213
Value of insurance business acquired 1,673 833 840
Non-compete agreements 228 76 152
--------------------- --------------------- ----------------------
$ 16,038 $ 6,833 $ 9,205
===================== ===================== ======================
Years Ended December 31,
-----------------------------------------------------------------------
2006 2005 2004
--------------------- --------------------- ----------------------
Aggregate amortization expense for:
Core deposit intangibles $ 1,366 $ 1,654 $ 1,766
Value of insurance business acquired 626 471 179
Non-compete agreements 103 69 -
Trade name 30 - -
--------------------- --------------------- ----------------------
$ 2,125 $ 2,194 $ 1,945
===================== ===================== ======================
71
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Goodwill and Other Intangible Assets (continued)The amortization period used for core deposit intangibles and value of insurance business acquired is 10 years. The amortization period used for non-compete agreements and trade name intangibles is 5 years. The following table shows estimated amortization expense of other intangible assets for the five succeeding years and thereafter, calculated based on current amortization schedules (in thousands):
2007 $ 1,701
2008 1,518
2009 1,484
2010 1,425
2011 1,177
Thereafter 2,109
-------------
$ 9,414
=============
Note 8. Mortgage Banking (including Mortgage Servicing Rights)The changes in the carrying amounts of mortgage servicing rights for the years ended December 31, 2006, 2005, and 2004 are as follows (in thousands):
Gross Carrying Valuation Net Carrying
Amount Allowance Amount
----------------- ----------------- -----------------
Balance as of January 1, 2004 $ 5,165 $ (2,409) $ 2,756
Additions 305 - 305
Disposals (635) 292 (343)
Amortization - (1,048) (1,048)
Impairment reversal - 850 850
----------------- ----------------- -----------------
Balance as of December 31, 2004 4,835 (2,315) 2,520
Additions 167 - 167
Disposals (710) 417 (293)
Amortization - (818) (818)
----------------- ----------------- -----------------
Balance as of December 31, 2005 4,292 (2,716) 1,576
Additions 21 - 21
Disposals (475) 368 (107)
Amortization - (549) (549)
----------------- ----------------- -----------------
Balance as of December 31, 2006 $ 3,838 $ (2,897) $ 941
================= ================= =================
The following table shows estimated amortization expense of mortgage servicing rights for the five succeeding years and thereafter, calculated based on current amortization schedules (in thousands):
2007 $ 359
2008 235
2009 163
2010 106
2011 56
Thereafter 22
-------------
$ 941
=============
72
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Mortgage Banking (including Mortgage Servicing Rights) - (continued)The assumptions underlying these estimates are subject to modification based on changes in market conditions and portfolio behavior (such as prepayment speeds). Variable prepayment speeds were used in this projection and are based on coupon stratification, age and type of loans in this portfolio under the current interest rate environment. As a result, these estimates are subject to change in a manner and amount that is not presently determinable by management.
Impairment for mortgage servicing rights occurs when the estimated fair value falls below amortized cost. Fair value is determined utilizing specific risk characteristics of the mortgage loan, current interest rates and current prepayments speeds. Although there were some temporary deferrals related to Hurricane Katrina in 2005, the value of the mortgage servicing rights was not subject to impairment as a result of the long term effects of the storm. During 2004, the Company reversed $850,000 of mortgage servicing right temporary impairment taken during 2003 due to changes in the interest rate environment and market conditions for prepayment activity. Mortgage servicing rights valuations during 2004 proved this impairment to be temporary, and management determined it appropriate to reverse the non-cash pre-tax expense.
At December 31, 2006, the fair value of mortgage servicing rights was $2.2 million, with a weighted average coupon of 5.73% as compared to a worse case scenario value (assuming 30% prepayments) of $2.5 million and a fair value (using Bloomberg prepayment speeds) of $3.0 million as of December 31, 2005.
Note 9. DepositsThe Company experienced significant deposit growth since Hurricane Katrina impacted our market area. The majority of the deposit inflows consisted of transaction accounts and, to a lesser extent, short duration (12 months or less) time deposits. This rapid inflow of deposit dollars creates the potential for additional future liquidity needs; accordingly, the deposit inflows since the storm were primarily invested in Fed Funds, short-term U. S. Treasury Bills and U. S. Agency Discount notes, and short duration U. S. Agency bonds.
The maturities of time deposits at December 31, 2006 follow (in thousands):
2007 $1,535,854
2008 188,864
2009 92,561
2010 35,200
2011 28,695
thereafter 8
----------------
$1,881,182
================
Time deposits of $100,000 or more totaled approximately $735.6 million and $633.6 million at December 31, 2006 and 2005, respectively.
73
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. BorrowingsShort-Term BorrowingsThe following table presents information concerning federal funds purchased and sold and securities sold under agreements to repurchase (in thousands):
December 31,
-------------------------------------------------
2006 2005
--------------------- ---------------------
Federal funds sold
Amount outstanding at period-end $ 212,242 $ 402,968
Weighted average interest rate at period-end 5.09% 4.00%
Federal funds purchased
Amount outstanding at period-end $ 3,800 $ 1,475
Weighted average interest rate at period-end 4.95% 3.95%
Weighted average interest rate during the year 5.38% 3.27%
Average daily balance during the year $ 11,557 $ 10,262
Maximum month end balance during the year $ 49,160 $ 55,120
Securities sold under agreements to repurchase
Amount outstanding at period-end $ 218,591 $ 250,807
Weighted average interest rate at period-end 3.72% 4.29%
Weighted average interest rate during the year 3.62% 1.94%
Average daily balance during the year $ 250,603 $ 224,842
Maximum month end balance during the year $ 425,753 $ 258,508
The contractual maturity of federal funds purchased and securities sold under agreements to repurchase is demand or due overnight.
Specific U. S. Treasury and U. S. Government agencies with carrying values of $218.6 million at December 31, 2006 and $250.8 million at December 31, 2005 collateralized the repurchase agreements. The fair value of this collateral approximated $216.6 million at December 31, 2006 and $259.2 million at December 31, 2005.
Long-Term BorrowingsOn April 6, 2006, the Company completed an early retirement of its $50.0 million debt obligation to the Federal Home Loan Bank (FHLB). This obligation was recorded as a long-term liability in the accompanying Consolidated Balance Sheets as of December 31, 2005. As a result of this transaction, a $41,000 loss on early extinguishment of debt was recognized in 2006. The Company has an approved line of credit with the FHLB of approximately $346.8 million, which is secured by a blanket pledge of certain residential mortgage loans. This line of credit had no outstanding balances at December 31, 2006 and 2005.
74
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Other Assets and Other LiabilitiesThe components of other assets and other liabilities follow (in thousands):
December 31,
---------------------------------
2006 2005
--------------- ---------------
Other assets
Prepaid assets $ 13,203 $ 11,115
Other receivables 4,845 20,709
Miscellaneous 2,000 1,768
--------------- ---------------
Total other assets $ 20,048 $ 33,592
=============== ===============
Other liabilities
Other interest bearing liabilities $ 4,378 $ 4,881
Accrued expenses 48,391 63,724
Miscellaneous 6,077 6,431
--------------- ---------------
Total other liabilities $ 58,846 $ 75,036
=============== ===============
Note 12. Stockholders' EquityRegulatory CapitalCommon stockholders’ equity of the Company includes the undistributed earnings of the bank subsidiaries. Dividends are payable only out of undivided profits or current earnings. Moreover, dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by the Banks. Consequently, dividends are dependent upon earnings, capital needs, regulatory policies and statutory limitations affecting the Banks. Federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Dividends paid by Hancock Bank are subject to approval by the Commissioner of Banking and Consumer Finance of the State of Mississippi and those paid by Hancock Bank of Louisiana are subject to approval by the Commissioner of Financial Institutions of the State of Louisiana. Dividends paid by Hancock Bank of Florida are subject to approval by the Florida Department of Financial Services. The amount of capital of the subsidiary banks available for dividends at December 31, 2006 was approximately $128.8 million.
Risk-based capital requirements are intended to make regulatory capital more sensitive to risk elements of the Company. Currently, the Company and its bank subsidiaries are required to maintain minimum risk-based capital ratios of 8.0%, with not less than 4.0% in Tier 1 capital. In addition, the Company and its bank subsidiaries must maintain minimum Tier 1 leverage ratios (Tier 1 capital to total average assets) of at least 3.0% based upon the regulators latest composite rating of the institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required each federal banking agency to implement prompt corrective actions for institutions that it regulates. The rules provide that an institution is “well capitalized” if its total risk-based capital ratio is 10.0% or greater, its Tier 1 risked-based capital ratio is 6.0% or greater, its leverage ratio is 5.0% or greater and the institution is not subject to a capital directive. Under this regulation, all of the subsidiary banks were deemed to be “well capitalized” as of December 31, 2006 and 2005 based upon the most recent notifications from their regulators. There are no conditions or events since those notifications that management believes would change these classifications.
75
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Stockholders' Equity (continued)The Company and its bank subsidiaries are required to maintain certain minimum capital levels. At December 31, 2006 and 2005, the Company and the Banks were in compliance with their respective statutory minimum capital requirements. Following is a summary of the actual capital levels at December 31, 2006 and 2005 (amounts in thousands):
To be Well
Required for Capitalized Under
Minimum Capital Prompt Corrective
Actual Adequacy Action Provisions
------------------------- ------------------------- ---------------------------
Amount Ratio % Amount Ratio % Amount Ratio %
------------ ---------- -------------- -------- ----------- ------------
At December 31, 2006
Total capital (to risk weighted assets)
Company $558,410 13.60 $327,792 8.00 $ N/A N/A
Hancock Bank 307,655 14.33 171,729 8.00 214,661 10.00
Hancock Bank of Louisiana 200,829 11.23 143,037 8.00 178,797 10.00
Hancock Bank of Florida 27,414 20.08 10,920 8.00 13,651 10.00
Tier 1 capital (to risk weighted assets)
Company $510,639 12.46 $163,896 4.00 $ N/A N/A
Hancock Bank 280,773 13.08 85,864 4.00 128,796 6.00
Hancock Bank of Louisiana 182,835 10.23 71,519 4.00 107,278 6.00
Hancock Bank of Florida 25,707 18.83 5,460 4.00 8,190 6.00
Tier 1 leverage capital
Company $510,639 8.63 $177,575 3.00 $ N/A N/A
Hancock Bank 280,773 7.98 105,513 3.00 175,855 5.00
Hancock Bank of Louisiana 182,835 7.69 71,348 3.00 118,913 5.00
Hancock Bank of Florida 25,707 17.77 4,340 3.00 7,233 5.00
At December 31, 2005
Total capital (to risk weighted assets)
Company $466,501 12.73 $293,166 8.00 $ N/A N/A
Hancock Bank 241,626 12.21 158,314 8.00 197,892 10.00
Hancock Bank of Louisiana 181,077 11.40 127,072 8.00 158,839 10.00
Hancock Bank of Florida 27,067 26.08 8,303 8.00 10,378 10.00
Tier 1 capital (to risk weighted assets)
Company $420,283 11.47 $146,568 4.00 $ N/A N/A
Hancock Bank 216,594 10.95 79,121 4.00 118,682 6.00
Hancock Bank of Louisiana 161,147 10.15 63,506 4.00 95,259 6.00
Hancock Bank of Florida 25,768 24.83 4,151 4.00 6,227 6.00
Tier 1 leverage capital
Company $420,283 7.85 $160,618 3.00 $ N/A N/A
Hancock Bank 216,594 6.84 94,997 3.00 158,329 5.00
Hancock Bank of Louisiana 161,147 7.67 63,030 3.00 105,050 5.00
Hancock Bank of Florida 25,768 24.01 3,220 3.00 5,366 5.00
76
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Stockholders' Equity (continued)Comprehensive Income (Loss)Comprehensive income is the change in equity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
In addition to net income, the Company has identified changes related to other nonowner transactions in the Consolidated Statements of Stockholders’ Equity. Changes in other nonowner transactions consist of changes in the fair value of securities available for sale and liability adjustments for pension and post-retirement benefit plans.
In the calculation of comprehensive income, certain reclassification adjustments are made to avoid duplicating items that are displayed as part of net income and other comprehensive income in that period or earlier periods. The following table reflects the reclassification amounts and the related tax effects of changes in fair value of securities available for sale and the liability adjustment for pension and post-retirement benefit plans for the years ended December 31, 2006, 2005 and 2004 (in thousands):
Accumulated
Other
Before-Tax Tax Comprehensive
Amount Effect Loss
------------------ ------------------ --------------------
Accumulated other comprehensive (loss) income:
Balance, January 1, 2004 $ (8,510) $ 2,206 $ (6,304)
Minimum pension liability (584) 142 (442)
Net change in fair value of securities available
for sale (6,795) 2,526 (4,269)
Less adjustment for net gains included in income (163) 57 (106)
------------------ ------------------ --------------------
Balance, December 31, 2004 (16,052) 4,931 (11,121)
Minimum pension liability 62 (24) 38
Net change in fair value of securities available
for sale (17,334) 6,347 (10,987)
Less adjustment for net losses included in income 53 (49) 4
------------------ ------------------ --------------------
Balance, December 31, 2005 (33,271) 11,205 (22,066)
Minimum pension liability 1,685 (628) 1,057
Adoption of SFAS No. 158 (12,663) 4,719 (7,944)
Net change in fair value of securities available
for sale 3,100 (1,352) 1,748
Less adjustment for net losses included in income 5,169 (1,977) 3,192
------------------ ------------------ --------------------
Balance, December 31, 2006 $ (35,980) $ 11,967 $ (24,013)
================== ================== ====================
77
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Stockholders' Equity (continued)SAB No. 108 Adjustments to Beginning Retained EarningsIn September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements. SAB No. 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 No. 108. The rollover approach quantifies misstatements based on the amount of the error in the current year consolidated statement of income, 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 No. 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB No. 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. The Company elected to record the effects of applying SAB No. 108 using the cumulative effect transition method as an adjustment to fiscal 2006 beginning retained earnings. The following table summarizes the effects at January 1, 2006 of applying the guidance in SAB No. 108:
Period in which the
Misstatement Originated (1)
----------------------------------------------------
Cumulative Adjustment
Prior to Years Ended December 31, Recorded as of
Janaury 1, ---------------------------------- January 1,
2004 2004 2005 2006
---------------- ---------------- ---------------- ---------------------
Net deferred loan fees (costs) (2) $ 2,546,831 $ (20,043) $(1,668,327) $ 858,461
Accrued interest receivable (3) 589,770 227,876 530,664 1,348,310
Equity investment in subsidiary (4) - - 644,204 644,204
Franchise tax payable (5) 950,000 (47,636) (142,364) 760,000
Income tax expense (benefit) (6) (1,304,468) 20,423 657,367 (626,678)
---------------- ---------------- ---------------- ---------------------
Impact on net income (7) $ 2,782,133 $ 180,620 $ 21,544
================ ================ ================
Retained earnings (8) $ 2,984,297
=====================
(1) The Company has concluded that these errors were immaterial, individually and in the aggregate, to all periods prior
to January 1, 2006.
(2) The Company was not properly accounting for net deferred loan fees (costs) in accordance with SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.
The Company had previously calculated the impact of SFAS No. 91 each year, but determined the adjustment to be immaterial.
The Company recorded a $0.9 million reduction in our loans as of January 1, 2006 for net deferred loan fees previously
recognized as income with a corresponding reduction in retained earnings to correct these misstatements.
78
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Stockholders' Equity (continued)
(3) The Company was not properly accounting for income tax credits on loans and securities. The Company recorded a $1.3
million reduction in accrued interest receivable as of January 1, 2006 with a corresponding reduction in retained
earnings to correct this misstatement.
(4) The Company was not properly accounting for its equity investment in Magna Insurance Company, related to certain
post-closing adjustments due to the one-month lag in recording its investment. The Company recorded a $0.6 million
reduction in equity investment in subsidiary as included in other assets as of January 1, 2006 with a corresponding
reduction in retained earnings to correct this misstatement.
(5) The Company was accounting for franchise taxes in prior years on a cash basis by expensing franchise taxes in arrears.
Accordingly, the $760,000 adjustment is a true-up at January 1, 2006 to establish an accrual. The Company recorded a
$0.8 million increase in its franchise tax liability as of January 1, 2006 with a corresponding reduction in retained
earnings to correct this misstatement.
(6) As a result of the misstatements previously described, the Company's provision for income taxes was misstated. The
Company recorded an increase in its deferred income tax assets in the amount of $0.6 million as of January 1, 2006 with
a corresponding increase in retained earnings to correct these misstatements.
(7) Represents the net overstatement of net income for the indicated periods resulting from these misstatements.
(8) Represents the net reduction to retained earnings as of January 1, 2006 to reflect the initial adoption of SAB No. 108.
Note 13. Retirement and Employee Benefit PlansAt December 31, 2006, the Company had a pension plan and two postretirement plans for employees, which are described more fully below. The Company has accounted for its defined benefit pension plan using the actuarial model required by SFAS No. 87,Employers' Accounting for Pensions. The compensation cost of an employee's pension benefit has been recognized on the projected unit credit method over the employee's approximate service period. The aggregate cost method has been utilized for funding purposes. The Company also sponsors two defined benefit postretirement plans, which provide medical benefits and life insurance benefits. The Company has accounted for these plans using the actuarial computations required by SFAS No. 106,Employers Accounting for Postretirement Benefits Other Than Pensions as amended by SFAS No. 132. The cost of the defined benefit postretirement plan has been recognized on the projected unit credit method over the employee's approximate service period.
Effective December 31, 2006, the Company adopted certain requirements of 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). Under SFAS No. 158, the Company is required to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability on its balance sheet. This pronouncement also requires the Company to recognize changes in that funded status in the year in which the changes occur through comprehensive income effective for years ending after December 15, 2006. The Company is evaluating the requirement to measure the funded status of a plan as of its year-end balance sheet date effective for years ending after December 15, 2008. Results for prior periods have not been restated.
79
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)
The incremental effect of applying SFAS No. 158 on individual line items in the accompanying Consolidated Balance Sheets as of
December 31, 2006 is as follows (in thousands):
Before After
Application of Application of
SFAS No. 158 Adjustments SFAS No. 158
-------------------- ------------------- --------------------
Liability for pension and
postretirement benefits $ 11,133 $ 12,663 $ 23,796
Deferred taxes assets 21,263 (4,719) 16,544
Total liabilities 5,398,211 7,944 5,406,155
Accumulated other
comprehensive loss (16,069) (7,944) (24,013)
Total stockholders' equity 566,354 (7,944) 558,410
Defined Benefit Plan - PensionThe Company has a noncontributory defined benefit pension plan covering substantially all salaried full time employees who have been employed by the Company the required length of time. The Company’s current policy is to contribute annually the minimum amount that can be deducted for federal income tax purposes. The benefits are based upon years of service and the employee’s compensation during the last five years of employment. The measurement date for the pension plan is September 30, 2006. Data relative to the pension plan is as follows (in thousands):
Years Ended September 30,
-----------------------------------
2006 2005
---------------- ---------------
Reconciliation of Benefit Obligation:
- ----------------------------------------------------------
Benefit obligation at beginning of year $ 65,191 $ 57,925
Service cost 2,304 2,153
Interest cost 3,499 3,395
Actuarial loss 53 4,400
Benefits paid (2,754) (2,682)
---------------- ---------------
Benefit obligation at end of year $ 68,293 $ 65,191
================ ===============
Reconciliation of Plan Assets:
- ----------------------------------------------------------
Fair value of plan assets at
beginning of year $ 48,509 $ 42,565
Actual return on plan assets 2,584 5,600
Employer contributions 3,854 3,119
Benefits paid (2,754) (2,683)
Expenses (258) (92)
---------------- ---------------
Fair value of plan assets at end of year $ 51,935 $ 48,509
================ ===============
Rate assumptions used for benefit obligations at September 30:
Discount rate 5.75% 5.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.00% 3.00%
80
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)The following table reconciles the amounts the Company recorded related to the pension plan (in thousands):
Year Ended
December 31,
2006
--------------------
Reconciliation of Balance Sheet Due to Adoption
of SFAS No. 158:
- --------------------------------------------------------------------------
Accrued pension cost at January 1, 2006 $ (8,490)
Net periodic cost for the year (2,998)
Contributions credited for the year 4,683
Adjustment to eliminate minimum pension
liability prior to SFAS No. 158 1,686
Adjustment to apply SFAS No. 158, pretax (11,239)
--------------------
Funded status for balance sheet (liability) $ (16,358)
====================
Amounts Recognized in Accumulated Other
Comprehensive Loss:
- --------------------------------------------------------------------------
Unrecognized loss at beginning of year $ 19,868
Amount of loss recognized during the year 1,062
Gain due to changes in actuarial assumptions (623)
--------------------
Unrecognized loss at end of year $ 20,307
====================
There is $1.1 million of net losses in accumulated other comprehensive loss as of December 31, 2006 that the Company expects to recognize as net periodic expense during the year ending December 31, 2007. Net periodic expense is as follows (in thousands):
Years Ended December 31,
----------------------------------------
2006 2005 2004
------------- ------------ -----------
Net pension expense included the following
(income) expense components:
Service cost benefits earned during the period $ 2,304 $ 2,153 $ 2,057
Interest cost on projected benefit obligation 3,499 3,395 3,151
Return on plan assets (3,867) (3,410) (3,043)
Amortization of prior service cost - 26 83
Net amortization and deferral 1,062 999 938
------------- ------------ -----------
Net pension expense $ 2,998 $ 3,163 $ 3,186
============= ============ ===========
Rate assumptions used for net periodic pension expense
for the years ended December 31:
Discount rate 5.75% 5.50% 6.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 3.00% 3.00%
81
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)The long term rate of return is determined by using the weighted-average of historical real returns for major asset classes based on target asset allocations. The result is then adjusted for inflation. The discount rate is based on published Aa Seasoned Moody Twenty Year Bond Rate as of the measurement date, adjusted within a band of 25 basis points. The adjustment reflects the general longer duration of liabilities under the Hancock Bank Pension Plan since the Plan does not pay lump sums in excess of $6,000.
In accordance with SFAS No. 158, the Company has recorded a funded pension obligation of $16.4 million at December 31, 2006. This amount represents the excess of projected benefit obligation over the Plan’s assets. At December 31, 2005, in accordance with SFAS No. 87, the Company had recorded an additional minimum pension liability for under funded plans of $13.5 million. This amount represents the excess of accumulated benefit obligations over the Plan’s assets as adjusted for prepaid pension costs.
The Company has been making the contributions required by the Internal Revenue Service. The Company’s contributions to this plan were $4.7 million in 2006, $2.7 million in 2005 and $3.1 million in 2004. The Company expects to contribute $3.0 million to the pension plan in 2007. The following pension plan benefit payments, which reflect expected future service, are expected to be made (in thousands):
2007 $ 2,988
2008 3,061
2009 3,127
2010 3,288
2011 3,478
2012 - 2016 21,844
------------
$ 37,786
============
The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2006.
The Company’s pension plan weighted-average asset allocations and target allocations at December 31, 2006 and 2005, by asset category, are as follows:
Plan Assets Target Allocation
at December 31, at December 31,
-------------------------------- -------------------------------
Asset category 2006 2005 2006 2005
-------------- -------------- -------------- --------------
Equity securities 54% 54% 30-60% 30-60%
Fixed income securities 45% 45% 40-70% 40-70%
Cash equivalents 1% 1% 0-10% 0-10%
-------------- --------------
100% 100%
============== ==============
The investment strategy of the pension plan is to emphasize a balanced return of current income and growth of principal while accepting a moderate level of risk. The investment goal of the plan is to meet or exceed the return of balanced market index comprised of 50% of the S&P 500 Index and 50% Lehman Brothers Intermediate Aggregate Index. The pension plan investment committee meets periodically to review the policy, strategy and performance of the plan.
The pension plan’s assets do not include any of the Company’s common stock at December 31, 2006 and 2005, respectively.
82
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)Defined Benefit Plan - PostretirementThe Company sponsors two defined benefit postretirement plans, other than the pension plan, that cover full-time employees who have reached 55 years of age with fifteen years of service, age 62 with twelve years of service or age 65 with ten years of service. One plan provides medical benefits and the other provides life insurance benefits. The postretirement health care plan is contributory, with retiree contributions adjusted annually and subject to certain employer contribution maximums; the life insurance plan is noncontributory.
The measurement date for the plans is December 31, 2006. The Company used a 5.75% and 5.5% discount rate for the determination of the projected postretirement benefit obligation as of December 31, 2006 and 2005, respectively. The discount rate is based on the published Aa Seasoned Moody Twenty Year Bond Rate as of the measurement date, adjusted within a band of 25 basis points. The adjustment reflects the general longer duration of liabilities under the Hancock Bank Pension Plan since the Plan does not pay lump sums in excess of $6,000.
Data relative to these postretirement benefits is as follows (in thousands):
Years Ended December 31,
-------------------------------------
2006 2005
----------------- -----------------
Reconciliation of Postretirement
Benefit Obligation:
- ------------------------------------------------------------------------
Projected postretirement benefit
obligation at beginning of year $ 7,517 $ 6,818
Service cost 315 269
Interest cost 393 380
Plan participants' contributions 156 144
Actuarial (gain)/loss (425) 384
Benefits paid (518) (479)
----------------- -----------------
Projected postretirement benefit
obligation at end of year $ 7,438 $ 7,517
================= =================
Years Ended December 31,
-------------------------------------
2006 2005
----------------- -----------------
Reconciliation of Plan Assets:
- ------------------------------------------------------------------------
Plan assets at beginning of year $ - $ -
Employer contributions 362 335
Plan participants' contributions 156 144
Benefits paid (518) (479)
----------------- -----------------
Plan assets at end of year $ - $ -
================= =================
83
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)The following table reconciles the amounts the Company recorded related to the postretirement benefit plans (in thousands):
Year Ended
December 31,
2006
--------------------
Reconciliation of Balance Sheet Due to Adoption
of SFAS No. 158:
- ------------------------------------------------------------------------
Accrued benefit cost at January 1, 2006 $ (5,600)
Net periodic cost for the year (776)
Contributions credited for the year 362
Adjustment to apply SFAS No. 158, pretax (1,424)
--------------------
Funded status for balance sheet (liability) $ (7,438)
====================
Items Not Recognized in Income:
- ------------------------------------------------------------------------
Prior service cost $ (314)
Net transition obligation 26
Net loss 1,712
--------------------
Total $ 1,424
====================
Amounts Recognized in Accumulated Other
Comprehensive Loss:
- ------------------------------------------------------------------------
Unrecognized loss at beginning of year $ 2,253
Amount of gain recognized during the year (115)
Gain due to changes in actuarial assumptions (426)
--------------------
Unrecognized loss at end of year $ 1,712
====================
The following table shows the amounts in accumulated other comprehensive loss that the Company expects to be recognized as net periodic benefit cost during the year ending December 31, 2007 (in thousands):
Prior service cost $ (53)
Net transition obligation 5
Net loss 78
--------------------
Total $ 30
====================
84
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)The net periodic postretirement benefit cost for the year is determined as the sum of service cost for the year, interest on both the postretirement benefit obligation and market related plan asset value, and amortization of the transition obligation less previously accrued expenses over the average remaining service period of employees expected to receive plan benefits. The following table shows the composition of net period postretirement benefit cost (in thousands):
Years Ended December 31,
------------------------------------------------
2006 2005 2004
--------------- --------------- --------------
Net periodic postretirement benefit cost:
Service cost for the year $ 315 $ 269 $ 278
Interest costs on postretirement benefit obligation 393 380 371
Amortization of net loss 116 86 82
Amortization of transition obligation 5 5 5
Amortization of prior service cost (53) (53) (53)
--------------- --------------- --------------
Net periodic postretirement benefit cost $ 776 $ 688 $ 683
=============== =============== ==============
For measurement purposes in 2006, a 9.0% annual rate of increase in the over age 65 per capita costs of covered health care benefits was assumed for 2007. The rate was assumed to decrease gradually to 5.00% over 4 years and remain at that level thereafter. In 2005, an 8.5% annual rate of increase in the over age 65 per capita costs of covered health care benefits was assumed. The rate was assumed to decrease gradually to 5.00% over 4 years and remain at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. The following table illustrates the effect on the postretirement benefit obligation of a 1% increase or 1% decrease in the assumed health care cost trend rates:
1% Decrease Assumed 1% Increase
in Rates Rates in Rates
------------------- ------------------- ------------------
Aggregated service and interest cost $ 530 $ 709 $ 779
Postretirement benefit obligation 6,506 7,439 8,611
The Company expects to contribute $316,000 to the plans in 2007. Expected benefits to be paid over the next ten years and are reflected in the following table (in thousands):
2007 $ 316
2008 314
2009 321
2010 363
2011 404
2012 - 2016 1,992
------------
$ 3,710
============
Defined Contribution Plan - 401(k)The Company has a 401(k) retirement plan covering substantially all employees who have been employed the required length of time and meet certain other requirements. Under this plan, employees can contribute a portion of their salary within limits provided by the Internal Revenue Code into the plan. The Company’s contributions to this plan were $1.4 million in 2006, $1.2 million in 2005 and $1.0 million in 2004.
85
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Retirement and Employee Benefit Plans (continued)Employee Stock Purchase PlanThe Company has an employee stock purchase plan that is designed to provide the employees of the Company a convenient means of purchasing common stock of the Company. Substantially all salaried, full time employees, with the exception of Leo W. Seal, Jr., President, who have been employed by the Company the required length of time, are eligible to participate. The Company makes no contribution to each participant’s contribution. The numbers of shares purchased under this plan were 7,213 in 2006, 10,461 in 2005 and 11,418 in 2004.
The postretirement plans relating to health care payments and life insurance and the stock purchase plan are not guaranteed and are subject to immediate cancellation and/or amendment. These plans are predicated on future Company profit levels that will justify their continuance. Overall health care costs are also a factor in the level of benefits provided and continuance of these post-retirement plans. There are no vested rights under the postretirement health or life insurance plans.
Note 14. Stock-Based Payment ArrangementsAt December 31, 2006, the Company had two share-based payment plans for employees, which are described below. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. Compensation cost for stock options was not recognized in our Condensed Consolidated Statements of Income until December 2005, when the Board approved accelerated vesting for all outstanding unvested options granted to employees. No compensation cost was recognized prior to 2006 as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Prior to January 1, 2006, compensation cost was recognized for restricted share awards. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective method. Under this method, compensation cost recognized in 2006 includes: (1) compensation cost for all the Company’s share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (2) compensation cost for all the Company’s share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.
For the years ended December 31, 2006, December 31, 2005, and December 31, 2004 total compensation cost for share-based compensation recognized in income was $3,690,000, $1,289,000, and $704,000, respectively. The total recognized tax benefit related to the share-based compensation was $1,158,000, $334,000, and $212,000, respectively, for years 2006, 2005, and 2004.
As a result of the adoption SFAS No. 123(R) on January 1, 2006, the Company’s income before income taxes and net income for December 31, 2006, are $3,690,000 and $2,532,000 lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Basic earnings per share for 2006 would have been $3.21 if the Company had not adopted SFAS No. 123(R), compared to reported basic earnings per share of $3.13. Diluted earnings per share for 2006 would have been $3.13 if the Company had not adopted SFAS No. 123(R), compared to reported diluted earnings per share of $3.06.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the year ended December 31, 2006, there was a $3.5 million excess tax benefit classified as a financing cash inflow and classified as an operating cash outflow.
86
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Stock-Based Payment Arrangements (continued)The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted in 2005. For purposes of this pro forma disclosure, the value of the options was estimated using a Black-Scholes-Merton option pricing formula and amortized to expense over the options’ vesting periods (in thousands, except per share amounts).
Years Ended December 31,
----------------------------------
2005 2004
---------------- ----------------
Net income, as reported $ 54,032 $ 61,704
Add: stock-based employee compensation expense included
in reported net income, net of related tax effects 558 -
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (8,954) (1,858)
---------------- ----------------
Pro forma net income $ 45,636 $ 59,846
================ ================
Earnings per share
Basic - as reported $ 1.67 $ 1.91
================ ================
Basic - pro forma $ 1.41 $ 1.85
================ ================
Diluted - as reported $ 1.64 $ 1.87
================ ================
Diluted - pro forma $ 1.38 $ 1.81
================ ================
Stock Option PlansThe 1996 Hancock Holding Company Long-Term Incentive Plan (the “1996 Plan”) that was approved by the Company’s shareholders in 1996 was designed to provide annual incentive stock awards. Awards as defined in the 1996 Plan include, with limitations, stock options (including restricted stock options), restricted and performance shares, and performance stock awards, all on a stand-alone, combination or tandem basis. A total of fifteen million (15,000,000) common shares can be granted under the 1996 Plan with an annual grant maximum of two percent (2%) of the Company’s outstanding common stock as reported for the fiscal year ending immediately prior to such plan year. Grants of restricted stock awards are limited to one-third of the grant totals.
The exercise price is equal to the market price on the date of grant, except for certain of those granted to major stockholders where the option price is 110 percent of the market price. Option awards generally vest based on five years of continuous service and have ten-year contractual terms. The Company’s policy is to issue new shares upon share option exercise and issue treasury shares upon restricted stock award vesting. The 1996 Long-Term Incentive Plan expired in 2006.
In March of 2005, the stockholders of the Company approved Hancock Holding Company’s 2005 Long-Term Incentive Plan (the “2005 Plan”) as the successor plan to the 1996 LTIP. The 2005 Plan is designed to enable employees and directors to obtain a proprietary interest in the Company and to attract and retain outstanding personnel. The 2005 Plan provides that awards for up to an aggregate of five million (5,000,000) shares of the Company’s common stock may be granted during the term of the 2005 Plan. The 2005 Plan limits the number of shares for which awards may be granted during any calendar year to two percent (2%) of the outstanding Company’s common stock as reported for the fiscal year ending immediately prior to such plan year.
87
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Stock-Based Payment Arrangements (continued)The fair value of each option award is estimated on the date of grant using Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Years Ended December 31,
-------------------------------------------------------
2006 2005 2004
------------------- ---------------- ----------------
Expected volatility 29.87% 31.33% 31.33%
Expected dividends 1.61% - 1.96% 2.12% 2.07%
Expected term (in years) 5 - 8 5 - 8 8
Risk-free rates 4.30% - 4.54% 4.00% 3.98%
A summary of option activity and changes under the plans for 2006 is presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Number of Exercise Term Intrinsic
Options Shares Price ($) (Years) Value ($000)
- -------------------------------------------- ----------------- ------------------ ----------------- ---------------
Outstanding at January 1, 2006 1,616,779 $ 22.32 6.5
Granted 347,043 $ 41.63 9.1
Exercised (423,571) $ 20.98 4.6 $ 8,256
Forfeited or expired (28,990) $ 26.74 5.3
-----------------
Outstanding at December 31, 2006 1,511,261 $ 27.04 6.6 $ 38,987
================= ================== ================= ===============
Exercisable at December 31, 2006 1,176,378 $ 22.90 5.9 $ 35,226
================= ================== ================= ===============
Share options expected to vest 301,989 $ 41.61 9.1 $ 3,392
================= ================== ================= ===============
The weighted-average grant-date fair value of options granted during 2006, 2005, and 2004 was $17.96, $13.43, and $11.87, respectively per optioned share. The total intrinsic value of options exercised during 2006, 2005, and 2004 was $8.2 million, $2.3 million, and $2.2 million, respectively.
88
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Stock-Based Payment Arrangements (continued)A summary of the status of the Company’s nonvested shares as of December 31, 2006, and changes during 2006, is presented below:
Weighted-
Average
Number of Grant-Date
Shares Fair Value ($)
----------------- -----------------
Nonvested at January 1, 2006 132,635 $ 26.77
Granted 409,880 $ 21.70
Vested (4,424) $ 34.56
Forfeited (15,521) $ 23.23
-------------------
Nonvested at December 31, 2006 522,570 $ 22.79
===================
As of December 31, 2006, there was $7.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 3.7 years. The total fair value of shares which vested during 2006 and 2005 was $153 thousand and $13.5 million, respectively.
During 2005, the Board of Directors of the Company approved the accelerated vesting of all outstanding unvested options granted to employees. The Company used guidance provided in FASB Interpretation No. 44 (FIN 44),Accounting for Certain Transactions Involving Stock Compensation, in the determination of the expense associated with the accelerated vesting of the unvested options outstanding. Compensation expense was calculated as the difference between the grant price and the current market price on the date of the vesting. Forfeiture rates were calculated based on observation of historical trends. The impact of this action was a reduction in 2005 pretax income of approximately $558,000. The acceleration of the vesting of these options allowed the Company to avoid future compensation expense estimated to be approximately $6.4 million.
Note 15. Off Balance Sheet RiskIn 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. These obligations are summarized below (in thousands):
December 31,
----------------------------------
2006 2005
---------------- ----------------
Commitments to extend credit $ 963,098 $ 550,948
Letters of credit 69,468 57,427
89
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Off Balance Sheet Risk (continued)Approximately $455.6 million and $348.9 million of commitments to extend credit at December 31, 2006 and 2005, respectively, 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. The Company accounts for these commitments under the provisions of the FASB Interpretation No. 45 (FIN 45),Guarantees of Indebtedness of Others. The liability associated with letters of credit is not material to the Company’s consolidated financial statements. Letters of credit are supported by collateral or borrower guarantee sufficient to cover any draw on the letter that would result in an outstanding loan.
Note 16. Fair Value of Financial InstrumentsThe following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:
Cash, Short-Term Investments and Federal Funds Sold — For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities — Estimated fair values for securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.
Loans, Net of Unearned Income — The fair value of loans is estimated by discounting the future cash flows using the current rates for similar loans with the same remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable- The carrying amounts are a reasonable estimate of their fair values.
Deposits — The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased — For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Securities Sold under Agreements to Repurchase and Federal Funds Purchased — For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.
Short-Term Notes — For short-term notes, the carrying amount is a reasonable estimate of fair value.
Long-Term Notes — Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The fair value is estimated by discounting the future contractual cash flows using current market rates at which similar Notes over the same remaining term could be obtained.
90
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Fair Value of Financial Instruments (continued)Commitments — The fair value of loan commitments and letters of credit approximate the fees currently charged for similar agreements or the estimated cost to terminate or otherwise settle similar obligations. The fees associated with these financial instruments, or the estimated cost to terminate, as applicable are immaterial.
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
December 31,
--------------------------------------------------------------
2006 2005
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- ---------------
Financial assets:
Cash, interest-bearing deposits and federal funds sold $ 412,553 $ 412,553 $ 681,330 $ 681,330
Securities available for sale 1,903,658 1,903,658 1,959,261 1,959,261
Loans, net of unearned income 3,266,584 3,360,368 2,989,186 3,079,084
Accrued interest receivable 32,984 32,984 35,046 35,046
Financial liabilities:
Deposits $ 5,030,991 $ 4,934,128 $ 4,989,820 $ 4,890,632
Federal funds purchased 3,800 3,800 1,475 1,475
Securities sold under agreements to repurchase 218,591 218,591 250,807 250,807
Long-term notes 258 258 50,266 50,566
Accrued interest payable 8,222 8,222 5,881 5,881
Note 17. Commitments and ContingenciesThe Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are not expected to have a material adverse effect on the financial statements of the Company.
Future minimum lease payments for all non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2006 (in thousands):
2007 $ 4,137
2008 3,056
2009 2,451
2010 2,030
2011 1,269
thereafter 3,999
-----------------
$ 16,942
=================
Rental expense approximated $3.6 million, $2.8 million, and $2.6 million for the years ended December 31, 2006, 2005, and 2004, respectively.
91
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Other Noninterest Income and Other Noninterest ExpenseThe components of other noninterest income and other noninterest expense are as follows (in thousands):
Years Ended December 31,
-----------------------------------------
2006 2005 2004
------------- ------------- ------------
Other noninterest income:
Income from bank owned life insurance $ 4,091 $ 3,449 $ 3,466
Outsourced check income 2,801 1,345 632
Income on real estate option 859 1,145 -
Safety deposit box income 842 807 836
Appraisal fee income 852 694 686
Other 3,912 4,942 3,374
------------- ------------- ------------
Total other noninterest income $ 13,357 $ 12,382 $ 8,994
============= ============= ============
Other noninterest expense:
Postage $ 3,731 $ 3,780 $ 4,199
Communication 5,918 4,040 3,953
Data processing 10,505 7,805 7,618
Professional fees 14,994 10,429 8,322
Taxes and licenses 3,346 3,607 1,699
Printing and supplies 1,997 1,787 1,702
Marketing 6,642 5,232 4,292
Regulatory and other fees 5,513 3,663 3,670
Miscellaneous expense 9,927 8,578 5,186
Other expense 8,119 5,791 6,377
------------- ------------- ------------
Total other noninterest expense $ 70,692 $ 54,712 $ 47,018
============= ============= ============
Note 19. Income TaxesIncome taxes consisted of the following components (in thousands):
Years Ended December 31,
--------------------------------------------
2006 2005 2004
------------- ------------- ------------
Current federal $ 19,879 $ 34,183 $ 28,001
Current state 2,066 3,089 2,121
------------- ------------- ------------
Total current provision 21,945 37,272 30,122
------------- ------------- ------------
Deferred federal 22,641 (14,864) (2,960)
Deferred state 1,958 (3,537) (569)
------------- ------------- ------------
Total deferred provision 24,599 (18,401) (3,529)
------------- ------------- ------------
Total tax expense $ 46,544 $ 18,871 $ 26,593
============= ============= ============
92
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Income Taxes (continued)Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
December 31,
-----------------------------------
2006 2005
---------------- ----------------
Deferred tax assets:
Pension liability $ 9,123 $ 5,031
Post-retirement benefit obligation 2,187 2,039
Allowance for loan losses 17,321 27,711
Deferred compensation 1,658 1,851
Unrealized loss on securities available for sale 4,579 7,908
Premium amortization on securities, net - 5,186
---------------- ----------------
Gross deferred tax assets 34,868 49,726
---------------- ----------------
Deferred tax liabilities:
Pension contribution (2,486) (1,856)
Loan servicing assets (360) (603)
Property and equipment depreciation (7,552) (5,034)
Other intangible assets (2,984) (339)
Discount accretion on securities, net (3,412) -
Prepaid expenses (1,525) (1,353)
Other (5) (161)
---------------- ----------------
Gross deferred tax liabilities (18,324) (9,346)
---------------- ----------------
Net deferred tax assets $ 16,544 $ 40,380
================ ================
Based upon the level of historical taxable income and projections for future taxable income over the periods, which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences existing at December 31, 2006. Therefore, no valuation allowance is necessary at this time.
93
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Income Taxes (continued)The reason for differences in income taxes reported compared to amounts computed by applying the statutory income tax rate of 35% to earnings before income taxes were as follows (in thousands):
Years Ended December 31,
----------------------------------------------------------------------------
2006 2005 2004
------------------------ ------------------------ ------------------------
Amount % Amount % Amount %
------------ ---------- ------------ ---------- ------------ ----------
Taxes computed at statutory rate $ 51,921 35% $ 25,526 35% $ 30,904 35%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income
tax benefit 2,616 2% 1,059 1% 1,099 1%
Tax-exempt interest (4,311) -3% (4,105) -5% (4,015) -5%
Bank owned life insurance (1,417) -1% (1,279) -2% (1,248) -
Contingency release, net (627) - (1,163) -1% - -
Tax credits (2,357) -2% (674) -1% - -
Other, net 719 - (493) -1% (147) -
------------ ---------- ------------ ---------- ------------ ----------
Income tax expense $ 46,544 31% $ 18,871 26% $ 26,593 31%
============ ========== ============ ========== ============ ==========
Due to recent tax legislation following Hurricane Katrina, tax credits available to the Company for the 2006 tax year include the Worker’s Opportunity Tax Credit and the Gulf Tax Credit.
The income tax provisions related to items included in other comprehensive income were as follows (in thousands):
Years Ended December 31,
----------------------------------------------------
2006 2005 2004
--------------- ---------------- ----------------
Pension liability $ (4,091) $ 24 $ (142)
Unrealized holdings gains (losses) 1,352 (6,347) (2,526)
Reclassification adjustments 1,977 49 (72)
--------------- ---------------- ----------------
Total tax benefit $ (762) $ (6,274) $ (2,740)
=============== ================ ================
94
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Earnings Per ShareFollowing is a summary of the information used in the computation of earnings per common share (in thousands):
Years Ended December 31,
----------------------------------------------------
2006 2005 2004
---------------- ---------------- ----------------
Net income available to common stockholders -
used in computation of basic and diluted
earnings per common share $ 101,802 $ 54,032 $ 61,704
================ ================ ================
Weighted average number of common shares
outstanding - used in computation of
basic earnings per common share 32,534 32,365 32,390
Effect of dilutive securities
Stock options and restricted stock awards 770 601 556
Convertible preferred stock - - 106
---------------- ---------------- ----------------
Weighted average number of common shares
outstanding plus effect of dilutive
securities - used in computation of
diluted earnings per common share 33,304 32,966 33,052
================ ================ ================
The Company had 55,398 shares of anti-dilutive options in 2006. There were no anti-dilutive options in 2005.
95
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. 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. The three segments offer commercial, consumer and mortgage loans and deposit services. In the second table, the column “Other” includes additional consolidated subsidiaries of the Company: 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 (in thousands):
Year Ended
December 31, 2006
-------------------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
--------------- ------------- ---------- ----------- ------------- ---------------
(In thousands)
Interest income $ 193,698 $ 136,844 $ 8,108 $ 20,270 $ (14,590) $ 344,330
Interest expense 72,154 52,833 2,934 6,103 (14,161) 119,863
-------------- ------------- ---------- ----------- ------------- ---------------
Net interest income 121,544 84,011 5,174 14,167 (429) 224,467
Provision for (reversal of) loan losses (19,811) (4,446) 834 2,661 - (20,762)
Noninterest income 47,844 29,782 346 25,966 (105) 103,833
Depreciation and amortization 6,986 2,611 319 527 - 10,443
Other noninterest expense 89,978 61,688 5,172 33,479 (44) 190,273
-------------- ------------- ---------- ----------- ------------- ---------------
Income before income taxes 92,235 53,940 (805) 3,466 (490) 148,346
Income tax expense (benefit) 23,074 24,035 (603) (796) 834 46,544
-------------- ------------- ---------- ----------- ------------- ---------------
Net income (loss) $ 69,161 $ 29,905 $ (202) $ 4,262 $ (1,324) $ 101,802
============== ============= ========== =========== ============= ===============
Total assets $ 3,454,274 $ 2,365,422 $ 158,836 $ 807,912 $ (821,879) $ 5,964,565
Total interest income from affiliates $ 13,895 $ 6 $ 260 $ - $ (14,161) $ -
Total interest income from external
customers $ 179,803 $ 136,838 $ 7,848 $ 20,270 $ (429) $ 344,330
(Amortization) & accretion of securities $ 10,287 $ 1,123 $ (51) $ (59) $ - $ 11,300
96
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Segment Reporting (continued)
Year Ended
December 31, 2005
-------------------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
--------------- ------------- ----------- ----------- ------------- ---------------
(In thousands)
Interest income $ 140,583 $ 109,248 $ 6,563 $ 17,037 $ (9,800) $ 263,631
Interest expense 45,392 33,184 1,796 3,902 (9,455) 74,819
--------------- ------------- ----------- ----------- ------------- ---------------
Net interest income 95,191 76,064 4,767 13,135 (345) 188,812
Provision for loan losses 24,744 14,836 494 2,561 - 42,635
Noninterest income 46,197 28,061 476 23,671 (135) 98,270
Depreciation and amortization 5,299 2,467 453 498 - 8,717
Other noninterest expense 73,725 56,065 4,349 28,819 (131) 162,827
--------------- ------------- ----------- ----------- ------------- ---------------
Income before income taxes
37,620 30,757 (53) 4,928 (349) 72,903
Income tax expense (benefit) 16,673 (191) 170 2,260 (41) 18,871
--------------- ------------- ----------- ----------- ------------- ---------------
Net income (loss) $ 20,947 $ 30,948 $ (223) $ 2,668 $ (308) $ 54,032
=============== ============= =========== =========== ============= ===============
Total assets $ 3,546,748 $ 2,138,894 $ 122,845 $ 697,548 $ (555,848) $ 5,950,187
Total interest income from affiliates $ 9,334 $ - $ 121 $ - $ (9,455) $ -
Total interest income from
external customers $ 131,249 $ 109,248 $ 6,442 $ 17,037 $ (345) $ 263,631
(Amortization) & accretion of securities $ (477) $ (1,228) $ (81) $ (61) $ - $ (1,847)
Year Ended
December 31, 2004
-------------------------------------------------------------------------------------
MS LA FL Other Eliminations Consolidated
------------ ------------ ----------- ----------- ------------ -------------
(In thousands)
Interest income $ 120,197 $ 91,148 $ 3,089 $ 17,189 $ (4,849) $ 226,774
Interest expense 37,953 20,385 922 2,581 (4,571) 57,270
------------ ------------ ----------- ----------- ------------ -------------
Net interest income 82,244 70,763 2,167 14,608 (278) 169,504
Provision for loan losses 5,564 6,429 928 3,616 - 16,537
Noninterest income 39,894 33,255 445 19,084 (2,397) 90,281
Depreciation and amortization 5,879 2,648 67 563 - 9,157
Other noninterest expense 67,370 51,348 3,047 24,157 (128) 145,794
------------ ------------ ----------- ----------- ------------ -------------
Income before income taxes 43,325 43,593 (1,430) 5,356 (2,547) 88,297
Income tax expense (benefit) 12,808 13,213 (547) 1,913 (794) 26,593
------------ ------------ ----------- ----------- ------------ -------------
Net income (loss) $ 30,517 $ 30,380 $ (883) $ 3,443 $ (1,753) $ 61,704
============ ============ =========== =========== ============ =============
Total assets $ 2,628,221 $ 1,895,832 $ 88,070 $ 703,844 $ (651,241) $ 4,664,726
Total interest income from affiliates $ 4,496 $ - $ 75 $ - $ (4,571) $ -
Total interest income from
external customers $ 115,701 $ 91,148 $ 3,014 $ 17,189 $ (278) $ 226,774
(Amortization) & accretion of securities $ (2,579) $ (2,795) $ (46) $ (44) $ - $ (5,464)
97
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Segment Reporting (continued)The Company allocated administrative charges between its Louisiana, Florida and Other segments and its Mississippi segment and the Parent Company. This allocation was based on an analysis of costs for 2006. The administrative charges allocated to the Louisiana segment were $11.8 million in 2006, $11.6 million in 2005, and $10.9 million in 2004. The Florida segment received $210,000 in allocated administrative charges in 2006 and $200,000 in 2005. The Other segments allocated charges were $708,760 in 2006 and $150,000 in 2005. No charges were allocated to the Florida or Other segments in 2004. The aforementioned administrative charges were allocated from the Mississippi segment ($12.7 million in 2006, $11.6 million in 2005, and $10.8 million in 2004). Subsidiaries of the Mississippi segment were included in the cost allocation process beginning in 2004. Administrative charges allocated from the Parent Company were $315,000 in 2006 and $300,000 in 2005, $124,000 in 2004.
Goodwill and other intangible assets assigned to the Mississippi segment totaled approximately $13.9 million, of which $12.1 million represented goodwill and $1.8 million represented core deposit intangibles at December 31, 2006. At December 31, 2005, goodwill and other intangible assets assigned to the Mississippi segment totaled approximately $15.9 million, of which $12.1 million represented goodwill and $2.2 million represented core deposit intangibles. The related core deposit amortization was approximately $409,000 in 2006, $518,000 in 2005, and $666,000 in 2004.
Goodwill and other intangible assets assigned to the Louisiana segment totaled approximately $38.0 million, of which $33.8 million represented goodwill and $4.2 million represented core deposit intangibles at December 31, 2006. Goodwill and other intangible assets assigned to the Louisiana segment totaled approximately $37.0 million, of which $32.0 million represented goodwill and $5.0 million represented core deposit intangibles, at December 31, 2005. The related core deposit amortization was approximately $815,000 in 2006, $977,000 in 2005, and $951,000 in 2004.
Goodwill and other intangible assets assigned to the Florida segment totaled approximately $12.1 million, of which $11.3 million represented goodwill and $0.8 million represented core deposit intangibles, at December 31, 2006. Goodwill and other intangible assets assigned to the Florida segment totaled approximately $12.3 million, of which $11.3 million represented goodwill and $1.0 million represented core deposit intangibles, at December 31, 2005. The related core deposit amortization was approximately $142,000 in 2006, $160,000 in 2005 and $149,000 in 2004.
Other intangible assets are also assigned to subsidiaries that are included in the “Other” category in the table above and totaled $7.7 million at December 31, 2006 and $7.0 million at December 31, 2005. Those intangibles consist of goodwill, $5.1 million; non-compete agreements, $189,000; value of insurance expirations, approximately $2.3 million and trade name of $70,000.
On July 1, 2005, Hancock Insurance Agency acquired 100% of the stock of J. Everett Eaves, Inc., a well-known commercial insurance agency operating in the New Orleans, Louisiana market. During 2006, the Company recorded reallocations of goodwill to other intangible assets to record the final purchase price of J. Everett Eaves, Inc. and the results of third-party studies which valued the intangible assets. The reallocation of intangibles and final purchase adjustments resulted in the recording of four separate categories of intangible assets: value of insurance expirations, $1.9 million; non-compete agreements, $0.1 million; trade name, $0.1 million and goodwill of $3.8 million. The value of insurance expirations, non-compete agreements and trade name assets are being amortized over 10, 5 and 5 year lives, respectively, on a straight line basis.
An intangibles valuation relating to the intangibles recorded in the acquisition of Ross King Walker, Inc. in late 2004 was completed during 2005. The reallocation of intangibles resulted in the recording of three separate categories of intangible assets: value of insurance expirations, $1.1 million; non-compete agreements, $0.2 million and goodwill of $1.3 million. The value of insurance expirations and non-compete agreement assets are being amortized over 10 year and 5 year lives, respectively, on an accelerated basis.
98
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Segment Reporting (continued)None of the segments recorded amortization of goodwill during 2006, 2005 and 2004 in accordance with SFAS No. 142 as discussed in Note 1. The segments performed a fair value based impairment test of goodwill and determined that the fair values of these reporting units exceeded their carrying values at December 2006, 2005 and 2004. No impairment loss, therefore, was recorded.
Note 22. Condensed Parent Company InformationThe following condensed financial information reflects the accounts and transactions of Hancock Holding Company (parent company only) for the dates indicated (in thousands):
Condensed Balance Sheets
December 31,
---------------------------------
2006 2005
--------------- ---------------
Assets:
Cash $ 6,669 $ 3,161
Investment in bank subsidiaries 537,890 461,375
Investment in non-bank subsidiaries 11,101 12,757
Due from subsidiaries and other assets 3,299 2,342
--------------- ---------------
$ 558,959 $ 479,635
=============== ===============
Liabilities and Stockholders' Equity:
Due to subsidiaries $ 2 $ 2,194
Other liabilities 547 26
Stockholders' equity 558,410 477,415
--------------- ---------------
$ 558,959 $ 479,635
=============== ===============
Condensed Statements of Income
Years Ended December 31,
--------------------------------------------
2006 2005 2004
------------- ----------- -------------
Operating Income
From subsidiaries
Dividends received from bank subsidiaries $ 19,416 $ 34,900 $ 45,506
Dividends received from non-bank subsidiaries 537 - 10,000
Equity in earnings of subsidiaries greater than
dividends received 80,523 20,702 6,484
------------- ----------- -------------
Total operating income 100,476 55,602 61,990
Other (expense) income (407) 512 (187)
Income tax provision (benefit) (1,733) 2,082 99
------------- ----------- -------------
Net income $ 101,802 $ 54,032 $ 61,704
============= =========== =============
99
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Condensed Parent Company Information (continued)
Condensed Statements of Cash Flows
Years Ended December 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities - principally
dividends received from subsidiaries $ 26,567 $ 50,670 $ 60,411
------------ ------------ ------------
Cash flows from investing activities:
Business acquisitions - - (4,533)
Infusion of capital to subsidiary - (20,000) (15,949)
------------ ------------ ------------
Net cash used by investing activities - (20,000) (20,482)
------------ ------------ ------------
Cash flows from financing activities:
Repayments of short-term notes - - (9,400)
Dividends paid to stockholders (29,311) (23,416) (18,977)
Stock transactions, net 6,252 (7,876) (8,919)
------------ ------------ ------------
Net cash used by financing activities (23,059) (31,292) (37,296)
------------ ------------ ------------
Net increase (decrease) in cash 3,508 (622) 2,633
Cash, beginning of year 3,161 3,783 1,150
------------ ------------ ------------
Cash, end of year $ 6,669 $ 3,161 $ 3,783
============ ============ ============
Note 23. Summary of Quarterly Operating Results (Unaudited)
2006 2005
---------------------------------------------- ----------------------------------------------
First Second Third Fourth First Second Third Fourth
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
(In thousands, except per share data)
Interest income (te) $ 83,563 $ 88,375 $ 91,275 $ 89,366 $ 62,302 $ 65,767 $ 67,506 $ 75,433
Interest expense (25,273) (28,636) (31,988) (33,966) (16,289) (17,961) (19,659) (20,910)
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Net interest income (te) 58,290 59,739 59,287 55,400 46,013 47,806 47,847 54,523
(Provision for) reversal of loan
losses 705 - 20,000 57 (2,760) (1,891) (36,905) (1,079)
Noninterest income 25,008 25,942 25,737 27,148 22,433 24,680 33,858 17,298
Noninterest expense (49,165) (51,172) (50,336) (50,042) (41,642) (42,505) (42,770) (44,626)
Taxable equivalent adjustment (1,973) (1,972) (2,043) (2,263) (1,771) (1,740) (1,862) (2,004)
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Income before income taxes 32,865 32,537 52,645 30,300 22,273 26,350 168 24,112
Income tax (expense) benefit (10,854) (10,539) (16,614) (8,538) (6,835) (8,256) 1,267 (5,047)
---------- ---------- ---------- ---------- ----------- ---------- ----------- -----------
Net income $ 22,011 $ 21,998 $ 36,031 $ 21,762 $ 15,438 $ 18,094 $ 1,435 $ 19,065
========== ========== ========== ========== =========== ========== =========== ===========
Basic earnings per share $0.68 $0.68 $1.11 $0.67 $0.48 $0.56 $0.04 $0.59
Diluted earnings per share 0.67 0.66 1.08 0.65 0.47 0.55 0.04 0.58
Unaudited - see accompanying accountants' report.
100
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone
ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresAs defined by the Securities and Exchange Commission in Exchange Act Rules 13a-14(c) and 15d-14(c), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of December 31, 2006, (the “Evaluation Date”), our Chief Executive Officers and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, our Chief Executive Officers and Chief Financial Officer have concluded Hancock’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to us and required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Internal Control over Financial ReportingThe management of Hancock Holding Company has prepared the consolidated financial statements and other information in our Annual Report in accordance with accounting principles generally accepted in the United States of America and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.
In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in our financial records and to safeguard our assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.
Management is responsible for establishing and maintaining the adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13 — 15(f). Under the supervision and with the participation of management, including our principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management also conducted an assessment of requirements pertaining to Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). This section relates to management’s evaluation of internal control over financial reporting including controls over the preparation of the schedules equivalent to the basic financial statements and compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on our evaluation under the framework inInternal Control — Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2006. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by KPMG, LLP, an independent registered public accounting firm, as stated in their report which is incorporated herein by reference.
ITEM 9B. OTHER INFORMATIONNone
101
PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEPursuant to General Instruction G (3), information on directors and executive officers of the Registrant will be incorporated by reference from the Company’s Definitive Proxy Statement for the annual meeting to be held on March 29, 2007.
ITEM 11. EXECUTIVE COMPENSATIONPursuant to General Instructions G (3), information on executive compensation will be incorporated by reference from the Company’s Definitive Proxy Statement for the annual meeting to be held on March 29, 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSPursuant to General Instructions G (3), information on security ownership of certain beneficial owners and management will be incorporated by reference from the Company’s Definitive Proxy Statement for the annual meeting to be held on March 29, 2007.
Equity Compensation Plan Information
Number of securities to be Weighted-average exercise Number of securities remaining available
issued upon exercise of price of outstanding for future issuance under equity
outstanding options, options, warrants and compensation plans (excluding securities
Plan Category warrants and rights rights reflected in column (a))
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Compensation plans
approved by security
holders 1,698,948 $ 24.06 4,996,975
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Compensation plans
not approved by security
holders - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,698,948 $ 24.06 4,996,975
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEPursuant to General Instructions G (3), information on certain relationships and related transactions will be incorporated by reference from the Company’s Definitive Proxy Statement for the annual meeting to be held on March 29, 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPursuant to General Instructions G (3), information on principal accountant fees and services will be incorporated by reference from the Company’s Definitive Proxy Statement for the annual meeting to be held on March 29, 2007.
102
PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of Hancock Holding Company and subsidiaries are filed as part of
this report under Item 8 - Financial Statements and Supplementary Data:
Consolidated balance sheets - December 31, 2006 and 2005
Consolidated statements of income - Years ended December 31, 2006, 2005, and 2004
Consolidated statements of stockholders' equity - Years ended December 31, 2006, 2005, and 2004
Consolidated statements of cash flows -Years ended December 31, 2006, 2005, and 2004
Notes to consolidated financial statements - December 31, 2006 (pages 58 to 100)
2. Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:
The schedules to the consolidated financial statements set forth by Article 9 of Regulation S-X are not required
under the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits required to be filed by Item 601 of Regulation S-K, and by Item 15(b) below.
(b) Exhibits:
All other financial statements and schedules are omitted as the required information is inapplicable or the required
information is presented in the consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Hancock Holding Company and Lamar Capital Corporation dated February 21,
2001 (Appendix C to the Prospectus contained in the S-4 Registration Statement 333-60280 filed on May 4, 2001
and incorporated by reference herein).
3.1 Amended and Restated Articles of Incorporation dated November 8, 1990 (filed as Exhibit 3.1 to the Registrant's
Form 10-K for the year ended December 31, 1990 and incorporated herein by reference).
3.2 Amended and Restated Bylaws dated November 8, 1990 (filed as Exhibit 3.2 to the Registrant's Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, dated October 16, 1991 (filed
as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1991).
3.4 Articles of Correction, filed with Mississippi Secretary of State on November 15, 1991 (filed as Exhibit 4.2 to
the Registrant's Form 10-Q for the quarter ended September 30, 1991).
3.5 Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, adopted February 13, 1992
(filed as Exhibit 3.5 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein
by reference).
3.6 Articles of Correction, filed with Mississippi Secretary of State on March 2, 1992 (filed as Exhibit 3.6 to the
Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference).
3.7 Articles of Amendment to the Articles of Incorporation adopted February 20, 1997 (filed as Exhibit 3.7 to the
Registrant's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
103
4.1 Specimen stock certificate (reflecting change in par value from $10.00 to $3.33, effective March 6, 1989) (filed
as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1989 and incorporated herein by
reference).
4.2 By executing this Form 10-K, the Registrant hereby agrees to deliver to the Commission upon request copies of
instruments defining the rights of holders of long-term debt of the Registrant or its consolidated subsidiaries
or its unconsolidated subsidiaries for which financial statements are required to be filed, where the total
amount of such securities authorized there under does not exceed 10 percent of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
*10.1 1996 Long Term Incentive Plan (filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein by reference).
*10.2 Description of Hancock Bank Executive Supplemental Reimbursement Plan, as amended (filed as Exhibit 10.2 to the
Registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference).
*10.3 Description of Hancock Bank Automobile Plan (filed as Exhibit 10.3 to the Registrant's Form 10-K for the year
ended December 31, 1996, and incorporated herein by reference).
*10.4 Description of Deferred Compensation Arrangement for Directors (filed as Exhibit 10.4 to the Registrant's Form
10-K for the year ended December 31, 1996, and incorporated herein by reference).
*10.5 Hancock Holding Company 2005 Long-Term Incentive Plan, filed as Appendix "A" to the Company's Definitive Proxy
Statement filed with the Commission on February 28, 2005 and incorporated herein by reference.
*10.6 Hancock Holding Company Nonqualified Deferred Compensation Plan, filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Commission on December 21, 2005 and incorporated herein by
reference.
10.7 Shareholder Rights Agreement dated as of February 21, 1997, between Hancock Holding Company and Hancock Bank, as
Rights Agent as extended by the Company.
21 Subsidiaries of Hancock Holding Company.
22 Proxy Statement for the Registrant's Annual Meeting of Shareholders on March 29, 2007 (deemed
"filed" for the purposes of this Form 10-K only for those portions which are specifically incorporated
herein by reference).
23 Consent of KPMG, LLP.
31.1 Certification of Chief Executive Officers pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
32 Certification of Chief Executive Officers and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------------------------------------------------------------------------------------------------------------
* Compensatory plan or arrangement.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 23, 2007 By: /s/ Carl J. Chaney
- ------------------- ----------------------------------
Date Carl J. Chaney
Chief Executive Officer &
Chief Financial Officer
Director
February 23, 2007 By: /s/ John M. Hairston
- ------------------- ----------------------------------
Date John M. Hairston
Chief Executive Officer &
Chief Operating Officer
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
President, February 23, 2007
- ------------------------------ Director
Leo W. Seal, Jr.
Chairman of the Board, February 23, 2007
- ------------------------------ Director
George A Schloegel
Director February 23, 2007
- ------------------------------
Alton G. Bankston
/s/ Frank E. Bertucci Director February 23, 2007
- ------------------------------
Frank E. Bertucci
/s/ Joseph F. Boardman, Jr. Director February 23, 2007
- ------------------------------
Joseph F. Boardman, Jr.
/s/ Don P. Descant Director February 23, 2007
- ------------------------------
Don P. Descant
/s/ James B. Estabrook, Jr. Director February 23, 2007
- ------------------------------
James B. Estabrook, Jr.
Director February 23, 2007
- ------------------------------
James H. Horne
(signatures continued)
/s/ Charles H. Johnson Director February 23, 2007
- -------------------------------
Charles H. Johnson
Director February 23, 2007
- -------------------------------
John H. Pace
/s/ Christine L. Pickering Director February 23, 2007
- -------------------------------
Christine L. Pickering
Director February 23, 2007
- -------------------------------
Robert W. Roseberry
Director February 23, 2007
- -------------------------------
Anthony J. Topazi
EXHIBIT INDEX
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Hancock Holding Company and Lamar Capital Corporation dated February 21,
2001 (Appendix C to the Prospectus contained in the S-4 Registration Statement 333-60280 filed on May 4, 2001
and incorporated by reference herein).
3.1 Amended and Restated Articles of Incorporation dated November 8, 1990 (filed as Exhibit 3.1 to the Registrant's
Form 10-K for the year ended December 31, 1990 and incorporated herein by reference).
3.2 Amended and Restated Bylaws dated November 8, 1990 (filed as Exhibit 3.2 to the Registrant's Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference).
3.3 Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, dated October 16, 1991 (filed
as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1991).
3.4 Articles of Correction, filed with Mississippi Secretary of State on November 15, 1991 (filed as Exhibit 4.2 to
the Registrant's Form 10-Q for the quarter ended September 30, 1991).
3.5 Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, adopted February 13, 1992
(filed as Exhibit 3.5 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein
by reference).
3.6 Articles of Correction, filed with Mississippi Secretary of State on March 2, 1992 (filed as Exhibit 3.6 to the
Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference).
3.7 Articles of Amendment to the Articles of Incorporation adopted February 20, 1997 (filed as Exhibit 3.7 to the
Registrant's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference).
4.1 Specimen stock certificate (reflecting change in par value from $10.00 to $3.33, effective March 6, 1989) (filed
as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1989 and incorporated herein by
reference).
4.2 By executing this Form 10-K, the Registrant hereby agrees to deliver to the Commission upon request copies of
instruments defining the rights of holders of long-term debt of the Registrant or its consolidated subsidiaries
or its unconsolidated subsidiaries for which financial statements are required to be filed, where the total
amount of such securities authorized there under does not exceed 10 percent of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
*10.1 1996 Long Term Incentive Plan (filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December
31, 1995, and incorporated herein by reference).
*10.2 Description of Hancock Bank Executive Supplemental Reimbursement Plan, as amended (filed as Exhibit 10.2 to the
Registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference).
*10.3 Description of Hancock Bank Automobile Plan (filed as Exhibit 10.3 to the Registrant's Form 10-K for the year
ended December 31, 1996, and incorporated herein by reference).
*10.4 Description of Deferred Compensation Arrangement for Directors (filed as Exhibit 10.4 to the Registrant's Form
10-K for the year ended December 31, 1996, and incorporated herein by reference).
*10.5 Hancock Holding Company 2005 Long-Term Incentive Plan, filed as Appendix "A" to the Company's Definitive Proxy
Statement filed with the Commission on February 28, 2005 and incorporated herein by reference.
*10.6 Hancock Holding Company Nonqualified Deferred Compensation Plan, filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K filed with the Commission on December 21, 2005 and incorporated herein by
reference.
10.7 Shareholder Rights Agreement dated as of February 21, 1997, between Hancock Holding Company and Hancock Bank, as
Rights Agent as extended by the Company.
21 Subsidiaries of Hancock Holding Company.
22 Proxy Statement for the Registrant's Annual Meeting of Shareholders on March 29, 2007 (deemed
"filed" for the purposes of this Form 10-K only for those portions which are specifically incorporated
herein by reference).
23 Consent of KPMG, LLP.
31.1 Certification of Chief Executive Officers pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
32 Certification of Chief Executive Officers and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------------------------------------------------------------------------------------------------------------
* Compensatory plan or arrangement.
