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Hancock Holding Company 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
 

UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

                                                                                                OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________ to ________________________

 

Commission File Number     0-13089

 
HANCOCK HOLDING COMPANY

 (Exact name of registrant as specified in its charter)
 
Mississippi   64-0693170

 
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
     
One Hancock Plaza, P.O. Box 4019, Gulfport, Mississippi   39502

 
 (Address of principal executive offices)    (Zip Code)
 
(228) 868-4000

 (Registrant’s telephone number, including area code)
 
NOT APPLICABLE

(Former name, address and fiscal year, if changed since last report)
   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                       Yes    x      No    o

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   o          Non-accelerated filer    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                       Yes     o      No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

32,020,143 common shares were outstanding as of July 31, 2007 for financial statement purposes.




Hancock Holding Company
 
Index
 
  Page Number  
       
 
Part I.   Financial Information      
           
ITEM 1.   Financial Statements
Condensed Consolidated Balance Sheets —
June 30, 2007 (unaudited) and December 31, 2006

  1  
           
    Condensed Consolidated Statements of Income (unaudited) —
Three and six months ended June 30, 2007 and 2006
  2  
   
    Condensed Consolidated Statements of Stockholders’ Equity
(unaudited) – Six months ended June 30, 2007 and 2006
  3  
           
    Condensed Consolidated Statements of Cash Flows (unaudited) —
Six Months Ended June 30, 2007 and 2006
  4  
           
    Notes to Condensed Consolidated Financial Statements (unaudited) —
June 30, 2007
  5-22  
           
ITEM 2.   Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  23-34  
           
ITEM 3.   Quantitative and Qualitative Disclosures about Market Risk   35  
           
ITEM 4.   Controls and Procedures   35  
           
Part II.   Other Information      
           
ITEM 1A.   Risk Factors   36  
           
ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds   36  
           
ITEM 4.   Submission of Matters to a Vote of Security Holders   37  
           
ITEM 6.   Exhibits   37  
           
Signatures   38  



Part I. Financial Information

Item 1. Financial Statements

Hancock Holding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)

 
June 30,
2007
(unaudited)
  December 31,
2006
 
 
 
 
  ASSETS        
     Cash and due from banks (non-interest bearing) $ 183,330   $ 190,114  
     Interest-bearing time deposits with other banks   12,616     10,197  
     Federal funds sold   184,328     212,242  
     Trading securities   1,731      
     Securities available for sale, at fair value
        (amortized cost of $1,642,287 and $1,916,944)
  1,615,473     1,903,658  
     Loans held for sale   25,198     16,946  
     Loans   3,433,605     3,267,058  
        Less: allowance for loan losses   (46,227 )   (46,772 )
              unearned income   (17,453 )   (17,420 )
 
 
 
        Loans, net   3,369,925     3,202,866  
     Property and equipment, net of accumulated
        depreciation of $69,860 and $66,043
  182,246     140,554  
     Other real estate, net   1,063     568  
     Accrued interest receivable   34,445     32,984  
     Goodwill, net   62,277     62,277  
     Other intangible assets, net   9,336     10,355  
     Life insurance contracts   116,554     110,751  
     Reinsurance receivables   34,497     38,042  
     Deferred tax asset, net   22,141     16,544  
     Other assets   19,646     16,467  
 
 
 
            Total assets $ 5,874,806   $ 5,964,565  
 
 
 
  
LIABILITIES AND STOCKHOLDERS’ EQUITY            
     Deposits:            
        Non-interest bearing demand $ 938,638   $ 1,057,358  
        Interest-bearing savings, NOW, money market
           and time
  4,039,032     3,973,633  
 
 
 
              Total deposits   4,977,670     5,030,991  
     Federal funds purchased   3,000     3,800  
     Securities sold under agreements to repurchase   196,639     218,591  
     Long-term notes   253     258  
     Policy reserves and liabilities   82,465     93,669  
     Other liabilities   65,081     58,846  
 
 
 
            Total liabilities   5,325,108     5,406,155  
    
Stockholders’ Equity            
     Common Stock-$3.33 par value per share; 350,000,000
        shares authorized, 32,093,858 and 32,666,052 issued
        and outstanding, respectively
  106,873     108,778  
     Capital surplus   115,735     139,099  
     Retained earnings   358,445     334,546  
     Accumulated other comprehensive loss, net   (31,355 )   (24,013 )
 
 
 
            Total stockholders’ equity   549,698     558,410  
 
 
 
  
           Total liabilities and stockholders’ equity $ 5,874,806   $ 5,964,565  
 
 
 
         
See notes to unaudited condensed consolidated financial statements.

1



Hancock Holding Company and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended June 30, Six Months Ended June 30,
2007 2006 2007 2006
 
 
 
 
 
Interest income:                
  Loans, including fees $ 63,202   $ 56,339   $ 124,054   $ 109,599  
  Securities - taxable   19,397     24,451     39,723     47,487  
  Securities - tax exempt   1,550     1,659     3,198     3,352  
  Federal funds sold   722     3,915     3,588     7,501  
  Other investments   66     39     84     54  
 
 
 
 
 
      Total interest income   84,937     86,403     170,647     167,993  
 
 
 
 
 
  
Interest expense:                        
  Deposits   31,557     26,791     64,006     49,812  
  Federal funds purchased and securities sold
    under agreements to repurchase
  1,827     1,593     3,684     3,252  
  Long-term notes and other interest expense   10     252     12     844  
 
 
 
 
 
      Total interest expense   33,394     28,636     67,702     53,908  
 
 
 
 
 
  
Net interest income   51,543     57,767     102,945     114,085  
Provision for (reversal of) loan losses, net   1,238         2,449     (705 )
 
 
 
 
 
Net interest income after provision for
 (reversal of) loan losses
  50,305     57,767     100,496     114,790  
 
 
 
 
 
  
Noninterest income:                        
  Service charges on deposit accounts   10,471     9,223     19,662     17,107  
  Other service charges, commissions and fees   14,704     12,732     27,844     25,235  
  Securities gains, net   34         40     118  
  Other income   5,018     3,987     8,575     8,490  
 
 
 
 
 
      Total noninterest income   30,227     25,942     56,121     50,950  
 
 
 
 
 
  
Noninterest expense:                        
  Salaries and employee benefits   24,837     26,400     51,401     52,602  
  Net occupancy expense   4,469     3,474     8,542     7,134  
  Equipment rentals, depreciation and maintenance   2,768     2,816     5,041     5,484  
  Amortization of intangibles   384     507     807     1,181  
  Other expense   19,399     17,975     35,205     33,937  
 
 
 
 
 
      Total noninterest expense   51,857     51,172     100,996     100,338  
 
 
 
 
 
  
Net income before income taxes   28,675     32,537     55,621     65,402  
Income tax expense   8,352     10,539     16,068     21,393  
 
 
 
 
 
Net income $ 20,323   $ 21,998   $ 39,553   $ 44,009  
 
 
 
 
 
Basic earnings per share $ 0.63   $ 0.68   $ 1.22   $ 1.36  
 
 
 
 
 
Diluted earnings per share $ 0.62   $ 0.66   $ 1.20   $ 1.32  
 
 
 
 
 
Dividends paid per share $ 0.240   $ 0.220   $ 0.480   $ 0.415  
 
 
 
 
 
Weighted avg. shares outstanding-basic   32,233     32,531     32,447     32,462  
 
 
 
 
 
Weighted avg. shares outstanding-diluted   32,749     33,322     33,024     33,237  
 
 
 
 
 
                 
See notes to unaudited condensed consolidated financial statements.

2



Hancock Holding Company and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share and per share data)
 
        Capital
Surplus
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss, net
   Unearned
Compensation
   Total  
Common Stock
Shares    Amount
 
 
 
 
 
 
 
 
Balance, January 1, 2006   32,301,123   $ 107,563   $ 129,222   $ 262,055   $ (22,066 ) $ (2,343 ) $ 474,431  
Comprehensive income                                          
      Net income per consolidated
        statements of income
              44,009             44,009  
      Net change in fair value of
        securities available for sale, net of tax
                  (21,593 )       (21,593 )
                                     
 
            Comprehensive income                                       22,416   
Cash dividends paid ($0.415 per common share)               (13,564 )           (13,564 )
Common stock issued, long-term incentive plan
  including income tax benefit of $524
  292,899     975     7,058                 8,033  
Compensation expense, long-term incentive plan           2,329                 2,329  
SFAS No. 123(R) reclass of unearned
  compensation
          (2,343 )           2,343      
Repurchase/retirement of common stock   (39,393 )   (131 )   (4,238 )               (4,369 )
 
 
 
 
 
 
 
 
Balance, June 30, 2006   32,554,629   $ 108,407   $ 132,028   $ 292,500   $ (43,659 ) $   $ 489,276  
 
 
 
 
 
 
 
 
  
Balance, January 1, 2007   32,666,052   $ 108,778   $ 139,099   $ 334,546   $ (24,013 ) $   $ 558,410  
Comprehensive income                                          
      Net income per consolidated
        statements of income
              39,553             39,553  
       Recognized pension and other employee
        benefit plan cost
                  443         443  
      Net change in fair value of
        securities available for sale, net of tax
                  (7,785 )       (7,785 )
                                     
 
            Comprehensive income                                       32,211   
Cash dividends paid ($0.480 per common share)               (15,654 )           (15,654 )
Common stock issued, long-term incentive plan,
  including income tax benefit of $96
  88,826     296     433                 729  
Compensation expense, long-term incentive plan           1,070                 1,070  
Repurchase/retirement of common stock   (661,020 )   (2,201 )   (24,867 )               (27,068 )
 
 
 
 
 
 
 
 
Balance, June 30, 2007   32,093,858   $ 106,873   $ 115,735   $ 358,445   $ (31,355 ) $   $ 549,698  
 
 
 
 
 
 
 
 
                             
See notes to unaudited condensed consolidated financial statements.

3



Hancock Holding Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,  
2007   2006  
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:        
        Net income $ 39,553   $ 44,009  
            Adjustments to reconcile net income to net
                  cash provided by operating activities:
           
                      Depreciation and amortization   6,034     4,759  
                      Provision for (reversal of) loan losses, net   2,449     (705 )
                      Gain on sales of ORE   (761 )   (146 )
                      Deferred tax benefit   (773 )   (1,397 )
                      Increase in cash surrender value of life insurance contracts   (2,531 )   (1,754 )
                      Gain on sales/paydowns of securities available for sale, net   (40 )   (118 )
                      Gain on disposal of other assets   (16 )   (4 )
                      Accretion of securities premium/discount, net   (1,973 )   (6,263 )
                      Amortization of mortgage servicing rights   179     289  
                      Amortization of intangible assets   807     1,182  
                      Stock-based compensation expense   1,070     2,329  
                      (Increase) decrease in accrued interest receivable   (1,461 )   1,604  
                      (Decrease) increase in accrued expenses   (2,602 )   18,632  
                      (Decrease) increase in other liabilities   986     (600 )
                      (Decrease) increase in interest payable   (1,047 )   1,351  
                      Decrease in policy reserves and liabilities   (11,204 )   (7,356 )
                      Decrease in reinsurance receivable   3,545     7,057  
                      Decrease (increase) in other assets   (2,137 )   2,244  
                      Increase in loans held for sale   (8,252 )   (486 )
                      Excess tax benefit from share based payments   (96 )   (524 )
                      Other, net   691     24  
 
 
 
            Net cash provided by operating activities   22,421     64,127  
 
 
 
   
CASH FLOWS FROM INVESTING ACTIVITIES:            
        Net increase in interest-bearing time deposits   (2,419 )   (1,674 )
        Proceeds from sales of securities available for sale   8,969     9,954  
        Proceeds from maturities of securities available for sale   650,546     421,946  
        Purchases of securities available for sale   (382,845 )   (634,240 )
        Net decrease (increase) in federal funds sold   27,914     (2,163 )
        Net increase in loans   (170,422 )   (58,128 )
        Purchases of property and equipment   (44,261 )   (31,347 )
        Proceeds from sales of property and equipment   204     250  
        Proceeds from sales of other real estate   1,180     1,293  
 
 
 
            Net cash provided by (used in) investing activities   88,866     (294,109 )
 
 
 
  
CASH FLOWS FROM FINANCING ACTIVITIES:            
        Net (decrease) increase in deposits   (53,321 )   257,507  
        Net decrease in federal funds purchased and
            securities sold under agreements to repurchase
  (22,752 )   (29,373 )
        Repayments of long-term notes   (5 )   (50,001 )
        Dividends paid   (15,654 )   (13,564 )
        Proceeds from exercise of stock options   633     8,034  
        Repurchase/retirement of common stock   (27,068 )   (4,369 )
        Excess tax benefit from stock option exercises   96     524  
 
 
 
            Net cash (used in) provided by financing activities   (118,071 )   168,758  
 
 
 
NET DECREASE IN CASH AND DUE FROM BANKS   (6,784 )   (61,224 )
CASH AND DUE FROM BANKS, BEGINNING   190,114     271,104  
 
 
 
CASH AND DUE FROM BANKS, ENDING $ 183,330   $ 209,880  
 
 
 
SUPPLEMENTAL INFORMATION:            
        Income taxes paid $ 17,003   $ 2,103  
        Interest paid, including capitalized interest
            of $717 and $97, respectively
  68,750     52,558  
        Restricted stock issued to employees of Hancock   137     2,460  
SUPPLEMENTAL INFORMATION FOR NON-CASH
INVESTING AND FINANCING ACTIVITIES
           
        Transfers from loans to other real estate $ 915   $ 842  
        Financed sale of foreclosed property       253  
             
See notes to unaudited condensed consolidated financial statements.

4





Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

     The condensed consolidated financial statements of Hancock Holding Company and all majority-owned subsidiaries (the “Company”) included herein are unaudited; however, they include all adjustments all of which are of a normal recurring nature which, in the opinion of management, are necessary to present fairly the Company’s Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006, the Company’s Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 and the Company’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006. Although the Company believes the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2006 and the notes thereto included in the Company’s Annual Report on Form 10-K. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results expected for the full year.

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for loan losses, investments, intangible assets and goodwill, property, plant and equipment, income taxes, insurance, employment benefits 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 that are not readily apparent from other sources. Actual results could differ from those estimates.

     Certain reclassifications have been made to conform prior year financial information to the current period presentation. These reclassifications had no material impact on the condensed consolidated financial statements.

Critical Accounting Policies

        There have been no material changes or developments in the Company’s evaluation of accounting estimates and underlying assumptions or methodologies that the Company believes to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K, for the year ended December 31, 2006.

2. Securities

         Available for Sale Securities

         For the six months ended June 30, 2007, a subsidiary of the Company, Magna Insurance Company, sold thirty securities out of its portfolio to provide liquidity for surrenders of annuities for Magna Insurance Company. These securities had a gross loss of $37,164.

         Trading Securities

         As of June 30, 2007, the Company held in trust $1.7 million in securities related to its own stock for the 2005 Nonqualified Deferred Compensation Plan.


5



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

3. Loans and Allowance for Loan Losses

     Loans, net of unearned income, totaled $3.4 billion and $3.3 billion at June 30, 2007 and December 31, 2006, respectively. The Company also held $25.2 million and $16.9 million in loans held for sale at June 30, 2007 and December 31, 2006, respectively, carried at lower of cost or 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.

         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.

         The Company’s investments in impaired loans at June 30, 2007 and December 31, 2006 were $22.9 million and $26.8 million, respectively. The amount of interest that was not recognized on nonaccrual loans would not have had a material effect on earnings for the three and six months ended June 30, 2007 and June 30, 2006.

         Nonaccrual loans and foreclosed assets, which make up total non-performing assets, amounted to approximately 0.25% and 0.13% of total loans at June 30, 2007 and December 31, 2006, respectively. Interest recognized on nonaccrual loans is immaterial to the Company’s operating results.

         The following table presents, for the periods indicated, non-performing assets:

 
    June 30, 2007   December 31, 2006  
   
 
 
    (In thousands)  
  
  Non-accrual loans $ 7,544   $ 3,500  
  Foreclosed assets   1,146     681  
   
 
 
  Total non-performing assets $ 8,690   $ 4,181  
   
 
 

6



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

3.  Loans and Allowance for Loan Losses (continued)

The following table sets forth, for the periods indicated, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off (In thousands):

 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
  
Balance of allowance for loan losses
  at beginning of period
$ 46,517   $ 73,961   $ 46,772   $ 74,558  
Provision for (reversal of) loan losses, net   1,238         2,449     (705 )
Loans charged-off:                        
     Commercial, real estate and mortgage   978     1,082     1,481     1,685  
     Direct and indirect consumer   1,179     1,500     2,394     3,438  
     Finance company   648     417     1,281     858  
     Demand deposit accounts   716     1,743     1,441     2,683  
 
 
 
 
 
  Total charge-offs   3,521     4,742     6,597     8,664  
 
 
 
 
 
Recoveries of loans previously
  charged-off:
                       
     Commercial, real estate and mortgage   1,064     435     1,375     2,625  
     Direct and indirect consumer   383     594     929     1,046  
     Finance company   123     136     267     329  
     Demand deposit accounts   423     576     1,032     1,771  
 
 
 
 
 
  Total recoveries   1,993     1,741     3,603     5,771  
 
 
 
 
 
  Net charge-offs   1,528     3,001     2,994     2,893  
 
 
 
 
 
  Balance of allowance for loan losses
    at end of period
$ 46,227   $ 70,960   $ 46,227   $ 70,960  
 
 
 
 
 
 

         The following table presents the makeup of allowance for loan losses by:

 
    June 30, 2007   December 31, 2006
 
   
 
    (In thousands)  
  Balance of allowance for loan losses          
      Non-impaired $ 39,280   $ 38,986  
      Impaired   6,947     7,786  
   
 
 
  Total allowance for loan losses $ 46,227   $ 46,772  
   
 
 
 

         As of June 30, 2007 and December 31, 2006, the Company had $18.2 million and $17.2 million, respectively, in loans carried at fair value.


7



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

3.  Loans and Allowance for Loan Losses (continued)

    The following table sets forth, for the periods indicated, certain ratios related to the Company’s charge-offs, allowance for loan losses and outstanding loans:

 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
Ratios :                
  Net charge-offs to average net loans (annualized)   0.18%   0.40%   0.18%   0.20%
  Net charge-offs to period-end net loans (annualized)   0.18%   0.39%   0.18%   0.19%
  Allowance for loan losses to average net loans   1.37%   2.37%   1.39%   2.38%
  Allowance for loan losses to period-end net loans   1.35%   2.35%   1.35%   2.35%
  Net charge-offs to loan loss allowance   3.31%   4.23%   6.48%   4.08%
  Provision for loan losses to net charge-offs   81.02%   0.00%   81.80%   -24.39%

8



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

4. Goodwill and Other Intangible Assets

     Goodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. In accordance with the provisions of Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangibles, the Company tests its goodwill for impairment annually. No impairment charges were recognized as of June 30, 2007. The carrying amount of goodwill was $62.3 million as of June 30, 2007 and December 31, 2006.

     The following tables present information regarding the components of the Company’s identifiable intangible assets, and related amortization for the dates indicated (In thousands):

 
As of
June 30, 2007
  As of
December 31, 2006
 
 
 
 
Gross Carrying
Amount
  Accumulated
Amortization
  Gross Carrying
Amount
  Accumulated
Amortization
 
 
 
 
 
 
Amortizable intangible assets:                
      Core deposit intangibles $ 14,137   $ 7,895   $ 14,137   $ 7,290  
      Value of insurance business acquired   3,768     1,615     3,767     1,459  
      Non-compete agreements   368     216     368     179  
      Trade name   100     40     100     30  
 
 
 
 
 
           Total $ 18,373   $ 9,766   $ 18,372   $ 8,958  
 
 
 
 
 
                 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
Aggregate amortization expense for:                
      Core deposit intangibles $ 331   $ 342   $ 605   $ 683  
      Value of insurance businesses acquired   29     138     155     418  
      Non-compete agreements   19     27     37     81  
      Trade name   5         10      
 
 
 
 
 
           Total $ 384   $ 507   $ 807   $ 1,182  
 
 
 
 
 

9



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

4.  Goodwill and Other Intangible Assets (continued)

     The remaining amortization expense for the core deposit intangibles in 2007 is estimated to be approximately $605,000. The amortization expense for core deposit intangibles is estimated to be approximately $1.1 million in 2008, $1.1 million in 2009, $1.1 million in 2010, $0.9 million in 2011 and the remainder of $1.4 million thereafter. The amortization of the value of business acquired, non-compete agreements and trade name are expected to approximate $220,000 for the remainder of 2007, $404,000 in 2008, $370,000 in 2009, $311,000 in 2010, $267,000 in 2011 and the remainder of $792,000 thereafter. The weighted-average amortization period used for intangibles is 10 years.

5.  Mortgage Banking (including Mortgage Servicing Rights)

     The Company adopted SFAS 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”) on January 1, 2007 without material impact. 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. Under SFAS No. 156, the Company decided to continue to use the amortization method instead of adopting the fair value measurement method. Management has determined that it has one class of servicing rights – mortgage servicing rights – which are based on the type of loan. The following are the risk characteristics of the underlying financial assets used to stratify servicing assets for purposes of measuring impairment: interest rate, type of product (fixed versus variable), duration and asset quality. The fair value of the mortgage servicing rights was $1.7 million and $2.2 million as of June 30, 2007 and December 31, 2006, respectively. The fair value was based upon Bloomberg prepayment speeds for the performing portion of the portfolio and actual prepayment speeds for the watch list portion of the portfolio. The following table shows the amount (In thousands) of contractually specified fees for the three and six months ended June 30, 2007 and 2006, respectively:

 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
  
Servicing fees $ 160   $ 191   $ 326   $ 410  
Late fees   16     7     33     14  
Ancillary fees   2     7     10     14  
 
 
 
 
 
     Total $ 178   $ 205   $ 369   $ 438  
 
 
 
 
 

10



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

5.  Mortgage Banking (including Mortgage Servicing Rights) (continued)

        The gross carrying amount of mortgage servicing rights is equal to the net carrying amount. There was no valuation allowance on the mortgage servicing rights portfolio as of June 30, 2007 or December 31, 2006.

        The changes in the carrying amounts of mortgage servicing rights as of June 30, 2007 and as of December 31, 2006 are as follows ( in thousands):

 
  Net Carrying
Amount
   
   
   
  Balance as of December 31, 2005 $ 1,576    
  Additions   21    
  Disposals   (107 )  
  Amortization   (549 )  
   
   
  Balance as of December 31, 2006   941    
  Additions   5    
  Disposals   (38 )  
  Amortization   (179 )  
   
   
  Balance as of June 30, 2007 $ 729    
   
   
 
           Amortization of servicing rights is estimated to be approximately $170,000 for the remainder of 2007, $226,000 in 2008, $157,000 in 2009, $101,000 in 2010, $54,000 in 2011, and the remainder of $21,000 thereafter.

11



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

6. Comprehensive Income

        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 as of December 31, 2006 and as of June 30, 2007.

 
  Before-Tax
Amount
  Tax
Effect
  Accumulated
Other
Comprehensive
Loss
 
   
 
 
 
  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 )
  
  Recognized pension and other employee benefit
  plan cost
  705     (262 )   443  
  Net change in fair value of securities available for sale   (13,488 )   5,728     (7,760 )
  Less adjustment for net (gains) included in income   (40 )   15     (25 )
   
 
 
 
  Balance, June 30, 2007 $ (48,803 ) $ 17,448   $ (31,355 )
   
 
 
 

12



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

7. Earnings Per Share

     Following is a summary of the information used in the computation of earnings per common share (in thousands):

 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
  
Net income - used in computation of
     earnings per share
$ 20,323   $ 21,998   $ 39,553   $ 44,009  
 
 
 
 
 
  
Weighted average number of shares
     outstanding - used in computation of basic
     earnings per share
  32,233     32,531     32,447     32,462  
  
Effect of dilutive securities
     Stock options and restricted stock awards
  516     791     577     775  
 
 
 
 
 
  
Weighted average number of shares
     outstanding plus effect of dilutive
     securities - used in computation of
     diluted earnings per share
  32,749     33,322     33,024     33,237  
 
 
 
 
 
                 
 
There were 60,585 and 42,347 anti-dilutive share-based incentives outstanding for the three and six months ended June 30, 2007, respectively. There were 53,359 and 89,894 anti-dilutive share-based incentives outstanding for the three and six months ended June 30, 2006, respectively.

13



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

8. Stock-Based Payment Arrangements

Stock Option Plans

     At June 30, 2007, the Company had two stock option plans. The 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% 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 upon restricted stock award vesting. The 1996 Long-Term Incentive Plan expired in 2006 and no additional awards may be granted under the 1996 Plan.

     In March of 2005, the stockholders of the Company approved Hancock Holding Company’s 2005 Long-Term Incentive Plan (the “2005 Plan”). 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.

     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. No grants have been issued in 2007. 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.

 
  Six Months Ended
June 30, 2006
   
   
   
  Expected volatility   29.87 %  
  Expected dividends   1.61% - 1.96 %  
  Expected term (in years)   5 - 8    
  Risk-free rates   4.30% - 4.54 %  

14



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

8. Stock-Based Payment Arrangements (continued)

   A summary of option activity under the plans for the six months ended June 30, 2007, and changes during the six months then ended is presented below:

 
Options   Number of
Shares
  Weighted-
Average
Exercise
Price ($)
  Weighted-
Average
Remaining
Contractual
Term
(Years)
  Aggregate
Intrinsic
Value ($000)
 

 
 
 
 
 
  
Outstanding at January 1, 2007   1,511,261   $ 27.04     6.6      
Granted     $          
Exercised   (110,456 ) $ 14.98     4.0   $ 3,457,259  
Forfeited or expired   (4,100 ) $ 35.25     7.1      
   
                   
Outstanding at June 30, 2007   1,396,705   $ 27.97     6.3   $ 13,380,615  
   
 
 
 
 
Exercisable at June 30, 2007   1,131,634   $ 24.78     5.8   $ 14,452,527  
   
 
 
 
 
Share options expected to vest   232,777   $ 41.58     8.6     N/A  
   
 
 
 
 
 

   The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was $3.5 million and $7.6 million, respectively.

     A summary of the status of the Company’s nonvested shares as of June 30, 2007, and changes during the six months ended June 30, 2007, is presented below:

 
  Number of
Shares
  Weighted-
Average
Grant-Date
Fair Value ($)
 
   
 
 
 
  Nonvested at January 1, 2007   522,570   $ 26.67  
  Granted   3,386   $ 40.58  
  Vested   (67,812 ) $ 18.34  
  Forfeited   (4,434 ) $ 26.04  
   
       
  Nonvested at June 30, 2007   453,710   $ 23.60  
   
       
 

         As of June 30, 2007, there was $5.4 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 3.0 years. The total fair value of shares which vested during the six months ended June 30, 2007 and 2006 was $1.2 million and $0 million, respectively.


15



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

9. Retirement Plans

     Net periodic benefits cost includes the following components for the three and six months ended June 30, 2007 and 2006:

 
Pension Benefits   Other Post-retirement Benefits  
 
 
 
  Three Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
Service cost $ 663,956   $ 575,934   $ 68,500   $ 78,750  
  
Interest cost   958,450     874,760     102,000     98,500  
  
Expected return on plan assets   (1,051,435 )   (966,840 )        
  
Amortization of prior service cost           (13,250 )   (13,250 )
  
Amortization of net loss   280,549     265,527     148,651     29,000  
  
Amortization of transition obligation           1,250     1,250  
 
 
 
 
 
Net periodic benefit cost $ 851,520   $ 749,381   $ 307,151   $ 194,250  
 
 
 
 
 
                 
Pension Benefits   Other Post-retirement Benefits  
 
 
 
  Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
Service cost $ 1,327,912   $ 1,151,868   $ 137,000   $ 157,500  
  
Interest cost   1,916,900     1,749,520     204,000     197,000  
  
Expected return on plan assets   (2,102,870 )   (1,933,680 )        
  
Amortization of prior service cost           (26,500 )   (26,500 )
  
Amortization of net loss   561,098     531,054     168,151     58,000  
  
Amortization of transition obligation           2,500     2,500  
 
 
 
 
 
Net periodic benefit cost $ 1,703,040   $ 1,498,762   $ 485,151   $ 388,500  
 
 
 
 
 
 

     The Company anticipates that it will contribute $4.6 million to its pension plan and approximately $565,000 to its post-retirement benefits in 2007. During the first six months of 2007, the Company contributed approximately $2.0 million to its pension plan and approximately $284,000 for post-retirement benefits.


16



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

10.  Other Service Charges, Commission and Fees, and Other Income

          Components of other service charges, commission and fees are as follows:

 
Three Months Ended June 30,  
Six Months Ended June 30,
 
2007   2006   2007   2006  
 
 
 
 
 
  (In thousands)  
Trust fees $ 4,124   $ 3,409   $ 7,816   $ 6,487  
Credit card merchant discount fees   2,171     1,863     3,949     3,571  
Income from insurance operations   5,033     4,596     9,402     9,755  
Investment and annuity fees   2,018     1,591     3,995     2,855  
ATM fees   1,358     1,273     2,682     2,567  
 
 
 
 
 
  Total other service charges, commissions and fees $ 14,704   $ 12,732   $ 27,844   $ 25,235  
 
 
 
 
 
 
        Components of other income are as follows:
 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
  (In thousands)  
Secondary mortgage market operations $ 1,116   $ 749   $ 2,027   $ 1,566  
Income from bank owned life insurance   1,227     890     2,419     1,754  
Outsourced check income   637     733     1,289     1,371  
Other   2,038     1,615     2,840     3,799  
 
 
 
 
 
   Total other income $ 5,018   $ 3,987   $ 8,575   $ 8,490  
 
 
 
 
 
 

11. Other Expense

        Components of other expense are as follows:

 
Three Months Ended June 30,   Six Months Ended June 30,  
2007   2006   2007   2006  
 
 
 
 
 
  (In thousands)  
Data processing expense $ 2,430   $ 2,579   $ 4,897   $ 4,499  
Postage and communications   2,688     2,569     4,947     4,945  
Ad valorem and franchise taxes   827     1,163     1,648     2,161  
Legal and professional services   6,077     3,710     11,039     5,923  
Stationery and supplies   640     537     1,132     1,085  
Advertising   2,033     1,748     3,595     3,107  
Deposit insurance and regulatory fees   253     237     509     293  
Training expenses   161     147     335     312  
Other fees   549     1,296     1,376     2,252  
Annuity expense   339     959     802     2,750  
Claims paid   470     709     898     1,004  
Other expense   2,932     2,321     4,027     5,606  
 
 
 
 
 
   Total other expense $ 19,399   $ 17,975   $ 35,205   $ 33,937  
 
 
 
 
 

17



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

12. Income Taxes

     The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, An Interpretation of FASB Statement No. 109  (“FIN 48”), on January 1, 2007 and determined that there was no need to make an adjustment to retained earnings due to the adoption of this Interpretation. The total balance of unrecognized tax benefits at January 1, 2007, was $317,175. The Company does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.

     It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. As of January 1, 2007, $36,735 in interest, and $80,053 in penalties, had been accrued on the Company’s balance sheet. As of June 30, 2007, no significant changes to these amounts have occurred since the adoption of FIN 48.

     The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various returns in the states where its banking offices are located. Its filed income tax returns are no longer subject to examination by taxing authorities for years before 2003.

13. Segment Reporting

     The Company’s primary segments are geographically divided into the Mississippi (MS), Louisiana (LA), Florida (FL) and Alabama (AL) markets. Each segment offers the same products and services but is managed separately due to different pricing, product demand, and consumer markets. Each segment offers commercial, consumer and mortgage loans and deposit services. In the following tables, the column “Other” includes additional consolidated subsidiaries of the Company: Hancock Investment Services, Inc. and subsidiaries, Hancock Insurance Agency, Inc. and subsidiaries, Harrison Finance Company, Magna Insurance Company and subsidiary and three real estate corporations owning land and buildings that house bank branches and other facilities.


18



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

13. Segment Reporting (continued)

     Following is selected information for the Company’s segments (in thousands):

 
  Three Months Ended June 30, 2007  
   
  MS   LA   FL   AL   Other   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
Interest income $ 44,117   $ 37,306   $ 2,347   $ 316   $ 6,464   $ (5,613 ) $ 84,937  
Interest expense   19,005     16,765     1,260     23     1,839     (5,498 )   33,394  
 
 
 
 
 
 
 
 
      Net interest income   25,112     20,541     1,087     293     4,625     (115 )   51,543  
Provision for (reversal of ) loan losses   2,003     (1,161 )   (238 )   121     513         1,238  
Noninterest income   13,252     9,506     219     1     7,261     (12 )   30,227  
Depreciation and amortization   2,237     741     110     6     114         3,208  
Other noninterest expense   22,370     16,376     1,330     361     8,517     (305 )   48,649  
 
 
 
 
 
 
 
 
Net income (loss) before
   income taxes
  11,754     14,091     104     (194 )   2,742     178     28,675  
Income tax expense (benefit)   3,338     3,997     (12 )   (75 )   1,104         8,352  
 
 
 
 
 
 
 
 
      Net income (loss) $ 8,416   $ 10,094   $ 116   $ (119 ) $ 1,638   $ 178   $ 20,323  
 
 
 
 
 
 
 
 
   
Total assets $ 3,307,456   $ 2,523,738   $ 172,904   $ 17,066   $ 799,179   $ (945,537 ) $ 5,874,806  
 
 
 
 
 
 
 
 
   
Total interest income from
  affiliates
$ 5,613   $   $   $ (24 ) $   $ (5,589 ) $  
   
Total interest income from
  external customers
$ 38,504   $ 37,306   $ 2,347   $ 340   $ 6,464   $ (24 ) $ 84,937  
   
Amortization & (accretion) of
  securities
$ (172 ) $ (124 ) $ 12   $   $ 11   $   $ (273 )
                                           
  Three Months Ended June 30, 2006  
   
  MS   LA   FL   AL   Other   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
Interest income $ 49,218   $ 33,980   $ 1,227   $   $ 5,209   $ (3,231 ) $ 86,403  
Interest expense   17,045     12,760     536         1,421     (3,126 )   28,636  
 
 
 
 
 
 
 
 
      Net interest income   32,173     21,220     691         3,788     (105 )   57,767  
Provision for (reversal of ) loan losses                            
Noninterest income   11,370     7,881     107         6,622     (38 )   25,942  
Depreciation and amortization   1,686     648     76         111         2,521  
Other noninterest expense   23,166     16,330     1,206         7,959     (10 )   48,651  
 
 
 
 
 
 
 
 
Net income (loss) before
   income taxes
  18,691     12,123     (484 )       2,340     (133 )   32,537  
Income tax expense (benefit)   6,175     3,659     (196 )       856     45     10,539  
 
 
 
 
 
 
 
 
      Net income (loss) $ 12,516   $ 8,464   $ (288 ) $   $ 1,484   $ (178 ) $ 21,998  
 
 
 
 
 
 
 
 
   
Total assets $ 3,647,836   $ 2,337,408   $ 122,508   $   $ 710,125   $ (662,685 ) $ 6,155,192  
 
 
 
 
 
 
 
 
   
Total interest income from
  affiliates
$ 2,910   $ 70   $ 145   $   $ 106   $ (3,231 ) $  
   
Total interest income from
  external customers
$ 46,308   $ 33,910   $ 1,082   $   $ 5,103   $   $ 86,403  
   
Amortization & (accretion) of
  securities
$ (2,485 ) $ (350 ) $ 14   $   $ 18   $   $ (2,803 )

19



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

13. Segment Reporting (continued)

 
  Six Months Ended June 30, 2007  
   
  MS   LA   FL   AL   Other   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
Interest income $ 90,431   $ 72,798   $ 4,848   $ 434   $ 12,424   $ (10,288 ) $ 170,647  
Interest expense   38,957     32,502     2,494     26     3,781     (10,058 )   67,702  
 
 
 
 
 
 
 
 
      Net interest income   51,474     40,296     2,354     408     8,643     (230 )   102,945  
Provision for (reversal of ) loan losses   491     1,047     (322 )   121     1,112         2,449  
Noninterest income   24,319     17,662     389     1     13,773     (23 )   56,121  
Depreciation and amortization   4,136     1,464     204     6     224         6,034  
Other noninterest expense   42,614     33,248     2,705     403     16,304     (312 )   94,962  
 
 
 
 
 
 
 
 
Net income (loss) before
   income taxes
  28,552     22,199     156     (121 )   4,776     59     55,621  
Income tax expense (benefit)   8,483     5,889     (87 )   (46 )   1,829         16,068  
 
 
 
 
 
 
 
 
      Net income (loss) $ 20,069   $ 16,310   $ 243   $ (75 ) $ 2,947   $ 59   $ 39,553  
 
 
 
 
 
 
 
 
   
Total assets $ 3,307,456   $ 2,523,738   $ 172,904   $ 17,066   $ 799,179   $ (945,537 ) $ 5,874,806  
 
 
 
 
 
 
 
 
   
Total interest income from
  affiliates
$ 10,288   $   $   $ 49   $   $ (10,337 ) $  
   
Total interest income from
  external customers
$ 80,143   $ 72,798   $ 4,848   $ 385   $ 12,424   $ 49   $ 170,647  
   
Amortization & (accretion) of
  securities
$ (1,048 ) $ (968 ) $ 22   $   $ 21   $   $ (1,973 )
                                           
  Six Months Ended June 30, 2006  
   
  MS   LA   FL   AL   Other   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
Interest income $ 94,931   $ 65,023   $ 3,589   $   $ 9,676   $ (5,226 ) $ 167,993  
Interest expense   32,167     23,088     1,037         2,643     (5,027 )   53,908  
 
 
 
 
 
 
 
 
      Net interest income   62,764     41,935     2,552         7,033     (199 )   114,085  
Provision for (reversal of ) loan losses   (1,412 )   519     43         145         (705 )
Noninterest income   22,250     15,372     219         13,186     (77 )   50,950  
Depreciation and amortization   3,126     1,257     149         227         4,759  
Other noninterest expense   45,135     31,601     2,312         16,555     (24 )   95,579  
 
 
 
 
 
 
 
 
Net income (loss) before
   income taxes
  38,165     23,930     267         3,292     (252 )   65,402  
Income tax expense (benefit)   12,819     7,219     78         1,277         21,393  
 
 
 
 
 
 
 
 
      Net income (loss) $ 25,346   $ 16,711   $ 189   $   $ 2,015   $ (252 ) $ 44,009  
 
 
 
 
 
 
 
 
   
Total assets $ 3,647,836   $ 2,337,408   $ 122,508   $   $ 710,125   $ (662,685 ) $ 6,155,192  
 
 
 
 
 
 
 
 
   
Total interest income from
  affiliates
$ 4,828   $ 6   $ 193   $   $ 199   $ (5,226 ) $  
   
Total interest income from
  external customers
$ 90,103   $ 65,017   $ 3,396   $   $ 9,477   $   $ 167,993  
   
Amortization & (accretion) of
  securities
$ (5,663 ) $ (660 ) $ 28   $   $ 32   $   $ (6,263 )

20



Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

14. New Accounting Pronouncements

     In June 2007, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award. The objective of this issue is to determine the accounting for the income tax benefits of dividend or dividend equivalents when the dividends or dividend equivalents are: (a) linked to equity-classified nonvested shares or share units or equity-classified outstanding share options and (b) charged to retained earnings under FASB Statement No. 123 (Revised 2004), Share-Based Payment. The Task Force reached a consensus that EITF No. 06-11 should be applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after September 15, 2007. Management is currently evaluating the requirements of EITF No. 06-11 but does not expect the impact to be significant.

     In March 2007, the FASB ratified EITF No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements. One objective of EITF No. 06-10 is to determine whether a liability for future benefits under a collateral assignment split-dollar life insurance arrangement that provides a benefit to an employee that extends into postretirement periods should be recognized in accordance with SFAS No. 106 or APB Opinion 12, as appropriate, based on the substantive agreement with the employee. Another objective of EITF No. 06-10 is to determine how the asset arising from a collateral assignment split-dollar life insurance arrangement should be recognized and measured. EITF No. 06-10 is effective for fiscal years beginning after December 15, 2007. Management is currently evaluating the requirements of EITF No. 06-10 but does not expect the impact to be significant.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment SFAS No. 115 (“SFAS No. 159”) which permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. The FASB’s stated objective in issuing this standard is as follows: “to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.”

     The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The Company will adopt the provisions of SFAS No. 159 in the first quarter of 2008, as required but does not expect the impact to be significant.


21



     Hancock Holding Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements – (Continued)
(Unaudited)

14. New Accounting Pronouncements (continued)

     In September 2006, the FASB issued Statement 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.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. 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 but does not expect the impact to be significant.

         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 No. 06-5 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. The Company adopted EITF No. 06-5 effective January 1, 2007. The adoption of EITF No. 06-5 has not had a material impact on the Company’s financial condition or results of operations.

         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 Company adopted SOP 05-1 effective January 1, 2007. The adoption of SOP 05-1 has not had a material impact on the Company’s financial condition or results of operations.


22



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview  

      General

     The following discussion should be read in conjunction with our financial statements included with this report and our financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2006 included in our Annual Report on Form 10-K. Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section below entitled “Forward-Looking Statements.”

     We were organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and are headquartered in Gulfport, Mississippi. We currently operate more than 140 banking and financial services offices and more than 130 automated teller machines (ATMs) in the states of Mississippi, Louisiana, Florida and Alabama through four wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi (Hancock Bank MS), Hancock Bank of Louisiana, Baton Rouge, Louisiana (Hancock Bank LA), Hancock Bank of Florida, Tallahassee, Florida (Hancock Bank FL) and Hancock Bank of Alabama, Mobile, Alabama (Hancock Bank AL). Hancock Bank MS, Hancock Bank LA, Hancock Bank FL and Hancock Bank AL 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. Our operating strategy is to provide our customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. At June 30, 2007, we had total assets of $5.9 billion and employed on a full-time equivalent basis 1,311 persons in Mississippi, 575 persons in Louisiana, 46 persons in Florida and 12 persons in Alabama.

RESULTS OF OPERATIONS

Net Interest Income

     Net interest income (te) for the second quarter decreased $5.9 million, or 10%, from the second quarter of 2006. The primary driver of the $5.9 million decrease in net interest income (te) was a $432.7 million, or 8%, decrease in average earning assets mainly to fund a reduction in total borrowings of $13.2 million, or 6%, and a decrease in average deposits of $374.0 million, or 7%. The decrease in borrowings and deposits was generally attributable to the regional post-Katrina economy. Our net interest margin (te) was 4% in the second quarter, 10 basis points narrower than the same quarter a year ago as the increase in the average earning asset yield (44 basis points) did not offset the increase in total funding costs (54 basis points). See tables on pages 26-31 for details.

Provision for Loan Losses

          The amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by recoveries of loans previously charged-off. A specific loan is charged-off when management believes, after considering, among other things, the borrower’s financial condition and the value of any collateral, that collection of the loan is unlikely. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with our loan portfolio. 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 June 30, 2007 is adequate.


23



        Annualized net charge-offs, as a percent of average loans, were 0.18% for the second quarter of 2007, compared to 0.40% in the second quarter of 2006.

        The following information is useful in determining the adequacy of the loan loss allowance and loan loss provision. The ratios are calculated using average loan balances (amounts in thousands).

 
  At and for the  
  Three Months Ended June 30,   Six Months Ended June 30,  
  2007   2006   2007   2006  

 
 
 
 
Annualized net charge-offs to average loans   0.18%   0.40%   0.18%   0.20%
   
Annualized provision (recovery) for loan losses
      to average loans
  0.15%   0.00%   0.15%   (0.05% )
   
Average allowance for loan losses to average loans   1.38%   2.46%   1.40%   2.48%
   
Gross charge-offs $ 3,521   $ 4,742   $ 6,597   $ 8,664  
   
Gross recoveries $ 1,993   $ 1,741   $ 3,603   $ 5,771  
   
Non-accrual loans $ 7,544   $ 7,237   $ 7,544   $ 7,237  
   
Accruing loans 90 days or more past due $ 2,558   $ 6,681   $ 2,558   $ 6,681  
 

        Accruing loans 90 days or more past due decreased $4.1 million from June 30, 2006. Since December 31, 2005, accruing loans 90 days or more past due, net of deferrals, have decreased $23.0 million to $2.6 million at June 30, 2007. This decrease is related to improved ability of certain borrowers to meet their regular payments after Hurricane Katrina.

Noninterest Income

        Noninterest income for the second quarter was up $4.3 million, or 16%, compared to the same quarter a year ago. The primary factors impacting the higher levels of non-interest income as compared to the same quarter a year ago, were higher levels of service charge fees (up $1.2 million, or 14%) and trust fees (up $0.7 million, or 21%).

        The components of noninterest income for the three and six months ended June 30, 2007 and 2006 are presented in the following table:


24



  Three Months Ended June 30,   Six Months Ended June 30,  
  2007   2006   2007   2006  
 
 
 
 
 
(In thousands)  
Service charges on deposit accounts $ 10,471   $ 9,223   $ 19,662   $ 17,107  
Trust fees   4,124     3,409     7,816     6,487  
Credit card merchant discount fees   2,171     1,863     3,949     3,571  
Income from insurance operations   5,033     4,596     9,402     9,755  
Investment and annuity fees   2,018     1,591     3,995     2,855  
ATM fees   1,358     1,273     2,682     2,567  
Secondary mortgage market operations   1,116     749     2,027     1,566  
Other income   3,902     3,238     6,548     6,924  
 
 
 
 
 
   Total other noninterest income   30,193     25,942     56,081     50,832  
Securities transactions gains, net   34         40     118  
 
 
 
 
 
   Total noninterest income $ 30,227   $ 25,942   $ 56,121   $ 50,950  
 
 
 
 
 
 

Noninterest Expense

     Operating expenses for the second quarter were $0.7 million, or 1%, higher compared to the same quarter a year ago. The increase from the same quarter a year ago was reflected in higher levels of other expense (up $1.4 million) and occupancy expense (up $1.0 million), with lower personnel expense (down $1.6 million).

     The following table presents the components of noninterest expense for the three and six months ended June 30, 2007 and 2006.

 
  Three Months Ended June 30,   Six Months Ended June 30,  
  2007   2006   2007   2006  
 
 
 
 
 
(dollars in thousands)  
Employee compensation $ 20,086   $ 21,553   $ 40,620   $ 42,639  
Employee benefits   4,751     4,847     10,781     9,963  
 
 
 
 
 
      Total salaries and employee benefits   24,837     26,400     51,401     52,602  
 
 
 
 
 
Equipment and data processing expense   5,198     5,395     9,938     9,983  
Net occupancy expense   4,469