The management of Hancock Holding Company is responsible for the preparation of the financial statements, related financial data and other information in the annual report. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management's estimates and judgements where appropriate. Financial information appearing throughout this annual report is consistent with that in the financial statements.
The Company's financial statements have been audited by Deloitte & Touche LLP, independent public accountants. Management has made available to Deloitte & Touche LLP, all of the Company's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche LLP during the Company's audit were valid and appropriate.
Management of the Company has established and maintained a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility, is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process, and is updated as necessary. Management continually monitors the system of internal control for compliance. The Company maintains a professional staff of internal auditors who independently assess the effectiveness of internal controls and recommend possible system improvements. As part of their audit of the Company's 2002 financial statements, Deloitte & Touche LLP considered the Company's system of internal control to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Management has considered the recommendations of the internal auditors and Deloitte & Touche LLP concerning the Company's system of internal control and has taken actions that it believes are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 2002, the Company's system of internal control is adequate to accomplish the objectives discussed above.
We have audited the accompanying consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of earnings, comprehensive earnings, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Hancock Holding Company and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------------
2002 2001
------------------ --------------------
Assets:
Cash and due from banks $ 187,786,215 $ 164,807,821
Interest-bearing time deposits with other banks 4,268,450 8,433,190
Securities available for sale, at fair value
(amortized cost of $1,233,459,147 and $1,078,128,805) 1,258,830,565 1,085,424,537
Securities held to maturity, at amortized cost
(fair value of $238,196,366 and $292,650,424) 227,979,338 287,369,708
Federal funds sold 42,988,830 92,000,000
Loans 2,114,486,268 1,900,063,744
Less:
Allowance for loan losses (34,740,465) (34,417,381)
Unearned income (9,504,398) (10,024,709)
--------------- ---------------
Loans, net 2,070,241,405 1,855,621,654
Property and equipment, net 71,354,515 66,266,101
Other real estate 5,936,010 3,003,394
Accrued interest receivable 25,480,241 27,860,479
Core deposit intangibles, net 4,144,359 4,788,277
Goodwill, net 49,099,639 49,121,787
Other assets 25,037,455 35,147,936
--------------- ---------------
Total Assets $ 3,973,147,022 $ 3,679,844,884
=============== ===============
Liabilities, Preferred Stock and Common Stockholders' Equity:
Deposits:
Non-interest bearing demand $ 630,789,978 $ 624,058,228
Interest-bearing savings, NOW,
money market and time 2,670,710,127 2,415,675,645
--------------- ---------------
Total deposits 3,301,500,105 3,039,733,873
Securities sold under agreements to repurchase 161,057,635 161,208,012
Federal funds purchased - 125,000
Other liabilities 34,987,835 22,555,708
Long-term notes 51,019,813 51,605,584
--------------- ---------------
Total Liabilities 3,548,565,388 3,275,228,177
Commitments and contingencies (notes 15 and 16)
--------------- ---------------
Preferred Stock-$20 par value, 50,000,000 shares authorized
and 1,658,275 shares issued-redemption value $33,171,280 37,068,905 37,068,905
Common Stockholders' Equity:
Common stock - $3.33 par value per share;
75,000,000 shares authorized, 16,608,120 shares issued 55,305,040 55,305,040
Capital surplus 177,434,234 177,736,847
Retained earnings 176,767,793 141,099,009
Accumulated other comprehensive income 10,049,390 4,742,226
Unearned compensation (551,755) (432,830)
Treasury stock, 881,607 shares in 2002 and 437,032
shares in 2001, at cost (31,491,973) (10,902,490)
--------------- ---------------
Total Common Stockholders' Equity 387,512,729 367,547,802
--------------- ---------------
Total Liabilities, Preferred Stock and
Common Stockholders' Equity $ 3,973,147,022 $ 3,679,844,884
=============== ===============
See notes to consolidated financial statements
Page 5 of 34
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Interest Income:
Loans $157,292,542 $162,048,992 $149,526,248
U.S. Treasury securities 1,604,998 3,023,203 5,494,273
Obligations of U.S. government agencies 25,467,723 24,950,340 21,819,311
Obligations of states and political subdivisions 10,624,702 9,660,338 9,475,402
Mortgage-backed securities 5,617,549 8,991,772 9,313,238
CMOs 26,636,029 19,427,783 16,740,452
Federal funds sold 789,778 4,981,013 2,432,906
Other investments 2,747,717 1,786,012 2,144,837
------------ ------------ ------------
Total interest income 230,781,038 234,869,453 216,946,667
------------ ------------ ------------
Interest Expense:
Deposits 67,385,444 94,524,578 86,548,381
Federal funds purchased and securities sold
under agreements to repurchase 2,242,622 6,659,130 7,495,280
Long-term notes and other interest 2,424,902 177,948 206,985
------------ ------------ ------------
Total interest expense 72,052,968 101,361,656 94,250,646
------------ ------------ ------------
Net Interest Income 158,728,070 133,507,797 122,696,021
Provision for loan losses 18,494,820 9,081,848 12,609,378
------------ ------------ ------------
Net interest income after provision for loan losses 140,233,250 124,425,949 110,086,643
------------ ------------ ------------
Non-Interest Income:
Service charges on deposit accounts 42,246,350 30,407,854 27,179,737
Trust income 7,603,213 6,454,386 6,058,166
Investment and annuity fees 4,721,927 3,444,321 3,257,914
Insurance commissions and fees 2,312,460 1,371,199 1,530,177
ATM fees 3,770,709 3,326,653 3,305,415
Secondary mortgage market operations 2,408,838 1,560,005 172,854
Credit card merchant discount fees 3,284,230 2,733,816 2,761,756
Securities gains, net 3,910 17,638 3,259
Gain on sale of credit card portfolio - - 3,753,498
Other income 5,241,763 5,028,065 4,427,864
------------ ------------ ------------
Total non-interest income 71,593,400 54,343,937 52,450,640
------------ ------------ ------------
Non-Interest Expense:
Salaries and employee benefits 77,299,554 67,621,811 59,185,839
Net occupancy expense of premises 8,535,506 8,174,550 7,135,408
Equipment rentals, depreciation and maintenance 8,801,873 7,842,213 8,323,356
Amortization of intangibles 750,098 4,349,130 3,755,670
Other expense 42,870,603 33,664,347 30,417,346
------------ ------------ ------------
Total non-interest expense 138,257,634 121,652,051 108,817,619
------------ ------------ ------------
Earnings Before Income Taxes 73,569,016 57,117,835 53,719,664
Income taxes 22,525,553 17,862,695 16,896,084
------------ ------------ ------------
Net Earnings 51,043,463 39,255,140 36,823,580
Preferred dividends 2,653,240 1,326,851 -
------------ ------------ ------------
Net Earnings Available to Common Stockholders $ 48,390,223 $ 37,928,289 $ 36,823,580
============ ============ ============
Basic earnings per common share $ 3.07 $ 2.36 $ 2.26
============ ============ ============
Diluted earnings per common share $ 3.00 $ 2.36 $ 2.26
============ ============ ============
See notes to consolidated financial statements
Page 6 of 34
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated
Other
Common Capital Retained Comprehensive Unearned Treasury
Amount Surplus Earnings Income Compensation Stock
-------------- ------------- -------------- ---------------- -------------- ------------
Balance, January 1, 2000 $ 55,305,040 $ 177,614,747 $ 92,153,278 $(13,764,053) $ (808,203) $ (73,381)
Net earnings 36,823,580
Cash dividends - $0.83 per share (13,611,093)
Change in unrealized gain on
securities available for sale, net 12,302,963
Transactions relating to restricted
stock grants, net (35,300)
Treasury stock transactions, net (23,285) (4,494,101)
-------------- ------------- -------------- ---------------- -------------- ------------
Balance, December 31, 2000 55,305,040 177,591,462 115,365,765 (1,461,090) (843,503) (4,567,482)
Net earnings 39,255,140
Cash dividends - $0.75 per share (12,195,045)
Cash dividends - $0.80 per preferred share (1,326,851)
Change in unrealized gain on
securities available for sale, net 6,203,316
Transactions relating to restricted
stock grants, net 410,673
Treasury stock transactions, net 145,385 (6,335,008)
-------------- ------------- -------------- ---------------- -------------- ------------
Balance, December 31, 2001 55,305,040 177,736,847 141,099,009 4,742,226 (432,830) (10,902,490)
Net earnings 51,043,463
Cash dividends - $0.80 per common share (12,721,439)
Cash dividends - $1.60 per preferred share (2,653,240)
Minimum pension liability adjustment, net (6,442,032)
Change in unrealized gain on
securities available for sale, net 11,749,196
Transactions relating to restricted
stock grants, net (118,925)
Treasury stock transactions, net (302,613) (20,589,483)
-------------- ------------- -------------- ---------------- ------------- ------------
Balance, December 31, 2002 $ 55,305,040 $ 177,434,234 $ 176,767,793 $ 10,049,390 $ (551,755) $(31,491,973)
============== ============= ============== ================ ============= ============
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Years Ended December 31,
--------------------------------------------------------
2002 2001 2000
--------------- ----------------- ------------------
Net earnings $ 51,043,463 $ 39,255,140 $ 36,823,580
Other comprehensive earnings:
Minimum pension liability adjustment, net (6,442,032)
Unrealized gain on securities available for sale, net:
Unrealized holding gains arising during the year 11,752,196 6,127,316 12,101,963
Reclassification adjustments for losses (gains)
included in net earnings (3,000) 76,000 201,000
--------------- ----------------- ------------------
Total other comprehensive earnings 5,307,164 6,203,316 12,302,963
--------------- ----------------- ------------------
Total Comprehensive Earnings $ 56,350,627 $ 45,458,456 $ 49,126,543
=============== ================= ==================
See notes to consolidated financial statements.
Page 7 of 34
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Cash Flows from Operating Activities:
Net earnings $ 51,043,463 $ 39,255,140 $ 36,823,580
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization of software 8,791,318 8,441,938 8,270,874
Provision for loan losses 18,494,820 9,081,848 12,609,378
Provision for losses on other real estate owned 1,587,317 120,731 (122,115)
Provision for deferred income taxes 1,626,000 1,463,000 (284,000)
Gains on sales/calls of securities (3,910) (17,638) (3,259)
Decrease (increase) in interest receivable 2,380,238 1,017,518 (1,779,843)
Amortization of intangible assets 750,098 4,349,130 3,755,670
Increase (decrease) in interest payable (3,671,919) (2,909,347) 3,031,954
Other, net 3,295,343 (7,051,831) (1,138,685)
-------------- --------------- --------------
Net cash provided by operating activities 84,292,768 53,750,489 61,163,554
-------------- --------------- --------------
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing time deposits 4,164,740 (4,566,169) (3,777,021)
Proceeds from maturities of securities held to maturity 59,390,370 130,407,292 98,053,228
Purchase of securities held to maturity -- -- (6,523,884)
Proceeds from sales and maturities of trading
and available-for-sale securities 649,115,512 457,906,140 195,017,484
Purchase of securities available for sale (804,445,854) (788,246,999) (112,989,533)
Net (increase) decrease in federal funds sold 49,011,170 (12,225,000) (56,000,000)
Net decrease (increase) in loans (237,278,411) 9,350,112 (186,741,929)
Proceeds from sale of credit card portfolio -- -- 21,330,000
Purchase of property, equipment and software, net (10,860,802) (12,450,927) (5,133,121)
Proceeds from sales of other real estate 4,950,593 4,441,540 1,420,277
Net cash used in connection with business acquisitions -- (52,490) --
-------------- --------------- --------------
Net cash used by investing activities (285,952,682) (215,436,501) (55,344,499)
-------------- --------------- --------------
Cash Flows from Financing Activities:
Net increase in deposits 261,766,232 219,624,770 106,134,066
Dividends paid (15,374,679) (13,521,896) (13,611,093)
Treasury stock transactions, net (20,892,096) (6,189,623) (4,951,086)
Repayments of long-term notes (585,772) (20,571,581) (537,031)
Net (decrease) increase in federal funds purchased and
securities sold under agreements to repurchase (275,377) 16,772,403 (69,212,610)
Repayments of short-term FHLB advances -- -- (50,000,000)
-------------- --------------- --------------
Net cash provided (used) by financing activities 224,638,308 196,114,073 (32,177,754)
-------------- --------------- --------------
Net increase (decrease) in cash and due from banks 22,978,394 34,428,061 (26,358,699)
Cash and due from banks, beginning 164,807,821 130,379,760 156,738,459
-------------- --------------- --------------
Cash and due from banks, ending $ 187,786,215 $ 164,807,821 $ 130,379,760
============== =============== ==============
Supplemental Information:
Income taxes paid $ 19,731,000 $ 16,050,000 $ 17,800,000
Interest paid 75,724,887 104,271,003 91,218,691
Supplemental Information of Non-cash Investing and Financing Activities:
Issuance of redeemable preferred stock in connection with
acquisition of a business $ -- $ 37,068,905 $ --
Transfers from loans to other real estate 9,924,000 3,295,000 1,130,000
See notes to consolidated financial statements
Page 8 of 34
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business Hancock Holding Company (the Company) is a bank holding company headquartered in Gulfport, Mississippi operating in the states of Mississippi and Louisiana through two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana (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 Policies The accounting and reporting policies of the Company conform with 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.
Consolidation - The consolidated financial statements of the Company include the accounts of the Company, the Banks and other subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.
Comprehensive Income - Comprehensive income includes net earnings and other comprehensive income, which, in the case of the Company, includes only unrealized gains and losses on securities available-for-sale and the minimum pension liability.
Use of Estimates - In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management is required 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. Actual results could differ significantly from those estimates. The determination of the allowance for loan losses is a material estimate that is particularly subject to significant change.
Cash - For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and due from banks".
Securities - Securities have been classified into one of three categories: trading, 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. Trading account securities are held for resale in anticipation of short-term market movements. 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 or trading are classified as available for sale. The Company had no significant trading account securities during the three years ended December 31, 2002.
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. 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 sale of securities available for sale are determined using the specific-identification method.
Derivative Instruments - The Company recognizes all derivatives as either assets or liabilities in the Company's balance sheet and measures those instruments at fair value. If certain conditions are met, a derivative may be specially designated as a hedge. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company is not currently engaged in any significant activities with derivatives.
Loans - Certain 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. Non-major homogenous 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.
Page 9 of 34
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 Losses - The allowance for loan losses is a valuation account available to absorb losses on loans. All losses are charged to the allowance for loan 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. Periodically, 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 experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral and current economic conditions. The allowance for loan losses is increased by charges to expense and decreased by loan charge-offs (net of recoveries).
Property and Equipment - Property and equipment are recorded at amortized cost. Depreciation is computed principally by the straight-line method 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.
Other Real Estate - Other real estate acquired through foreclosure and bank acquisitions is stated at the fair market value at the date of acquisition, net of the costs of disposal. When a reduction to fair market value at the time of foreclosure is required, it is charged to the allowance for loan losses. Any subsequent adjustments are charged to expense.
Core Deposit Intangibles - Core deposit intangibles relating to acquired banks is being amortized over lives ranging from six to ten years using accelerated methods. Accumulated amortization of core deposit intangibles amounted to approximately $1.4 million and $710,000 at December 31, 2002 and 2001, respectively.
Goodwill - Goodwill related to acquisitions consummated prior to July 1, 2001 was being amortized over fifteen years using an accelerated method. Goodwill related to the July 1, 2001 acquisition of Lamar Capital Corporation was not amortized. Accumulated amortization of intangible assets amounted to approximately $16.9 million at December 31, 2002 and 2001.
In June 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangibles". These Statements provide that, among other things, (1) all business combinations on or after July 1, 2001 be accounted for as purchases, (2) any related goodwill on those acquisitions does not require amortization, but is subject to a periodic impairment test and that (3) goodwill on any of the Company's acquisitions prior to July 1, 2001 not be amortized after January 1, 2002, but is subject to periodic impairment tests. There was no amortization of goodwill recorded in the year ended December 31, 2002. Goodwill amortization amounted to approximately $3.6 million and $3.7 million in 2001 and 2000, respectively. Goodwill amortization is not deductible for income tax purposes.
Transfers of Financial Assets - In September 2000, the FASB issued SFAS No.140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. This Statement provides consistency for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Because SFAS No. 140 focuses on control after a transfer of financial assets, an entity is required to recognize the financial and servicing assets it controls and the liabilities it has incurred, derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. All measurements and allocations are based on fair value. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The implementation of this statement did not have a material effect on the Company's financial statements.
Trust Income - Trust income is recorded as earned.
Income Taxes - Provisions 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 deferred taxes on temporary differences between the amount of taxable income and pre-tax financial income. 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.
Stock Based Compensation - The Company applies the Accounting Practices Board (APB) Opinion No. 25 and related interpretations in accounting for its stock options. The pro forma disclosures required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS No. 123) are included in Note 12.
Basic and Diluted Earnings Per Common Share - Basic earnings per common share (EPS) excludes dilution and is computed by dividing net earnings available to common stockholders 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 by the total of the weighted average number of shares outstanding plus the effect of outstanding options and convertible preferred stock. On July 12, 2002, the Company's Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend. The additional shares were payable August 5, 2002 to shareholders of record at the close of business on July 23, 2002. All information concerning earnings per share, dividends per share, and numbers of shares outstanding have been adjusted to give effect to this split.
Reclassifications - Certain prior year amounts have been reclassified to conform to the 2002 presentation.
Page 10 of 34
NOTE 2 - ACQUISITION AND GOODWILL On July 1, 2001 the Company acquired 100% of the common stock of Lamar Capital Corporation (LCC), Purvis, Mississippi and its subsidiaries, The Lamar Bank and Southern Financial Services, Inc. The acquisition was accounted for as a purchase and the results of LCC's operations are included in the consolidated financial statements of the Company from the date of acquisition. LCC operated 9 banking offices in southern Mississippi. The Company acquired LCC in order to expand the geographic area in which its services are offered. The aggregate purchase price was approximately $51.3 million, including cash of $14.2 million and 1,658,275 shares of mandatorily redeemable convertible preferred stock with a fair value of $37.1 million.
The following unaudited pro forma consolidated results of operations give effect to the acquisition of LCC as though it had occurred on January 1, 2000 (in thousands, except per share data):
The unaudited pro forma information is not necessarily indicative either of results of operations that would have occurred had the purchase been made as of January 1, 2000, or of future results of operations of the combined companies.
Year Ended December 31,
2001 2000
------------ ------------
Interest income $250,140 $248,352
Interest expense 110,956 112,603
Provision for loan losses 12,352 15,441
------------ ------------
Net interest income after provision for loan losses 126,832 120,308
Net earnings available to common stockholders $ 35,260 $ 35,834
Basic earnings per common share $ 2.21 $ 2.20
Diluted earnings per common share $ 2.21 $ 2.20
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
Cash and due from banks $ 14,155
Securities 169,204
Federal funds sold 20,775
Loans 210,021
Property and equipment 9,971
Core deposit intangible 5,500
Goodwill 12,200
Other 1,000
----------------
Total assets acquired 442,826
----------------
Deposits 316,322
Other liabilities 75,204
----------------
Total liabilities assumed 391,526
----------------
Net assets acquired $ 51,300
================
The core deposit intangible has a weighted average life of 10 years. Amortization of the core deposit intangible was approximately $720,000 in 2002 and $710,000 in 2001. Amortization is estimated to be approximately $680,000 in 2003, $634,000 in 2004, $507,000 in 2005, $406,000 in 2006, $324,000 in 2007 and the remainder of $1,519,000 thereafter. Goodwill was assigned to the Mississippi segment and is not deductible for tax purposes. No amortization of any goodwill related to this acquisition was recorded in 2002 or 2001 in accordance with SFAS No. 142.
As discussed in Note 1, in June 2001 the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangibles". These Statements provide that, among other things, (1) all business combinations on or after July 1, 2001 be accounted for as purchases, (2) any related goodwill on those acquisitions does not require amortization, but is subject to a periodic impairment test and that (3) goodwill on any of the Company's acquisitions prior to July 1, 2001 not be amortized after January 1, 2002, but is subject to periodic impairment tests. The Company performed fair value based impairment tests on its goodwill and determined that the fair value exceeded the recorded value at December 31, 2002 and 2001. No impairment loss, therefore, was recorded. There was no amortization of goodwill recorded in the year ended December 31, 2002. Goodwill amortization is not deductible for income tax purposes.
Page 11 of 34
Following is a reconciliation of net earnings and basic and diluted net earnings per share as reported to the amounts that would have been reported if SFAS No. 142 had been effective as of January 1, 2000 and the amortization of goodwill had been discontinued as of that date.
Year Ended December 31,
2002 2001 2000
--------------- -------------- --------------
Net earnings $ 51,043 $ 39,255 $ 36,824
Add back goodwill amortization - 3,606 3,724
--------------- -------------- --------------
Adjusted net earnings $ 51,043 $ 42,861 $ 40,548
=============== ============== ==============
Basic earnings per common share
Reported net earnings $ 3.07 $ 2.36 $ 2.26
Goodwill amortization - 0.26 0.23
--------------- -------------- --------------
Adjusted net earnings $ 3.07 $ 2.62 $ 2.49
=============== ============== ==============
Diluted earnings per common share
Reported net earnings $ 3.00 $ 2.36 $ 2.26
Goodwill amortization - 0.22 0.23
--------------- -------------------------------
Adjusted net earnings $ 3.00 $ 2.58 $ 2.49
=============== ============== ==============
NOTE 3 - SECURITIES The amortized cost and fair value of securities classified as available for sale were as follows (in thousands):
December 31, 2002 December 31, 2001
------------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------ ----------- ---------- ---------- ---------- ------------ --------- ----------
U.S. Treasury $ 49,970 $ 865 $ - $ 50,835 $ 30,258 $ 151 $ 1 $ 30,408
U.S. government agencies 517,482 13,013 - 530,495 440,481 9,311 28 449,764
Municipal obligations 74,270 2,294 - 76,564 85,284 88 1,030 84,342
Mortgage-backed securities 43,820 1,868 16 45,672 69,704 450 - 70,154
CMOs 524,414 6,957 - 531,371 422,368 1,847 3,308 420,907
Other debt securities 12,288 765 443 12,610 19,338 199 34 19,503
Equity securities 11,216 73 5 11,284 10,696 10 359 10,347
----------- --------- ---------- ---------- ---------- ----------- -------- ----------
$1,233,460 $ 25,835 $ 464 $1,258,831 $1,078,129 $ 12,056 $ 4,760 $1,085,425
=========== ========= ========== ========== ========== =========== ======== ==========
The amortized cost and fair value of securities (excluding equity securities, which have no maturity) classified as available for sale at December 31, 2002, by contractual maturity, were as follows (in thousands):
Amortized
Cost Fair Value
---------- ----------
Due in one year or less $501,276 $507,788
Due after one year through five years 546,927 561,098
Due after five years through ten years 81,902 85,026
Due after ten years 92,139 93,635
---------- ----------
$1,222,244 $1,247,547
========== ==========
Page 12 of 34
The amortized cost and fair value of securities classified as held to maturity at December 31,2002, by contractual maturity were as follows (in thousands):
December 31, 2002 December 31, 2001
--------------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------- ------------ ---------- --------- -------- ----------- ------------ --------
U.S. Treasury $ 294 $ -- $ -- $ 294 $ 293 $ 9 $ -- $ 302
U.S. government agencies 16,350 629 -- 16,979 35,746 884 12 36,618
Municipal obligations 136,122 7,081 -- 143,203 148,545 2,069 -- 150,614
Mortgage-backed securities 35,950 1,627 -- 37,577 37,749 1,161 -- 38,910
CMOs 30,087 880 -- 30,967 58,508 1,169 -- 59,677
Other debt securities 9,176 -- -- 9,176 6,529 -- -- 6,529
---------- ----------- ---------- --------- -------- ---------- ------------ -------
$227,979 $ 10,217 $ -- $238,196 $287,370 $ 5,292 $ 12 $292,650
========== ========== ========== ========= ======== ========== ============ ========
The amortized cost and fair value of securities classified as held to maturity at December 31, 2002, by contractual maturity, were as follows (in thousands):
Amortized
Cost Fair Value
---------- -----------
Due in one year or less $ 37,722 $ 38,188
Due after one year through five years 60,760 63,809
Due after five years through ten years 99,543 105,090
Due after ten years 29,954 31,109
---------- -----------
$227,979 $ 238,196
========== ===========
Proceeds from sales of available-for-sale securities were $67,124,000 in 2002, $41,336,000 in 2001 and $97,417,000 in 2000. Gross gains of $323,000 in 2002, $42,000 in 2001, $51,000 in 2000 and gross losses of $318,000 in 2002, $159,000 in 2001 and $360,000 in 2000 were realized on such sales. There were no material gains or losses on held-to-maturity securities called during 2002, 2001 or 2000. The Company realized trading gains of approximately $300,000 in 2000.
Securities with an amortized cost of approximately $830,670,000 at December 31, 2002 and $736,600,000 at December 31, 2001, were pledged primarily to secure public deposits and securities sold under agreements to repurchase.
The Company's collateralized mortgage obligations (CMOs) generally consist of first and second tranche sequential pay and/or planned amortization class (PAC) instruments.
NOTE 4 - LOANS Loans, net of unearned income, consisted of the following (in thousands):
December 31,
-----------------------------------
2002 2001
------------ ---------------
Real estate loans $ 1,289,602 $ 1,120,588
Commercial and industrial loans 275,297 270,851
Loans to individuals for household, family
and other consumer expenditures 442,485 437,513
Leases and other loans 97,598 61,087
-------------- -------------
$ 2,104,982 $ 1,890,039
============== =============
The Company generally makes loans in its market areas of South Mississippi and Southern Louisiana. 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. The balance of loans to the Company's directors, executive officers and their affiliates at December 31, 2002 and 2001 was approximately $17,442,000 and $10,774,000, respectively.
Page 13 of 34
Changes in the allowance for loan losses were as follows (in thousands):
Years Ended December 31,
--------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Balance at January 1 $ 34,417 $28,604 $25,713
Balance acquired through acquisitions & other (400) 8,342 (147)
Recoveries 5,781 4,687 4,148
Loans charged off (23,553) (16,298) (13,719)
Provision charged to operating expense 18,495 9,082 12,609
-------------- -------------- ---------------
Balance at December 31 $ 34,740 $34,417 $28,604
============== ============== ===============
Non-accrual and renegotiated loans amounted to approximately 0.56% and 0.92% of total loans at December 31, 2002 and December 31, 2001, respectively. In addition, the Company's other individually evaluated impaired loans amounted to approximately 0.30% and 0.67% of total loans at December 31, 2002 and 2001, respectively. Related reserve amounts were not significant and there was no significant change in these amounts during the years ended December 31, 2002, 2001 or 2000. The amount of interest not accrued on these loans did not have a significant effect on earnings in 2002, 2001 or 2000.
Transfers from loans to other real estate amounted to approximately $9,924,000, $3,295,000 and $1,130,000 in 2002, 2001 and 2000, respectively. Valuation allowances associated with other real estate amounted to $2,675,000, $688,000 and $887,000 at December 31, 2002, 2001 and 2000, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment, stated at cost less accumulated depreciation and amoritization, consisted of the following (in thousands):
December 31,
--------------------------------------
2002 2001
----------------- -----------------
Land, buildings and leasehold improvements $ 75,230 $ 71,020
Furniture, fixtures and equipment 62,845 58,158
----------------- -----------------
138,075 129,178
Accumulated depreciation and amortization (66,720) (62,912)
----------------- -----------------
$ 71,355 $ 66,266
================= =================
Property and equipment, stated at cost less accumulated depreciation and amortization, consisted of the following (in thousands):
NOTE 6 - DEPOSITS Deposits of $100,000 or more totaled approximately $1.996 billion and $1.762 billion at December 31, 2002 and 2001, respectively. Deposits of over $100,000 totaled approximately $1.966 billion and $1.728 billion at December 31, 2002 and 2001, respectively.
NOTE 7 - LONG TERM NOTES Long-term notes consist primarily of $50,000,000 of advances from the Federal Home Loan Bank (FHLB), of which $40,000,000 bears interest at 4.49% and is due January 21, 2009 and $10,000,000 bears interest at 4.75% and is due November 11, 2008. The rates are fixed through January 21, 2003 and November 12, 2003, respectively, at which time the FHLB can begin making annual elections to reset the rates to a floating rate of .35% above the three month London InterBank Offered Rate (LIBOR) (approximately 1.37% at January 15, 2003) for the remaining terms of the advances. These advances are collateralized by a blanket pledge of certain residential mortgage loans. The Company has an available line of credit with the FHLB of approximately $218,000,000 at December 31, 2002.
NOTE 8 - REDEEMABLE PREFERRED STOCK On June 28, 2001 the Company's stockholders approved the issuance of up to 50 million shares of $20 par value preferred stock on terms to be determined by the Company's Board of Directors.
The issuance of 1,658,275 shares of 8% Cumulative Convertible Preferred Stock Series A was authorized by the Board of Directors in connection with the acquisition of Lamar Capital Corporation on July 1, 2001. Each share of the preferred stock is convertible into .6667 of the Company's common stock at any time after issuance. The Company can call for conversion of the preferred stock into common stock or for redemption at par any time between the 30th and 60th month following issuance if the closing price of the Company's common stock exceeds $37.50 for 20 consecutive days. After 60 months, the Company can call for redemption at par at any time. At the end of 30 years the Company must redeem the preferred stock at par.
Page 14 of 34
The Series A Preferred stock qualifies as Tier 1 capital for regulatory purposes but is classified similar to a liability for reporting under accounting principles generally accepted in the United States of America.
NOTE 9 - COMMON STOCKHOLDERS' EQUITY Common 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 stockholders 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. The amount of capital of the subsidiary banks available for dividends at December 31, 2002 was approximately $160 million.
The Company and its bank subsidiaries are required to maintain certain minimum capital levels. At December 31, 2002 and 2001, 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, 2002 and 2001 (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, 2002
Total capital (to risk weighted assets)
Company $ 395,717 17.25 $ 183,554 8.00 $ N/A N/A
Hancock Bank 237,669 16.75 113,514 8.00 141,893 10.00
Hancock Bank of Louisiana 157,544 16.81 74,994 8.00 93,742 10.00
Tier 1 capital (to risk weighted
assets)
Company $ 360,976 15.73 $ 91,777 4.00 $ N/A N/A
Hancock Bank 217,187 15.31 56,757 4.00 85,136 6.00
Hancock Bank of Louisiana 143,285 15.29 37,497 4.00 56,245 6.00
Tier 1 leverage capital
Company $ 360,976 9.35 $ 115,788 3.00 $ N/A N/A
Hancock Bank 217,187 9.10 71,635 3.00 119,392 5.00
Hancock Bank of Louisiana 143,285 9.39 45,768 3.00 76,280 5.00
At December 31, 2001
Total capital (to risk weighted assets)
Company $ 375,660 15.73 $ 191,036 8.00 $ N/A N/A
Hancock Bank 226,891 15.21 119,344 8.00 149,180 10.00
Hancock Bank of Louisiana 143,330 15.76 72,766 8.00 90,958 10.00
Tier 1 capital (to risk weighted
assets)
Company $ 345,589 14.47 $ 95,518 4.00 $ N/A N/A
Hancock Bank 208,210 13.96 59,672 4.00 89,508 6.00
Hancock Bank of Louisiana 131,940 14.51 36,383 4.00 54,575 6.00
Tier 1 leverage capital
Company $ 345,589 8.50 $ 121,916 3.00 $ N/A N/A
Hancock Bank 208,210 9.10 68,670 3.00 114,450 5.00
Hancock Bank of Louisiana 131,940 9.67 40,936 3.00 68,227 5.00
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 a minimum risk-based capital ratio of 8.0%, with not less than 4.0% in Tier 1 capital. In addition, the Company and its bank subsidiaries must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total average assets) of at least 3.0% based upon the regulators latest composite rating of the institution.
Page 15 of 34
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, each of the subsidiary banks was deemed to be "well capitalized" as of December 31, 2002 and 2001 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.
NOTE 10 - INCOME TAXES 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 purposes. Significant components of the Company's deferred tax assets and liabilities were as follows (in thousands):
December 31,
--------------------------------
2002 2001
-------------- --------------
Deferred tax assets:
Accrued pension liability $ 2,033 $ -
Post-retirement benefit obligation 2,097 1,868
Allowance for loan losses 9,870 9,744
Deferred compensation 1,450 1,505
Other 345 1,159
-------------- --------------
15,795 14,276
-------------- --------------
Deferred tax liabilities:
Loan servicing assets (1,190) (500)
Property and equipment depreciation (4,200) (3,451)
Prepaid pension - (1,844)
Unrealized gain on securities available for sale (8,880) (2,554)
Core deposit intangible (1,583) (1,829)
Discount accretion on securities (1,527) (1,679)
-------------- --------------
(17,380) (11,857)
-------------- --------------
Net deferred tax (liability)asset $ (1,585) $ 2,419
============== ==============
Income taxes consisted of the following components (in thousands):
Years Ended December 31,
------------ ------------ ------------
2002 2001 2000
------------ ------------ ------------
Currently payable $20,900 $16,400 $17,180
Deferred 1,626 1,463 (284)
------------ ------------ ------------
$22,526 $17,863 $16,896
============ ============ ============
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,
----------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- ---------------------
Amount % Amount % Amount %
------------- ------- ------------- -------- ------------- -------
Taxes computed at statutory rate $ 25,749 35 $ 19,991 35 $ 18,802 35
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income tax benefit 214 - 300 - 272 1
Tax-exempt interest (4,254) (5) (4,133) (7) (3,610) (7)
Goodwill amortization - - 1,262 2 1,303 2
Other, net 817 1 443 1 129 -
------------- ------- ------------- -------- ------------- -------
Income tax expense $ 22,526 31 $ 17,863 31 $ 16,896 31
============= ======= ============= ======== ============= =======
Page 15 of 34
The income tax provisions related to items included in the Statement of Other Comprehensive Earnings were as follows (in thousands):
Years Ended December 31,
--------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Minimum pension liability $ (3,948) $ - $ -
Unrealized holdings gains 6,326 3,300 6,516
Reclassification adjustments - 41 108
--------------- -------------- --------------
Total $ 2,378 $ 3,341 $ 6,624
=============== ============== ==============
NOTE 11 - EMPLOYEE BENEFIT PLANS The Company has a non-contributory 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. Data relative to the pension plan follows (in thousands):
Years Ended December 31,
----------------------------------
2002 2001
------------ ------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 38,166 $ 34,203
Service cost 1,700 1,516
Interest cost 2,697 2,496
Actuarial loss 4,452 1,696
Benefits paid (1,827) (1,745)
------------ ------------
Benefit obligation at end of year 45,188 38,166
------------ ------------
Change in Plan Assets:
Fair value of plan assets at
beginning of year 34,504 33,803
Actual return on plan assets 484 451
Employer contributions 2,301 2,044
Benefits paid (1,826) (1,745)
Expenses (178) (49)
------------ ------------
Fair value of plan assets at end of year 35,285 34,504
------------ ------------
Unfunded status (9,903) (3,662)
Unrecognized net actuarial loss 14,714 8,250
Unrecognized prior service cost 200 290
Adjustment to recognize minimum pension liability (10,390) -
------------ ------------
(Accrued) prepaid pension cost, net $ (5,379) $ 4,878
============ ============
Rate assumptions at December 31:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.50% 3.00%
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ----------- -----------
Net pension expense included the following
(income) expense components:
Service cost benefits earned during the period $1,700 $1,516 $1,180
Interest cost on projected benefit obligation 2,697 2,496 2,178
Return on plan assets (2,670) (2,604) (2,748)
Amortization of prior service cost 92 92 92
Net amortization and deferral 349 123 406
---------- ----------- -----------
Net pension expense $2,168 $1,623 $1,108
========== =========== ===========
Page 17 of 34
In accordance with FASB No. 87, the Company has recorded an additional minimum pension liability for underfunded plans of $10,390,000 at December 31, 2002 representing the excess of accumulated benefit obligations over the Plan's assets as adjusted for prepaid pension costs. No such adjustment was required at December 31, 2001. Accumulated benefit obligations represent the actuarial present value of benefits attributable to employee service through the measurement date, excluding the effect of projected future pay increases. A corresponding amount, net of related income taxes of $3,948,000 was charged directly to common stockholders' equity and is a component of other comprehensive income. The principal cause of this underfunded pension liability is that the actual return on plan assets for 2002 and 2001 was less than 2%, which reflects recent overall market conditions. The accrued interest on the pension liabilities, however, continued to be increased for actuarial purposes at the assumed rate of approximately 7%. The Company has been making the contributions required by the IRS.
The Company sponsors two defined benefit post-retirement plans, other than the pension plan, that cover full-time employees who have reached 45 years of age. One plan provides medical benefits and the other provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually and subject to certain employer contribution maximums; the life insurance plan is non-contributory. Data relative to these post-retirement benefits, none of which have been funded, were as follows (in thousands):
Years Ended December 31,
---------------------------
2002 2001
----------- ------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 4,425 $ 4,826
Service cost 244 185
Interest cost 301 301
Actuarial (gain) loss 325 (553)
Benefits paid (382) (334)
----------- ------------
Benefit obligation at end of year 4,913 4,425
Fair value of plan assets - -
Amount unfunded (4,913) (4,425)
Unrecognized transition obligation being
amortized over 20 years 46 528
Unrecognized net actuarial (gain) loss 108 (734)
----------- ------------
Accrued post-retirement benefit cost 4,759 $ (4,631)
=========== ============
Rate assumptions at December 31:
Discount rate 6.50% 7.25%
For measurement purposes in 2002, a 14% annual rate of increase in the over age 65 per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 5.25% over 7 years and remain at that level thereafter. In 2001, a 12% annual rate of increase in the over age 65 per capita cost of covered health care benefits was assumed. The rate was assumed to decrease gradually to 5% over 7 years and remain at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation at December 31, 2002, by $653,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $110,000. A 1% decrease in the rate would decrease those items by $524,000 and $85,000, respectively.
Years Ended December 31,
--------------------------------------
2002 2001 2000
----------- ----------- ----------
Net Periodic Post-Retirement Benefit Cost:
Amortization of unrecognized net loss and other $ (40) $ (26) $ 8
Service cost benefits attributed to service during the year 244 185 216
Interest costs on accumulated post-retirement benefit obligation 301 301 341
Amortization of transition obligation over 20 years 5 53 53
----------- ----------- ----------
Net Periodic Post-Retirement Cost $ 510 $ 513 $ 618
=========== =========== ==========
Prior to 2002, the Company had a non-contributory profit sharing plan covering substantially all salaried full-time employees who had been employed the required length of time. Contributions were made at the discretion of the Board of Directors and amounted to $751,000 in 2001 and $648,000 in 2000. The profit sharing plan was merged into the Company's 401(k) retirement plan effective January 1, 2002.
Page 18 of 34
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 defer a portion of their salary and matching contributions are made at the discretion of the Board of Directors, which amounted to $1,235,000 in 2002. The Company made no matching contributions to this plan prior to 2002 since it was making contributions to its profit sharing plan and matching contributions to the stock purchase plan described below.
In addition, the 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. Prior to 2002, the Company contributed an amount equal to 25% of each participant's contribution, which contribution could not exceed 5% of the employee's base pay. The Company's contribution amounted to $118,000 in 2001 and $125,000 in 2000.
The post-retirement 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 post-retirement health or life insurance plans.
NOTE 12 - EMPLOYEE STOCK PLANS In February 1996, the stockholders of the Company approved the Hancock Holding Company 1996 Long-Term Incentive Plan (the Plan) to provide incentives and awards for employees of the Company and its subsidiaries. Awards as defined in the 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 7,500,000 common shares can be granted under the Plan with an annual grant maximum of 1% of the Company's outstanding common stock (as reported for the fiscal year ending immediately prior to such plan year). The exercise price is equal to the market price on the date of grant, except for certain of those granted to major shareholders where the option price is 110% of the market price.
On January 9, 2002, options to purchase 147,976 shares were granted, which are exercisable at $28.99 per share. These options vest at a rate of 25% per year on the anniversary date of grant.
On December 14, 2000, options to purchase 127,950 shares were granted, of which 124,054 are exercisable at $23.33 per share and 3,896 are exercisable at $25.67 per share. Options totaling 124,054 are exercisable at a vesting rate of 25% per year on the anniversary date of grant and 3,896 are exercisable six months after the date of grant.
Following is a summary of the transactions:
Number of Average Exercise
Options Exercise Price of Options
Outstanding Per Share Aggregate
------------------ ------------------ --------------------
Balance January 1, 2000 360,418 $ 30.17 $ 10,872,206
Granted 127,950 23.40 2,994,590
Cancelled (22,389) 30.67 (686,697)
------------------ ------------------ --------------------
Balance December 31, 2000 465,979 28.28 13,180,099
Granted - - -
Exercised (38) 23.03 (875)
Cancelled (30,783) 28.09 (864,656)
------------------ ------------------ --------------------
Balance December 31, 2001 435,158 28.30 12, 314,568
Granted 147,976 28.99 4,289,908
Exercised (42,498) 27.41 (1,164,862)
Cancelled (9,189) 31.83 (292,521)
------------------ ------------------ --------------------
Balance December 31, 2002 531,447 $ 28.50 $ 15,147,093
================== ================== ====================
Following is a summary of certain information about the exercisable stock options outstanding as of December 31, 2002:
Number of Average Average
Range of Options Years to Exercise Price
Exercise Prices Outstanding Expiration Per Share
--------------- --------------- ----------------
$23.33-$25.67 130,727 7.3 $ 24.60
$26.67-$28.05 29,331 3.8 26.84
$29.00-$31.90 77,208 5.8 29.12
$40.00 69,091 5.0 40.00
--------------- --------------- ----------------
$23.33-$40.00 306,357 6.1 $ 29.43
=============== =============== ================
Page 19 of 34
At December 31, 2002, options on 306,357 shares were exercisable at $23.33 to $40.00 per share, with a weighted average price of $29.43 per share. At December 31, 2001, options on 268,479 shares were exercisable at $25.50 to $40.00 per share, with a weighted average price of $30.45 per share. The weighted average remaining contractual life of options outstanding at December 31, 2002 was 7.2 years.
The Company has adopted the disclosure-only option under SFAS No. 123. The weighted average fair value of options granted during 2002 and 2001 was $9.69 and $6.80, respectively. Had compensation costs for the Company's stock options been determined based on the fair value at the grant date, consistent with the method under SFAS No. 123, the Company's net earnings and earnings per share would have been as indicated below.
Years Ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net earnings available to common
stockholders (in thousands):
As reported $ 51,043 $ 39,255 $ 36,824
Pro forma 50,158 38,845 36,390
Basic earnings per share:
As reported $ 3.07 $ 2.36 $ 2.26
Pro forma 3.02 2.34 2.23
Diluted earnings per share:
As reported $ 3.00 $ 2.36 $ 2.26
Pro forma 2.94 2.33 2.23
The fair value of the options granted under the Company's stock option plans during the years ended December 31, 2002 and 2000 was estimated using the Black-Scholes Pricing Model with the following assumptions used: dividend yield 2.8% and 2.5%, expected volatility of 34% and 25%, risk-free interest rates of 5.1% and 5.3%, respectively and expected lives of 8 years in 2002, and 2000.
During 2002, the Company granted 20,738 restricted shares, which vest at the end of three years. During 2001, the Company granted 488 restricted shares, which vest at the end of three years, and 150 restricted shares, which vest at the end of three years. During 2000, the Company granted 300 restricted shares, which vest at the end of three years, and 18,630 restricted shares, which vest at the end of three years. Vesting is contingent upon continued employment by the Company. On December 31, 2002, 39,781 of these restricted grants were not vested. The 2002 shares had a market value of $28.99 at the date of grant. The 2001 shares had respective market values of $25.79 and $28.30 at the dates of grant. The 2000 shares had respective market values of $21.33 and $23.33 at the dates of grant. Compensation expense related to restricted stock grants totaled $480,000 for 2002, $402,000 for 2001, and $398,000 for 2000. The remaining unearned compensation of $551,755 is being amortized over the life of the grants.
NOTE 13 - NET INCOME PER COMMON SHARE Following is a summary of the information used in the computation of earnings per common share (in thousands).
Years Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Net earnings - used in computation of diluted
earnings per common share $ 51,043 $ 39,255 $ 36,824
Preferred dividend requirement 2,653 1,327 -
----------- ----------- -----------
Net earnings available to common stockholders -
used in computation of basic earnings
per common share $ 48,390 $ 37,928 $ 36,824
=========== =========== ===========
Weighted average number of common shares
outstanding - used in computation of
basic earnings per common share 15,743 16,047 16,290
Effect of dilutive securities
Stock options 194 42 11
Convertible preferred stock 1,105 550 -
----------- ----------- -----------
Weighted average number of common shares
outstanding plus effect of dilutive
securities - used in computation of
diluted earnings per common share 17,042 16,639 16,301
=========== =========== ===========
Page 20 of 34
NOTE 14 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The 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 - For securities, fair value equals quoted market price, if available. If a quoted market price is not available, a reasonable estimate of fair value is used.
Loans - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities would be made to borrowers with similar credit ratings.
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.
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.
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. Commitments - The fair value of commitments to extend credit was not significant.
The estimated fair values of the Company's financial instruments were as follows (in thousands):
December 31,
------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- --------------
Financial assets
Cash, interest-bearing deposits and federal funds sold $ 235,044 $ 235,044 $ 265,241 $ 265,241
Securities available for sale 1,258,831 1,258,831 1,085,425 1,085,425
Securities held to maturity 227,979 238,196 287,370 292,650
Loans, net of unearned income 2,104,982 2,285,066 1,890,039 1,905,800
Less: allowance for loan losses (34,740) (34,740) (34,417) (34,417)
------------- -------------- ------------- --------------
Loans, net 2,070,242 2,250,326 1,855,622 1,871,383
Financial liabilities:
Deposits 3,301,500 $ 3,338,013 3,039,734 $ 3,064,969
Securities sold under agreements to repurchase an
federal funds purchased 161,058 161,058 161,333 161,333
Long-term notes 51,020 51,751 51,606 50,500
NOTE 15 - OFF-BALANCE-SHEET RISK In 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,
----------------------------
2002 2001
------------- -------------
Commitments to extend credit $ 390,107 $ 351,802
Letters of credit 20,323 20,162
Approximately $225,958,000 and $206,415,000 of commitments to extend credit at December 31, 2002 and 2001, respectively, were at variable rates and the remainder were 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.
Page 21 of 34
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.
NOTE 16 - CONTINGENCIES The 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 adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on the financial statements of the Company.
NOTE 17 - SUPPLEMENTAL INFORMATION The following is selected supplemental information (in thousands):
Years Ended December 31,
-----------------------------------------
2002 2001 2000
------------ ------------ -----------
Other non-interest expense:
Postage $ 3,647 $ 3,540 $ 3,496
Communication 4,261 4,310 4,102
Data processing 6,887 6,102 5,456
Professional fees 4,762 3,467 2,862
Taxes and licenses 4,376 2,759 2,389
Printing and supplies 2,054 1,882 1,349
Marketing 3,848 2,871 2,386
NOTE 18 - SEGMENT REPORTING The Company's primary segments are geographically divided into the Mississippi (MS) and Louisiana (LA) markets. Each segment offers the same products and services but are managed separately due to different pricing, product demand and consumer markets. Both segments offer commercial, consumer and mortgage loans and deposit services. Following is selected information for the Company's segments (in thousands):
Years Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000
--------------------------- --------------------------- ---------------------------
MS LA MS LA MS LA
------------- ------------ ------------- ------------ ------------- ------------
Interest income $ 131,286 $ 88,166 $ 138,787 $ 90,255 $ 127,496 $ 87,060
Interest expense 49,735 22,784 66,867 37,404 61,046 37,019
------------- ------------ ------------- ------------ ------------- ------------
Net interest income 81,551 65,382 71,920 52,851 66,450 50,041
Provision for loan losses 9,895 6,803 4,235 3,640 5,308 5,657
Non-interest income 35,447 26,120 27,108 21,691 22,341 25,325
Depreciation and amortization 5,587 2,757 5,344 2,857 4,954 2,884
Other non-interest expense 72,765 40,696 60,238 41,594 51,248 41,997
------------- ------------ ------------- ------------ ------------- ------------
Earnings before income taxes 28,751 41,246 29,211 26,451 27,281 24,828
Income taxes 7,909 13,138 7,891 8,544 7,470 8,724
------------- ------------ ------------- ------------ ------------- ------------
Net earnings $ 20,842 $ 28,108 $ 21,320 $ 17,907 $ 19,811 $ 16,104
============= ============ ============= ============ ============= ============
Page 22 of 34
At and For Years Ended December 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net Interest Income:
MS $ 81,551 $ 71,920 $ 66,450
LA 65,382 52,851 50,041
Other 11,795 8,737 6,205
-------------- -------------- --------------
Consolidated net interest income $ 158,728 $ 133,508 $ 122,696
============== ============== ==============
Net Earnings:
MS $ 20,842 $ 21,320 $ 19,811
LA 28,108 17,907 16,104
Other 2,093 28 909
-------------- -------------- --------------
Consolidated net earnings $ 51,043 $ 39,255 $ 36,824
============== ============== ==============
Assets:
MS $ 2,426,379 $ 2,320,914 $ 1,847,203
LA 1,578,505 1,442,919 1,284,735
Other 92,601 67,537 44,219
Intersegment (124,338) (151,525) (162,727)
-------------- -------------- --------------
Consolidated assets $ 3,973,147 $ 3,679,845 $ 3,013,430
============== ============== ==============
Goodwill and core deposit intangibles assigned to the Mississippi segment totaled approximately $16.2 million, of which $12.1 million represented goodwill and $4.1 million represented core deposit intangibles, at December 31, 2002. At December 2001 goodwill and core deposit intangibles assigned to the Mississippi segment totaled approximately $17.0 million, of which $12.1 million represented goodwill and $4.9 million represented core deposit intangibles. The related goodwill amortization was $0 in 2001 and $118,000 in 2000. The related core deposit amortization was approximately $750,000 in 2002, $745,000 in 2001 and $32,000 in 2000. Goodwill assigned to the Louisiana segment totaled approximately $37.0 million at December 31, 2002 and December 31, 2001. The related goodwill amortization was approximately $3,606,000 in 2001and in 2000. Both segments recorded no amortization of goodwill during 2002 due to the implementation of SFAS No. 142 as discussed in Note 1. The segments performed a fair value based impairment test on its goodwill and determined that the fair value exceeded the recorded value at December 2002 and 2001. No impairment loss, therefore, was recorded.
NOTE 19 - SUMMARIZED FINANCIAL INFORMATION OF HANCOCK HOLDING COMPANY
(PARENT COMPANY ONLY)
Balance Sheets
December 31,
--------------------------------------
2002 2001
------------------ -----------------
Assets:
Investment in subsidiaries $ 424,077,283 $ 399,178,497
Due from subsidiaries and other assets 4,321,956 5,441,884
------------------ -----------------
$ 428,399,239 $ 404,620,381
================== =================
Liabilities and Stockholders' Equity:
Due to subsidiaries $ 3,541,667 $ 3,557
Other liabilities 275,938 117
Preferred stock 37,068,905 37,068,905
Common stockholders' equity 387,512,729 367,547,802
------------------ -----------------
$ 428,399,239 $ 404,620,381
================== =================
Page 23 of 34
Statements of Earnings
Years Ended December 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ------------------- ------------------
Dividends received from subsidiaries $ 33,580,276 $ 39,338,376 $ 17,636,385
Equity in earnings of subsidiaries greater than
dividends received 19,404,436 2,167,084 20,960,727
Net expenses, including taxes (1,941,249) (2,250,320) (1,773,532)
----------------- ------------------- ------------------
Net earnings 51,043,463 39,255,140 36,823,580
Preferred dividends (2,653,240) (1,326,851) -
----------------- ------------------- ------------------
Net earnings available to common stockholders $ 48,390,223 $ 37,928,289 $ 36,823,580
================= =================== ==================
Statements of Cash Flows
Years Ended December 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ------------------- ------------------
Cash flows from operating activities - principally
dividends received from subsidiaries $ 38,934,506 $ 33,623,680 $ 18,664,517
Cash flows from investing activities - principally
business acquisitions (500,000) (12,890,062) -
Cash flows from financing activities:
Dividends paid to stockholders (15,374,679) (13,521,896) (13,611,093)
Dividends paid to subsidiaries (194,640) (181,664) (202,750)
Treasury stock transactions, net (20,892,096) (6,189,623) (4,951,086)
----------------- ------------------- ------------------
Net cash used by financing activities (36,461,415) (19,893,183) (18,764,929)
----------------- ------------------- ------------------
Net increase in cash 1,973,091 840,435 (100,412)
Cash, beginning 1,016,931 176,496 276,908
----------------- ------------------- ------------------
Cash, ending $ 2,990,022 $ 1,016,931 $ 176,496
================= =================== ==================
Page 24 of 34
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Purpose
The 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 during 2002 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 Statements
Congress 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 the company 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. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company's actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgements and estimates used in the preparation of the consolidated financial statements. The Company's single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If the financial condition of its borrowers were to deteriorate, resulting in an impairment of their ability to make payments, its estimates would be updated, and additional provisions for loan losses may be required.
Summary
The Company reported net earnings of $51.0 million in 2002, an increase of $11.7 million, or 29.8%, from the $39.3 million earned in 2001. Diluted earnings per common share was $3.00 in 2002, an increase of $0.64 from 2001's $2.36. The Company recorded no amortization of goodwill during 2002 due to the implementation of SFAS No. 142 as discussed in Note 1 to the consolidated financial statements. This resulted in a decrease of $3.6 million in amortization of purchased intangibles. During 2001, the Company made one business acquisition as detailed in Note 2 to the consolidated financial statements. The acquisition of Lamar Capital Corporation (Lamar) on July 1, 2001 resulted in pre-tax merger-related costs of $670,000 in 2001. Table 1 compares net income and diluted earnings per common share for 2001, excluding the impact of the 2002 discontinuation of the amortization of goodwill and 2001's merger-related costs.
TABLE 1. EFFECT OF THE IMPLEMENTATION OF SFAS NO. 142 AND MERGER-RELATED COSTS
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousand, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings including amortization of goodwill
and merger-related costs $51,043 $39,255
Amortization of goodwill - 3,606
Tax-effected merger-related costs - 436
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings excluding amortization of goodwill
and merger-related costs $51,043 43,297
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share including
amortization of goodwill and merger-related costs $3.00 $2.36
Amortization of goodwill - 0.22
Tax-effected merger-related costs - 0.02
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share excluding
amortization of goodwill and merger-related costs $3.00 $2.60
- ----------------------------------------------------------------------------------------------------------------------------------
Net income of $51.0 million was $7.7 million, or 17.8%, higher than the $43.3 million (excluding the impact of the aforementioned items in Table 1) earned in 2001. The key components of 2002's earnings performance follow:
Page 25 of 34
• Net interest income, on a tax-equivalent basis, increased
$25.2 million, or 17.9%, from 2001 to 2002 due to an increase of $406
million, or 13.0%, in average earning assets as well as a 20 basis point
expansion in the net interest margin (te). In addition, average loans
increased $169 million, or 9.4%. The increase in average earning assets was
due, in part, to the Lamar acquisition and was funded primarily with core
interest-bearing transaction accounts. The net interest margin (te)
expanded 20 basis points from 2001 to 2002. The expansion in the net
interest margin (te) resulted mainly from the low interest rate environment
that enabled the Company to better control deposit costs.
• Non-interest income, exclusive of securities gains in 2001 & 2002,
grew $17.3 million, or 31.9%, from 2001 to 2002. The increase was
reflected primarily in service charges on deposit accounts, trust
income, investment and annuity fees, insurance commissions and fees and
secondary mortgage market operations. The aforementioned changes in
non-interest income reflect the impact of the Lamar acquisition, higher
levels of mortgage originations and efforts to increase fee income related
to the Company's wealth management line of business.
• Non-interest expense, exclusive of merger-related costs in 2001,
increased $17.3 million, or 14.3%, from 2001 to 2002. Approximately $9.7
million of the increase from 2001 was due to increases in personnel expense
and $9.2 million was due to increases in other operating expenses. These
increases were experienced as the Company absorbed a full year's impact of
the Lamar acquisition. The Company adopted SFAS No. 142 and no longer
amortized goodwill, which resulted in a decrease of $3.6 million in
amortization of purchased intangibles.
• The Company provided $18.5 million for loan losses in 2002,
compared to $9.1 million for 2001 - an increase of $9.4 million, or 103.3%.
The increase in the provision for loan losses was due to a higher level of
net charge-offs in 2002 (0.91% of average loans versus 0.65% in 2001) and
was a function of the substantial loan growth experienced during the year.
Loans and Allowance For Loan Losses
Average loans increased $169 million, or 9%, in 2002 compared to an increase of $182 million, or 11%, in 2001. Table 2 shows average loans for a three-year period.
TABLE 2. AVERAGE LOANS
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Commercial & R.E. Loans $992,699 50.6% $883,913 49.3% $791,157 49.1%
Mortgage loans 246,333 12.6% 236,708 13.2% 212,904 13.2%
Direct consumer loans 503,629 25.7% 493,812 27.5% 446,201 27.7%
Indirect consumer loans 176,583 9.0% 144,280 8.0% 135,400 8.4%
Finance company loans 42,055 2.1% 33,846 1.9% 25,384 1.6%
- ----------------------------------------------------------------------------------------------------------------------------
Total average loans (net of unearned) $1,961,299 100.0% $1,792,559 100.0% $1,611,046 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
The Company experienced an overall increase in loan growth that affected all loan categories as its successful efforts to generate profitable loan volume continued. In addition, as mentioned previously, 2002 reflects the full impact of the Lamar acquisition.
As indicated by Table 2, commercial and real estate loans increased $109 million, or 12%, from 2001. Included in this category are commercial real estate loans, which are secured by properties used in commercial or industrial operations. The Company originates 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, 2002.
Average mortgage loans of $246.3 million were $9.6 million, or 4%, higher than in 2001. The majority of the growth in 2002 for this category was in retail mortgage loans. The Company originates both fixed-rate and adjustable-rate mortgage loans. Certain types of mortgage loans are sold in the secondary mortgage market, while the Banks retain other types. The Banks also originate home equity loans. This product offers customers the opportunity to leverage rising home prices and equity to obtain tax-advantaged consumer financing.
Direct consumer loans, which includes loans and revolving lines of credit made directly to consumers were up $9.8 million, or 2%, from 2001. The Company also originates indirect consumer loans, which consist primarily of consumer loans originated through a third party such as an automobile dealer or other point of sale channels. Average indirect consumer loans of $176.6 million for 2002 were up $32.3 million, or 22%, from 2001. The Company owns a finance company subsidiary, which originates both direct and indirect consumer loans. Finance company loans increased approximately $8.2 million, or 24.3%, at December 31, 2002, compared to the subsidiary's outstanding loans on December 31, 2001. The loan growth in the Finance company was mainly due to expansion into new geographical markets.
At December 31, 2002, the allowance for loan losses was $34.7 million, or 1.65%, of year-end loans, compared to $34.4 million, or 1.82%, of year-end loans for 2001. Net charge-offs amounted to $17.8 million in 2002, as compared to $11.6 million in 2001. The $6.2 million increase from 2001 was primarily related to an increase in commercial/real estate loan charge-offs. The increase in commercial net charge-offs was due to specific credits charged-off in the first quarter of 2002
Page 26 of 34
related to the Lamar acquisition and was also indicative of the loan growth experienced in this area, as well as a continuing process of becoming more proactive with respect to addressing asset quality issues.
Overall, the allowance for loan losses was 293% of non-performing loans at year-end 2002, compared to 199% at year-end 2001. Management utilizes several quantitative methodologies for determining the adequacy of the allowance for loan losses and is of the opinion that the allowance at December 31, 2002 is adequate even after considering the current slowdown in the U.S. economy. Table 3 presents the activity in the allowance for loan losses over the past 5 years.
TABLE 3. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at the beginning of year $34,417 $28,604 $25,713 $21,800 $21,000
Reserves acquired in bank purchase and other (400) 8,342 (147) 3,815 0
Provision for loan losses
charged to operations 18,495 9,082 12,609 8,688 6,956
Loans charged to the allowance
Commercial, real estate & mortgage 9,262 6,445 6,917 3,202 1,087
Direct and indirect consumer 9,384 6,324 4,084 6,769 6,043
Demand deposit accounts 4,907 3,529 2,718 2,230 1,792
- -----------------------------------------------------------------------------------------------------------------------------------
Total 23,553 16,298 13,719 12,201 8,922
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off
Commercial, real estate & mortgage 646 322 1,334 814 546
Direct and indirect consumer 2,071 2,026 1,174 1,670 1,155
Demand deposit accounts 3,064 2,339 1,640 1,127 1,065
- -----------------------------------------------------------------------------------------------------------------------------------
Total 5,781 4,687 4,148 3,611 2,766
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 17,772 11,611 9,571 8,590 6,156
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at the end of year $34,740 $34,417 $28,604 $25,713 $21,800
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios
Gross charge-offs to average loans 1.20% 0.91% 0.85% 0.84% 0.72%
Recoveries to average loans 0.29% 0.26% 0.26% 0.25% 0.22%
Net charge-offs to average loans 0.91% 0.65% 0.59% 0.59% 0.50%
Allowance for loan losses to year end loans 1.65% 1.82% 1.68% 1.67% 1.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-performing assets consist of loans accounted for on a non-accrual basis, restructured loans and other real estate (ORE). Table 4 presents information related to non-performing assets for the five years ended December 31, 2002. Total non-performing assets at December 31, 2002 were $17.8 million, a decrease of $2.5 million, or 12%, from December 31, 2001. This decrease was due primarily to Management's aggressive efforts to reduce the levels of non-performing assets. Loans that are 90 days past due but still accruing were $6.4 million at December 31, 2002. This compares to $12.6 million at December 31, 2001. Efforts on the part of Management to reduce the levels of non-performing assets as well as past due loans will continue in 2003 as the Company focuses on this issue.
TABLE 4. NON-PERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a non-accrual basis $11,870 $17,328 $10,182 $6,901 $4,602
Restructured loans 0 0 0 152 1,332
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 11,870 17,328 10,182 7,053 5,934
Other real estate 5,936 3,003 1,492 1,616 2,245
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $17,806 $20,331 $11,674 $8,669 $8,179
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 90 days past due still accruing $6,407 $12,591 $9,277 $4,442 $2,907
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios
Non-performing assets to loans plus
other real estate 0.84% 1.07% 0.69% 0.56% 0.63%
Allowance for loan losses to
non-performing loans 293% 199% 281% 365% 367%
Loans 90 days past due still accruing to loans 0.30% 0.67% 0.55% 0.29% 0.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Page 27 of 34
Investment Securities
The Company's investment in securities was $1.487 billion at December 31, 2002, compared to $1.373 billion at December 31, 2001. Average investment securities were $1.494 billion for 2002 as compared to $1.220 billion for 2001.
The Company generally purchases securities with a maturity schedule that provides ample liquidity. Certain securities have been classified as available for sale based on management's internal assessment of the portfolio after considering the Company's liquidity requirements and the portfolio's exposure to changes in market interest rates and prepayment activity. At December 31, 2002, the composition of the securities portfolio was 85% classified as available for sale and 15% as held to maturity. At December 31, 2001, these relative percentages were 79% available for sale and 21% held to maturity.
The December 31, 2002 carrying value of the held-to-maturity portfolio was $228.0 million and the market value was $238.2 million. The available-for-sale portfolio was $1.259 billion at December 31, 2002. The vast majority of securities in the Bank's portfolio 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 stockholder's equity. The Bank does not normally maintain a securities trading portfolio.
Deposits and Other Borrowings
Deposits increased to $3.302 billion at December 31, 2002 from $3.040 billion at December 31, 2001, an increase of $262 million, or approximately 9%. Total average deposits increased by $354.6 million, or nearly 13%, from 2001 to 2002. Of the increase in year-end deposits from 2001 to 2002, approximately $376 million consisted of core interest-bearing transaction deposits.
As was the case in 2001, over the course of 2002, the Company did experience disintermediation of time deposits, primarily into interest-bearing transaction accounts. This was due to the falling interest rate environment throughout 2002 and customer behavior that favored transaction accounts over time deposits. Time deposits, which consisted mainly of certificates of deposits, decreased by more than $120 million from January through December 2002. However, interest-bearing transaction accounts, which include NOW accounts, money market investment accounts and savings accounts were up more than $255 million for the same time period. In addition, non-interest-bearing deposits were up almost $7 million for the period January through December 2002. The vast majority of the aforementioned net growth occurred as consumers moved investments from the still uncertain stock market to safer investment avenues such as financial institutions.
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 $.861 million from December 31, 2001 to December 31, 2002. Purchases of federal funds were down $.125 million from year-end 2001 as there were no purchases of federal funds outstanding at year-end 2002. Sales of securities under repurchase agreements decreased $.150 million from year-end 2001, while borrowings from the FHLB were down $.586 million. The majority of the FHLB borrowings consist of two notes with maturities in 2008 and 2009. The average interest rate on the two notes is 4.54% and is fixed through 2003, after which time the FHLB can make annual elections to reset the rates to LIBOR plus .35%.
TABLE 5. AVERAGE DEPOSITS
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits $601,374 19% $562,989 20% $537,057 22%
NOW account deposits 552,419 17% 195,079 7% 219,511 9%
Money market deposits 438,364 14% 619,000 22% 464,140 19%
Savings deposits 448,993 14% 298,024 11% 297,715 12%
Time deposits 1,133,796 36% 1,145,259 41% 959,493 39%
- --------------------------------------------------------------------------------------------------------------------------
Total average deposits $3,174,946 100% $2,820,351 100% $2,477,916 100%
- --------------------------------------------------------------------------------------------------------------------------
Liquidity
Liquidity 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 it's 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.
Page 28 of 34
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 a line of credit with the Federal Home Loan Bank of over $218 million and borrowing capacity at the Federal Reserve's Discount Window in excess of $100 million.
Asset/Liability Management
The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, the Asset/Liability Committee (ALCO) monitors the Company's interest rate risk. The Company's interest rate management policy is designed to produce a stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company's securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and Management attempt to manage the Company's interest rate risk while enhancing the net interest margin. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the Board and Management may determine to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
The Company also controls interest rate risk reductions by emphasizing non-certificate depositor accounts. The Board and management believe that such accounts carry a lower interest cost than certificate accounts and that a material portion of such accounts may be more resistant to changes in interest rates.
One approach used to quantify interest rate risk is the net interest income (NII) at risk analysis. NII at risk measures the risk of a decline in earnings due to potential short-term and long-term changes in interest rates. Table 6 presents an analysis of the Company's interest rate risk as measured by the estimated changes in NII resulting from an instantaneous and sustained parallel shift in the yield curve (+ or - 300 basis points, measured in 100 basis point increments) at December 31, 2002. Current interest rate levels make it improbable that rates would fall in excess of 100 basis points; therefore, those scenarios are not presented. Table 6 indicates that the Company's level of NII declines under rising and falling rates but does so to a lesser degree in a falling interest rate environment.
TABLE 6. NET INTEREST INCOME (te) AT RISK
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
Estimated Increase
Change in (Decrease) in NII
Interest Estimated -------------------------------
Rates NII Amount Amount Percent
--------------- --------------- ------------ ------------
(basis points) (amounts in thousands)
- 100 $165,299 ($893) -0.5%
Stable $166,192 - -
+ 100 $165,317 ($875) -0.5%
+ 200 $164,705 ($1,487) -0.9%
+ 300 $164,154 ($2,038) -1.2%
- -------------------------------------------------------------------------------------------------------------------------------
Page 29 of 34
TABLE 7. INTEREST RATE SENSITIVITY
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Within 6 months 1 to 3 > 3 Non-Sensitive
Overnight 6 months to 1 year years years Balance Total
----------- -------------------------------- ---------- -------------- ------------
(amounts in thousands)
Assets
Securities $0 $264,002 $235,338 $467,133 $494,965 $0 $1,461,438
Federal funds sold & Short-term investments $22,214 $0 $216 $0 $24,827 $0 $47,257
Loans $26,512 $1,072,824 $279,728 $511,423 $214,494 $0 $2,104,981
Other assets $0 $0 $0 $0 $66,807 $292,664 $359,471
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $48,726 $1,336,826 $515,282 $978,556 $801,093 $292,664 $3,973,147
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest bearing transaction deposits $0 $736,755 $192,087 $554,900 $57,729 $0 $1,541,471
Time deposits $0 $432,127 $149,750 $277,138 $270,223 $0 $1,129,238
Non-interest bearing deposits $0 $264,865 $126,270 $220,209 $19,446 $0 $630,790
Federal funds purchased $0 $0 $0 $0 $0 $0 $0
Borrowings $165,237 $0 $0 $0 $46,840 $0 $212,077
Other liabilities $0 $0 $0 $0 $0 $34,989 $34,989
Shareholders' Equity $0 $0 $9,774 $0 $414,808 $0 $424,582
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Equity $165,237 $1,433,747 $477,881 $1,052,247 $809,046 $34,989 $3,973,147
- -----------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap ($116,511) ($96,921) $37,401 ($73,691) ($7,953) $257,675
Cumulative interest rate sensitivity gap ($116,511) ($213,432) ($176,031) ($249,722) ($257,675) -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets (3.0)% (6.0)% (5.0)% (7.0)% (7.0)%
- -----------------------------------------------------------------------------------------------------------------------------------
Table 7 indicates that the Company is liability sensitive; however, this static gap report does not take into consideration the strategic options available to management designed to maximize net interest income over time.
Certain assumptions in assessing the interest rate risk were employed in preparing data for the Company included in the preceding tables (Tables 6 & 7). These assumptions relate to interest rates, loan and deposit growth, pricing, loan prepayment speeds, deposit decay rates and the market values of certain assets under the various interest rate scenarios. Even if interest rates change in the designated amounts, there can be no assurance that the Company's assets and liabilities would perform as anticipated. In addition, a change in U. S. Treasury rates in the designated amounts accompanied by a change in the shape of the U. S. Treasury yield curve would cause significantly different changes to the NII than indicated above.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
As part of the regular asset/liability management process, management reviews the results of the monthly model simulations, combined with the other risk factors affecting operations, and adjusts the Company's strategies in order to maximize net interest income over the horizon.
Capital Resources
Common stockholder's equity increased $20.0 million during 2002 and stood at $387.5 million at December 31, 2002. The increase from 2001 was due primarily to an increase in retained earnings, an increase in the unrealized gain on securities available for sale and was partially offset by an increase in the unfunded pension liability and an increase in treasury stock related to the execution of the Company's ongoing stock buyback program. Dividends paid by the Company to common stock shareholder's totaled $12.721 million, or $.80 per common share. This represents an increase of $.05 per common share over 2001. The Company also paid dividends totaling $2.653 million, or $1.60 per share to preferred shareholders in 2002. The preferred stock was issued July 1, 2001 in connection with the Lamar acquisition. Preferred dividends paid in 2001 were $0.80 per share, or $0.40 per share per quarter.
Page 30 of 34
On July 12, 2002, the Company's Board of Directors declared a three-for-two stock split in the form of a 50% stock dividend. The additional shares were payable on August 5, 2002 to shareholders of record at the close of business on July 23, 2002. All information concerning earnings per share, dividends per share, and numbers of shares outstanding have been adjusted to give effect to this split.
Common stockholder's equity at December 31, 2002 reflects charge of $6.4 million (net of tax) relating to the unfunded portion of the Company's pension plan. The unfunded portion of the pension plan increased in 2001 and 2002, as the actual return on plan assets has been less than 2%. This reflects the effect of overall market conditions and the interest cost on the pension obligations, which continued to increase from 6.75% to 7.00%. The Company changed the discount rate on the obligations from 7.25% at December 31, 2001, to 6.75% at December 31, 2002 to reflect current market conditions.
A 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, 2002, the Company's and the Banks' capital balances were in excess of current regulatory minimum requirements. As indicated in Table 8 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 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 1,660,000 shares of the Company's outstanding stock. Over the course of 2002, the Company purchased 438,942 shares of common stock at an aggregate price of $19.714 million, or approximately $44.92 per share. In 2001, the Company purchased 228,455 shares of common stock at an aggregate price of $6.415 million, or approximately $28.08 per share. As of December 31, 2002, the total number of common shares purchased under the current stock buyback program was approximately 845,000, or 5.1%, of the outstanding common shares at June 30, 2000.
TABLE 8. RISK-BASED CAPITAL AND CAPITAL RATIOS
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Tier 1 regulatory capital $360,976 $345,589 $302,094 $279,659 $260,182
Tier 2 regulatory capital 34,741 30,071 24,416 22,447 18,997
- -------------------------------------------------------------------------------------------------------------------------
Total regulatory capital $395,717 $375,660 $326,510 $302,106 $279,179
- -------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $2,294,427 $2,387,945 $1,949,085 $1,792,515 $1,516,986
- -------------------------------------------------------------------------------------------------------------------------
Ratios
Leverage (Tier 1 capital to average assets) 9.35% 8.50% 10.24% 9.61% 9.50%
Tier 1 capital to risk-weighted assets 15.73% 14.47% 15.50% 15.60% 17.15%
Total capital to risk-weighted assets 17.25% 15.73% 16.75% 16.85% 18.40%
Common stockholders' equity to total assets 9.75% 9.99% 11.33% 10.38% 10.19%
Tangible common equity to total assets 8.42% 8.61% 10.11% 9.02% 9.34%
- -------------------------------------------------------------------------------------------------------------------------
Results of Operations
Net Interest Income
Net interest income (te) of $166.2 million was recorded for the year 2002, an increase of $25.3 million, or 18%, from 2001. The increase in 2001 followed an increase of $12.0 million, or 9%, from 2000 to 2001. The factors contributing to the changes in net interest income for 2002, 2001 and 2000 are presented in Tables 9 and 10. Table 9 is an analysis of the components of the Company's average balance sheets, level of interest income and expense and the resulting earning asset yields and liability rates. Table 10 breaks down the overall changes in the level of net interest income into rate and volume components. Net interest income (te) in 2002 was impacted by a higher level of average earning assets and an expanded net interest margin (te). Average earning assets, increased $406 million, or 13%, from 2001 to 2002. The majority of these funds were invested in the securities portfolio, which increased $274 million, or 22%, while average loans increased $169 million, or 9% from 2001 to 2002. The overall increase in average earning assets was funded primarily by growth in average deposits of $355 million, or 13%, from 2001 to 2002.
The Company's net interest margin (te) for 2002 was 4.70%, an increase of 20 basis points from the 4.50% recorded in 2001. The earning asset yield (te) narrowed 101 basis points from 7.74% in 2001 to 6.73% in 2002. The Company's loan yield decreased 103 basis points from 2001, while the yield on the securities portfolio was down a total of 79 basis points. The yield on short-term investments decreased 267 basis points. All of the aforementioned declines in earning asset yield were related to the overall reduction in the interest rate environment that occurred in 2002. The Company's total cost of funds fell 120 basis points, while the cost of interest-bearing deposits fell 157 basis points from 2001 to 2002. Within interest-bearing deposits, the cost of interest-bearing transaction deposits fell 129 basis points as the Company aggressively reduced the cost of savings accounts, NOW accounts and money market investment accounts. The cost of time deposits was down 150 basis points from 2001.
Page 31 of 34
Provision for Loan Losses
The provision for loan losses was $18.5 million for 2002, an increase of $9.4 million from 2001's level of $9.1 million. Net charge-offs increased $6.2 million from 2001 to 2002 and were $17.8 million for 2002. The increase from 2001, occurred as the Company completed the process of recognizing problem commercial/real estate credits resulting from the Lamar acquisition. The Company's allowance for loan losses as a percent of period-end loans was 1.65% at December 31, 2002, a decrease of 17 basis points from the 1.82% at December 31, 2001.
TABLE 9. SUMMARY OF AVERAGE BALANCE SHEETS
NET INTEREST INCOME (te) & INTEREST RATES
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
EARNING ASSETS
Loans (te) $1,961,299 $159,453 8.13% $1,792,559 $164,183 9.16% $1,611,046 $150,857 9.36%
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities 48,423 1,605 3.31% 53,930 3,023 5.61% 98,704 5,494 5.57%
U.S. agency securities 530,704 25,468 4.80% 447,525 24,564 5.49% 373,295 21,819 5.85%
CMOs 560,264 26,636 4.75% 338,511 19,428 5.74% 264,207 16,740 6.34%
Mortgage-backed securities 95,158 5,618 5.90% 130,122 8,251 6.34% 136,879 9,313 6.80%
Obligations of states and
political subdivisions (te) 222,037 15,926 7.17% 218,196 15,700 7.20% 196,518 14,429 7.34%
FHLB stock and
other corporate securities 36,988 2,085 5.64% 31,790 1,869 5.88% 20,955 2,057 9.81%
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment in securities 1,493,574 77,338 5.18% 1,220,074 72,835 5.97% 1,090,558 69,852 6.41%
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds sold and
short-term investments 83,427 1,452 1.74% 119,832 5,285 4.41% 42,672 2,523 5.91%
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets (te) 3,538,300 $238,243 6.73% 3,132,465 $242,303 7.74% 2,744,276 $223,232 8.13%
- -----------------------------------------------------------------------------------------------------------------------------------
NON-EARNING ASSETS
Other assets 352,533 316,066 276,287
Allowance for loan losses (33,135) (32,487) (26,591)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $3,857,698 $3,416,044 $2,993,972
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EUITY
INTEREST-BEARING LIABILITIES
Interest-bearing transaction deposits $1,126,594 $15,678 1.39% $902,582 $24,206 2.68% $829,760 $27,190 3.28%
Time deposits 971,457 39,532 4.07% 1,020,249 56,821 5.57% 875,627 49,056 5.60%
Public fund 475,521 12,175 2.56% 334,531 13,498 4.03% 235,472 10,302 4.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,573,572 67,385 2.62% 2,257,362 94,525 4.19% 1,940,859 86,548 4.46%
- -----------------------------------------------------------------------------------------------------------------------------------
Customer repurchase agreement 173,084 2,214 1.28% 159,511 5,241 3.29% 157,633 7,024 4.46%
Other interest-bearing liabilities 54,798 2,454 4.48% 34,421 1,596 4.64% 10,533 679 6.44%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,801,454 72,053 2.57% 2,451,294 101,362 4.14% 2,109,025 94,251 4.47%
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Demand deposits 601,374 562,989 537,057
Other liabilities 28,980 25,931 22,382
Preferred stockholders' equity 37,069 16,733 -
Common stockholders' equity 388,821 359,097 325,508
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities, preferred stock &
common stockholders' equity $3,857,698 2.04% $3,416,044 3.24% $2,993,972 3.43%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income and margin (te) $166,190 4.70% $140,941 4.50% $128,981 4.70%
Net earning assets and spread $736,846 4.16% $681,171 3.60% $635,251 3.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Page 32 of 34
TABLE 10. SUMMARY OF CHANGES IN NET INTEREST INCOME (te)
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 Compared to 2001 2001 Compared to 2000
- ---------------------------------------------------------------------------------------------------------------------------
Due to Due to
Change in Total Change in Total
------------------------ Increase ------------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME (te)
Loans $13,067 ($17,797) ($4,730) $13,963 ($638) $13,325
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities (284) (1,134) (1,418) (2,510) 39 (2,471)
U.S. agency securities 846 58 904 2,271 474 2,745
CMOs 6,152 1,056 7,208 2,210 477 2,687
Mortgage-backed securities (2,100) (533) (2,633) (444) (619) (1,063)
Obligations of states and
political subdivisions (te) 62 164 226 716 555 1,271
FHLB stock and
other corporate securities 296 (80) 216 823 (1,010) (187)
- ---------------------------------------------------------------------------------------------------------------------------
Total investment in securities 4,972 (469) 4,503 3,066 (84) 2,982
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds and short-term investments (1,281) (2,552) (3,833) 3,545 (782) 2,763
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income (te) $16,758 ($20,818) ($4,060) $20,574 ($1,504) $19,070
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing transaction deposits $5,024 ($13,552) ($8,528) ($2,245) $5,229 $2,984
Time deposits (2,607) (14,682) (17,289) (8,054) 292 (7,762)
Public Funds 4,576 (5,899) (1,323) (4,050) 853 (3,197)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,993 (34,133) (27,140) (14,349) 6,374 (7,975)
- ---------------------------------------------------------------------------------------------------------------------------
Customer repurchase agreements 413 (3,440) (3,027) (83) 1,866 1,783
Other interest-bearing liabilities 937 (79) 858 (1,155) 237 (918)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense $8,343 ($37,652) ($29,309) ($15,587) $8,477 ($7,110)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income (te) $8,415 $16,834 $25,249 $4,987 $6,973 $11,960
- ---------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Table 11 presents a three-year analysis of the components of non-interest income. Overall, non-interest income of $71.6 million was reported in 2002, as compared to $54.3 million for 2001. This represented an increase of $17.3 million, or 32%, from 2001. Significant increases in non-interest income from 2001 were reflected in service charges on deposit accounts, trust income, investment and annuity fees and insurance commissions and fees, secondary mortgage market operations and other fees and income. Less significant changes were reflected in credit card income (primarily merchant discount fees) and ATM fees.
Service charges on deposit accounts increased $11.8 million, or 39%, from 2001 to 2002. The vast majority of this increase related to service charge income derived from the implementation of a series of initiatives concerning pricing and processing for service charges on deposit accounts. Trust income increased $1.1 million, or 18% from 2001 to 2002. Investment and annuity fees and insurance commissions and fees were $1.3 million and $.9 million, respectively or 37% and 69%, respectively, higher in 2002. These increases occurred as a result of ongoing efforts to build and expand the Company's wealth management line of business. Fees related to the retention of mortgage servicing rights were $2.4 million in 2002. Beginning in second quarter 2001, the Company, through its wholly owned subsidiary, Hancock Mortgage Company, began selling 85% to 90% of certain residential mortgage loans originated by that subsidiary in the secondary market to investors where the servicing rights are retained. Higher volumes of mortgage originations contributed to the 54% increase in secondary mortgage market operations income over 2001. ATM fees were up $0.4 million and largely consist of surcharges on foreign (non-Hancock) cardholders that utilize Hancock-owned ATM machines.
Page 33 of 34
TABLE 11. NON-INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 % change 2001 % change 2000
- -------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $42,246 39% $30,408 12% $27,180
Trust income 7,603 18% 6,454 7% 6,058
Investment and annuity fees 4,722 37% 3,444 6% 3,258
Insurance commissions and fees 2,312 69% 1,371 -10% 1,530
Credit card merchant discount fees 3,284 20% 2,734 -1% 2,762
ATM fees 3,771 13% 3,327 1% 3,305
Secondary mortgage market operations 2,409 54% 1,560 802% 173
Other fees and income 5,242 4% 5,028 14% 4,429
- -------------------------------------------------------------------------------------------------------------------------------
Total other non-interest income 71,589 32% 54,326 12% 48,695
- -------------------------------------------------------------------------------------------------------------------------------
Gain on sale of credit cards - - 3,753
Securities transactions 4 18 3
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest income $71,593 32% $54,344 4% $52,451
- -------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Table 12 presents an analysis of the components of non-interest expense for the years 2002, 2001 and 2000. The Company's level of operating expenses increased $16.6 million, or 13%, from 2001 to 2002, inclusive of a $3.6 million reduction in amortization of purchased intangibles in accordance with the Company's adoption of SFAS No. 142 on January 1, 2002. The Company also had $670,000 of pretax merger-related expenses in 2001, which was related to the acquisition of Lamar Capital Corporation. Excluding the impact of not amortizing purchased intangibles, operating expenses increased $20.2 million or 17.2%, from 2001 to 2002.
Personnel expense increased $9.7 million, or 14.3% from 2001 to 2002 due, in part, to the full year impact of the Lamar acquisition, as well as an increase in full-time equivalent (FTE) headcount of 54. Less significant increases were reflected in occupancy expense ($361,000 or 4.4%) and equipment expense ($960,000 or 12.0%).
Other operating expense (not including amortization of purchased intangibles) increased $9.2 million, or 27.3%, from 2001 to 2002. Significant increases, which, in part, were related to a full year impact related to the Lamar acquisition, were reflected in ad valorem and franchise taxes (59%), legal and professional fees (37%), advertising expense (34%), training expenses (40%) and ORE expense (595%).
TABLE 12. NON-INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2002 % change 2001 % change 2000
- -----------------------------------------------------------------------------------------------------------------------------
Employee compensation $62,152 14% $54,524 12% $48,660
Employee benefits 15,148 16% 13,098 24% 10,526
- -----------------------------------------------------------------------------------------------------------------------------
Total personnel expense 77,300 14% 67,622 14% 59,186
Equipment and data processing expense 15,689 13% 13,944 1% 13,779
Net occupancy expense 8,536 4% 8,175 15% 7,135
Postage and communications 7,908 1% 7,850 3% 7,598
Ad valorem and franchise taxes 4,376 59% 2,759 15% 2,389
Legal and professional services 4,762 37% 3,467 21% 2,862
Stationery and supplies 2,054 9% 1,882 40% 1,349
Amortization of intangible assets 750 -83% 4,349 16% 3,756
Advertising 3,848 34% 2,871 20% 2,386
Deposit insurance and regulatory fees 884 1% 879 10% 802
Training expenses 569 40% 407 4% 390
Other real estate owned expense 2,218 595% 319 406% 63
Other expense 9,364 31% 7,128 0% 7,123
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 138,258 14% 121,652 12% 108,818
- -----------------------------------------------------------------------------------------------------------------------------
Page 34 of 34
