On July 12, 2002 the Company's Board of Directors declared a three-for-two stock split in the form of a 50% common 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 number of shares outstanding has been adjusted to give effect to this split.
The following tables present selected comparative financial data. All share and per share data has been restated to give effect of a 50% stock dividend made August 5, 2002.
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------- -----------------------
9/30/2003 9/30/2002 9/30/2003 9/30/2002
-------------------------- -----------------------
Performance Ratios
- ------------------
Return on average assets 1.31% 1.36% 1.29% 1.30%
Return on average common equity 13.79% 13.30% 13.42% 12.87%
Earning asset yield (Tax Equivalent ("TE")) 5.99% 6.77% 6.00% 6.81%
Total cost of funds 1.46% 1.97% 1.58% 2.10%
Net interest margin (TE) 4.54% 4.80% 4.42% 4.71%
Non-interest expense as a percent of total revenue (TE)
before amortization of purchased intangibles
and securities transactions
57.90% 57.97% 58.44% 57.78%
Average common equity as a percent of average total assets 9.49% 10.24% 9.63% 10.09%
Leverage ratio (period end) 9.10% 9.30% 9.10% 9.30%
FTE Headcount 1,751 1,773 1,751 1,773
Asset Quality Information
- --------------------------
Non-accrual loans $13,988 $12,373 $13,988 $12,373
Foreclosed assets $6,187 $7,178 $6,187 $7,178
Total non-performing assets $20,175 $19,551 $20,175 $19,551
Non-performing assets as a percent of loans and foreclosed assets 0.86% 0.96% 0.86% 0.96%
Accruing loans 90 days past due $4,439 $5,234 $4,439 $5,234
Accruing loans 90 days past due as a percent of loans 0.19% 0.26% 0.19% 0.26%
Non-performing assets + accruing loans 90 days past due
to loans and foreclosed assets 1.05% 1.22% 1.05% 1.22%
Net charge-offs $2,978 $2,547 $9,464 $14,506
Net charge-offs as a percent of average loans 0.52% 0.51% 0.58% 1.01%
Allowance for loan losses $36,250 $33,315 $36,250 $33,315
Allowance for loan losses as a percent of period end loans 1.54% 1.65% 1.54% 1.65%
Allowance for loan losses to NPAs + accruing loans 90 days past due 147.27% 134.42% 147.27% 134.42%
Provision for loan losses $3,988 $3,597 $10,974 $13,804
Provision for loan losses to net charge-offs 133.92% 141.23% 115.96% 95.16%
Average Balance Sheet
- ---------------------
Total loans $2,288,917 $1,985,726 $2,185,694 $1,928,893
Securities 1,461,532 1,511,750 1,501,077 1,499,953
Short-term investments 32,870 46,478 73,103 93,988
Earning assets 3,783,319 3,543,954 3,759,873 3,522,834
Allowance for loan losses (35,534) (32,607) (35,065) (32,897)
Other assets 393,706 360,824 382,016 349,073
Total assets $4,141,490 $3,872,171 $4,106,824 $3,839,011
Non-interest bearing deposits $616,689 $616,347 $599,697 $616,256
Interest bearing transaction deposits 1,689,865 1,427,413 1,676,010 1,414,671
Time deposits 1,120,946 1,134,825 1,128,773 1,131,613
Total interest bearing deposits 2,810,811 2,562,238 2,804,784 2,546,284
Total deposits 3,427,499 3,178,585 3,404,481 3,162,540
Other borrowed funds 243,219 228,757 233,018 224,569
Other liabilities 40,646 31,151 36,754 27,506
Preferred stock 37,069 37,069 37,069 37,069
Common shareholders' equity 393,057 396,609 395,503 387,326
Total liabilities, preferred stock & common equity $4,141,490 $3,872,171 $4,106,824 $3,839,011
Page 9 of 23
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
9/30/2003 9/30/2002 9/30/2003 9/30/2002
-------------------------- ---------------------------
Period end Balance Sheet
- ------------------------
Commercial/real estate loans $1,196,393 $1,014,565 $1,196,393 $1,014,565
Mortgage loans 376,603 271,891 376,603 271,891
Direct consumer loans 483,936 503,123 483,936 503,123
Indirect consumer loans 238,503 185,882 238,503 185,882
Finance Company loans 53,635 44,711 53,635 44,711
Total loans 2,349,070 2,020,171 2,349,070 2,020,171
Securities 1,420,923 1,509,931 1,420,923 1,509,931
Short-term investments 6,569 137,323 6,569 137,323
Earning assets 3,776,562 3,667,426 3,776,562 3,667,426
Allowance for loan losses (36,250) (33,315) (36,250) (33,315)
Other assets 402,208 337,643 402,208 337,643
Total assets $4,142,520 $3,971,754 $4,142,520 $3,971,754
Non-interest bearing deposits $616,515 $657,211 $616,515 $657,211
Interest bearing transaction deposits 1,690,499 1,462,363 1,690,499 1,462,363
Time deposits 1,093,777 1,158,720 1,093,777 1,158,720
Total interest bearing deposits 2,784,276 2,621,082 2,784,276 2,621,082
Total deposits 3,400,791 3,278,293 3,400,791 3,278,293
Other borrowed funds 273,160 232,067 273,160 232,067
Other liabilities 40,436 34,055 40,436 34,055
Preferred stock 37,069 37,069 37,069 37,069
Common shareholders' equity 391,063 390,269 391,063 390,269
Total liabilities, preferred stock & common equity $4,142,520 $3,971,754 $4,142,520 $3,971,754
Net Charge-Off Information
- --------------------------
Net charge-offs:
Commercial/real estate loans $880 $256 $3,226 $7,663
Mortgage loans - 1 39 -
Direct consumer loans 1,094 1,420 3,439 3,987
Indirect consumer loans 637 405 1,559 1,518
Finance company loans 367 465 1,201 1,338
Total net charge-offs $2,978 $2,547 $9,464 $14,506
Net charge-offs to average loans:
Commercial/real estate loans 0.30% 0.10% 0.39% 1.05%
Mortgage loans 0.00% 0.00% 0.02% 0.00%
Direct consumer loans 0.90% 1.12% 0.93% 1.06%
Indirect consumer loans 1.12% 0.87% 1.02% 1.17%
Finance Company loans 2.77% 4.19% 3.23% 4.40%
Total net charge-offs to average loans 0.52% 0.51% 0.58% 1.01%
Page 10 of 23
(amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
9/30/2003 9/30/2002 9/30/2003 9/30/2002
---------------------------- ---------------------------
Averaqe Balance Sheet Composition
- ---------------------------------
Percentage of earning assets/funding sources:
Loans 60.50% 56.03% 58.13% 54.75%
Securities 38.63% 42.66% 39.92% 42.58%
Short-term investments 0.87% 1.31% 1.94% 2.67%
Earning assets 100.00% 100.00% 100.00% 100.00%
Non-interest bearing deposits 16.30% 17.39% 15.95% 17.49%
Interest bearing transaction deposits 44.67% 40.28% 44.58% 40.16%
Time deposits 29.63% 32.02% 30.02% 32.12%
Total deposits 90.60% 89.69% 90.55% 89.77%
Other borrowed funds 6.43% 6.45% 6.20% 6.37%
Other net interest-free funding sources 2.98% 3.85% 3.25% 3.85%
Total funding sources 100.00% 100.00% 100.00% 100.00%
Loan mix:
Commercial/real estate loans 50.65% 50.56% 50.67% 50.56%
Mortgage loans 16.04% 12.71% 15.17% 12.19%
Direct consumer loans 21.18% 25.26% 22.51% 26.17%
Indirect consumer loans 9.84% 9.25% 9.38% 8.97%
Finance Company loans 2.29% 2.21% 2.28% 2.11%
Total loans 100.00% 100.00% 100.00% 100.00%
Average dollars (in thousands)
Loans 2,288,917 $1,985,726 $2,185,694 $1,928,893
Securities 1,461,532 1,511,750 1,501,077 1,499,953
Short-term investments 32,870 46,478 73,103 93,988
Earning assets 3,783,319 $3,543,954 $3,759,873 $3,522,834
Non-interest bearing deposits $616,689 $616,347 $599,697 $616,256
Interest bearing transaction deposits 1,689,865 1,427,413 1,676,010 1,414,671
Time deposits 1,120,946 1,134,825 1,128,773 1,131,613
Total deposits 3,427,499 3,178,585 3,404,481 3,162,540
Other borrowed funds 243,219 228,757 233,018 224,569
Other net interest-free funding sources 112,601 136,612 122,375 135,725
Total funding sources $3,783,319 $3,543,954 $3,759,873 $3,522,834
Loans:
Commercial/real estate loans $1,159,338 $1,004,067 $1,107,455 $975,272
Mortgage loans 367,134 252,351 331,491 235,190
Direct consumer loans 484,736 501,672 491,962 504,771
Indirect consumer loans 225,199 183,652 205,048 172,971
Finance Company loans 52,509 43,983 49,737 40,689
Total average loans $2,288,917 $1,985,726 $2,185,694 $1,928,893
Page 11 of 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides management's analysis of certain factors that have affected the Company's financial condition and operating results during the periods included in the accompanying condensed consolidated financial statements.
CHANGES IN FINANCIAL CONDITION
Liquidity
The Company manages liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and securities held to maturity and sales and maturities of securities available for sale.
The following liquidity ratios compare certain assets and liabilities to total deposits or total assets:
September 30, June 30, March 31, December 31,
2003 2003 2003 2002
------------- ---------- --------- ------------
Total securities to total deposits 41.78% 45.18% 48.04% 45.03%
Total loans (net of unearned
income) to total deposits 69.07% 65.62% 61.33% 63.76%
Interest-earning assets
to total assets 91.17% 92.14% 92.06% 91.59%
Interest-bearing deposits
to total deposits 81.87% 82.15% 82.31% 80.89%
Loans and Allowance for Loan Losses
The following table sets forth, for the periods indicated, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off:
Page 12 of 23
Three Months Ended Sept. 30, Nine Months Ended Sept 30
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- --------------- ------------- --------------
Balance of allowance for loan losses
at beginning of period $ 35,240 $ 32,265 $ 34,740 $ 34,417
Balance acquired through acquisition & other - - - (400)
Provision for loan losses 3,988 3,597 10,974 13,804
Loans charged-off:
Commercial, Real Estate & Mortgage 1,156 508 4,037 8,164
Direct & Indirect Consumer 1,743 1,619 5,362 5,535
Finance Company 427 531 1,389 1,573
Demand Deposit Accounts 1,212 1,455 3,309 3,614
-------------- --------------- ------------- --------------
Total charge-offs 4,538 4,113 14,097 18,886
-------------- --------------- ------------- --------------
Recoveries of loans previously
charged-off:
Commercial, Real Estate & Mortgage 276 251 772 501
Direct & Indirect Consumer 450 394 1,454 1,361
Finance Company 60 66 188 235
Demand Deposit Accounts 774 855 2,219 2,283
-------------- --------------- ------------- --------------
Total recoveries 1,560 1,566 4,633 4,380
-------------- --------------- ------------- --------------
Net charge-offs 2,978 2,547 9,464 14,506
-------------- --------------- ------------- --------------
Balance of allowance for loan losses
at end of period $ 36,250 $ 33,315 $ 36,250 $ 33,315
============== =============== ============= ==============
The following table sets forth, for the periods indicated, certain ratios related to the Company's charge-offs, allowance for loan losses and outstanding loans:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- ------------- -------------- --------------
Ratios
Net charge-offs to average net loans 0.52% 0.51% 0.58% 1.01
Net charge-offs to period-end net loans 0.50% 0.50% 0.54% 0.96%
Allowance for loan losses to average net loans 1.58% 1.68% 1.66% 1.73%
Allowance for loan losses to period-end net loans 1.54% 1.65% 1.54% 1.65%
Net charge-offs to loan loss allowance 8.22% 7.65% 26.11% 43.54%
Loan loss provision to net charge-offs 133.92% 141.23% 115.96% 95.16%
Capital Resources
The Company continues to maintain an adequate capital position. The ratios as of September 30, 2003, June 30, 2003, March 31, 2003 and December 31, 2002 are as follows:
September 30, June 30, March 31, December 31,
2003 2003 2003 2002
------------ ----------- ------------ ---------------
Average equity to average assets (1) 9.49% 9.68% 9.73% 10.08%
Total capital to risk-weighted assets (2) 15.24% 16.08% 16.45% 16.38%
Tier 1 capital to risk-weighted assets (3) 13.99% 14.82% 15.19% 15.15%
Leverage capital to average total assets (4) 9.10% 9.16% 9.21% 9.35%
Page 13 of 23
(1) Equity capital consists of stockholder's equity (excluding unrealized gains/(losses)).
(2) Total capital consists of equity capital less intangible assets plus a limited amount of loan loss
allowance. Risk-weighted assets represent the assigned risk portion of all on and off-balance-
sheet assets. Based on Federal Reserve Board guidelines, assets are assigned a risk factor
percentage from 0% to 100%. A minimum ratio of total capital to risk-weighted assets of 8% is
required.
(3) Tier 1 capital consists of equity capital less intangible assets. A minimum ratio of tier 1 capital to
risk-weighted assets of 4% is required.
(4) Leverage capital consists of equity capital less goodwill and core deposit intangibles.
Regulations require a minimum 4% leverage capital ratio for an entity to be considered
adequately capitalized.
RESULTS OF OPERATIONS
Net Earnings
Net earnings increased approximately $400,000 or 3% for the third quarter of 2003 compared to the third quarter of 2002. Net earnings increased $2.4 million or 6% for the first nine months of 2003 compared to the first nine months of 2002. Following is selected information for quarterly and year-to-date comparison:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Return on average assets 1.31% 1.36% 1.29% 1.30%
Return on average equity 13.79% 13.30% 13.42% 12.87%
Net Interest Income:
Yield on average interest-earning assets (TE) 5.99% 6.77% 6.00% 6.81%
Cost of average interest-bearing funds 1.80% 2.50% 1.96% 2.67%
----------- ----------- ----------- -----------
Net interest spread (TE) 4.19% 4.26% 4.04% 4.14%
=========== =========== =========== ===========
Net interest margin (TE)
(net interest income on a tax-equivalent basis
divided by average interest-earning assets) 4.54% 4.80% 4.42% 4.71%
=========== =========== =========== ===========
Net Interest Income
Net interest income (te) for the third quarter of 2003 increased $424,000, or 1%, from the third quarter of 2002, and was $1.6 million, or 4% higher than the second quarter of 2003. The Company's net interest margin (te) was 4.54% in the third quarter of 2003, 26 basis points narrower than the same quarter a year ago, but 17 basis points wider than the previous quarter. Compared to the same quarter a year ago, the primary driver of the $424,000 increase in net interest income (te) was a $239 million, or 7% increase in average earning assets mainly from average loan growth of $303 million, or 15%. Average deposit growth of $249 million, or 8%, funded most of the increase in earning assets. The expansion of the Company's earning asset base as well as improvement in earning asset mix were the main factors behind the increase in net interest income (te) compared to the same quarter a year ago. The Company improved its loan to deposit ratio from 62% in the third quarter of 2002 to 67% in the current quarter. In addition, loans now comprise 60% of the Company's earning asset base, as compared to 56% for the same quarter a year ago. The net interest margin (te) was narrowed 26 basis points as the overall yield on loans, securities and short-term investments fell more rapidly (78 basis points) than total funding costs (51 basis points). Improvements in the earning asset mix continue to be significant factors in the Company's ability to overcome the decline in our earning asset yield.
Page 14 of 23
The higher level of net interest income (te) (up $1.6 million, or 4%) and net interest margin (te) expansion (17 basis points) compared to the previous quarter was primarily due to a combination of increased loan growth contributing to a better earning asset mix, an improved yield on the Company's securities portfolio, and lower funding costs. Average loans grew $116 million, or 5%, from the previous quarter and were funded largely through maturing cash flows from the securities portfolio. Although average deposits were down $1 million, or .02%, from the prior quarter, the mix of deposits was favorably changed as transaction deposits grew by $21 million, while time deposits were down $22 million. The loan to deposit ratio for the third quarter of 2003 improved to 67% from 63% in the previous quarter. The yield on the Company's $1.4 billion securities portfolio improved 8 basis points to 4.22%. The portfolio's effective duration was a relatively short 2.39 at September 30, 2003, an increase from the 1.90 reported at June 30, 2003. Finally, the Company was able to reduce its overall funding costs by 12 basis points from the prior quarter, largely through a 15 basis point reduction in the cost of interest-bearing deposits.
The following tables detail the components of the Company's net interest spread and net interest margin.
Three Months Ended Sept. 30, Three Months Ended Sept. 30,
---------------------------------------- -----------------------------------------
2003 2002
---------------------------------------- -----------------------------------------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
--------- ------------ ------- --------- ------------- -------
Average Earning Assets
Commercial & real estate loans (TE) $16,695 $1,159,338 5.71% $17,224 $1,004,067 6.81%
Mortgage loans 5,596 367,134 6.10% 4,460 252,351 7.07%
Consumer loans 15,858 762,444 8.25% 16,671 729,307 9.07%
Loan fees & late charges 3,341 - 0.00% 2,248 - 0.00%
--------- ------------ ------- --------- ------------- -------
Total loans (TE) 41,490 2,288,917 7.20% 40,603 1,985,726 8.12%
US treasury securities 77 10,194 2.98% 416 50,452 3.27%
US agency securities 4,705 468,048 4.02% 6,322 538,059 4.70%
CMOs 3,134 364,045 3.44% 6,796 575,653 4.72%
Mortgage backed securities 3,708 393,160 3.77% 1,374 92,096 5.97%
Municipals (TE) 3,483 198,557 7.02% 3,943 219,373 7.19%
Other securities 303 27,528 4.40% 622 36,118 6.83%
--------- ------------ ------- --------- ------------- -------
Total securities (TE) 15,410 1,461,532 4.22% 19,473 1,511,750 5.15%
Fed funds sold 64 26,105 0.98% 164 39,638 1.65%
Cds with banks 12 6,766 0.68% 10 5,101 0.80%
Other short-term investments - - 0.00% 9 1,739 2.16%
--------- ------------ ------- --------- ------------- -------
Total short-term investments 76 32,870 0.91% 184 46,478 1.57%
Average earning assets yield (TE) $56,975 $3,783,319 5.99% $60,260 $3,543,954 6.77%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $4,060 $1,689,865 0.95% $6,114 $1,427,413 1.70%
Time deposits 8,950 1,120,946 3.17% 10,285 1,134,825 3.60%
--------- ------------ ------- --------- ------------- -------
Total interest bearing deposits 13,010 2,810,811 1.84% 16,399 2,562,238 2.54%
Customer repos 394 187,033 0.84% 574 172,973 1.32%
Other borrowings 485 56,186 3.42% 624 55,784 4.44%
--------- ------------ ------- --------- ------------- -------
Total borrowings 879 243,219 1.43% 1,198 228,757 2.08%
Total interest bearing liab cost $13,889 $3,054,030 1.80% $17,597 $2,790,995 2.50%
Noninterest-bearing deposits 616,689 616,347
Other net interest-free funding sources 112,601 136,612
Total Cost of Funds $13,889 $3,783,319 1.46% $17,597 $3,543,954 1.97%
Net Interest Spread (TE) $43,087 4.19% $42,663 4.26%
Net Interest Margin (TE) $43,087 $3,783,319 4.54% $42,663 $3,543,954 4.80%
--------- ------------ ------- --------- ------------- -------
Page 15 of 23
Nine Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------- -------------------------------------
2003 2002
------------------------------------- -------------------------------------
(dollars in thousands)
Interest Volume Rate Interest Volume Rate
---------- -------------- ------- --------- ----------- --------
Average Earning Assets
Commercial & real estate loans (TE) $49,137 $1,107,455 5.93% $49,952 $975,272 6.85%
Mortgage loans 15,427 331,491 6.20% 12,730 235,190 7.22%
Consumer loans 47,245 746,748 8.46% 49,696 718,431 9.25%
Loan fees & late charges 8,645 - 0.00% 6,772 - 0.00%
---------- -------------- ------- --------- ----------- --------
Total loans (TE) 120,453 2,185,694 7.36% 119,150 1,928,893 8.26%
US treasury securities 889 36,040 3.30% 1,189 47,782 3.33%
US agency securities 15,076 480,172 4.19% 19,577 532,976 4.90%
CMOs 11,641 479,343 3.24% 20,360 557,441 4.87%
Mortgage backed securities 8,549 275,934 4.13% 4,414 98,738 5.96%
Municipals (TE) 10,731 200,747 7.13% 12,095 224,725 7.18%
Other securities 906 28,841 4.19% 1,645 38,290 5.73%
---------- -------------- ------- --------- ----------- --------
Total securities (TE) 47,791 1,501,077 4.25% 59,281 1,499,953 5.27%
Fed funds sold 513 59,591 1.15% 645 51,896 1.66%
Cds with banks 33 6,280 0.69% 162 8,422 2.58%
Other short-term investments 65 7,231 1.21% 449 33,670 1.78%
---------- -------------- ------- --------- ----------- --------
Total short-term investments 611 73,103 1.12% 1,256 93,988 1.79%
Average earning assets yield (TE) $168,855 $3,759,873 6.00% $179,686 $3,522,834 6.81%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $13,847 $1,676,010 1.10% $18,794 $1,414,671 1.78%
Time deposits 27,788 1,128,773 3.29% 32,980 1,131,613 3.89%
---------- -------------- ------- --------- ----------- --------
Total interest bearing deposits 41,635 2,804,784 1.98% 51,774 2,546,284 2.72%
Customer repos 1,103 178,550 0.83% 1,675 169,831 1.32%
Other borrowings 1,694 54,468 4.16% 1,842 54,738 4.50%
---------- -------------- ------- --------- ----------- --------
Total borrowings 2,798 233,018 1.61% 3,517 224,569 2.09%
Total interest bearing liab cost $44,432 $3,037,801 1.96% $55,291 $2,770,853 2.67%
Noninterest-bearing deposits 599,697 616,256
Other net interest-free funding sources 122,375 135,725
Total Cost of Funds $44,432 $3,759,873 1.58% $55,291 $3,522,834 2.10%
Net Interest Spread (TE) $124,422 4.04% $124,396 4.14%
Net Interest Margin (TE) $124,422 $3,759,873 4.42% $124,396 $3,522,834 4.71%
---------- -------------- ------- --------- ----------- --------
Page 16 of 23
Provision for Loan Losses
The amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by allowances acquired in acquisitions and recoveries of loans previously charged-off. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with the bank's loan portfolio. A specific loan is charged-off when management believes, after considering, among other things, the borrower's financial condition and the value of any collateral, that collection of the loan is unlikely.
The following information is useful in determining the adequacy of the loan loss allowance and loan loss provision. The ratios are calculated using average loan balances. (Amounts shown are in thousands.)
At and For the
--------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ ---------------------------------
2003 2002 2003 2002
-------------- ------------ ------------- --------------
Annualized net charge-offs to average loans 0.52% 0.51% 0.58% 1.01%
Annualized provision for loan losses to average
loans (1) 0.69% 0.72% 0.67% 0.96%
Average allowance for loan losses to average loans 1.55% 1.64% 1.60% 1.71%
Gross charge-offs (2) $ 4,538 $ 4,113 $ 14,097 $ 18,886
Gross recoveries $ 1,560 $ 1,566 $ 4,633 $ 4,380
Non-accrual loans $ 13,988 $ 12,373 $ 13,988 $ 12,373
Accruing loans 90 days or more past due $ 4,439 $ 5,234 $ 4,439 $ 5,234
(1) The 2003 provision decreased as a result of management's periodic review of the allowance for
loan losses. This review considered the effect of changes in the mix and the size of the loan
portfolio. Provision for loan losses was significantly higher in 2002 as the reserve was
replenished for large credits written off that were due to the Lamar Bank acquisition in 2001.
As overall credit quality has improved, the need for higher reserves has decreased.
(2) Gross charge-offs were higher in 2002 primarily due to the removal of credits acquired in the
Lamar Capital Corporation acquisition that were determined to be uncollectible.
Non-Interest Income
Non-interest income for the third quarter of 2003 was up $1.4 million, or 8%, compared to the same quarter a year ago and was also up $1.4 million, or 8%, compared to the previous quarter. The primary factors impacting the higher levels of non-interest income as compared to the prior quarter were higher service charges on deposit accounts (up $915,000), secondary mortgage market operations (up $913,000) and, other income (up $558,000). Driving the higher levels of non-interest income from the same quarter a year ago were increases in insurance fees (up $191,000), investment & annuity fees (up $115,000) and secondary mortgage market operations (up $294,000). In addition, other income increased $686,000 primarily due to recording income on bank owned life insurance, which was purchased during the third quarter of 2003. The investment in these life insurance policies totaled approximately $51 million at September 30, 2003 and is included in "other assets" on the consolidated balance sheet.
The second quarter 2003 level of non-interest income include a pretax net securities gain of $659,000, related to the sale of $50 million of U.S. Treasury and Agency securities with near-term maturity dates. The Company did not record any net securities gains during the third quarter 2003. Also included in the second quarter 2003 was a mortgage servicing rights temporary impairment write-down of $850,000. No additional write-down related to the Company's mortgage servicing operations was recorded in the current quarter.
Page 17 of 23
The components of non-interest income for the three months and nine months ended September 30, 2003 and 2002 are presented in the following table.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- --------------------------------------
(dollars in thousands) 2003 2002 2003 2002
--------------- ------------- --------------- ------------------
Service charges on deposit accounts $ 11,117 $ 11,080 $ 31,474 $ 31,095
Trust fees 1,776 1,785 5,748 5,700
Credit card merchant discount fees 882 792 2,773 2,434
Insurance fees 841 650 2,193 1,753
Investment & annuity fees 970 855 2,741 3,867
ATM fees 1,021 1,003 2,978 2,833
Secondary mortgage market operations 710 416 1,146 1,634
Other income 1,774 1,088 4,379 3,262
Securities transactions gains - 5 1,114 5
--------------- ------------- --------------- ------------------
Total non-interest income $ 19,091 17,674 $ 54,546 $ 52,583
=============== ============= =============== ==================
Non-Interest Expense
Operating expenses for the third quarter of 2003 were $1.2 million, or 3%, higher compared to the same quarter a year ago and were $1.1 million, or 3%, higher than the previous quarter. Increases over the prior quarter were reflected in personnel (up $585,000) and occupancy & equipment (up $456,000). The increases from the same quarter a year ago were also concentrated in personnel expense (up $1.8 million), occupancy & equipment (up $491,000), but were partly offset by a decrease in other operating expense.
The Company's efficiency ratio (expressed as non-interest income as a percent of total revenue before securities transactions and amortization of purchased intangibles) decreased to 57.90% in the third quarter of 2003. This was compared to 57.97% for the same quarter a year ago, and 60.09% for the previous quarter. The Company's number of full service banking facilities was reduced by 2 during the third quarter and stands at 102 as of September 30, 2003. One facility was sold (Hineston Branch in central Louisiana), while another was merged into an existing facility (Beau Chene Branch in St. Tammany Parish, Louisiana). In addition, the Company's number of full-time equivalent employees was 1,751 at September 30, 2003, a reduction of 22 from one year ago.
The following table presents the components of non-interest expense for the three months and nine months ended September 30, 2003 and 2002.
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Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -------------------------------
(dollars in thousands) 2003 2002 2003 2002
-------------- ------------ ------------- -------------
Employee compensation $ 16,956 $ 16,070 $ 49,906 $ 47,044
Employee benefits 4,335 3,441 12,261 11,528
-------------- ------------ ------------- -------------
Total personnel expense 21,291 19,511 62,167 58,572
-------------- ------------ ------------- -------------
Equipment and data processing expense 4,356 3,846 12,048 11,045
Net occupancy expense 2,512 2,220 6,923 6,331
Postage and communications 2,020 2,002 6,293 5,829
Ad valorem and franchise taxes 840 1,441 2,265 3,876
Legal and professional services 946 1,009 2,735 3,135
Stationery and supplies 400 518 1,355 1,460
Amortization of intangible assets 352 188 708 563
Advertising 1,394 752 3,047 2,812
Deposit insurance and regulatory fees 222 222 653 662
Training expenses 117 181 368 419
Other real estate owned expense 527 1,039 1,062 2,020
Other expense 1,375 2,234 5,016 6,096
-------------- ------------ ------------- -------------
Total non-interest expense $ 36,352 $ 35,163 $ 104,640 $ 102,820
============== ============ ============= =============
Income Taxes
The effective federal income tax rate of the Company continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income. The amount of tax-exempt income earned during the first nine months of 2003 was $10.1 million compared to $10.6 million for the comparable period in 2002.
Net Earnings Per Common Share
Following is a summary of the information used in the computation of earnings per common share (in thousands).
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ----------- ----------- ------------
Net earnings - used in computation of diluted
earnings per common share $ 13,661 $ 13,290 $ 39,707 $ 37,293
Preferred dividend requirement 663 663 1,990 1,990
------------- ----------- ----------- ------------
Net earnings available to common stockholders -
used in computation of basic earnings
per common share $ 12,998 $ 12,627 $ 37,717 $ 35,303
============= =========== ============ ============
Weighted average number of common shares
outstanding - used in computation of
basic earnings per common share 15,312 15,709 15,391 15,825
Effect of dilutive securities
Stock options 231 232 220 185
Convertible preferred stock 1,106 1,106 1,106 1,106
------------- ----------- ----------- ------------
Weighted average number of common shares
outstanding plus effect of dilutive
securities - used in computation of
diluted earnings per common share 16,649 17,047 16,717 17,116
============= =========== ============ ============
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Recent Accounting Pronouncement
In May 2003 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" which is effective for financial statements issued for periods beginning after June 15, 2003. The statement provides for, among other things, that certain preferred stocks be shown as a liability. The company has analyzed the terms of its preferred stock and determined that no reclassification is required by this new Statement.
Forward Looking Information
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 disclosures that protects the companies from unwarranted litigation if the actual results are different from management expectations. This report contains forward-looking statements and reflects management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause the Company's actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net earnings are dependent, in part, 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 interest income.
In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. The Company's interest rate management policy is designed to produce a relatively stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews 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 and the fair value of the Company's investment securities.
In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase 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 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 a material portion of such accounts may be more resistant to changes in interest rates than are certificate accounts. At September 30, 2003 the Company had $256.1 million of regular savings and club accounts and $1.1 billion of money market and NOW accounts, representing 49.7% of total interest-bearing depositor accounts.
Even though permissible under the Asset Liability Management Policy approved by the Board of Directors, the Company is not currently engaged in the use of derivatives to control interest rate risk. Management and the Board of Directors review the need for such activities on a regular basis as part of its monthly interest rate risk analysis.
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.
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ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2003, (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PART II - OTHER INFORMATION
ITEM 6. EXHIITS AND REPORTS ON FORM 8-K
Exhibits:
1. Exhibit 31 - Rule 13a-14(a) / 15d-14(a) Certifications
2. Exhibit 32 - Section 1350 Certifications
Reports on Form 8-K:
1. A Form 8-K was filed on July 24, 2003 for the purpose of announcing, by press release, earnings for the
second quarter ended June 30, 2003.
2. A Form 8-K was filed on August 13, 2003 for the purpose of announcing, by press release, an agreement
between Hancock Bank and Union Planters Corporation, Memphis, TN, in which Hancock
would buy Magna Insurance Company, a wholly owned subsidiary of Union Planters
Corporation.
3. A Form 8-K was filed August 15, 2003 for the purpose of announcing, by press release, that the Company's
board of Directors approved a regular third quarter 2003 common stock cash dividend
of $0.23 per share, an increase of $0.02 per common share.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HANCOCK HOLDING COMPANY
-------------------------------
Registrant
November 13, 2003 By:
- -------------------- --------------------------------------
Date George A. Schloegel
Vice-Chairman of the Board and
Chief Executive Officer
November 13, 2003 By:
- -------------------------- --------------------------------------
Date Carl J. Chaney
Executive Vice President and
Chief Financial Officer
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