HANCOCK HOLDING COMPANY AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (amounts in thousands) At and For the Years Ended December 31, ------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------------- Period-End Balance Sheet Data: Securities $1,278,049 $1,486,810 $1,372,794 $ 994,095 $1,148,722 Short-term investments 11,288 47,257 100,433 62,877 3,100 Loans, net of unearned income 2,448,644 2,104,982 1,890,039 1,699,841 1,541,521 Total earning assets 3,737,981 3,639,049 3,363,266 2,756,813 2,693,343 Allowance for loan losses 36,750 34,740 34,417 28,604 25,713 Total assets 4,150,358 3,973,147 3,679,845 3,013,430 2,991,874 Total deposits 3,447,847 3,301,500 3,039,734 2,503,788 2,397,653 Short-term notes 9,400 - - - - Long-term notes 50,428 51,020 51,606 2,177 2,714 Total preferred stockholders' equity 37,067 37,069 37,069 - - Total common stockholders' equity 397,814 387,513 367,548 341,390 310,427 Average Balance Sheet Data: Securities $1,466,156 $1,493,574 $1,220,074 $1,090,558 $1,251,971 Short-term investments 57,986 83,427 119,832 42,672 28,845 Loans, net of unearned income 2,238,245 1,961,299 1,792,559 1,611,046 1,455,086 Total earning assets 3,762,387 3,538,300 3,132,465 2,744,276 2,735,902 Allowance for loan losses 35,391 33,135 32,487 26,591 23,939 Total assets 4,111,949 3,857,698 3,416,044 2,993,972 3,006,195 Total deposits 3,407,205 3,174,946 2,820,351 2,477,916 2,505,531 Short-term notes 26 - - - - Long-term notes 50,677 51,299 31,569 2,426 2,795 Total preferred stockholders' equity 37,069 37,069 16,733 - - Total common stockholders' equity 396,034 388,821 359,097 325,508 308,854 Performance Ratios: Return on average assets 1.34% 1.32% 1.15% 1.23% 1.05% Return on average assets excluding gain on sale of credit cards, securities transactions and merger- related costs 1.31% 1.32% 1.16% 1.15% 1.05% Return on average common equity 13.88% 13.13% 10.93% 11.31% 10.27% Return on average common equity excluding gain on sale of credit cards, securities transactions and merger-related costs 13.60% 13.13% 10.56% 10.56% 10.25% Net interest margin (te)* 4.45% 4.70% 4.50% 4.70% 4.73% Average loans to average deposits 65.69% 61.77% 63.56% 65.02% 58.07% Non-interest expense as a percent of total revenue (te) and excluding amortization of intangibles and securities transactions 57.83% 57.83% 60.07% 57.91% 63.21% Non-interest expense as a percent of total revenue (te) and excluding amortization of intangibles, securities transactions, gain on sale of credit cards and merger-related costs 57.83% 57.83% 59.73% 59.13% 63.21% Allowance for loan losses to period-end loans 1.50% 1.65% 1.82% 1.68% 1.67% Non-performing assets to loans plus other real estate 0.73% 0.84% 1.07% 0.69% 0.56% Allowance for loan losses to non-performing loans and accruing loans 90 days past due 169.73% 143.48% 104.54% 136.53% 196.12% Net charge-offs to average loans 0.59% 0.91% 0.65% 0.59% 0.59% FTE employees (period end) 1,734 1,790 1,736 1,590 1,664 *Tax Equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%
Page 1 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (amounts in thousands) At and For the Years Ended December 31, ------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------------- Capital Ratios: Average common stockholders' equity to 9.63 10.08 10.51 10.87 10.27 average assets Common stockholders' equity to total assets 9.59 9.75 9.99 11.33 10.38 Tier 1 leveraged 9.29 9.19 8.50 10.24 9.61 Tier 1 risk-based 14.21 14.88 14.47 15.50 15.60 Total risk-based 15.60 16.11 15.73 16.75 16.85 Income Data: Interest income $218,149 $230,781 $234,870 $216,947 $ 207,675 Interest expense 57,961 72,053 101,362 94,251 83,961 Net interest income 160,188 158,728 133,508 122,696 123,713 Net interest income (te) 167,358 166,190 140,941 128,981 129,375 Provision for loan losses 15,154 18,495 9,082 12,609 8,688 Non-interest income (excluding securities trans- actions and gain on sale of credit cards) 73,089 71,589 54,326 48,695 45,545 Securities transactions 1,667 4 18 3 67 Gain on sale of credit card portfolio - - - 3,753 - Non-interest expense (excluding merger-related costs) 140,208 138,258 120,982 108,818 114,340 Merger-related costs - - 670 - Earnings before income taxes 79,582 73,569 57,118 53,720 46,298 Net earnings 54,955 51,043 39,255 36,824 31,710 Net earnings available to common stockholders 52,302 48,390 37,928 36,824 31,710 Per Common Share Data: Net earnings: Basic $ 3.41 $ 3.07 $ 2.36 $ 2.26 $ 1.94 Diluted 3.29 3.00 2.36 2.26 1.94 Cash dividends paid 0.88 0.80 0.75 0.83 0.67 Book value to common $ 26.13 $ 25.09 $ 23.13 $ 21.19 $ 19.03 Dividend payout ratio 25.81% 26.06% 31.78% 36.73% 34.54% Weighted average number of shares outstanding Basic 15,357 15,743 16,047 16,290 16,331 Diluted 16,705 17,042 16,639 16,301 16,352 Number of shares outstanding (period end) 15,225 15,443 15,893 16,110 16,310 Market data: High closing price $ 58.50 $ 50.37 $ 29.97 $ 27.92 $ 32.00 Low closing price 42.00 27.56 23.33 19.17 24.75 Period-end closing price 54.57 44.65 28.69 25.50 25.83 Trading volume 5,703 9,406 3,275 3,375 2,978
Page 2 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES Summary of Quarterly Operating Results (unaudited, in thousands, except per share data) ---------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First ---------------------------------------------------------------------------------------- Interest income (te) $56,464 $56,976 $56,400 $ 55,479 $58,557 $60,260 $59,931 $59,496 Interest expense (13,529) (13,889) (14,962) (15,581) (16,762) (17,597) (18,373) (19,320) --------- -------- --------- --------- -------- --------- --------- -------- Net interest income (te) 42,935 43,087 41,438 39,898 41,795 42,663 41,558 40,176 Provision for loan losses (4,180) (3,988) (3,966) (3,020) (4,691) (3,597) (4,879) (5,329) Non-interest income 20,210 19,091 17,661 17,794 19,011 17,674 17,519 17,390 Non-interest expense (35,568) (36,352) (35,297) (32,991) (35,438) (35,163) (34,063) (33,596) Taxable equivalent adjustment (1,767) (1,767) (1,773) (1,862) (1,855) (1,856) (1,860) (1,891) --------- -------- --------- --------- -------- --------- --------- -------- Earnings before income taxes 21,630 20,071 18,063 19,819 18,822 19,72l 18,275 16,750 Income taxes (6,382) (6,409) (5,681) (6,156) (5,072) (6,430) (5,694) (5,329) --------- -------- --------- --------- -------- --------- --------- -------- Net earnings $15,248 $13,662 $12,382 $13,663 $13,750 $13,291 $12,581 $11,421 ========= ======== ========= ========= ======== ========= ========= ========= Basic earnings per common share: Net earnings $0.96 $0.85 $0.76 $0.84 $0.84 $0.80 $0.75 $0.68 Net earnings excluding gain on sales of securities 0.92 0.85 0.72 0.81 0.84 0.80 0.75 0.68 Diluted earnings per common share: Net earnings 0.91 0.82 0.74 0.82 0.82 0.78 0.73 0.67 Net earnings excluding gain on sales of securities 0.88 0.82 0.70 0.79 0.82 0.78 0.73 0.67Market Information
The Company's common stock trades on the Nasdaq Stock Market under the symbol "HBHC" and is quoted in publications under "HancHd". The following table sets forth the high and low sale prices of the Company's common stock as reported on the Nasdaq Stock Market. These prices do not reflect retail mark-ups, mark-downs or commissions.
Cash High Low Dividends Sale Sale Paid -------- ------- ---------- 2003 4th quarter 58.50 49.35 0.23 3rd quarter 51.69 46.01 0.23 2nd quarter 49.25 42.00 0.21 1st quarter 46.94 42.80 0.21 2002 4th quarter 50.37 42.00 0.20 3rd quarter 49.73 39.33 0.20 2nd quarter 45.13 35.17 0.20 1st quarter 36.17 27.56 0.20
There were 5,478 registered holders and approximately 9,134 unregistered holders of common stock of the Company at January 2, 2004 and 16,618,120 shares issued. On January 2, 2004, the high and low sale prices of the Company's common stock as reported on the Nasdaq Stock Market were $55.87 and $54.98, respectively. The principal source of funds to the Company to pay cash dividends is the dividends received from the Hancock Bank, Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana (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 to the Company by Hancock Bank are subject to approval by the Commissioner of Banking and Consumer Finance of the State of Mississippi and those paid by Hancock Bank of Louisiana are subject to approval by the Commissioner for Financial Institutions of the State of Louisiana. The Company's management does not expect regulatory restrictions to affect its policy of paying cash dividends. Although no assurance can be given that Hancock Holding Company will continue to declare and pay regular quarterly cash dividends on its common stock, the Company has paid regular cash dividends since 1937.
Page 3 of 37
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
_____________________________________________________________________________________________________________________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 2003 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, 2003, the Company's system of internal control is adequate to accomplish the objectives discussed above.
INDEPENDENT AUDITORS' REPORT____________________________________________________________________________________________________________Board of Directors and Stockholders
Hancock Holding Company
Gulfport, Mississippi
We have audited the accompanying consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLPNew Orleans, Louisiana
January 19, 2004
Page 4 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data) December 31, ---------------------------------- 2003 2002 -------------- -------------- Assets: Cash and due from banks $ 178,082 $ 187,786 Interest-bearing deposits with other banks 5,554 4,268 Securities available for sale, at fair value (amortized cost of $1,115,404 and $1,233,460) 1,118,066 1,258,831 Securities held to maturity, at amortized cost (fair value of $169,451 and $238,196) 159,983 227,979 Federal funds sold 5,734 42,989 Loans 2,459,143 2,114,486 Less: Allowance for loan losses (36,750) (34,740) Unearned income (10,499) (9,504) -------------- -------------- Loans, net 2,411,894 2,070,242 Property and equipment, net 73,332 71,355 Other real estate, net 5,439 5,936 Accrued interest receivable 23,125 25,480 Goodwill, net 49,100 49,100 Other intangible assets, net 8,131 7,266 Life insurance contracts 51,165 - Other assets 60,753 21,915 -------------- -------------- Total Assets $ 4,150,358 $ 3,973,147 ============== ============== Liabilities, Preferred Stock and Common Stockholders' Equity: Deposits: Non-interest bearing demand $ 636,745 $ 630,790 Interest-bearing savings, NOW, money market and time 2,811,102 2,670,710 -------------- -------------- Total deposits 3,447,847 3,301,500 Securities sold under agreements to repurchase 150,096 161,058 Short-term notes 9,400 - Long-term notes 50,428 51,020 Other liabilities 57,706 34,987 -------------- -------------- Total Liabilities 3,715,477 3,548,565 Commitments and contingencies (notes 15 and 16) - - Preferred Stock-$20 par value, 50,000,000 shares authorized and 1,658,187 shares issued-redemption value $33,163,740 37,067 37,069 Common Stockholders' Equity: Common stock - $3.33 par value per share; 75,000,000 shares authorized, 16,608,120 shares issued 55,305 55,305 Capital surplus 145,125 145,950 Retained earnings 247,001 208,253 Accumulated other comprehensive income (6,304) 10,049 Unearned compensation (957) (552) Treasury stock, 1,095,551 shares in 2003 and 881,607 shares in 2002, at cost (42,356) (31,492) -------------- -------------- Total Common Stockholders' Equity 397,814 387,513 -------------- -------------- Total Liabilities, Preferred Stock and Common Stockholders' Equity $ 4,150,358 $ 3,973,147 ============== ============== See notes to consolidated financial statements.
Page 5 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands, except share data) Years Ended December 31, ------------------------------------------- 2003 2002 2001 ------------ ----------- ----------- Interest Income: Loans $159,367 $157,292 $ 162,049 U.S. Treasury securities 948 1,605 3,023 Obligations of U.S. government agencies 19,162 25,468 24,951 Obligations of states and political subdivisions 9,358 10,625 9,660 Mortgage-backed securities 12,558 5,617 8,992 CMOs 14,905 26,636 19,428 Federal funds sold 532 790 4,981 Other investments 1,319 2,748 1,786 ------------ ----------- ----------- Total interest income 218,149 230,781 234,870 ------------ ----------- ----------- Interest Expense: Deposits 54,191 67,385 94,525 Federal funds purchased and securities sold under agreements to repurchase 1,509 2,243 6,659 Long-term notes and other interest 2,261 2,425 178 ------------ ----------- ----------- Total interest expense 57,961 72,053 101,362 ------------ ----------- ----------- Net Interest Income 160,188 158,728 133,508 Provision for loan losses 15,154 18,495 9,082 ------------ ----------- ----------- Net interest income after provision for loan losses 145,034 140,233 124,426 ------------ ----------- ----------- Non-Interest Income: Service charges on deposit accounts 42,544 42,246 30,408 Trust fees 7,724 7,603 6,454 Investment and annuity fees 3,615 4,722 3,444 Insurance commissions and fees 2,750 2,312 1,371 ATM fees 3,994 3,771 3,327 Secondary mortgage market operations 1,728 2,409 1,560 Credit card merchant discount fees 3,643 3,284 2,734 Securities gains, net 1,667 4 18 Other income 7,091 5,242 5,028 ------------ ----------- ----------- Total non-interest income 74,756 71,593 54,344 ------------ ----------- ----------- Non-Interest Expense: Salaries and employee benefits 81,409 77,300 67,622 Net occupancy expense of premises 9,286 8,535 8,175 Equipment rentals, depreciation and maintenance 9,097 8,802 7,842 Amortization of intangibles 1,148 750 4,349 Other expense 39,268 42,871 33,664 ------------ ----------- ----------- Total non-interest expense 140,208 138,258 121,652 ------------ ----------- ----------- Earnings Before Income Taxes 79,582 73,569 57,118 Income taxes 24,627 22,526 17,863 ------------ ----------- ----------- Net Earnings 54,955 51,043 39,255 Preferred dividends 2,653 2,653 1,327 ------------ ----------- ----------- Net Earnings Available to Common Stockholders $ 52,302 $ 48,390 $ 37,928 ============ =========== =========== Basic earnings per common share $ 3.41 $ 3.07 $ 2.36 ============ =========== =========== Diluted earnings per common share $ 3.29 $ 3.00 $ 2.36 ============ =========== =========== See notes to consolidated financial statements
Page 6 of 37
Start Here HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (amounts in thousands, except share data) Accumulated Other Common Capital Retained Comprehensive Unearned Treasury Stock Surplus Earnings Income (Loss) Compensation Stock ----------- ----------- ----------- ------------- ------------ ---------- Balance, January 1, 2001 $ 55,305 $ 146,107 $ 146,851 $ (1,461) $ (844) $ (4,567) Net earnings 39,255 Cash dividends - $0.75 per share (12,195) Cash dividends - $0.80 per preferred share (1,327) Change in unrealized gain on securities available for sale, net 6,203 Transactions relating to restricted stock grants, rid 411 Treasury stock transactions, net 145 (6,335) ----------- ----------- ----------- ------------- ------------ ---------- Balance, December 31, 2001 55,305 146,252 172,584 4,742 (433) (10,902) Net earnings 51,043 Cash dividends - $0.80 per corrrrwn share (12,721) Cash dividends - $1.60 per preferred share (2,653) Minimum pension liability adjustment, net (6,442) Change in unrealized gain on securities available for sale, net 11,749 Transactions relating to restricted stock grants, net (119) Treasury stock transactions, net (302) (20,590) ----------- ----------- ----------- ------------- ------------ ---------- Balance, December 31, 2002 55,305 145,950 208,153 10,049 (552) (31,492) Net earnings 54,955 Cash dividends - $0.88 per common share (13, 554) Cash dividends - $1.60 per preferred share (2,653) Minimum pension liability adjustment, net (1,574) Change in unrealized gain on securities available for sale, net (14,779) Transactions relating to restricted stock grants, net (405) Treasury stock transactions, net (825) (10,864) ----------- ----------- ----------- ------------- ------------ ---------- Balance, December 31,2003 $ 55,305 $ 145,125 $ 247,001 $ (6,304) $ (957) $ (42,356) =========== =========== =========== ============= ============ ========== HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (amounts in thousands) Years Ended December 31, -------------------------------------------- 2003 2002 2001 ------------- ------------- ------------- Net earnings $ 54,955 $ 51,043 $ 39,255 Other comprehensive earnings: Minimum pension liability adjustment, net (1,574) (6,442) Unrealized (loss) gain on securities available for sale, net: Unrealized holding (losses) gains arising during the year (13,695) 11,752 6,127 Reclassification adjustments for losses (gains) included in net earnings (1,084) (3) 76 ------------- ------------- ------------- Total other comprehensive (loss) earnings (16,353) 5,307 6,203 ------------- ------------- ------------- Total Comprehensive Earnings $ 38,602 $ 56,350 $ 45,458 ============= ============= ============= See notes to consolidated financial statements.
Page 7 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) Years Ended December 31, ------------------------------------------------- 2003 2002 2001 -------------- -------------- ------------- Cash Flows from Operating Activities: Net earnings $ 54,955 $ 51,043 $ 39,255 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of software 9,882 8,791 8,442 Provision for loan losses 15,154 18,494 9,082 Provision for losses on other real estate owned 1,068 1,587 121 Provision for deferred income taxes 150 1,626 1,463 Amortization of securities 11,366 5,631 1,812 Gains on sales of securities available for sale (1,667) (4) (18) Amortization of intangible assets 1,148 750 4,349 Decrease in interest receivable 2,355 2,380 1,018 Decrease in interest payable (1,303) (3,672) (2,909) Other, net (7,071) 3,298 (7,054) -------------- -------------- ------------- Net cash provided by operating activities 86,037 89,924 55,561 -------------- -------------- ------------- Cash Flows from Investing Activities: Net (increase) decrease in interest-bearing time deposits (1,286) 4,165 (4,566) Proceeds from maturities of securities held to maturity 67,780 59,101 129,991 Purchase of securities held to maturity - - - Proceeds from sales and maturities of available-for-sale securities 1,353,722 643,774 456,511 Purchase of securities available for sale (1,245,149) (804,446) (788,247) Net decrease (increase) in federal funds sold 37,255 49,011 (12,225) Net (increase) decrease in loans (363,633) (237,278) 9,350 Purchase of property, equipment and software, net (9,167) (10,861) (12,451) Proceeds from sales of other real estate 4,911 4,950 4,442 Purchase of bank owned life insurance (50,000) - - Net cash received (used) in business acquisitions 32,769 - (52) -------------- -------------- ------------- Net cash used by investing activities (172,798) (291,584) (217,247) -------------- -------------- ------------- Cash Flows from Financing Activities: Net increase in deposits 107,106 261,766 219,625 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (10,962) (275) 16,772 Advances of short-term notes 9,400 - - Repayments of long-term notes (592) (586) (20,572) Dividends paid (16,207) (15,375) (13,522) Treasury stock transactions, net (11,688) (20,892) (6,189) -------------- -------------- ------------- Net cash provided by financing activities 77,057 224,638 196,114 -------------- -------------- ------------- Net (decrease) increase in cash and due from banks (9,704) 22,978 34,428 Cash and due from banks, beginning 187,786 164,808 130,380 -------------- -------------- ------------- Cash and due from banks, ending $ 178,082 $ 187,786 $ 164,808 ============== ============== ============= Supplemental Information: Income taxes paid $ 22,839 $ 19,731 $ 16,050 Interest paid 59,264 75,725 104,271 Supplemental Information of Non-cash Investing and Financing Activities: Issuance of redeemable preferred stock in connection with acquisition of a business $ - $ - $ 37,069 Transfers from loans to other real estate 7,068 9,924 3,295 See notes to consolidated financial statements
Page 8 of 37
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 PoliciesThe 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, 2003.
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 option date 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 37
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.
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, 2003 and 2002.
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 years ended December 31, 2003 and 2002. Goodwill amortization amounted to approximately $3.6 million in 2001. Goodwill amortization is not deductible for income tax purposes.
Other Intangible Assets - Other intangible assets consist of core deposit intangibles and mortgage servicing rights. 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 $2.5 million and $1.4 million at December 31, 2003 and 2002, respectively. Mortgage servicing rights are rights to service mortgage loans for others, whether the loans were acquired through purchase or loan origination. Purchased mortgage servicing rights are capitalized at cost. For loans originated and sold, where the servicing rights have been retained, the Company allocates the cost of the loan and servicing right based on their relative fair values. Mortgage servicing rights are amortized over the estimated period of the related net servicing income. Impairment for mortgage servicing rights, if any, is tested periodically and is recognized through a valuation allowance.
Life Insurance Contracts - Life insurance contracts represent single premium life insurance contracts on the lives of certain officers of the Company. The Company is the beneficiary of these policies, which were purchased during the third quarter of 2003 for $50.0 million. These contracts are reported at their cash surrender value of $51.2 million and changes in the cash surrender value are included in other income and amounted to $1.2 million in 2003.
Self Insurance - The Company is self insured for certain risks including employee health insurance and records appropriate liabilities for these risks.
Transfers of Financial Assets - The Company recognizes the financial and servicing assets it controls and the liabilities it incurs, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. All measurements and allocations are based on fair value.
Trust 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 SFAS No. 123 "Accounting for Stock Based Compensation" 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
Page 10 of 37
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.
Accounting Pronouncements - In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 provides that certain financial instruments previously categorized as equity may need to be reclassified as liabilities. Such instruments include equity shares with mandatory redemption features, and instruments, other than outstanding equity shares, that represent an obligation to repurchase equity shares or an obligation that must or may be settled by issuing a variable number of equity shares. The Company has analyzed the terms of its preferred stock and determined that no reclassification is required by this statement. As indicated in Note 8, the Company has called its preferred stock for redemption on February 4, 2004.
In late 2002 and early 2003, the FASB issued two interpretations of existing accounting principles. FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," elaborated on disclosures an entity should make about its obligations under certain guarantees and clarified that a guarantor should recognize a liability for the fair value of the obligations when a guarantee is first issued. The only significant guarantees issued by the Company that have been identified as subject to the guidance of FIN No. 45 are its standby letters of credit. The requirement to recognize a liability was effective for those guarantees issued or modified beginning in 2003. Given the current volume and type of guarantees issued, the amount of the liability required to be reported at December 31, 2003 was insignificant. Note 15 provides information on off-balance sheet financial instruments.
FIN No. 46, "Consolidation of Variable Interest Entities," was issued in response to perceived weaknesses in the accounting for special-purpose entities, in particular the possibility that a controlling financial interest in such an entity might not result in consolidation of the entity with the holder of the interest. The specific entities to which FIN No. 46 refers are called "variable interest entities," and the interpretation explains how to identify a variable interest entity and how an enterprise should assess its interest in such an entity to decide whether consolidation is appropriate. The Company has no interests that would require consolidation under the guidance of FIN No. 46.
Reclassifications - Certain prior year amounts have been reclassified to conform to the 2003 presentation.
NOTE 2 - ACQUISITIONS AND GOODWILLOn December 31, 2003, the Company completed the acquisition of Magna Insurance Company, a wholly owned subsidiary of Union Planters Corporation, Memphis, Tennessee. The acquisition will enable the Company to offer Magna products and services through the Banks and other client banks across the entire southeastern United States and much of the Midwest. The net purchase price was $19.4 million.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash and Investments $ 24,348 Prepaid Reinsurance 13,863 Other 3,169 ----------- Total Assets Acquired 41,380 ----------- Unearned Premiums 20,792 Other 1,188 ----------- Total Liabilities Assumed 21,980 ----------- Net Cash Paid in Connection with the Acquisition $ (19,400) ===========
On February 22, 2003, the Company completed the acquisition of two Dryades Savings Bank branches located in Metairie and Kenner, LA (both suburbs of New Orleans, LA). Both locations are within minutes of the causeway connecting metropolitan Jefferson Parish to St. Tammany Parish's thriving Northshore communities. The Company acquired the two branches in order to further strengthen both the comprehensive services provided to existing customers and the value offered to its shareholders. The two acquired facilities have a combined total deposit base of approximately $40 million. The Company acquired $4.2 million in assets, which includes the core deposit intangible totaling $2.4 million. The core deposit intangible has a weighted average life of 10 years. Amortization of the core deposit intangible was approximately $436,000 in 2003. Amortization is estimated to be approximately $476,000 in 2004, $381,000 in 2005, $305,000 in 2006, $244,000 in 2007, $195,000 in 2008 and the remainder of $343,000 thereafter. The Company received $35 million in consideration for the assumption of the deposit liabilities, net of related assets.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
Proforma earnings information has not been provided for both acquisitions since the effect is not significant.
Page 11 of 37
Cash $ 232 Loans 240 Property and Equipment 1,353 Core Deposit Intangibles 2,380 ----------- Total Assets Acquired 4,205 ----------- Deposits 39,241 Other 13 ----------- Total Liabilities Assumed 39,254 ----------- Net Cash Received in Connection with the Acquisition $ 35,049 ===========
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, 2001 (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, 2001, or of future results of operations of the combined companies.
Year Ended December 31, 2001 ----------- Interest income $250,140 Interest expense 110,956 Provision for loan losses 12,352 ----------- Net interest income after provision for loan losses 126,832 Net earnings available to common stockholders $ 35,260 Basic earnings per common share $ 2.21 Diluted earnings per common share $ 2.21
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 $680,000 in 2003, $720,000 in 2002 and $710,000 in 2001. Amortization is estimated to be approximately $634,000 in 2004, $507,000 in 2005, $406,000 in 2006, $324,000 in 2007, $260,000 in 2008 and the remainder of $1,259,000 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.
Page 12 of 37
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, 2001 and the amortization of goodwill had been discontinued as of that date:
Years Ended December 31, 2003 2002 2001 ------------ ------------ ------------ Net earnings $ 54,955 $ 51,043 $ 39,255 Add back goodwill amortization - - 3,606 ------------ ------------ ------------ Adjusted net earnings $ 54,955 $ 51,043 $ 42,861 ------------ ------------ ------------ Basic earnings per common share Reported net earnings $ 3.41 $ 3.07 $ 2.36 Goodwill amortization - - 0.26 ------------ ------------ ------------ Adjusted net earnings $ 3.41 $ 3.01 $ 2.62 ------------ ------------ ------------ Diluted earnings per common share Reported net earnings $ 3.29 $ 3.00 $ 2.36 Goodwill amortization - - 0.26 ------------ ------------ ------------ Adjusted net earnings $ 3.29 $ 3.00 $ 2.58 ============ ============ ============NOTE 3 - SECURITIES
The amortized cost and fair value of securities classified as available for sale were as follows (in thousands):
December 31, 2003 December 31, 2002 ------------------------------------------------------------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ----------- ----------- ----------- ------------ ------------ ----------- ----------- ---------- U.S. Treasury $ 9,966 $ 35 $ - $ 10,001 $ 49,970 $ 865 $ - $ 50,835 U.S. government agencies 346,836 3,345 2,527 347,654 517,482 13,013 - 530,495 Municipal obligations 70,070 3,465 199 73,336 74,270 2,294 - 76,564 Mortgage-backed securities 348,266 1,980 3,772 346,474 43,820 1,868 16 45,672 CMOs 321,324 1,523 1,608 321,239 524,414 6,957 - 531,371 Other debt securities 7,219 577 - 7,796 12,288 765 443 12,610 Equity securities 11,723 28 185 11,566 11,216 73 5 11,284 ----------- ----------- ----------- ------------ ------------ ----------- ----------- ---------- $1,115,404 $ 10,953 $ 8,291 $ 1,118,066 $ 1,233,460 $ 25,835 $ 464 $1,258,831 =========== =========== =========== ============ ============ =========== =========== ==========
The amortized cost and fair value of securities (excluding equity securities, which have no maturity) classified as available for sale at December 31, 2003, by contractual maturity, were as follows (in thousands):
Amortized Fair Cost Value -------------------------- Due in one year or less $ 193,855 $ 194,866 Due after one year through five years 165,711 168,654 Due after five years through ten years 206,703 207,890 Due after ten years 537,412 535,090 ------------- ----------- $ 1,103,681 $ 1,106,500 ============= ===========
The amortized cost and fair value of securities classified as held to maturity were as follows (in thousands):
December 31, 2003 December 31, 2002 ------------------------------------------------------------------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ----------- ----------- ----------- ------------ ------------ ----------- ----------- ---------- U.S. Treasury $ 574 $ - $ - $ 574 $ 294 $ - $ - $ 294 U.S. government agencies 14,737 348 6 15,079 16,350 629 - 16,979 Municipal obligations 117,484 8,067 1 125,550 136,122 7,081 - 143,203 Mortgage-backed securities 18,727 942 2 19,667 35,950 1,627 - 37,577 CMOs 1,403 55 - 1,458 30,087 880 - 30,967 Other debt securities 7,058 65 - 7,123 9,176 - - 9,176 ----------- ----------- ----------- ------------ ------------ ----------- ----------- ---------- $ 159,983 $ 9,477 $ 9 $ 169,451 $ 227,979 10,217 - $ 238,196 =========== =========== =========== ============ ============ =========== =========== ==========
Page 13 of 37
The amortized cost and fair value of securities classified as held to maturity at December 31, 2003, by contractual maturity, were as follows (in thousands):
Amortized Fair Cost Value -------------------------- Due in one year or less $ 15,684 $ 15,964 Due after one year through five years 48,027 50,531 Due after five years through ten years 82,660 88,851 Due after ten years 13,612 14,105 -------------- ----------- $ 159,983 $ 169,451 ============== ===========
The details concerning securities classified as available for sale with unrealized losses as of December 31, 2003 were as follows (in thousands):
Losses Less Than Losses 12 months 12 months or Greater Total ------------------------ ----------------------- ---------------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------ ---------- ---------- ----------- ----------- --------- U.S. government agencies $ 100,216 $ 2,515 $ 836 $ 13 $ 101,052 $ 2,528 Municipal obligations 8,330 199 - - 8,330 199 Mortgage-backed securities 212,765 3,655 5,270 116 218,035 3,771 CMOs 175,572 1,608 - - 175,572 1,608 Equity securities 1,930 185 - - 1,930 185 ------------ ---------- ---------- ----------- ----------- --------- $ 498,813 $ 8,162 6,106 $ 129 $ 504,919 $ 8,291 ============ ========== ========== ============ =========== =========
The details concerning securities classified as held to maturity with unrealized losses as of December 31, 2003 were as follows (in thousands):
Losses Less Than Losses 12 months 12 months or Greater Total ------------------------ ----------------------- ---------------------- Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------------ ---------- ---------- ----------- ----------- --------- U.S. government agencies - $ - $ 2,114 $ 6 $ 2,114 $ 6 Municipal obligations 448 1 - - 448 1 Mortgage-backed securities 311 2 - - 311 2 ------------ ---------- ---------- ----------- ----------- --------- $ 759 $ 3 $ 2,114 $ 6 $ 2,873 $ 9 ============ ========== ========== =========== =========== =========
As of December 31, 2003, the Company has approximately 1,200 investments. Of the total portfolio only 75 securities show an unrealized loss. Management and the Asset/Liability Committee are continually monitoring the securities portfolio and the Company believes that its premium amortization policies are appropriate. Accordingly, it is expected that the loss position on these securities will be mitigated producing appropriate returns.
Proceeds from sales of available-for-sale securities were $256,620,000 in 2003, $67,124,000 in 2002 and $41,336,000 in 2001. Gross gains of $2,030,000 in 2003, $323,000 in 2002, $42,000 in 2001 and gross losses of $363,000 in 2003, $318,000 in 2002 and $159,000 in 2001 were realized on such sales. There were no material gains or losses on held-to-maturity securities called during 2003, 2002 or 2001.
Securities with an amortized cost of approximately $735,311,000 at December 31, 2003 and $830,670,000 at December 31, 2002, were pledged primarily to secure public deposits and securities sold under agreements to repurchase.
NOTE 4 - LOANSLoans, net of unearned income, consisted of the following (in thousands):
December 31, ------------------------- 2003 2002 ------------- ----------- Real estate loans $ 1,549,985 $ 1,289,602 Commercial and industrial loans 281,310 275,297 Loans to individuals for household, family and other consumer expenditures 472,371 442,485 Leases and other loans 144,978 97,598 ------------- ----------- $ 2,448,644 $ 2,104,982 ============= ===========
Page 14 of 37
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, 2003 and 2002 was approximately $15,240,000 and $17,442,000, respectively.
Changes in the allowance for loan losses were as follows (in thousands):
Years Ended Decembber 31, --------------------------------------- 2003 2002 2001 ------------- ------------ ------------ Balance at January 1 $ 34,740 $ 34,417 $ 28,604 Balance acquired through acquisitions & other - (400) 8,342 Recoveries 6,399 5,781 4,687 Loans charged off (19,543) (23,553) (16,298) Provision charged to operating expense 15,154 18,495 9,082 ------------- ------------ ------------ Balance at December 31 $ 36,750 $ 34,740 $ 34,417 ============= ============ ============
Non-accrual and renegotiated loans amounted to approximately 0.50% and 0.56% of total loans at December 31, 2003 and December 31, 2002, respectively. In addition, the Company's other individually evaluated impaired loans amounted to approximately 0.15% and 0.30% of total loans at December 31, 2003 and 2002, respectively. Related reserve amounts were not significant and there was no significant change in these amounts during the years ended December 31, 2003, 2002 or 2001. The amount of interest not accrued on these loans did not have a significant effect on earnings in 2003, 2002 or 2001.
Transfers from loans to other real estate amounted to approximately $7,068,000, $9,924,000 and $3,295,000 in 2003, 2002 and 2001, respectively. Valuation allowances associated with other real estate amounted to $2,205,000, $2,675,000 and $688,000 at December 31, 2003, 2002 and 2001, respectively.
NOTE 5 - PROPERTY AND EQUIPMENTProperty and equipment, stated at cost less accumulated depreciation and amortization, consisted of the following (in thousands):
December 31, -------------------------- 2003 2002 ------------- ----------- Land, buildings and leasehold improvements $ 81,331 $ 75,230 Furniture, fixtures and equipment 64,035 62,845 ------------- ----------- 145,366 138,075 Accumulated depreciation and amortization (72,034) (66,720) ------------- ----------- $ 73,332 $ 71,355 ============= ===========
NOTE 6 - DEPOSITS The maturities of time deposits at December 31, 2003, are as follows (in thousands): 2004 $ 470,348 2005 223,817 2006 106,941 2007 222,042 2008 and thereafter 89,239 ------------ $ 1,112,387 ============
Time deposits of $100,000 or more totaled approximately $447,903,000 and $459,991,000 at December 31, 2003 and 2002, respectively.
NOTE 7 - SHORT-TERM AND LONG-TERM NOTESShort-term notes consist of a promissory note for $9,400,000. These funds were used to fund the purchase of Magna Insurance Company on December 31, 2003. The note bears interest at rate of 2.75% and matures on March 31, 2004.
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 were fixed through 2003 and the advances are now floating rate advances. 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 1.12% at January 12, 2004) 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 $265,000,000, which has no outstanding balance at December 31, 2003.
Page 15 of 37
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 .6666 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.
The Series A Preferred stock qualifies as Tier 1 capital for regulatory purposes but is classified between liabilities and stockholders' equity for reporting under accounting principles generally accepted in the United States of America.
On January 5, 2004, the Company announced that it has elected to call for redemption all the outstanding shares of the Company's preferred stock on February 4, 2004. The total redemption price, including accrued dividends to the redemption date is $20.15 per share. Pursuant to the terms of the preferred stock, the redemption is contingent on the Company's common stock trading at $37.50 or above for 20 consecutive trading days beginning after January 1, 2004. The closing price of the Company's common stock on January 2, 2004 was $55.87. In lieu of the cash redemption price of $20.15 per share, shareholders may convert each share of the preferred stock into 0.6666 shares of the Company common stock at any time on or before 5:00 p.m., Central Standard Time, January 28, 2004.
NOTE 9 - COMMON STOCKHOLDERS' EQUITYCommon 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, 2003 was approximately $129 million.
Risk-based capital requirements are intended to make regulatory capital more sensitive to risk elements of the Company. Currently, the Company and its bank subsidiaries are required to maintain 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.
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, both of the subsidiary banks were deemed to be "well capitalized" as of December 31, 2003 and 2002 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.
Page 16 of 37
The Company and its bank subsidiaries are required to maintain certain minimum capital levels. At December 31, 2003 and 2002, 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, 2003 and 2002 (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, 2003 Total capital (to risk weighted assets) Company $ 415,167 15.60 $ 212,968 8.00 $ N/A N/A Hancock Bank 247,064 16.12 122,638 8.00 153,297 10.00 Hancock Bank of Louisiana 153,254 13.02 94,166 8.00 117,708 10.00 Tier 1 capital (to risk weighted assets) Company $ 378,417 14.21 $ 106,484 4.00 $ N/A N/A Hancock Bank 225,487 14.71 61,319 4.00 91,978 6.00 Hancock Bank of Louisiana 138,081 11.73 47,083 4.00 70,625 6.00 Tier 1 leverage capital Company $ 378,417 9.29 $ 122,172 3.00 $ N/A N/A Hancock Bank 225,487 9.06 74,687 3.00 124,479 5.00 Hancock Bank of Louisiana 138,081 8.56 48,374 3.00 80,624 5.00 At December 31, 2002 Total capital (to risk weighted assets) Company $ 384,079 16.11 $ 190,674 8.00 $ N/A N/A Hancock Bank 230,850 15.68 117,787 8.00 147,234 10.00 Hancock Bank of Louisiana 153,798 15.81 77,840 8.00 97,300 10.00 Tier 1 capital (to risk weighted assets) Company $ 354,535 14.88 $ 95,337 4.00 $ N/A N/A Hancock Bank 212,420 14.43 58,894 4.00 88,341 6.00 Hancock Bank of Louisiana 141,610 14.55 38,920 4.00 58,380 6.00 Tier 1 leverage capital Company $ 354,535 9.19 $ 115,809 3.00 $ N/A N/A Hancock Bank 212,420 8.90 71,635 3.00 119,392 5.00 Hancock Bank of Louisiana 141,610 9.28 45,768 3.00 76,281 5.00
Page 17 of 37
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, ----------------------------- 2003 2002 -------------- ------------- Deferred tax assets: Accrued pension liability $ 2,997 $ 2,033 Post-retirement benefit obligation 1,832 2,097 Allowance for loan losses 12,233 9,870 Deferred compensation 1,129 1,450 Other - 345 -------------- ------------- 18,191 15,795 -------------- ------------- Deferred tax liabilities: Loan servicing assets (1,668) (1,190) Property and equipment depreciation (4,975) (4,200) Unrealized gain on securities available for sale (950) (8,880) Core deposit intangible (1,220) (1,583) Discount accretion on securities (1,925) (1,527) Other (265) - -------------- --------------- (11,003) (17,380) -------------- ------------- Net deferred tax (liability) asset $ 7,188 $ (1,585) ============== =============
Income taxes consisted of the following components (in thousands):
Years Ended December 31, -------------------------------------------- 2003 2002 2001 ----------- ------------ --------- Currently payable 24,477 $ 20,900 $ 16,400 Deferred 150 1,626 1,463 ----------- ------------ --------- $ 24,627 $ 22,526 $ 17,863 =========== ============ =========
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, --------------------------------------------------------------------- 2003 2002 2001 ---------------------- ---------------------- ------------------- Amount % Amount % Amount % ----------- ------- --------- --------- ----------- ----- Taxes computed at statutory rate $ 27,854 35 $ 25,749 35 $ 19,991 35 Increases (decreases) in taxes resulting from: State income taxes, net of federal income tax benefit 619 1 214 - 300 - Tax-exempt interest (3,964) (5) (4,254) (5) (4,133) (7) Goodwill amortization - - - - 1,262 2 Other, net 118 - 817 1 443 1 ----------- ------- --------- --------- ----------- ----- Income tax expense $ 24,627 31 $ 22,526 31 $ 17,863 31 =========== ======= ========= ========= =========== =====
The income tax provisions related to items included in the Statement of Other Comprehensive Earnings were as follows (in thousands):
Years Ended December 31, ---------------------------------------------------- 2003 2002 2001 ---------------- -------------- --------------- Minimum pension liability $ (964) $ (3,948) $ - Unrealized holdings gains (7,931) 6,326 3,300 Reclassification adjustments - - 41 ---------------- -------------- --------------- Total Provision (Benefit) $ (8,895) $ 2,378 $ 3,341 ================ ============== ===============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, --------------------------------- 2003 2002 ----------- ---------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 45,188 $ 38,166 Service cost 1,808 1,700 Interest cost 2,977 2,697 Actuarial loss 3,801 4,452 Benefits paid (2,172) (1,827) ----------- ---------- Benefit obligation at end of year 51,602 45,188 ----------- ---------- Change in Plan Assets: Fair value of plan assets at beginning of year 35,285 34,504 Actual return on plan assets 3,573 484 Employer contributions 2,957 2,301 Benefits paid (2,172) (1,826) Expenses (138) (178) ----------- ---------- Fair value of plan assets at end of year 39,505 35,285 ----------- ---------- Unfunded status (12,097) (9,903) Unrecognized net actuarial loss 16,987 14,714 Unrecognized prior service cost 109 200 Adjustment to recognize minimum pension liability (12,928) (10,390) ----------- ---------- Accrued pension cost, net (7,929) (5,379) =========== ========== Rate assumptions at December 31: Discount rate 6.25% 6.75% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 3.00% 3.50% Years Ended December 31, ---------------------------------- 2003 2002 2001 ---------- ---------- --------- Net pension expense included the following (income) expense components: Service cost benefits earned during the period $ 1,808 $ 1,700 $ 1,516 Interest cost on projected benefit obligation 2,977 2,697 2,496 Return on plan assets (2,711) (2,670) (2,604) Amortization of prior service cost 92 92 92 Net amortization and deferral 804 349 123 ---------- ---------- --------- Net pension expense $ 2,970 $ 2,168 $ 1,623 ========== ========== =========
In accordance with FASB No. 87, the Company has recorded an additional minimum pension liability for underfunded plans of $12,928,000 and $10,390,000 at December 31, 2003 and 2002, respectively. This amount represents the excess of accumulated benefit obligations over the Plan's assets as adjusted for prepaid pension costs. 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 $4,912,000 and $3,948,000 for December 31, 2003 and 2002 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 in recent years has been less than expected due to overall market conditions and the discount rate used to measure the liability has declined in a direction consistent with the recent trend in interest rates. 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):
Page 18 of 37
Years Ended December 31 ---------------------------- 2003 2002 ------------ --------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 4,913 $ 4,425 Service cost 226 244 Interest cost 335 301 Actuarial loss 885 325 Benefits paid (612) (382) ------------ --------- Benefit obligation at end of year 5,747 4,913 Fair value of plan assets - - ------------ --------- Amount unfunded (5,747) (4,913) Unrecognized transition obligation being amortized over 20 years 41 46 Unrecognized net actuarial loss 836 108 ------------ --------- Accrued post-retirement benefit cost $(4,870) $(4,759) ============ ========= Rate assumptions at December 31: Discount rate 6.25% 6.50%
For measurement purposes in 2003, a 13% annual rate of increase in the over age 65 per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease gradually to 5.00% over 6 years and remain at that level thereafter. In 2002, a 14% 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 5.25% 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, 2003, by $491,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $90,000. A 1% decrease in the rate would decrease those items by $491,000 and $72,000, respectively.
Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- ------ Net Periodic Post-Retirement Benefit Cost: Service cost benefits attributed to service during the year $ 226 $ 244 $ 185 Interest costs on accumulated post-retirement benefit obligation 335 301 301 Amortization of transition obligation over 20 years 5 5 53 Amortization of unrecognized net loss and other (29) (40) (26) -------- -------- ------ Net Periodic Post-Retirement Cost $ 537 $ 510 $ 513 ======== ======== ======
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. The profit sharing plan was merged into the Company's 401(k) retirement plan effective January 1, 2002.
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 $1,138,000 in 2003 and $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.
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.
Page 19 of 37
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 6, 2003, options to purchase 162,930 shares were granted, of which 160,897 are exercisable at $44.71 per share and 2,033 are exercisable at $49.18 per share. Options totaling 160,897 vest at a rate of 20% per year on the anniversary date of grant and 2,033 are exercisable six months after the date of grant.
On January 9, 2002, options to purchase 147,976 shares were granted, which are exercisable at $28.99 per share. These options are exercisable at a vesting rate of 25% per year on the anniversary 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, 2001 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 Granted 162,930 44.77 7,293,688 Exercised (50,425) 26.97 (1,359,816) Cancelled (16,946) 34.89 (591,179) ------------ --------------- --------------- Balance December 31, 2003 627,006 $ 32.68 $ 20,489,786 ============ =============== ===============
Following is a summary of certain information about the exercisable stock options outstanding as of December 31, 2003:
Number of Average Average Range of Options Years to Exercise Price Exercise Prices Outstanding Expiration Per Share --------------- ------------- ------------- --------------- $23.33-$25.67 159,746 7.36 $ 24.50 $26.67-$28.05 61,275 6.01 27.96 $29.00-$31.90 62,648 6.00 29.00 $40.00 61,406 5.00 40.00 ------------- ------------- --------------- $23.33-$40.00 345,075 6.46 $ 28.69 ============= ============= ===============
At December 31, 2003, options on 345,075 shares were exercisable at $23.33 to $40.00 per share, with a weighted average price of $28.69 per share. 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. The weighted average remaining contractual life of options outstanding at December 31, 2003 was 6.9 years.
The Company has adopted the disclosure-only option under SFAS No. 123. The weighted average fair value of options granted during 2003 and 2002 was $14.18 and $9.69, 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.
Page 20 of 37
Years Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------ ---------- ---------- Net earnings available to common stockholders (in thousands): As reported $ 54,955 $ 51,043 $ 39,255 Deduct total stock based compensation (fair value method) (1,202) (885) (410) ------------ ---------- ---------- Pro forma $ 53,753 $ 50,158 $ 38,845 ============ ========== ========== Basic earnings per share: As reported $ 3.41 $ 3.07 $ 2.36 Pro forma 3.33 3.02 2.34 Diluted earnings per share: As reported $ 3.29 $ 3.00 $ 2.36 Pro forma 3.22 2.94 2.33
The fair value of the options granted under the Company's stock option plans during the years ended December 31, 2003 and 2002 was estimated using the Black-Scholes Pricing Model with the following assumptions used: dividend yield 1.97% and 2.80%, expected volatility of 28% and 34%, risk-free interest rates of 4.25% and 5.10%, respectively and expected lives of 8 years in 2003 and 2002.
During 2003, the Company granted 21,600 restricted shares, which vest at the end of three years. 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 also vest at the end of three years. Vesting is contingent upon continued employment by the Company. On December 31, 2003, 41,626 of these restricted grants were not vested. The 2003 shares had a market value of $44.71 at the date of grant. 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. Compensation expense related to restricted stock grants totaled $487,000 for 2003, $480,000 for 2002, and $402,000 for 2001. The remaining unearned compensation of $957,000 is being amortized over the life of the grants.
NOTE 13 - NET INCOME PER COMMON SHAREFollowing is a summary of the information used in the computation of earnings per common share (in thousands).
Years Ended December 31, ------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Net earnings - used in computation of diluted earnings per common share $ 54,955 $ 51,043 $ 39,255 Preferred dividend requirement 2,653 2,653 1,327 ---------- ---------- ---------- Net earnings available to common stockholders - used in computation of basic earnings per common share $ 52,302 $ 48,390 $ 37,928 ========== ========== ========== ---------- ---------- ---------- Weighted average number of common shares outstanding - used in computation of basic earnings per common share 15,357 15,743 16,047 Effect of dilutive securities Stock options 243 194 42 Convertible preferred stock 1,105 1,105 550 ---------- ---------- ---------- Weighted average number of common shares outstanding plus effect of dilutive securities - used in computation of diluted earnings per common share 16,705 17,042 16,639 ========== ========== ==========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.
Page 21 of 37
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.
Short-Term Notes - For short-term notes, the carrying amount is a reasonable estimate of fair value.
Long-Term Notes - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
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, -------------------------------------------------------------- 2003 2002 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ -------------- ------------- Financial assets: Cash, interest-bearing deposits and federal funds sold $ 189,371 $ 189,371 $ 235,043 $ 235,043 Securities available for sale 1,118,066 1,118,066 1,258,831 1,258,831 Securities held to maturity 159,983 169,451 227,979 238,196 Loans, net of unearned income 2,448,644 2,636,979 2,104,982 2,285,066 Less: allowance for loan losses (36,750) (36,750) (34,740) (34,740) ------------ ------------ -------------- ------------- Loans, net 2,411,894 2,600,229 2,070,242 2,250,326 Financial liabilities: Deposits $3,447,847 $3,470,604 $3,301,500 $3,338,013 Securities sold under agreements to repurchase 150,096 150,096 161,058 161,058 Short-term notes 9,400 9,400 - - Long-term notes 50,428 53,807 51,020 51,751NOTE 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, -------------------------------- 2003 2002 -------------- ------------- Commitments to extend credit $ 547,448 $ 390,107 Letters of credit 33,710 20,323
Approximately $345,850,000 and $225,958,000 of commitments to extend credit at December 31, 2003 and 2002, respectively, were at variable rates and the remainder was at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company continually evaluates each customer's credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in the Company obtaining collateral to support the obligation.
Page 22 of 37
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 - CONTINGENCIESThe Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are 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 INFORMATIONThe following is selected supplemental information (in thousands):
Years Ended December 31, ------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Other non-interest expense: Postage $ 3,972 $ 3,647 $ 3,540 Communication 4,381 4,261 4,310 Data processing 7,158 6,887 6,102 Professional fees 3,718 4,762 3,467 Taxes and licenses 2,907 4,376 2,759 Printing and supplies 1,724 2,054 1,882 Marketing 4,381 3,848 2,871NOTE 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, ---------------------------------------------------------------------- 2003 2002 2001 -------------------- ------------------------ ---------------------- MS LA MS LA MS LA ---------- --------- ----------- --------- ----------- ---------- Interest income $ 121,664 $ 83,368 $ 131,286 $ 88,166 $ 138,787 $ 90,255 Interest expense 38,982 19,301 49,735 22,784 66,867 37,404 ---------- --------- ----------- --------- ----------- ---------- Net interest income 82,682 64,067 81,551 65,382 71,920 52,851 Provision for loan losses 7,635 5,970 9,895 6,803 4,235 3,640 Non-interest income 37,198 26,555 35,447 26,120 27,108 21,691 Depreciation and amortization 6,335 3,053 5,587 2,757 5,344 2,857 Other non-interest expense 64,609 51,528 72,765 40,696 60,238 41,594 ---------- --------- ----------- --------- ----------- ---------- Earnings before income taxes 41,301 30,071 28,751 41,246 29,211 26,451 Income taxes 12,480 9,074 7,909 13,138 7,891 8,544 ---------- --------- ----------- --------- ----------- ---------- Net earnings $ 28,821 $ 20,997 $ 20,842 $ 28,108 $ 21,320 $ 17,907 ========== ========= =========== ========= =========== ==========
Page 23 of 37
At and For Years Ended December 31, ----------------------------------------------- 2003 2002 2001 ------------- ------------- ------------ Net Interest Income: MS $ 82,682 $ 81,551 $ 71,920 LA 64,067 65,382 52,851 Other 13,439 11,795 8,737 ------------- ------------- ------------ Consolidated net interest income $ 160,188 $ 158,728 $ 133,508 ============= ============= ============ Net Earnings: MS $ 28,821 $ 20,842 $ 21,320 LA 20,997 28,108 17,907 Other 5,137 2,093 28 ------------- ------------- ------------ Consolidated net earnings $ 54,955 $ 51,043 $ 39,255 ============= ============= ============ Assets: MS $2,471,918 $2,426,379 $2,320,914 LA 1,673,973 1,578,505 1,442,919 Other 125,659 92,601 67,537 Intersegment (121,192) (124,338) (151,525) ------------- ------------- ------------ Consolidated assets $4,150,358 $3,973,147 $3,679,845 ============= ============= ============
During 2003, the Company changed the method it used to allocate administrative charges between its Mississippi and Louisiana segments and the Parent Company. This change was based on an analysis of costs for 2003. The administrative charges allocated to the Louisiana segment were $14.1 million in 2003 and $4.9 in 2002. These charges were allocated from the Mississippi segment ($11.3 million in 2003 and $4.9 million in 2002) and the Parent Company ($2.8 million in 2003 and $0 in 2002). Prior to 2002, the Company did not allocate administrative charges between its segments.
Goodwill and core deposit intangibles assigned to the Mississippi segment totaled approximately $15.5 million, of which $12.1 million represented goodwill and $3.4 million represented core deposit intangibles, at December 31, 2003. At December 31, 2002, 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. The related goodwill amortization was $0 in 2001. The related core deposit amortization was approximately $712,000 in 2003, $750,000 in 2002 and $745,000 in 2001.
Goodwill and core deposit assigned to the Louisiana segment totaled approximately $39.0 million, of which $37.0 million represented goodwill and $2.0 million represented core deposit intangibles, at December 31, 2003. Goodwill assigned to the Louisiana segment totaled approximately $37.0 million, at December 31, 2002. The related goodwill amortization was approximately $3,606,000 in 2001. The related core deposit amortization was approximately $436,000 in 2003. Both segments recorded no amortization of goodwill during 2003 and 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 2003 and 2002. No impairment loss, therefore, was recorded.
NOTE 19 - SUMMARIZED FINANCIAL INFORMATION OF HANCOCK HOLDING COMPANY(PARENT COMPANY ONLY)
Balance Sheets December 31, -------------------------------------- 2003 2002 ----------------- ----------------- Assets: Investment in subsidiaries $ 429,432,401 $ 424,077,283 Due from subsidiaries and other assets 15,215,270 4,321,956 ----------------- ----------------- $ 444,647,671 $ 428,399,239 ================= ================= Liabilities and Stockholders' Equity: Due to subsidiaries $ 22,419 $ 3,541,667 Other liabilities 9,744,256 275,938 Preferred stock 37,066,939 37,068,905 Common stockholders' equity 397,814,057 387,512,729 ----------------- ----------------- $ 444,647,671 $ 428,399,239 ================= =================
Page 24 of 37
Statements of Earnings Years Ended December 31, ------------------------------------------------- 2003 2002 2001 --------------- -------------- -------------- Dividends received from subsidiaries $ 42,501,396 $ 33,580,276 $ 39,338,376 Equity in earnings of subsidiaries greater than dividends received 12,097,393 19,404,436 2,167,084 Net earnings/(expenses), including taxes 355,996 (1,941,249) (2,250,320) --------------- -------------- -------------- Net earnings 54,954,785 51,043,463 39,255,140 Preferred dividends (2,653,238) (2,653,240) (1,326,851) --------------- -------------- -------------- Net earnings available to common stockholders $ 52,301,547 $ 48,390,223 $ 37,928,289 =============== ============== ============== Statements of Cash Flows Years Ended December 31, ------------------------------------------------- 2003 2002 2001 --------------- -------------- -------------- Cash flows from operating activities - principally dividends received from subsidiaries $ 36,266,184 $ 38,934,506 $ $ 33,623,680 Cash flows from investing activities - principally business acquisitions (19,400,000) (500,000) (12,890,062) Cash flows from financing activities: Advances of short-term notes 9,400,000 Dividends paid to stockholders (16,208,182) (15,374,679) (13,521,896) Dividends paid to subsidiaries (209,549) (194,640) (181,664) Treasury stock transactions, net (11,688,120) (20,892,096) (6,189,623) --------------- -------------- -------------- Net cash used by financing activities (18,705,851) (36,461,415) (19,893,183) --------------- -------------- -------------- Net (decrease) increase in cash (1,839,667) 1,973,091 840,435 Cash, beginning 2,990,022 1,016,931 176,496 --------------- -------------- -------------- Cash, ending $ 1,150,355 $ 2,990,022 $ 1,016,931 =============== ============== ==============
Page 25 of 37
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PurposeThe 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 2003 and selected prior periods. This discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this report, including the preceding consolidated financial statements and related notes. Certain information relating to prior years has been reclassified to conform to the current year's presentation.
Forward-Looking StatementsCongress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects 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 PoliciesCertain 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.
SummaryThe Company reported net earnings of $55.0 million in 2003, an increase of $4.0 million, or 8%, from the $51.0 million earned in 2002. Diluted earnings per common share was $3.29 in 2003, an increase of $0.29, or 10% from 2002's $3.00.
The key components of 2003's earnings performance follow:
• Net interest income, on a tax-equivalent (te)* basis, increased $1.2 million, or 1%, from 2002 to 2003 due to an increase of $224 million, or 6%, in average earning assets, from average loan growth of $277 million, or 14%. The increase in average earning assets was funded primarily with deposit growth. The aforementioned 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 a year ago. • Non-interest income, inclusive of securities transaction gains in 2002 & 2003, grew $3.2 million, or 4%, from 2002 to 2003. Significant increases were reflected in insurance commissions and fees ($438,000), credit card merchant discount fees ($359,000), other fees and income ($1.8 million) and securities gains ($1.7 million). Partially offsetting the increased non-interest income when compared to 2002 was the decrease in investment and annuity fees ($1.1 million) and secondary mortgage market operations ($681,000). • Non-interest expense, increased $2.0 million, or 2%, from 2002 to 2003. Significant increases were reflected in personnel expense ($4.1 million) and occupancy ($750,000), equipment expense ($295,000) and amortization of intangibles ($398,000). However, these increases were offset by a substantial decrease in other operating expense ($3.6 million). • The Company provided $15.2 million for loan losses in 2003, compared to $18.5 million for 2002 - a decrease of $3.3 million, or 18%. The decrease in the provision for loan losses was primarily due to lower net charge-offs, which decreased $4.6 million or 26% during 2003.
*Tax-equivalent (te) amounts are calculated using a marginal federal tax income tax rate of 35%.
Page 26 of 37
Average loans increased $277 million, or 14%, in 2003 compared to an increase of $169 million, or 9%, in 2002. Table 1 shows average loans for a three-year period.
TABLE 1. AVERAGE LOANS- ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Commercial & R.E. Loans $1,140,288 50.9% $992,699 50.6% $883,913 49.3% Mortgage loans 336,603 15.0% 246,333 12.6% 236,708 13.2% Direct consumer loans 494,311 22.1% 503,629 25.7% 493,812 27.5% Indirect consumer loans 216,080 9.7% 176,583 9.0% 144,280 8.0% Finance company loans 50,963 2.3% 42,055 2.1% 33,846 1.9% - ----------------------------------------------------------------------------------------------------------------------------- Total average loans (net of unearned) $2,238,245 100.0% $1,961,299 100.0% $1,792,559 100.0% - -----------------------------------------------------------------------------------------------------------------------------
The Company experienced an overall increase in loan growth that affected all loan categories as its successful efforts to generate profitable loan volume continued.
As indicated by Table 1, commercial and real estate loans increased $148 million, or 15%, from 2002. 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, 2003.
Average mortgage loans of $336.6 million were $90.3 million, or 37%, higher than in 2002. The majority of the growth in 2003 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 include loans and revolving lines of credit made directly to consumers, were down $9.3 million, or 2%, from 2002. 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 $216.1 million for 2003 were up $39.5 million, or 22%, from 2002. The Company owns a finance company subsidiary, which originates both direct and indirect consumer loans. Finance company loans increased approximately $8.9 million, or 21%, at December 31, 2003, compared to the subsidiary's outstanding loans on December 31, 2002. The loan growth in the Finance company was mainly due to expansion into new geographical markets.
At December 31, 2003, the allowance for loan losses was $36.7 million, or 1.50%, of year-end loans, compared to $34.7 million, or 1.65%, of year-end loans for 2002. Net charge-offs amounted to $13.1 million in 2003, as compared to $17.8 million in 2002. The $4.7 million decrease from 2002 was primarily related to a decrease in commercial/real estate loan charge-offs. Gross charge-offs were higher in 2002 primarily due to the removal of credits acquired in the Lamar Bank acquisition in 2001 that were determined uncollectible. Overall, the allowance for loan losses was 170% of non-performing loans and accruing loans 90 days past due at year-end 2003, compared to 143% at year-end 2002. 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, 2003 is adequate even after considering the recent slowdown in the U.S. economy. Table 2 presents the activity in the allowance for loan losses over the past 5 years.
Page 27 of 37
- ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Balance at the beginning of year $34,740 $34,417 $28,604 $25,713 $21,800 Reserves acquired in bank purchase and other 0 (400) 8,342 (147) 3,815 Provision for loan losses charged to operations 15,154 18,495 9,082 12,609 8,688 Loans charged to the allowance Commercial, real estate & mortgage 5,232 9,262 6,445 6,917 3,202 Direct and indirect consumer 9,626 9,384 6,324 4,084 6,769 Demand deposit accounts 4,685 4,907 3,529 2,718 2,230 - ---------------------------------------------------------------------------------------------------------------------------- Total 19,543 23,553 16,298 13,719 12,201 - ---------------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-off Commercial, real estate & mortgage 1,296 646 322 1,334 814 Direct and indirect consumer 2,117 2,071 2,026 1,174 1,670 Demand deposit accounts 2,986 3,064 2,339 1,640 1,127 - ---------------------------------------------------------------------------------------------------------------------------- Total 6,399 5,781 4,687 4,148 3,611 - ---------------------------------------------------------------------------------------------------------------------------- Net charge-offs 13,144 17,772 11,611 9,571 8,590 - ---------------------------------------------------------------------------------------------------------------------------- Balance at the end of year $36,750 $34,740 $34,417 $28,604 $25,713 - ---------------------------------------------------------------------------------------------------------------------------- Ratios Gross charge-offs to average loans 0.87% 1.20% 0.91% 0.85% 0.84% Recoveries to average loans 0.29% 0.29% 0.26% 0.26% 0.25% Net charge-offs to average loans 0.59% 0.91% 0.65% 0.59% 0.59% Allowance for loan losses to year end loans 1.50% 1.65% 1.82% 1.68% 1.67% - ----------------------------------------------------------------------------------------------------------------------------
Non-performing assets consist of loans accounted for on a non-accrual basis, restructured loans and foreclosed assets. Table 3 presents information related to non-performing assets for the five years ended December 31, 2003. Total non-performing assets at December 31, 2003 were $18.0 million, an increase of $164,000, or 1%, from December 31, 2002. Loans that are over 90 days past due but still accruing were $3.7 million at December 31, 2003. This compares to $6.4 million at December 31, 2002. This decrease was due primarily to Management's aggressive efforts to reduce the levels of past due loans. Efforts on the part of Management to reduce the levels of non-performing assets as well as past due loans will continue in 2004.
TABLE 3. NON-PERFORMING ASSETS- ----------------------------------------------------------------------------------------------------------------------------- December 31 - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Loans accounted for on a non-accrual basis $12,161 $11,870 $17,328 $10,182 $6,901 Restructured loans 0 0 0 0 152 - ----------------------------------------------------------------------------------------------------------------------------- Total non-performing loans 12,161 11,870 17,328 10,182 7,053 Foreclosed Assets 5,809 5,936 3,003 1,492 1,616 - ----------------------------------------------------------------------------------------------------------------------------- Total non-performing assets $17,970 $17,806 $20,331 $11,674 $8,669 - ----------------------------------------------------------------------------------------------------------------------------- Loans 90 days past due still accruing $3,682 $6,407 $12,591 $9,277 $4,442 - ----------------------------------------------------------------------------------------------------------------------------- Ratios Non-performing assets to loans plus other real estate 0.73% 0.84% 1.07% 0.69% 0.56% Allowance for loan losses to non-performing loans and accruing 90 days past due 170% 143% 105% 137% 196% Loans 90 days past due still accruing to loans 0.15% 0.30% 0.67% 0.55% 0.29% - -----------------------------------------------------------------------------------------------------------------------------Investment Securities
The Company's investment in securities was $1.278 billion at December 31, 2003, compared to $1.487 billion at December 31, 2002. Average investment securities were $1.466 billion for 2003 as compared to $1.494 billion for 2002.
The Company generally purchases securities that provide stable cash flows for liquidity purposes while limiting the amount of prepayment risk. 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. Certain other securities are classified as held to maturity based on management's assessment of the ability to hold those securities.
Page 28 of 37
At December 31, 2003, the composition of the securities portfolio was 87% classified as available for sale and 13% as held to maturity. At December 31, 2002, these relative percentages were 85% available for sale and 15% held to maturity. The December 31, 2003 carrying value of the held-to-maturity portfolio was $160.0 million and the market value was $169.4 million. The available-for-sale portfolio was $1.118 billion at December 31, 2003.
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. At December 31, 2003, the average life of the portfolio in maturity years was 3.69 with an effective duration of 2.61 and an average coupon of 4.79%.
During 2003, the Company sold $256.6 million of securities from the available for sale portfolio with near-term maturity dates at a pretax net securities gain of $1.7 million. The Company recorded net securities gains during 2002 and 2001 of $4,000 and $18,000, respectively. The Banks do not normally maintain securities trading portfolios.
Deposits and Other BorrowingsDeposits increased to $3.448 billion at December 31, 2003 from $3.302 billion at December 31, 2002, an increase of $146 million, or approximately 4%. Of the increase in year-end deposits from 2002 to 2003, approximately $156 million consisted of core interest-bearing transaction deposits. Total average deposits increased by $232.3 million, or 7%, from 2002 to 2003.
Over the course of 2003, the Company experienced continuing demand for the safety and liquidity of deposit products, which helped fuel overall deposit growth. However, the Company did experience some disintermediation of time deposits primarily into interest-bearing transaction accounts. This was due to the historically low interest rate environment throughout 2003 and customer behavior that favored transaction accounts over time deposits. Time deposits, which consisted mainly of certificates of deposits, decreased by more than $10 million from January through December 2003. However, interest-bearing transaction accounts, which include NOW accounts, money market investment accounts and savings accounts were up more than $239 million for the same time period. In addition, non-interest-bearing deposits were up almost $3 million for the period January through December 2003. 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 addition, the Company has a short-term note consisting of a promissory note for $9.4 million. These funds were used to fund the purchase of Magna Insurance Company on December 31, 2003. (See Note 2 in the Notes to Consolidated Financial Statements.) The note bears interest at 2.75% and matures on March 31, 2004. In total, borrowings were down over $2.2 million from December 31, 2002 to December 31, 2003. Sales of securities under repurchase agreements decreased $11.0 million from year-end 2002, while borrowings from the FHLB were down $.592 million. Substantially offsetting these decreases was the $9.4 million increase in a short-term note as previously discussed. 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 was fixed through 2003. The FHLB can now make annual elections to reset the rates to LIBOR plus 0.35%. There were no purchases of federal funds outstanding at year-end 2003 and 2002.
TABLE 4. AVERAGE DEPOSITS- -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits $604,448 18% $601,374 19% $562,989 20% NOW account deposits 694,681 20% 552,419 17% 195,079 7% Money market deposits 442,919 13% 438,364 14% 619,000 22% Savings deposits 541,748 16% 448,993 14% 298,024 11% Time deposits 1,123,409 33% 1,133,796 36% 1,145,259 41% - -------------------------------------------------------------------------------------------------------------------------- Total average deposits $3,407,205 100% $3,174,946 100% $2,820,351 100% - --------------------------------------------------------------------------------------------------------------------------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. As of December 31, 2003, all liquidity ratios approved and tracked by the Company's Asset Liability Committee were within policy limits.
Page 29 of 37
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest-bearing deposits with other banks are additional sources of liquidity funding. As of December 31, 2003 and 2002, free securities stood at 41.4% or $529.1 million and 42.6% or $633.4 million, respectively.
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 $264 million and borrowing capacity at the Federal Reserve's Discount Window in excess of $100 million. As of December 31, 2003, the Company's core deposits were $2.905 billion and Net Wholesale Funding stood at $620.9 million.
TABLE 5. LIQUIDITY RATIOS- ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------------------------------------- Free Securities 41.40% 42.60% Free Securities-Net Wholesale Funds/Core Deposits 10.90% 13.20% - ---------------------------------------------------------------------------------------------------------------- Wholesale Funding Diversification Certificate of Deposits > $100,000 (Excluding Public Funds) 6.80% 7.50% Brokered Certificate of Deposits 0.60% 0.60% Public Fund Certificate of Deposits $143,250 $141,410 - ---------------------------------------------------------------------------------------------------------------- Net Wholesale Funding Maturity Concentrations Overnight 0.00% 0.00% Up to 3 Months 3.60% 4.10% Up to 6 Months 1.50% 2.60% Over 6 Months 6.00% 5.60% - ---------------------------------------------------------------------------------------------------------------- Net Wholesale Funds $620,890 $644,293 Core Deposits $2,904,775 $2,810,748 - ----------------------------------------------------------------------------------------------------------------Contractual Obligations
Table 6 shows all significant contractual obligations of the Company at December 31, 2003 according to payments due by period.
TABLE 6. CONTRACTUAL OBLIGATIONS- ---------------------------------------------------------------------------------------------------------- Payment due by period - ---------------------------------------------------------------------------------------------------------- (dollars in thousands) Less than 1-3 3-5 More than Total 1 year years years 5 years - ---------------------------------------------------------------------------------------------------------- Certificates of Deposit $1,112,387 $470,348 $330,758 $311,256 $25 Short-Term Debt Obligations 159,496 159,496 0 0 0 Long-Term Debt Obligations 50,428 155 15 10,022 40,236 Operating Lease Obligations 15,261 2,811 3,898 2,140 6,412 - ---------------------------------------------------------------------------------------------------------- Total - ----------------------------------------------------------------------------------------------------------Asset/Liability Management
The asset liability management (ALM) process at the Company consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain stability in net interest income (NII) under varying interest rate environments. The principal objective of ALM is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of liquidity.
The Company's net income is dependent on its net interest income. Net interest income is susceptible to IRR to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. This timing difference represents a potential risk to the Company's future earnings. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect NII. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in NII.
Page 30 of 37
Management and the Asset/Liability Committee (ALCO) directs the Company's IRR management through a Risk Management policy that is designed to produce a stable net interest margin (NIM) in periods of interest rate fluctuation. In adjusting the Company's asset/liability position, the Board and management attempt to direct the Company's IRR while enhancing the NIM. At times depending on the general level of interest rates, the relationship between long-term and short- term interest rates, market conditions and competitive factors, the Board and management may determine to increase its NIM. Not withstanding the Company's IRR management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also administers this sensitivity through the development and implementation of lending, funding and pricing strategies designed to achieve NII performance goals while minimizing the potential negative variations in NII under different interest rate scenarios. Additionally, securities portfolio management is fully integrated into the interest rate scenarios. Investment strategies, including portfolio durations and cash flows, are formulated and continually adjusted during implementation to assure attainment of objectives in the most effective manner.
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 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 7 presents an analysis of the Company's IRR 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, 2003 and 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 7 indicates that the Company's level of NII declines under rising and falling rates, except in an increase of 100 basis points, which produces a slight rise in NII. Furthermore, NII declines to a lesser degree in a rising rate environment versus a falling interest rate environment.
TABLE 7. NET INTEREST INCOME (te) AT RISK- ----------------------------------------------------------------------------------------------------------------------------------- Change in Estimated Increase Interest (Decrease) in NII Rates December 31, 2003 -------------- ------------------- (basis points) - 100 -4.9% Stable 0.0% + 100 1.0% + 200 -0.9% + 300 -3.3% - -----------------------------------------------------------------------------------------------------------------------------------
Page 31 of 37
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2003 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $222,439 $184,857 $415,614 $455,139 $0 $1,278,049 Federal funds sold & Short-term investments $11,138 $0 $150 $0 $0 $0 $11,288 Loans $31,477 $1,190,556 $213,713 $514,248 $498,650 $0 $2,448,644 Other assets $0 $0 $0 $0 $0 $412,377 $412,377 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $42,615 $1,412,995 $398,720 $929,862 $923,789 $412,377 $4,150,358 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities Interest bearing transaction deposits $0 $811,256 $212,119 $612,678 $62,661 $0 $1,698,714 Time deposits $0 $351,459 $118,889 $330,758 $311,281 $0 $1,112,387 Non-interest bearing deposits $0 $310,781 $133,810 $188,406 $3,748 $0 $636,745 Federal funds purchased $0 $0 $0 $0 $0 $0 $0 Borrowings $159,496 $78 $77 $15 $50,258 $0 $209,924 Other liabilities $0 $0 $0 $0 $0 $57,707 $57,707 Stocldiolders' Equity $0 $37,067 $0 $0 $397,814 $0 $434,881 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Equity $159,496 $1,510,641 $464,895 $1,131,857 $825,762 $57,707 $4,150,358 - ----------------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap ($116,881) ($97,646) ($66,175) ($201,995) $128,027 $354,670 cumulative interest rate sensitivity gap ($116,881) ($214,527)($280,702) ($482,697) ($354,670) - Cumulative interest rate sensitivity gap as a percentage of total earning assets (3.0)% (6.0)% (8.0)% (13.0)% (10.0)% - ------------------------------------------------------------------------------------------------------------------------------------
Table 8 contains a static gap report, which measures the net amounts of assets or liabilities that reprice in the same time period over the remaining lives of those assets and liabilities. This report displays the Company's gap position as liability sensitive; however, this static gap report does not take into consideration the strategic options available to management designed to maximize NII over time.
Certain assumptions in assessing IRR were employed in preparing data for the Company included in the preceding tables (Tables 7 & 8). These assumptions relate to interest rates, loan and deposit growth, pricing, loan prepayment speeds, deposit decay rates, securities portfolio strategy and market value 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.
Capital ResourcesCommon stockholder's equity increased $10.3 million during 2003 and stood at $397.8 million at December 31, 2003. The increase from 2002 was due primarily to a $38.7 million increase in retained earnings and was partially offset by a $14.8 million decrease in the unrealized gain on securities available for sale, a $1.6 million increase in the unfunded pension liability and a $10.9 million increase in treasury stock related to the execution of the Company's ongoing stock buyback program. Dividends paid by the Company to common stockholder's totaled $13.6 million, or $0.88 per common share. This represents an increase of $0.08 per common share over 2002. The Company also paid dividends totaling $2.7 million, or $1.60 per share to preferred stockholders in 2003 and 2002. Preferred stock totaled $37.067 million at December 31, 2003 and totaled $37.069 million at December 31, 2002.
On January 5, 2004, the Company announced that it has elected to call for redemption all the outstanding shares of the Company's preferred stock on February 4, 2004. The total redemption price, including accrued dividends to the redemption date is $20.15 per share. Pursuant to the terms of the preferred stock, the redemption is contingent on the Company's common stock trading at $37.50 or above for 20 consecutive trading days beginning after January 1, 2004. The closing price of the Company's common stock on January 2, 2004 was $55.87. Stockholders may convert each share of the preferred stock into 0.6666 shares of the Company common stock at any time on or before 5:00 p.m., Central Standard Time, January 28, 2004.
Page 32 of 37
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 stockholders' equity at December 31, 2003 reflects a balance of $8.0 million (net of tax) relating to the unfunded portion of the Company's pension plan. The principal cause of this underfunded pension liability is that the actual return on plan assets in recent years has been less than expected due to overall market conditions and the discount rate used to measure the liability has declined consistent with the recent trend in interest rates. The Company changed the discount rate on the obligations from 6.75% at December 31, 2002, to 6.25% at December 31, 2003 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, 2003, the Company's and the Banks' capital balances were in excess of current regulatory minimum requirements. As indicated in Table 9 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 2003, the Company purchased 264,087 shares of common stock at an aggregate price of $12.9 million, or approximately $48.75 per share. In 2002, the Company purchased 438,942 shares of common stock at an aggregate price of $19.7 million, or approximately $44.92 per share. As of December 31, 2003, the total number of common shares purchased under the current stock buyback program was approximately 1,109,000, or 6.8%, of the outstanding common shares at June 30, 2000.
TABLE 9. RISK-BASED CAPITAL AND CAPITAL RATIOS- --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 2002 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Tier 1 regulatory capital $378,417 $354,535 $345,589 $302,094 $279,659 Tier 2 regulatory capital 36,750 29,544 30,071 24,416 22,447 - --------------------------------------------------------------------------------------------------------------------------------- Total regulatory capital $415,167 $384,079 $375,660 $326,510 $302,106 - --------------------------------------------------------------------------------------------------------------------------------- Risk-weighted assets $2,662,098 $2,383,423 $2,387,945 $ $1,949,085 $1,792,515 - --------------------------------------------------------------------------------------------------------------------------------- Ratios Leverage (Tier 1 capital to average assets) 9.29% 9.19% 8.50% 10.24% 9.61% Tier 1 capital to risk-weighted assets 14.21% 14.88% 14.47% 15.50% 15.60% Total capital to risk-weighted assets 15.60% 16.11% 15.73% 16.75% 16.85% Common stockholders' equity to total assets 9.29% 9.75% 9.99% 11.33% 10.38% Tangible common equity to total assets 8.32% 8.45% 8.61% 10.11% 9.02% - ---------------------------------------------------------------------------------------------------------------------------------Results of Operations
Net Interest Income
Net interest income (te) of $167.4 million was recorded for the year 2003, an increase of $1.2 million, or 1%, from 2002. The Company also experienced an increase $25.3 million, or 18%, from 2001 to 2002. The factors contributing to the changes in net interest income for 2003, 2002 and 2001 are presented in Tables 10 and 11. Table 10 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 11 breaks down the overall changes in the level of net interest income into rate and volume components. Net interest income (te) in 2003 was primarily impacted by increased average earning assets, which were funded primarily with deposit growth. 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 $224 million or 6% during 2003 mainly from average loan growth of $277 million, or 14%. The increase in average earning assets was due, in part, to and was funded primarily with core interest-bearing transaction accounts. Average interest bearing deposits increased $229 million, or 9%. Average securities decreased $27 million, or 2%, over 2002. The net interest margin (te) narrowed to 4.45% in 2003 from 4.70% in 2002. The 25 basis points narrowing in the net interest margin (te) resulted mainly from the overall yield on loans, securities and short-term investments falling more rapidly than total funding costs.
Page 33 of 37
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.
TABLE 10. SUMMARY OF AVERAGE BALANCE SHEETSNET INTEREST INCOME (te) & INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS EARNING ASSETS Loans (te) $2,238,245 $161,850 7.23% $1,961,299 $159,453 8.13% $1,792,559 $164,183 9.16% - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities 29,575 948 3.20% 48,423 1,605 3.31% 53,930 3,023 5.61% U.S. agency securities 466,809 19,162 4.10% 530,704 25,468 4.80% 447,525 24,564 5.49% CMOS 440,705 14,905 3.38% 560,264 26,636 4.75% 338,511 19,428 5.74% Mortgage-backed securities 302,393 12,558 4.15% 95,158 5,618 5.90% 130,122 8,251 6.34% Obligations of states and political subdivisions (te) 198,599 14,045 7.07% 222,037 15,926 7.17% 218,196 15,700 7.20% FHLB stock and other corporate securities 28,075 1,215 4.33% 36,988 2,085 5.64% 31,790 1,869 5.88% - ------------------------------------------------------------------------------------------------------------------------------------ Total investment in securities 1,466,156 62,833 4.29% 1,493,574 77,338 5.18% 1,220,074 72,835 5.97% - ------------------------------------------------------------------------------------------------------------------------------------ Federal funds sold and short-term investments 57,986 637 1.10% 83,427 1,452 1.74% 119,832 5,285 4.41% - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets (te) 3,762,387 $225,320 5.99% 3,538,300 $238,243 6.73% 3,132,465 $242,303 7.74% - ------------------------------------------------------------------------------------------------------------------------------------ NON-EARNING ASSETS Other assets 384,953 352,533 316,066 Allowance for loan losses (35,391) (33,135) (32,487) - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $4,111,949 $3,857,698 $3,416,044 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY INTEREST-BEARING LIABILITIES Interest-bearing transaction deposits $1,303,441 $10,461 0.80% $1,126,594 $15,678 1.39% $902,582 $24,206 2.68% Time deposits 980,703 34,429 3.51% 971,457 39,532 4.07% 1,020,249 56,821 5.57% Public funds 518,613 9,301 1.79% 475,521 12,175 2.56% 334,531 13,498 4.03% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 2,802,757 54,191 1.93% 2,573,572 67,385 2.62% 2,257,362 94,525 4.19% - ------------------------------------------------------------------------------------------------------------------------------------ Customer repurchase agreements 177,535 1,446 0.81% 173,084 2,214 1.28% 159,511 5,241 3.29% Other interest-bearing liabilities 56,672 2,324 4.10% 54,798 2,454 4.48% 34,421 1,596 4.64% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 3,036,964 57,961 1.91% 2,801,454 72,053 2.57% 2,451,294 101,362 4.14/6 - ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST BEARING LIABILITIES, PREFERED STOCK AND COMMON STOCKHOLDERS' EQUITY Demand deposits 604,448 601,374 562,989 Other liabilities 37,434 28,980 25,931 Preferred stockholders' equity 37,069 37,069 16,733 Common stockholders' equity 396,034 388,821 359,097 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities, preferred stock & common stockholders' equity $4,111,949 1.54% $3,857,698 2.04% $3,416,044 3.24% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and margin (te) $167,359 4.45% $166,190 4.70% $140,941 4.50% Net earning assets and spread $725,423 4.08% $736,846 4.16% $681,171 3.60% - ------------------------------------------------------------------------------------------------------------------------------------
Page 34 of 37
- ------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 2003 Compared to 2002 2002 Compared to 2001 - ------------------------------------------------------------------------------------------------------------------------------ Due to Due to Change in Total Change in Total ------------------ Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME (te) Loans $15,467 ($13,071) $2,396 $13,067 ($17,797) ($4,730) - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities (606) (51) (657) (284) (1,134) (1,418) U.S. agency securities (2,867) (3,439) (6,306) 846 58 904 CMOs (4,987) (6,745) (11,732) 6,152 1,056 7,208 Mortgage-backed securities 6,352 589 6,941 (2,100) (533) (2,633) Obligations of states and political subdivisions (te) (377) (1,504) (1,881) 62 164 226 FHLB stock and other corporate securities (443) (427) (870) 296 (80) 216 - ------------------------------------------------------------------------------------------------------------------------------ Total investment in securities (2,928) (11,577) (14,505) 4,972 (469) 4,503 - ------------------------------------------------------------------------------------------------------------------------------ Federal funds and short-term investments (369) (446) (815) (1,281) (2,552) (3,833) - ------------------------------------------------------------------------------------------------------------------------------ Total interest income (te) $12,170 ($25,094) ($12,924) $16,758 ($20,818) ($4,060) - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest-bearing transaction deposits ($2,179) $7,396 $5,217 $5,024 ($13,552) ($8,528) Time deposits (373) 5,476 5,103 (2,607) (14,682) (17,289) Public Funds (1,026) 3,901 2,875 4,576 (5,899) (1,323) - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits (3,578) 16,773 13,195 6,993 (34,133) (27,140) - ------------------------------------------------------------------------------------------------------------------------------ Customer repurchase agreements (56) 824 768 413 (3,440) (3,027) Other interest-bearing liabilities 25 104 129 937 (79) 858 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense ($3,609) $17,701 $14,092 $8,343 ($37,652) ($29,309) - ------------------------------------------------------------------------------------------------------------------------------ Change in net interest income (te) $8,561 ($7,393) $1,168 $8,415 $16,834 $25,249 - ------------------------------------------------------------------------------------------------------------------------------Provision for Loan Losses
The provision for loan losses was $15.2 million for 2003, a decrease of $3.3 million from 2002's level of $18.5 million. The decrease from 2002 was as primarily due to lower net charge-offs. Net charge-offs decreased $4.6 million from 2002 to 2003 and were $13.1 million for 2003. The provision for loan losses increased $9.4 million from 2001's level of $9.1 million to $18.5 million in 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 1.50% at December 31, 2003, a decrease of 15 basis points from the 1.65% at December 31, 2002.
Non-Interest IncomeTable 12 presents a three-year analysis of the components of non-interest income. Overall, non-interest income of $74.8 million was reported in 2003, as compared to $71.6 million for 2002 and $54.3 million for 2001. This represented an increase of $3.2 million, or 4%, from 2002 to 2003 and an increase of $17.3 million, or 32% from 2001 to 2002.
Significant increases in non-interest income in 2003 over 2002 were reflected in insurance commissions and fees, credit card merchant discount fees, other fees and income and securities transactions gains. Less significant increases were reflected in service charges on deposit accounts, trust fees and ATM fees. Partially offsetting the increased non-interest income when compared to 2002 was the decrease in investment and annuity fees and secondary mortgage market operations.
Insurance commissions and fees increased $438,000, or 19%, from 2002 to 2003 primarily due to continuing efforts on behalf of the Company to expand the wealth management line of business. Credit card merchant discount fees increased $359,000, or 11%, when compared to the previous year primarily due to an increase in interchange income and a reduction in processing costs. Other fees and income increased $1.8 million, or 35%, from 2002 to 2003 primarily due to recording income ($1.2 million) on bank owned life insurance. The investment in these life insurance policies totaled approximately $51 million at December 31, 2003. The 2003 level of non-interest income includes a pre-tax net securities gain of $1.7 million, related to the sale of securities available for sale with near-term maturity dates. Investment and annuity fees decreased $1.1 million, or 23%, from 2002 to 2003. During 2003, the
Page 35 of 37
Company recorded a mortgage servicing rights temporary impairment write-down of $850,000, which is the primary factor that secondary mortgage market operations decreased $681,000, or 28% from 2002 to 2003. The Company maintains a mortgage servicing portfolio of approximately $417 million and must periodically perform a valuation of those servicing rights. The $850,000 non-cash pretax write-down was required due to an increase in the expected speed of mortgage loan prepayments resulting form the current low interest rate environment. Further impairment of the mortgage servicing rights portfolio is possible in future quarters and is dependent on mortgage prepayment speeds. Somewhat mitigating this issue for the Company is a recent decision to begin selling mortgage servicing rights versus retaining these rights in our servicing portfolio pending a change in the interest rate environment.
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.
TABLE 12. NON-INTEREST INCOME- --------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 % change 2002 % change 2003 - --------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $42,544 1% $42,246 39% $30,408 Trust fees 7,724 2% 7,603 18% 6,454 Investment and annuity fees 3,615 -23% 4,722 37% 3,444 Insurance commissions and fees 2,750 19% 2,312 69% 1,371 Credit card merchant discount fees 3,643 11% 3,284 20% 2,734 ATM fees 3,994 6% 3,771 13% 3,327 Secondary mortgage market operations 1,728 -28% 2,409 54% 1,560 Other fees and income 7,091 35% 5,242 4% 5,028 - --------------------------------------------------------------------------------------------------------------------------------- Total other non-interest income 73,089 2% 71,589 32% 54,326 - --------------------------------------------------------------------------------------------------------------------------------- Securities transactions 1,667 41575% 4 -78% 18 - --------------------------------------------------------------------------------------------------------------------------------- Total non-interest income $74,756 4% $71,593 32% $54,344 - ---------------------------------------------------------------------------------------------------------------------------------Non-Interest Expense
Table 13 presents an analysis of the components of non-interest expense for the years 2003, 2002 and 2001. The Company's level of operating expenses increased $2.0 million, or 1%, from 2002 to 2003 and $16.6 million, or 14% from 2001 to 2002, inclusive 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%, from 2001 to 2002.
In 2003, Operating expenses increased $2.0 million, or 1%, over 2002. Increases were reflected in personnel expense ($4.1 million or 5%), occupancy expense ($750,000 or 9%), equipment expense ($295,000 or 3%) and amortization of intangibles ($398,000 or 53%). However, these increases were offset by a substantial decrease in other operating expenses of $3.6 million or 8%). Other operating expenses primarily decreased as a result of decreases in franchise taxes ($1.5 million or 34%), legal and professional services expense ($1.1 million or 22%) and foreclosed real estate expense ($884,000 or 34%).
Personnel expense increased $9.7 million, or 14% 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%) and equipment expense ($960,000 or 12%).
Page 36 of 37
Other operating expense (not including amortization of purchased intangibles) increased $9.2 million, or 27%, 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 foreclosed real estate expense.
TABLE 13. NON-INTEREST EXPENSE- ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2003 % change 2002 % change 2001 - ---------------------------------------------------------------------------------------------------------------------------- Employee compensation $65,597 6% $62,152 14% $54,524 Employee benefits 15,812 4% 15,148 16% 13,098 - ---------------------------------------------------------------------------------------------------------------------------- Total personnel expense 81,409 5% 77,300 14% 67,622 Equipment and data processing expense 16,255 4% 15,689 13% 13,944 Net occupancy expense 9,286 9% 8,536 4% 8,175 Postage and communications 8,352 6% 7,908 1% 7,850 Ad valorem and franchise taxes 2,907 -34% 4,376 59% 2,759 Legal and professional services 3,718 -22% 4,762 37% 3,467 Stationery and supplies 1,724 -16% 2,054 9% 1,882 Amortization of intangible assets 1,148 53% 750 -83% 4,349 Advertising 4,381 14% 3,848 34% 2,871 Deposit insurance and regulatory fees 867 -2% 884 1% 879 Training expenses 519 -9% 569 40% 407 Other real estate owned expense 1,706 -34% 2,590 NA (173) Other expense 7,936 -12% 8,992 18% 7,620 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 140,208 1% 138,258 14% 121,652 - ----------------------------------------------------------------------------------------------------------------------------