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.
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.
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 SHEETS
NET INTEREST INCOME (te) & INTEREST RATES
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(dollars in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
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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%
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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%
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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%
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Federal funds sold and
short-term investments 57,986 637 1.10% 83,427 1,452 1.74% 119,832 5,285 4.41%
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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%
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NON-EARNING ASSETS
Other assets 384,953 352,533 316,066
Allowance for loan losses (35,391) (33,135) (32,487)
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Total assets $4,111,949 $3,857,698 $3,416,044
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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%
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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%
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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%
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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
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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
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Total liabilities, preferred stock &
common stockholders' equity $4,111,949 1.54% $3,857,698 2.04% $3,416,044 3.24%
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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%
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TABLE 11. SUMMARY OF CHANGES IN NET INTEREST INCOME (te)
- ------------------------------------------------------------------------------------------------------------------------------
(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)
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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
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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)
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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)
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Total interest-bearing deposits (3,578) 16,773 13,195 6,993 (34,133) (27,140)
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Customer repurchase agreements (56) 824 768 413 (3,440) (3,027)
Other interest-bearing liabilities 25 104 129 937 (79) 858
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Total interest expense ($3,609) $17,701 $14,092 $8,343 ($37,652) ($29,309)
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Change in net interest income (te) $8,561 ($7,393) $1,168 $8,415 $16,834 $25,249
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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 Income
Table 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
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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
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(dollars in thousands) 2003 % change 2002 % change 2003
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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
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Total other non-interest income 73,089 2% 71,589 32% 54,326
- ---------------------------------------------------------------------------------------------------------------------------------
Securities transactions 1,667 41575% 4 -78% 18
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Total non-interest income $74,756 4% $71,593 32% $54,344
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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%).
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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
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