Page 5
Hancock Holding Company and Subsidiaries Financial Highlights
Amounts in thousands (except per share data)
1997 1996 % Change
---------- ----------- ----------
Earnings statement data:
Net interest income $ 112,197 $ 106,719 5.13
Provision for loan losses 6,399 6,154 3.98
Earnings before income taxes 47,975 46,773 2.57
Net earnings 30,624 31,603 (3.10)
Per share data:
Basic and diluted earnings* $ 2.82 $ 3.08 (8.44)
Cash dividends paid* 1.00 0.88 13.64
Book value (period end) 26.44 24.42 8.27
Weighted average shares outstanding 10,870 10,277 5.77
Shares outstanding 12/31 10,916 10,725 1.78
Balance sheet data (period end):
Securities $1,079,995 $ 901,592 19.79
Net loans 1,220,629 1,173,967 3.97
Allowance for loan losses 21,000 19,800 6.06
Total assets 2,537,957 2,289,582 10.85
Total deposits and deposit related liabilities 2,233,181 2,014,185 10.87
Long-term bonds and notes 1,279 1,050 21.81
Total stockholders' equity 288,573 261,938 10.17
Balance sheet data (average for the year):
Securities $ 984,203 $ 903,386 8.95
Net loans 1,201,381 1,083,165 10.91
Allowance for loan losses 20,410 17,670 15.51
Total assets 2,442,953 2,285,877 6.87
Total deposits and deposit related liabilities 2,155,189 2,027,105 6.32
Long-term bonds and notes 1,369 1,795 (23.73)
Total stockholders' equity 271,303 230,051 17.93
Performance ratios (%):
Return on average assets 1.25 1.38 (9.42)
Return on average stockholders' equity 11.29 13.74 (17.83)
Allowance for loan losses to period-end loans 1.72 1.69 1.78
Allowance for loan losses to non-performing loans 538.74 681.58 (20.96)
Net charge-offs to period-end loans 0.49 0.37 32.43
Net interest margin 5.14 5.20 (1.15)
Regulatory
Requirement
-----------
Capital ratios (%):
Primary capital 11.37 11.11 -
Tier 1 leveraged 10.24 10.37 3%
Tier 1 risk-based 18.22 18.03 4%
Total risk-based 19.18 19.02 8%
* The Earnings and Cash Dividends Paid Per Common Share is based on the weighted
average number of shares after giving retroactive effect for a 15% stock
dividend in 1996. Actual Cash Dividends Paid in 1996 were $1.00.
Page 6
Hancock Holding Company and Subsidiaries
Description of Business
Hancock Holding Company (the "Company") is a bank holding company headquartered
in Gulfport, Mississippi with total consolidated assets of approximately $2.5
billion at December 31, 1997. The Company operates a total of 80 banking offices
and over 100 automated teller machines ("ATMs") 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 Quarterly Operating Results
1997 1996
------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
------------------------------------- --------------------------------------
(Amounts in thousands, except per share data)
Interest incom $ 44,300 $45,698 $46,356 $47,541 $42,320 $42,432 $43,138 $43,633
Interest expense 17,003 17,783 18,158 18,754 16,152 16,104 15,979 16,569
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 27,297 27,915 28,198 28,787 26,168 26,328 27,159 27,064
Provision for loan losses 836 1,508 2,993 1,062 1,004 797 1,036 3,317
Earnings before income taxes 12,282 12,818 10,477 12,398 11,623 11,934 12,005 11,211
Net earnings 8,257 8,193 6,687 7,487 7,768 8,032 8,082 7,721
Basic and diluted
earnings per share $ 0.76 $ 0.76 $ 0.61 $ 0.69 $ 0.76 $ 0.79 $ 0.79 $ 0.74
Market Information
The Company's common stock trades on the NASDAQ National Market System under the
symbol"HBHC" and is listed in newspapers under NASDAQ market quotations under
"HancHd". The following table sets forth the high and low sale prices of the
Company's common stock as reported on the NASDAQ National Market System. These
prices do not reflect retail mark-ups, mark-downs or commissions.
Cash
High Low Dividends
Sale Sale Paid
------- ------- ---------
1997
1st Quarter $ 42.50 $ 39.25 $ 0.25
2nd Quarter $ 49.00 $ 39.50 $ 0.25
3rd Quarter $ 51.50 $ 46.00 $ 0.25
4th Quarter $ 63.25 $ 50.12 $ 0.25
1996
Actual Cash
Restated* Dividends Paid
----------------------------------- ---------------
1st Quarter $32.83 $31.09 $0.22 $0.25
2nd Quarter $35.22 $31.09 $0.22 $0.25
3rd Quarter $35.00 $31.52 $0.22 $0.25
4th Quarter $42.50 $32.61 $0.22 $0.25
* The figures presented have been restated to reflect the effect of a 15%
stock dividend paid in 1996.
There were 5,488 holders of record of common stock of the Company at January 2,
1998 and 10,916,770 shares outstanding. On January 2, 1998, the high and low
sale prices of the Company's common stock as reported on the NASDAQ National
Market System were $60.50 and $59.17, respectively. The principal source of
funds to the Company to pay cash dividends are the earnings of the Bank
subsidiaries. Consequently, dividends are dependent upon earnings, capital
needs, regulatory policies and other policies affecting the Banks. For example,
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. 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. However,
the Company has paid regular cash dividends since 1937.
Page 7
Hancock Holding Company and Subsidiaries
Consolidated Summary of Selected Financial Information
Amounts In Thousands (except for per share data)
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
Interest Income:
Interest and fees on loans $ 117,474 $ 107,080 $ 97,626 $ 82,563 $ 80,176
Income on federal funds sold 2,733 5,580 5,820 3,832 3,603
Interest & dividends on investments 63,688 58,863 58,083 49,884 49,936
Total interest income 183,895 171,523 161,529 136,279 133,715
------------ ----------- ---------- ---------- ----------
Interest Expense:
Interest on deposits 66,150 60,625 57,612 48,193 46,935
Interest on federal funds purchased
and securities purchased under
agreements to resell 5,383 4,013 3,082 1,472 1,021
Interest on bonds, notes and other 165 166 468 332 44
----------- ---------- ---------- ---------- ----------
Total interest expense 71,698 64,804 61,162 49,997 48,396
----------- ---------- ---------- ---------- ----------
Net Interest Income 112,197 106,719 100,367 86,282 85,319
Provision for loan losses 6,399 6,154 4,425 1,998 4,632
----------- ---------- ---------- ---------- ----------
Net Interest Income after Provision
for Loan Losses 105,798 100,565 95,942 84,284 80,687
Other income 29,866 26,460 23,956 20,557 22,153
Other expenses 87,689 80,252 79,816 71,218 67,450
----------- ---------- ---------- ---------- ----------
Earnings before income taxes 47,975 46,773 40,082 33,623 35,390
Income taxes 17,351 15,170 13,065 10,493 10,528
----------- ---------- ---------- ---------- ----------
Net Earnings $ 30,624 $ 31,603 $ 27,017 $ 23,130 $ 24,862
=========== ========== ========== ========== ==========
Per Common Share:
Basic and diluted earnings $ 2.82 $ 3.08 $ 2.65 $ 2.48 $ 2.67
Cash dividends paid* 1.00 0.88 0.84 0.80 0.78
Weighted average number of shares 10,870 10,277 10,181 9,314 9,307
Return on Average Assets 1.25% 1.38% 1.22% 1.13% 1.27%
Dividend payout 36.05% 28.90% 31.45% 32.21% 29.29%
Balance Sheet Data December 31:
Total assets $2,537,957 $2,289,582 $2,234,286 $2,026,929 $1,988,125
Total deposits and deposit
related liabilities 2,233,181 2,014,185 1,991,069 1,800,810 1,790,338
Total long-term bonds and notes 1,279 1,050 2,035 2,955 4,300
Stockholders' equity 288,573 261,938 224,179 182,277 166,712
*Earnings and Cash Dividends Paid per Common Share are based on the weighted
average number of shares after giving retroactive effect for a 15% stock
dividend in December 1996. Actual Cash Dividends Paid in 1996, 1995, 1994 and
1993 were $1.00, $0.96, $0.92, and $0.90, respectively.
On April 29, 1994, the Company merged Hancock Bank of Louisiana, a wholly-owned
subsidiary of the Company, with First State Bank and Trust Company of East Baton
Rouge Parish, Baker, Louisiana (Baker). On February 1, 1995, the Company merged
Hancock Bank of Louisiana with Washington Bank and Trust Company, Franklinton,
Louisiana (Washington). These mergers were accounted for using the
pooling-of-interests method, and, therefore, all prior years financial
information has been restated. On January 13, 1995, the Company acquired First
Denham Bancshares, Inc., Denham Springs, Louisiana, which owned 100% of the
stock of First National Bank of Denham Springs (Denham). This acquisition was
accounted for using the purchase method and the results of operations since the
date of acquisition have been included in the consolidated statements of
earnings. On November 15, 1996, the Company acquired Community Bancshares, Inc.,
Independence, Louisiana, which owned 100% of the stock of Community State Bank
(Community). This acquisition was accounted for using the purchase method and
results of operations since the date of acquisition have been included in the
consolidated statements of earnings. On January 17, 1997 the Company acquired
Southeast National Bank, Hammond, Louisiana (Southeast) for approximately
$3,700,000 cash and 121,000 shares of common stock of the Company. The
acquisition was accounted for using the purchase method of accounting and the
results of operations since January 17, 1997 are included in the consolidated
statements of earnings. The excess of the purchase price over the value of net
tangible assets acquired was assigned to goodwill and is being amortized over 15
years. On July 15, 1997 the Company acquired Commerce Corporation, Inc.
(Commerce), St. Francisville, Louisiana, which owned 100% of the stock of Bank
of Commerce and Trust Company, for approximately $330,000 cash and 65,000 shares
of common stock and the assumption of Commerce debt owed to certain individuals
in the aggregate principal amount of $1,250,000. The transaction was accounted
for using the purchase method of accounting and the results of operations since
July 15, 1997 are included in the consolidated statements of earnings. The
excess of the purchase price over the value of net tangible assets acquired was
assigned to goodwill and is being amortized over 15 years.
Page 18
Hancock Holding Company and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------------
1997 1996
--------------- ---------------
Assets:
Cash and due from banks (non-interest bearing) $ 113,124,897 $ 119,483,272
Interest bearing time deposits with other banks 2,067,500 2,945,001
Securities available-for-sale
(amortized cost of $163,531,000 and $98,567,000) 163,633,434 97,594,689
Securities held-to-maturity
(market value of $924,958,000 and $806,710,000) 916,361,847 803,997,535
Federal funds sold 35,500,000 12,000,000
Loans 1,245,355,439 1,198,769,903
Less:
Allowance for loan losses (21,000,000) (19,800,000)
Unearned income (24,725,896) (24,803,151)
--------------- ---------------
Loans, net 1,199,629,543 1,154,166,752
Property and equipment 42,810,352 40,412,254
Other real estate 2,357,399 1,875,683
Accrued interest receivable 20,976,878 20,188,062
Other assets 41,494,695 36,918,982
--------------- ---------------
Total Assets $ 2,537,956,545 $ 2,289,582,230
=============== ===============
Liabilities and Stockholders' Equity:
Deposits:
Non-interest bearing demand $ 462,730,852 $ 432,963,782
Interest-bearing savings, NOW,
money market and other time 1,599,916,793 1,493,612,581
--------------- ---------------
Total Deposits 2,062,647,645 1,926,576,363
Securities sold under agreements to repurchase 170,533,618 87,609,038
Other liabilities 14,922,683 12,408,884
Long-term bonds and notes 1,279,402 1,050,000
--------------- ---------------
Total Liabilities 2,249,383,348 2,027,644,285
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity:
Common stock: $3.33 par value per share;
75,000,000 shares authorized, 11,072,770 and
10,887,302 shares issued and outstanding 36,872,324 36,254,716
Capital surplus 200,766,498 194,499,422
Undivided profits 51,401,100 31,816,568
Unrealized gain (loss) on securities
available-for-sale, net of deferred taxes 65,742 (632,761)
Unearned compensation (532,467) ---
--------------- ---------------
Total Stockholders' Equity 288,573,197 261,937,945
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 2,537,956,545 $ 2,289,582,230
=============== ===============
See notes to consolidated financial statements.
Page 19
Hancock Holding Company and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------- -------------
Interest Income:
Interest and fees on loans $ 117,473,854 $ 107,079,501 $ 97,626,040
Interest on:
U.S. Treasury securities 14,733,156 13,567,085 14,567,927
Obligations of other U.S. government agencies 34,699,383 34,885,873 33,726,484
Obligations of states and political subdivisions 4,150,307 3,543,436 3,526,973
Interest on federal funds sold 2,733,341 5,580,275 5,820,225
Interest on time deposits and other 10,105,014 6,866,644 6,261,921
------------- ------------- -------------
Total interest income 183,895,055 171,522,814 161,529,570
------------- ------------- -------------
Interest Expense:
Interest on deposits 66,149,396 60,624,862 57,612,465
Interest on securities sold under agreements to
repurchase and federal funds purchased 5,383,358 4,013,259 3,081,896
Interest on bonds and notes 165,449 165,840 468,029
------------- ------------- -------------
Total interest expense 71,698,203 64,803,961 61,162,390
------------- ------------- -------------
Net Interest Income 112,196,852 106,718,853 100,367,180
Provision for loan losses 6,399,481 6,153,753 4,424,701
------------- ------------- -------------
Net Interest Income after Provision
for Loan Losses 105,797,371 100,565,100 95,942,479
Non-Interest Income:
Service charges on deposit accounts 18,528,677 16,877,678 15,040,119
Other service charges, commissions and fees 4,657,517 4,412,938 4,693,062
Securities gains (losses) 278,651 30,531 (49,121)
Other 6,401,572 5,139,145 4,271,598
------------- ------------- -------------
Total non-interest income 29,866,417 26,460,292 23,955,658
------------- ------------- -------------
Non-Interest Expense:
Salaries and employee benefits 46,472,455 42,384,113 41,319,402
Net occupancy expense of premises 4,366,166 4,263,421 3,751,201
Equipment rentals, depreciation and maintenance 10,274,698 10,510,300 9,968,619
Other 26,574,650 23,094,554 24,777,018
------------- ------------- -------------
Total non-interest expense 87,687,969 80,252,388 79,816,240
------------- ------------- -------------
Earnings Before Income Taxes 47,975,819 46,773,004 40,081,897
Income Taxes 17,351,400 15,170,000 13,065,000
------------- ------------- -------------
Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897
============= ============= =============
Basic and Diluted Earnings Per Common Share $ 2.82 $ 3.08 $ 2.65
============= ============= =============
See notes to consolidated financial statements.
Page 20
Hancock Holding Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Common Stock Gain (Loss)
----------------------------- on Securities
Shares Capital Undivided Available-for- Unearned
Issued Amount Surplus Profits Sale, Net Compensation
-------------- -------------- -------------- -------------- -------------- ------------
Balance, January 1, 1995 8,247,851 $ 27,465,344 $104,170,000 $ 51,056,611 $ (415,070)
Net earnings 27,016,897
Cash dividends: $.84 per share (8,661,027)
Change in unrealized gain(loss)
on securities available-for-sale 727,148
Merger with Denham accounted
for as a purchase 774,098 2,577,746 20,240,868
Transfer from undivided profits 5,589,132 (5,589,132)
------------ ------------ -------------- -------------- ------------- ------------
Balance, December 31, 1995 9,021,949 30,043,090 130,000,000 63,823,349 312,078
Net Earnings 31,603,004
Cash dividends: $.88 per share (9,134,130)
Change in unrealized gain(loss)
on securities available-for-sale (944,839)
15% Stock dividend 1,351,960 4,502,027 49,914,363 (54,475,655)
Acquisition of Community
accounted for as a purchase 513,393 1,709,599 14,585,059
------------ ------------ ------------ ------------ ------------ -----------
Balance, December 31, 1996 10,887,302 36,254,716 194,499,422 31,816,568 (632,761)
Net earnings 30,624,419
Cash Dividends: $1.00 per share (11,039,887)
Change in unrealized gain(loss)
on securities available-for-sale 698,503
Acquisition of Southeast
accounted for as a purchase 120,900 402,597 3,486,530
Acquisition of Commerce
accounted for as a purchase 64,568 215,011 2,780,546
Transactions relating to
restricted stock grants, net (532,467)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 11,072,770 $ 36,872,324 $200,766,498 $ 51,401,100 $ 65,742 $ (532,467)
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
Page 21
Hancock Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Cash Flows from Operating Activities:
Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 4,705,432 4,818,532 4,343,507
Provision for loan losses 6,399,481 6,153,753 4,424,701
Deferred income taxes (credit) (395,000) (754,000) (790,000)
(Gains) losses on sales of securities (278,651) (30,531) 49,121
Increase in interest receivable (282,032) (117,042) (1,130,794)
Amortization of intangible assets 2,281,666 2,230,082 2,450,553
Increase (decrease) in interest payable 14,102 (215,863) 1,869,527
Other: net 1,140,190 (734,320) 860,087
------------- ------------- -------------
Net cash provided by operating activities 44,209,607 42,953,615 39,093,599
------------- ------------- -------------
Cash Flows from Investing Activities:
Net (decrease) increase in interest bearing
time deposits (2,056,716) 1,395,000 (100,000)
Proceeds from maturities of
securities held-to-maturity 261,488,556 372,251,124 394,491,517
Purchases of securities held-to-maturity (359,318,934) (375,169,554) (363,531,311)
Proceeds from sales and maturities of securities
available-for-sale 31,441,417 25,122,385 10,164,925
Purchase of securities available-for-sale (97,379,020) (34,102,782) (1,831,268)
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (18,525,000) 147,175,000 (96,725,000)
Net increase in loans (11,363,057) (109,554,135) (39,410,863)
Purchase of property and equipment, net (5,206,091) (5,029,439) (3,460,209)
Proceeds from sales of other real estate 1,737,568 1,169,568 628,300
Net cash received in connection with
purchase transactions 2,288,000 201,830 7,872,000
------------- ------------- -------------
Net cash (used in) provided by investing activities (196,893,277) 23,458,997 (91,901,909)
------------- ------------- -------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 75,490,602 (82,051,076) 54,419,827
Dividends paid (11,039,887) (9,193,395) (8,661,027)
Repayments of long-term bonds and notes (1,050,000) (985,000) (920,000)
Net increase in federal funds purchased,
securities sold under agreements to repurchase
and other temporary funds 82,924,580 21,023,725 11,713,955
------------- ------------- -------------
Net cash provided by (used in) financing activities 146,325,295 (71,205,746) 56,552,755
------------- ------------- -------------
Net (Decrease) Increase in Cash and Due From Banks (6,358,375) (4,793,134) 3,744,445
Cash and Due From Banks, Beginning 119,483,272 124,276,406 120,531,961
------------- ------------- -------------
Cash and Due From Banks, Ending $ 113,124,897 $ 119,483,272 $ 124,276,406
============= ============= =============
Supplemental Information
Income Taxes Paid $ 16,410,052 $ 17,185,000 $ 13,600,000
Interest Paid 71,684,101 65,019,824 60,910,863
See notes to consolidated financial statements.
Page 22
Hancock Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
NOTE 1 - 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.
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.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management 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 from those estimates.
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 trading account securities during the three years ended December 31,
1997. Held-to-maturity securities are stated at amortized cost.
Available-for-sale securities are stated at market value, with unrealized gains
and losses, net of income taxes, reported as a separate component of
stockholders' equity until realized. The amortized cost of debt securities
classified as held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity or, in the case
of mortgage-backed securities, over the estimated life of the security.
Amortization, accretion and accrued interest are included in interest income on
securities. Realized gains and losses, and declines in value judged to be other
than temporary, are included in net securities gains. Gains and losses on the
sale of securities available-for-sale are determined using the
specific-identification method.
Allowance for Loan Losses. The allowance for loan losses is a valuation account
available to absorb probable 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 recovery. Periodically during the year management
estimates the probable level of future losses to determine whether the reserve
is adequate to absorb 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 borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions.
Based on these estimates, the allowance for loan losses is increased by charges
to income and decreased by 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. Leasehold improvements are
amortized over the shorter of the term of the lease or the asset's useful life.
Intangible Assets. Intangible assets, which amounted to $28,633,000 and
$24,582,000 at December 31, 1997 and 1996, respectively, include the values
assigned to the core deposits of acquired banks which are being amortized over
lives ranging from six to seven years using accelerated methods, and goodwill
which is being amortized over fifteen years.
Other Real Estate. Other real estate acquired through foreclosure and bank
acquisitions is stated at the lower of cost or fair market value, net of the
costs of disposal. When a reduction to fair market value is required, it is
charged to the allowance for loan losses at the time of foreclosure and any
subsequent adjustments are charged to expense.
Loans. Loan origination fees and certain direct origination costs are deferred
and recognized as an adjustment of the yield on the related loan. Interest on
commercial and real estate mortgage loans is recorded as income as earned.
Page 23
Unearned income on installment loans is recognized as income based on a method
which approximates the interest method. Where doubt exists as to collectibility
of a loan, the accrual of interest is discontinued and payments received are
applied first to principal. Upon such discontinuances, all unpaid accrued
interest is reversed. 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 in which full payment of principal or interest is not expected. Non major
homogeneous 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 loans effective interest rate, or at 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. Generally, loans of all types which become 90 days delinquent are in the
process of collection through repossession, foreclosure or have been deemed
currently uncollectible. Loans deemed currently 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.
Trust Fees. Trust fees are recorded when received, which is the general
practice within the banking industry.
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
and between the tax basis of assets and liabilities and their reported amounts
in the financial statements. 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 APB Opinion No. 25 and related
interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized. The pro forma disclosures required by
SFAS 123 are included in Note 9.
Basic and Diluted Earnings Per Common Share. In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard No. 128, Earnings Per Share. This Statement simplifies the standards
for computing earnings per share previously required under APB Opinion No. 15,
Earnings Per Share. Basic earnings per share (EPS) excludes dilution and is
computed by dividing 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 similarly to fully diluted EPS pursuant to APB
Opinion No. 15. SFAS No. 128 is effective for 1997 and required restatement of
all prior period EPS data. Basic and diluted earnings per share as currently
presented are the same amounts as primary earnings per share as previously
reported.
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".
NOTE 2 - ACQUISITIONS
Poolings
On February 1, 1995, the Company merged Hancock Bank of Louisiana, a
wholly-owned subsidiary of the Company, with Washington Bank and Trust Company,
Franklinton, Louisiana (Washington). The merger was consummated by the exchange
of all outstanding common stock of Washington in return for approximately
624,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of
the Company. The merger was accounted for using the pooling-of-interests method.
Net interest income and net earnings of Washington was $372,000 and $114,000 for
the period from January 1, 1995 to January 31, 1995, respectively.
Page 24
Purchases
On January 13, 1995, the Company acquired First Denham Bancshares, Inc. for
approximately $4,000,000 cash and 890,000 shares (adjusted for a 15% stock
dividend in 1996) of common stock of the Company. First Denham Bancshares, Inc
owned 100% of the stock of First National Bank of Denham Springs (Denham). The
acquisition was accounted for using the purchase method and the results of
operation since January 13, 1995 are included in the consolidated statements of
earnings. The excess of the purchase price over the value of the net tangible
assets acquired was assigned to goodwill and is being amortized over 15 years.
On November 15, 1996, the Company acquired Community Bancshares, Inc.
(Community) for approximately $5,000,000 cash and 513,000 shares (adjusted for a
15% stock dividend in 1996) of common stock of the Company. The acquisition was
accounted for using the purchase method and the results of operations since
November 15, 1996 are included in the consolidated statements of earnings. The
excess of the purchase price over the value of the net tangible assets acquired
was assigned to goodwill and is being amortized over 15 years. On January 17,
1997 the Company acquired Southeast National Bank, Hammond, Louisiana
(Southeast) for approximately $3,700,000 cash and 121,000 shares of common stock
of the Company. The acquisition was accounted for using the purchase method of
accounting and the results of operations since January 17, 1997 are included in
the consolidated statements of earnings. The excess of the purchase price over
the value of net tangible assets acquired was assigned to goodwill and is being
amortized over 15 years. On July 15, 1997 the Company acquired Commerce
Corporation, Inc. (Commerce), St. Francisville, Louisiana, which owned 100% of
the stock of Bank of Commerce and Trust Company, for approximately $330,000 cash
and 65,000 shares of common stock and the assumption of Commerce debt owed to
certain individuals in the aggregate principal amount of $1,250,000. The
transaction was accounted for using the purchase method of accounting and the
results of operations since July 15, 1997 are included in the consolidated
statements of earnings. The excess of the purchase price over the value of the
net tangible assets acquired was assigned to goodwill and is being amortized
over 15 years. The following unaudited pro forma consolidated results of
operations give effect to the acquisitions of Denham and Community as though
they had occurred on January 1, 1995; and Southeast and Commerce as though they
had occurred on January 1, 1996, (amounts in thousands, except for share
amounts):
Years ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
Interest income $ 185,124 $ 182,372 $ 167,275
Interest expense (72,162) (69,278) (63,772)
Provision for loan losses (6,565) (6,179) (4,425)
--------- --------- ---------
Net interest income after provision for
loan losses 106,397 106,915 99,078
Net earnings $ 30,643 $ 32,624 $ 27,977
Basic and diluted earnings per common share $ 2.81 $ 2.99 $ 2.65
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the purchases been made as of
January 1, 1995 or January 1, 1996, as appropriate, or of future results of
operations of the combined companies.
In connection with the 1997, 1996 and 1995 acquisitions, liabilities were
assumed as follows (in thousands):
1997 1996 1995
---------- ---------- ----------
Fair value of all assets, excluding cash $ 68,815 $ 96,623 $ 120,407
Cash acquired, net of amount paid 2,288 202 7,872
Market value of common stock issued (6,885) (16,295) (22,819)
--------- --------- ---------
Liabilities assumed $ 64,218 $ 80,530 $ 105,460
========= ========= =========
Page 25
NOTE 3 - SECURITIES
The book and market values of securities classified as available-for-sale were
as follows (in thousands):
December 31, 1997 December 31, 1996
------------------------------------------------------ ----------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ------- -------- --------- --------- ------- -------- ---------
U.S. Treasury securities $54,637 $ 79 $ 8 $54,708 $ 499 $ 3 $ 0 $ 502
Other U.S. gov. obligations 46,039 5 126 45,918 53,802 120 501 53,421
Municipal obligations 1,496 30 0 1,526 923 2 0 925
Other Securities 6,305 0 5 6,300 0 0 0 0
Mortgage-backed securities 27,538 318 29 27,827 5,373 317 391 5,299
CMOs 21,427 0 162 21,265 33,038 111 633 32,516
Equity securities 6,089 0 0 6,089 4,932 0 0 4,932
-------- ------- ------- ------- ------- ------- ------- -------
$163,531 $ 432 $ 330 163,633 $ 98,567 $ 553 $ 1,525 $97,595
======== ======= ======= ======= ======= ======= ======= =======
The amortized cost and market value of the debt securities classified as
available-for-sale at December 31, 1997, by estimated maturity, were as follows
(in thousands):
Amortized Cost Market Value
-------------- -------------
Due in one year or less $ 29,820 $ 29,774
Due after one year through five years 68,343 68,373
Due after five years through ten years 25,856 25,825
Due after ten years 33,423 33,572
-------- --------
$157,442 $157,544
======== ========
The amortized cost and market values of securities classified as
held-to-maturity were as follows (in thousands):
December 31, 1997 December 31, 1996
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- -------- -------- --------- --------- --------- ------- --------
U.S. Treasury securities $ 210,525 $ 2,533 $ 127 $ 212,931 $ 175,171 $ 1,990 $ 60 $177,101
Other U.S. gov. obligations 267,437 1,112 312 268,237 338,796 618 1,863 337,551
Municipal obligations 88,062 2,979 37 91,004 66,367 2,088 47 68,408
Other Securities 25,874 19 20 25,873 0 0 0 0
Mortgage-backed securities 133,925 1,943 137 135,731 87,991 498 222 88,267
CMOs 190,539 1,245 602 191,182 135,673 300 590 135,383
-------- -------- -------- -------- ---------- --------- ------- --------
$916,362 $ 9,831 $ 1,235 $ 924,958 $ 803,998 $ 5,494 $ 2,782 $806,710
======== ======== ======== ======== ======== ========= ======= ========
The amortized cost and market value of securities classified as held-to-maturity
as of December 31, 1997, by contractual maturity, were as follows (in
thousands):
Amortized Cost Market Value
-------------- -------------
Due in one year or less $ 194,406 $ 194,626
Due after one year through five years 305,508 307,880
Due after five years through ten years 177,870 179,584
Due after ten years 238,578 242,868
------- -------
$ 916,362 $ 924,958
======= =======
Proceeds from sales of available-for-sale securities were $12,919,000 in 1997,
$20,425,000 in 1996 and $9,435,000 in 1995. Gross gains of $321,000 in 1997,
$178,000 in 1996 and $16,000 in 1995 and gross losses of $42,000 in 1997,
$147,000 in 1996 and $65,000 in 1995 were realized on those sales. Securities
with a book value of approximately $600,264,000 at December 31, 1997 and
$440,507,000 at December 31, 1996, were pledged to secure public deposits,
securities sold under agreements to repurchase, and for other purposes as
required or permitted by law.
Page 26
The Company's collateralized mortgage obligations ("CMOs") generally consist
of first and second tranche sequential pay and/or planned amortization class
(PAC) instruments. Interest income on CMOs and mortgage-backed securities is
generally included with interest on obligations of other U.S. government
agencies and corporations due to their guarantees of the underlying mortgages.
Note 4 - Loans
Loans consisted of the following (in thousands):
December 31,
-----------------------
1997 1996
------------ ----------
Real estate loans - primarily mortgage $ 476,612 $ 465,919
Commercial and industrial loans 175,721 169,515
Loans to individuals for household, family
and other consumer expenditures 558,147 534,560
Leases 16,889 15,881
Other loans 17,986 12,895
---------- ----------
$1,245,355 $1,198,770
========== ==========
Changes in the allowance for loan losses are as follows (in thousands):
1997 1996 1995
-------- ---------- --------
Balance at January 1 $ 19,800 $ 17,391 $ 15,372
Balance acquired through acquisitions 833 654 1,147
Recoveries 2,181 2,068 1,830
Loans charged off (8,213) (6,466) (5,383)
Provision charged to operating expense 6,399 6,153 4,425
-------- -------- --------
Balance at December 31 $ 21,000 $ 19,800 $ 17,391
======== ======== ========
The Company generally makes loans in its market areas of South Mississippi and
Southeastern Louisiana. Loans are made in the normal course of business to its
directors and 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 or contain other unfavorable features. The
balance of loans to related parties at December 31, 1997 and 1996 was
approximately $8,133,000 and $6,080,000, respectively.
Non-accrual and renegotiated loans amounted to approximately .30% of total loans
at December 31, 1997 and .25% at December 31, 1996. The amount of interest not
accrued on these loans did not have a significant effect on earnings in 1997,
1996 or 1995.
The Company's impaired loans amounted to less than .25% of total loans at
December 31, 1997 and 1996, and the related reserve amounts were not significant
at those dates. There was no significant change in these amounts during the
years ended December 31, 1997, 1996 or 1995. Interest income recognized on these
loans amounted to approximately $125,000, $100,000 and $300,000 for the years
ended December 31, 1997, 1996 and 1995 respectively. Transfers from loans to
other real estate amounted to approximately $1,894,000, $1,952,000 and $574,000
in 1997, 1996 and 1995, respectively. Reserve balances associated with other
real estate amounted to $812,000 and $668,000 at December 31, 1997 and 1996,
respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization as follows (in thousands):
December 31,
-----------------
1997 1996
------- -------
Land, buildings and leasehold improvements $47,073 $46,730
Furniture, fixtures and equipment 42,022 37,047
------- -------
89,095 83,777
Less accumulated depreciation and amortization 46,285 43,365
------- -------
$42,810 $40,412
======= =======
<PAGE<
Page 27
NOTE 6 - STOCKHOLDERS' EQUITY
Basic and diluted earnings per common share is based on the weighted average
number of shares outstanding of approximately 10,870,000 and 10,877,000 in 1997,
10,277,000 and 10,277,000 in 1996 and 10,181,000 and 10,181,000 in 1995, which
have been reduced by shares of stock owned by subsidiaries and after giving
retroactive effect to the 15% stock dividend paid in 1996. At December 31, 1997,
these subsidiaries owned 162,200 shares of stock.
Stockholders' equity of the Company includes the undistributed earnings of the
subsidiary Banks. 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 which, with respect to
Hancock Bank, are subject to approval by the Commissioner of Banking and
Consumer Finance of the State of Mississippi. The amount of capital of the
subsidiary banks available for dividends at December 31, 1997 was approximately
$100 million.
The Company and its bank subsidiaries are required to maintain certain minimum
capital levels. At December 31, 1997 and 1996, the Company and the banks were in
compliance with their respective statutory minimum capital requirements.
Following is a summary of the capital levels:
To be Well
Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- ----------------
Amount Ratio % Amount Ratio % Amount Ratio %
-------- ------ ------ ----- ------ --------
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Company $273,724 19.18 $ 114,200 8.00 $ N/A
Hancock Bank 165,059 18.45 71,600 8.00 89,500 10.00
Hancock Bank of Louisiana 109,517 20.58 42,600 8.00 53,200 10.00
Tier I Capital (to Risk Weighted Assets)
Company $259,940 18.22$ 57,100 4.00 $ N/A
Hancock Bank 157,927 17.65 35,800 4.00 53,700 6.00
Hancock Bank of Louisiana 102,865 19.33 21,300 4.00 31,900 6.00
Tier I Leveraged Capital
Company $259,940 10.24$ 76,100 3.00 $ N/A
Hancock Bank 157,927 9.75 48,600 3.00 81,000 5.00
Hancock Bank of Louisiana 102,865 10.94 28,200 3.00 47,000 5.00
To be Well
Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- -------------------- -----------------
Amount Ratio %Amount Ratio % Amount Ratio %
-------- ----- ------- ------- ------ -------
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Company $250,369 19.02$105,300 8.00 $ N/A
Hancock Bank 152,370 18.62 65,500 8.00 81,800 10.00
Hancock Bank of Louisiana 97,801 19.63 39,800 8.00 49,800 10.00
Tier I Capital (to Risk Weighted Assets)
Company $237,356 18.03$ 52,700 4.00 $ N/A
Hancock Bank 145,583 17.79 32,700 4.00 49,100 6.00
Hancock Bank of Louisiana 91,575 18.38 20,000 4.00 29,900 6.00
Tier I Leveraged Capital
Company $237,356 10.37$ 69,000 3.00 $ N/A
Hancock Bank 145,583 10.10 43,200 3.00 72,100 5.00
Hancock Bank of Louisiana 91,575 10.54 26,000 3.00 43,400 5.00
Risk-based capital requirements are intended to make regulatory capital more
sensitive to risk elements of the Company. Currently, the Company and its bank
subsidiaries are required to maintain a minimum risk-based capital ratio of
8.0%, with not less than 4.0% in Tier 1 capital. In addition, the Company and
Page 28
its bank subsidiaries must maintain a minimum Tier 1 leveraged ratio (Tier 1
capital to total assets) of at least 3.0% based upon the regulators latest
composite rating of the institutions. 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% or greater, its Tier 1 risked-based capital ratio is 6% or
greater, its leveraged ratio is 5% or greater and the institution is not subject
to a capital directive. Under this regulation, each of the subsidiary banks were
deemed to be well capitalized as of December 31, 1997 and 1996 based upon the
most recent notifications from their regulators. There are no conditions or
events since those notifications that management believes would change their
classifications.
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
December 31,
--------------------
1997 1996
------- --------
Deferred tax assets:
Post-retirement benefit obligation $ 993 $ 789
Reserve for loan losses not currently deductible 6,022 5,002
Reserve for other real estate not currently deductible 284 234
Deferred compensation 725 715
Lease accounting 195 159
Unrealized loss on securities available-for-sale 339
Other 242 547
------- -------
8,461 7,785
------- -------
Deferred tax liabilities:
Tax over book depreciation (3,325) (3,517)
Prepaid pension (1,088) (959)
Unrealized gain on securities available-for-sale (36)
Market discount accretion (1,321) (638)
------- -------
(5,770) (5,114)
------- -------
Net deferred tax asset $ 2,691 $ 2,671
======= =======
Income taxes consist of the following components (in thousands):
1997 1996 1995
----------- ----------- ---------
Currently payable $ 17,746 $ 15,924 $ 13,855
Deferred (395) (754) (790)
-------- -------- --------
$ 17,351 $ 15,170 $ 13,065
======== ======== ========
Income taxes amounted to less than the amounts computed by applying the U.S.
Federal income tax rate of 35% to earnings before income taxes. The reasons for
these differences are as follows (in thousands):
1997 1996 1995
---------- ------------ ----------
Amount % Amount % Amount %
---------- -------- ------------ --- ---- ---------- --------
Taxes computed at statutory rate $ 16,792 35 $ 16,371 35 $ 14,029 35
Increases (decreases) in taxes resulting from:
State income taxes 550 1 - - - -
Tax exempt interest income (1,501) (3) (1,583) (3) (1,355) (3)
Goodwill amortization 831 2 400 - 380 1
Miscellaneous items - net 679 1 (18) - 11 -
-------- -------- -------- -------- -------- ---------
Income tax expense $ 17,351 36 $ 15,170 32 $ 13,065 33
======== ======== ======== ======== ======== =========
The related income tax provision (credit) on securities gains (losses) was
$98,000 in 1997, $10,700 in 1996 and $(17,000) in 1995.
Page 29
NOTE 8 - 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 employee's
compensation during the last five years of employment. Data relative to
the pension plan follows (in thousands):
December 31,
--------------------
1997 1996
-------- ---------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 24,557 $ 22,702
======== ========
Accumulated benefit obligation $ 24,650 $ 22,792
======== ========
Projected benefit obligation for service rendered to date $(26,742) $(24,687)
Plan assets at fair value 26,524 23,251
-------- --------
Projected benefit obligation in excess of plan assets (218) (1,436)
Remaining unrecognized portion of net obligation being
amortized over 15 years 183 228
Unrecognized prior service cost 659 751
Unrecognized net loss from past experience different
from that assumed 2,484 3,197
-------- --------
Prepaid pension cost included in other assets $ 3,108 $ 2,740
======== ========
Years Ended December 31,
--------------------------------
Net pension expense included the 1997 1996 1995
-------- -------- --------
following (income) expense components:
Service cost - benefits earned during the period $ 942 $ 850 $ 836
Interest cost on projected benefit obligation 1,871 1,628 1,555
Return on plan assets (3,091) (2,222) (2,411)
Net amortization and deferral 1,478 747 1,275
-------- -------- --------
Net pension expense $ 1,200 $ 1,003 $ 1,255
======== ======== ========
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
7.75% and 3.0% in 1997 and 1996, respectively. The expected rate of return on
plan assets was 8% in 1997 and 1996. The Plan's assets consist primarily of U.S.
government and agency obligations, certificates of deposit and other fixed
income obligations.
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 noncontributory. The actuarial and recorded
liabilities for these post-retirement benefits, none of which have been funded,
are as follows (in thousands):
December 31,
------------------
Accumulated post-retirement benefit obligations: 1997 1996
------- -------
Retirees $ 2,952 $ 2,159
Fully eligible active plan participants 1,051 1,071
Other active plan participants 1,506 1,410
------- -------
5,509 4,640
Unrecognized transition obligation (2,006) (2,150)
Unrecognized net (loss) gain (665) (236)
------- -------
$ 2,838 $ 2,254
======= =======
Net periodic post-retirement benefit costs included the following components (in
thousands):
1997 1996 1995
----- ------ -----
Amortization of unrecognized net gain (loss) $ 0 $ (30) $ 55
Service cost-benefits attributed to service during the year 233 219 264
Interest costs on accumulated post-retirement benefit obligations 357 254 390
Amortization of transition obligation over 20 years 143 143 143
----- ----- -----
Net periodic post-retirement benefit cost $ 733 $ 586 $ 852
===== ===== =====
Page 30
For measurement purposes in 1997, an 8.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed. The rate was assumed to
decrease gradually to 5.5% for 2003 and remain at that level thereafter. In
1996, rates of 9.0% and 5.5% were assumed, and in 1995, rates of 9.5% and 5.5%
were assumed. 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 as of December 31, 1997, by $719,000 and the aggregate of the service
and interest cost components of net periodic post-retirement benefit cost for
the year then ended by $89,000. The weighted average discount rate used in
determining the accumulated post-retirement benefit obligation was 7.0% in 1997
and 7.5% in 1996 and 1995.
The Company has a non-contributory profit sharing plan covering substantially
all salaried full-time employees who have been employed the required length of
time. Contributions are made at the discretion of the Board of Directors and
amounted to $568,500 in 1997, $568,500 in 1996 and $456,000 in 1995.
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., who have been employed by the Company the
required length of time are eligible to participate, if they so elect. The
Company contributes an amount equal to 25% of each participant's contribution,
which contribution cannot exceed 5% of the employee's base pay. The Company's
contribution amounted to $84,500 in 1997, $71,000 in 1996 and $58,000 in 1995.
The post-retirement plans relating to health care payments and life insurance
and the stock purchase plan are not guaranteed and are subject to immediate
cancellation and/or amendment. These plans are predicated on future Company
profit levels that will justify their continuance. Overall health care costs are
also a factor in the level of benefits provided and continuance of these
post-retirement plans. There are no vested rights under the post-retirement
health or life insurance plans.
NOTE 9 - EMPLOYEE STOCK PLANS
In February 1996 the stockholders of the Company approved the Hancock Holding
Company 1996 Long-Term Incentive Plan to provide incentives and awards for
employees of the Company and it's subsidiaries. Awards as defined in the Plan
includes, 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 5,000,000 common shares can
be granted under the Plan with a maximum of 1% of the outstanding common stock
(as reported for the fiscal year ending immediately prior to such plan year) in
any one 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 December 15, 1996, options to purchase
35,250 shares were granted, of which 32,978 are exercisable at $40 per share and
2,272 are exercisable at $44 per share. 27,522 of these options are exercisable
on the first anniversary of the date of grant and 7,728 are exercisable six
months after date of grant. The options generally expire ten years after the
date of grant.
On December 11, 1997, options to purchase 62,375 were granted, of which 60,860
shares are exercisable at $66 per share and 1,515 are exercisable at $66 per
share. 48,288 of these options are exercisable on the first anniversary of the
date of grant and 14,087 are exercisable six months after the date of grant.
Below is a summary of the transactions:
Exercise Price
------------------------------------
Number of
Options Average Price
Outstanding Per Share Aggregate
----------- ------ -----------
Balance January 1, 1996 0 $ 0.00$ 0
Granted 35,250 40.26 1,419,000
----------- ------ -----------
Balance December 31, 1996 35,250 40.26 1,419,000
Granted 62,375 60.15 3,752,000
Cancelled (1,300) 40.00 (52,000)
----------- ------ -----------
Balance December 31, 1997 96,325 $ 53.14$ 5,119,000
=========== ====== ===========
Options on 33,950 shares were exercisable at December 31, 1997 with a weighted
average exercise price of $40.27 per share. The weighted average contractual
life of options outstanding at December 31, 1997 was 9.5 years.
Page 31
The Company has adopted the disclosure-only option under SFAS No. 123
"Accounting for Stock Based Compensation". The weighted average fair
value of options granted during 1997 and 1996 was $20.36 and $11.53,
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 123, the Company's net income and earnings
per share would have been as indicated below:
Year Ended December 31,
-------------------------
1997 1996
---------- ----------
Net earnings
As reported $ 30,624 $ 31,603
Pro Forma 30,220 31,584
Basic and diluted earnings per share
As reported $ 2.82 $ 3.08
Pro Forma 2.78 3.07
The fair value of the options granted under the Company's stock option plans
during the years ended December 31, 1997 and 1996 was estimated using the
Black-Scholes Pricing Model with the following assumptions used: dividend yield
of 1.6% and 2.3%, expected volatility of 25% and 22%, risk free interest rates
of 5.5% and 5.6%, and expected lives of 8 years and 8 years, respectively.
The Company also issued 12,300 restricted share grants during 1997 which vest
at the end of three years. Vesting is contingent upon continued employment by
the Company. All of these grants were outstanding at December 31, 1997. The
6,100 and 6,200 shares had respective market values of $42 and $60 per share at
the dates of grant, and $96,000 of compensation expense relating to these grants
was recorded in 1997. The remaining unearned compensation of $532,467 is being
amortized over the life of the grants.
NOTE 10 - DISCLOSURES ABOUT 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 that
value: Cash, Short-term Investments and Federal Funds Sold. For those short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Securities. For securities, fair value equals quoted market price, if available.
If a quoted market price is not available, a reasonable estimate of fair value
is used.
Loans. The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
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. Long-Term Bond
and 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
are as follows (in thousands):
December 31,
--------------------------------------------------------
1997 1996
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ----------- ------------
Financial Assets:
Cash, short-term investments and federal funds sold $ 150,692 $ 150,692 $ 134,428 $ 134,428
Securities available-for-sale 163,633 163,633 97,595 97,595
Securities held-to-maturity 916,362 924,958 803,998 806,710
Loans 1,220,630 1,208,958 1,173,967 1,167,767
Less: allowance for loan losses (21,000) (21,000) (19,800) (19,800)
----------- ----------- ----------- -----------
Loans, net of reserve 1,199,630 1,187,958 1,154,167 1,147,967
Financial Liabilities:
Deposits $ 2,062,648 $ 2,063,604 $ 1,926,576 $ 1,925,157
Securities sold under agreements to repurchase 170,534 170,534 87,609 87,609
Long-term bonds and notes 1,279 1,279 1,050 1,050
Page 32
NOTE 11 - 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 which are not reflected in the accompanying
consolidated financial statements, until they are funded or related fees are
incurred or received. These instruments 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
----------------------
1997 1996
---------- ---------
Commitments to extend credit $241,000 $224,500
Letters of credit 8,950 7,700
Approximately $181,000,000 and $183,000,000 of commitments to extend credit at
December 31, 1997 and 1996, respectively, were at variable rates and the
remainder were at fixed rates. The difference between the interest rates on
commitments to extend credit and market rates is reflected in the consolidated
financial statements over the terms of the related loans when, and if, they are
made.
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 customers' 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.
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 12 - Commitments and CONTINGENCIES
The Company is party to various legal proceedings arising in the ordinary course
of business. In the opinion of management, after consultation with outside 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
condition of the Company.
NOTE 13 - SUPPLEMENTAL INFORMATION
The following is selected supplemental information (in thousands):
Years Ended December 31,
-------------------------
1997 1996 1995
------- ------ ------
Other non-interest income:
Trust fee income $2,946 $2,412 $2,525
Other non-interest expense:
Deposit insurance premium expense 236 285 2,221
Postage expense 3,088 2,327 2,354
NOTE 14 - IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Standards No. 130
"Reporting Comprehensive Income" which requires that an enterprise report by
major components and as a single total, the change in net assets during the
period from non-owner sources and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes annual and interim
reporting standards for an enterprises operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's consolidated
Page 33
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997. The Company is in
the process of reviewing its operating segments.
NOTE 15 - SUMMARIZED FINANCIAL INFORMATION OF HANCOCK HOLDING COMPANY
(PARENT COMPANY ONLY)
BALANCE SHEETS
December 31,
---------------------------
1997 1996
------------ --------------
Assets:
Investment in subsidiaries $289,423,238 $261,740,752
Other 811,280 225,736
------------ ------------
$290,234,518 $261,966,488
============ ============
Liabilities and Stockholders' Equity:
Accrued Expenses $ 381,919 $ 28,543
Note Payable 1,279,402 -
Stockholders' Equity 288,573,197 261,937,945
------------ ------------
$290,234,518 $261,966,488
============ ============
STATEMENTS OF EARNINGS
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
Dividends received from subsidiaries $ 17,150,000 $ 15,391,000 $ 9,112,361
Excess equity in earnings of subsidiaries over dividends received 14,793,067 16,632,753 18,201,558
Interest and other expenses (1,847,491) (555,788) (398,472)
Income tax credit 528,843 135,039 101,450
------------ ------------ ------------
Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897
============ ============ ============
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
Cash Flows from Operating Activities:
principally dividends from subsidiaries $ 15,116,205 $ 14,813,634 $ 10,054,361
Cash Flows from Investing Activities:
purchase transactions (4,062,524) (5,622,371)
Cash Flows from Financing Activities:
principally dividends paid (11,039,887) (9,134,130) (10,028,311)
------------ ------------ ------------
Net increase in cash 13,794 57,133 26,050
Cash, Beginning 157,307 100,174 74,124
------------ ------------ ------------
Cash, Ending $ 171,101 $ 157,307 $ 100,174
============ ============ ============
Page 34
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, 1997 and 1996, and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New Orleans, Louisiana
January 13, 1998
Page 35
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the years ended December 31, 1997 and 1996
The Company's net income was $30.6 million, or $2.82 per share for the year
ended December 31, 1997, compared with $31.6 million, or $3.08 per share, for
the year ended December 31, 1996. Net interest income and non interest income
increased as a result of increased volume. Net interest margin declined from
5.20% in 1996 to 5.14% in 1997. Revenue increases were offset by higher levels
of operating costs and income taxes. Income taxes increased $2.2 million over
1996 due to, among other things, increased taxable income, state income taxes,
and higher levels of non-deductible goodwill amortization expense in conjunction
with the most recent three mergers. The provision for loan losses increased from
$6.2 million to $6.4 million as a result of increased loan charge-off activity.
The loan loss allowance was 1.72% of period-end loans and represented 539% of
non-performing loan balances at December 31, 1997.
For the years ended December 31, 1996 and 1995
The Company's net income was $31.6 million, or $3.08 per share, for the year
ended December 31, 1996, compared with $27.0 million, or $3.05 per share, for
the year ended December 31, 1995. The increase in net income can be primarily
attributed to increased loan volume and an increase in the net interest margin
from an average of 5.13% in 1995 to 5.20% in 1996. The Bank's balance sheets are
liability sensitive with deposits repricing faster than loans and investment
securities. Non-interest income increased $2.5 million or 10.4% while
non-interest expenses increased 0.6% or $500 thousand. FDIC premium expense in
1996 was $2 million lower than in 1995, which offset acquisition related
expenses and other normal expense increases. The provision for loan loss
increased from $4.4 million to $6.2 million in 1996 as a result of increased
loan charge-off activity and increased loan volume. The loan loss allowance was
1.69% of period-end loans and represented 682% of non-performing loan balances
at December 31, 1996.
Financial Condition
Securities
The Company generally purchases securities to be held to maturity, with a
maturity schedule that provides ample liquidity. Securities classified as
held-to-maturity are carried at amortized cost. Certain securities have been
classified as available-for-sale based on management's internal assessment of
the portfolio considering future liquidity and earning requirements. The
December 31, 1997 book value of the held-to-maturity portfolio was $916 million
and the market value was $925 million. The available-for-sale portfolio balance
was $164 million at December 31, 1997. Total securities increased by
approximately $178 million during 1997.
Loans
Loans outstanding increased $46.7 million in 1997 bringing the December 31,
1997, net loan portfolio balances to $1.2 billion or 52% of earning assets.
Loans acquired through the Southeast and Commerce transactions accounted for as
purchases amounted to $41 million or 88% of the increase. Non-performing loans
were $3.9 million or less than 1/2% of the December 31, 1997, loan balances.
Restructured loans were insignificant and the amount of interest not accrued on
non-performing loans did not significantly effect earnings in 1997, 1996 or
1995. The Company generally makes loans in its market areas of South Mississippi
and Southeastern Louisiana.
Deposits and Deposit Related Liabilities
Deposits increased to $2.1 billion on December 31, 1997. Interest bearing
deposit balances increased 7%. Deposits acquired through the Southeast and
Commerce transactions accounted for as purchases amounted to $62 million. Other
deposit related liabilities, principally securities purchased under agreements
to resell, increased from $88 million in 1996 to $171 million in 1997, or 94%.
Deposits and deposit related liabilities are the Company's primary source of
funds supporting its earning assets base.
Liquidity
Liquidity represents the Company's ability to provide funds to satisfy demands
from depositors, borrowers and other commitments by either converting assets to
cash or accessing new or existing funds. The principal sources of funds which
provide liquidity are customer deposits, payments of principal and interest on
Page 36
loans, maturities and sales of securities, earnings and borrowings. During 1995,
the Company established a line of credit with the Federal Home Loan Bank in
excess of $30 million, providing an additional liquidity source. At December 31,
1997, cash and due from banks, securities available-for-sale and federal funds
sold were in excess of 62% of total deposits.
Capital Resources
Composite ratings by the respective regulatory authorities of the Company and
Banks establish minimum capital levels. Currently, the Company and the Banks are
required to maintain minimum Tier I leveraged ratios of at least 3%, subject to
increase to at least 4% to 5%, depending on the composite rating. As of December
31, 1997, the Company and the Banks capital balances were in excess of current
regulatory minimum requirements and showed increases over the prior year.
Year 2000
In 1997 the Company began addressing all the systems requiring modifications to
accomodate the turn of the century. Testing of these systems will begin during
1998 with a complete year end test to be accomplished at the end of 1998.
Management believes it has dedicated adequate resources to this project and does
not believe that the cost of implementation will be a significant amount.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Standards No. 130
"Reporting Comprehensive Income" which requires that an enterprise report by
major components and as a single total, the change in net assets during the
period from non-owner sources and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes annual and interim
reporting standards for an enterprises operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997. The Company is in
the process of reviewing its operating segments.
Form 10-K Annual Report
Hancock Holding Company files an annual report with the Securities and Exchange
Commission on Form 10-K. A copy of the report filed on Form 10-K, when
completed, will be sent free of charge to any shareholder by writing to George
A. Schloegel, Vice-Chairman, Hancock Holding Company, P. O. Box 4019, Gulfport,
MS 39502.