Hancock Holding Company and Subsidiaries
Financial Highlights
(amounts in thousands, except per share data)
At and For the Years Ended December 31,
---------------------------------------
1998 1997 % Change
-------- -------- --------
Earnings Data:
Net interest income $ 111,917 $ 109,761 1.96
Provision for loan losses 6,229 6,399 (2.66)
Earnings before income taxes and cumulative
effect of accounting change 44,237 47,976 (7.79)
Net earnings 30,960 30,624 1.10
Per Share Data:
Earnings before cumulative effect
of accounting change:
Basic $ 2.79 $ 2.82 (1.06)
Diluted 2.78 2.82 (1.42)
Net earnings:
Basic 2.90 2.82 2.84
Diluted 2.89 2.82 2.48
Cash dividends paid 1.00 1.00 -
Book value (period end) 27.29 26.44 3.21
Weighted average number of shares outstanding 10,693 10,870 (1.63)
Number of shares outstanding 10,508 10,916 (3.74)
Balance Sheet Data (period end):
Securities $ 1,244,369 $ 1,079,995 15.22
Loans, net of unearned income 1,305,555 1,220,630 6.96
Allowance for loan losses 21,800 21,000 3.81
Total assets 2,814,695 2,537,957 10.90
Total deposits and deposit-related liabilities 2,514,798 2,233,181 12.61
Long-term bonds and notes - 1,279 (100.00)
Total stockholders' equity 286,807 288,573 (0.61)
Balance Sheet Data (average):
Securities $ 1,184,698 $ 984,203 20.37
Loans, net of unearned income 1,243,617 1,201,381 3.52
Allowance for loan losses 21,040 20,410 3.09
Total assets 2,696,107 2,442,953 10.36
Total deposits and deposit-related liabilities 2,390,036 2,155,189 10.90
Long-term bonds and notes 586 1,369 (57.20)
Total stockholders' equity 289,878 271,303 6.85
Performance Ratios (%):
Return on average assets 1.15 1.25 (8.00)
Return on average assets, excluding
cumulative effect of accounting change 1.11 1.25 (11.20)
Return on average equity 10.68 11.29 (5.40)
Return on average equity, excluding cumulative
effect of accounting change 10.28 11.29 (8.95)
Allowance for loan losses to period-end loans 1.67 1.72 (2.91)
Allowance for loan losses to non-performing loans 364.43 417.33 (12.68)
Net charge-offs to average loans 0.44 0.50 (12.00)
Net interest margin (1) 4.67 5.03 (7.16)
Regulatory Capital Ratios (%): Requirement
-----------
Tier I leveraged 9.69 10.41 3.00
Tier I risk-based 16.88 19.08 4.00
Total risk-based 17.41 20.33 8.00
(1) Fully taxable equivalent basis (FTE).
Hancock Holding Company and Subsidiaries
Consolidated Summary of Selected Financial Information
(amounts in thousands, except per share data)
At and For the Years Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
Interest Income:
Loans $ 118,502 $ 115,038 $ 104,961 $ 95,213 $ 80,157
Federal funds sold 3,090 2,733 5,580 5,820 3,831
Other investments 72,067 63,688 58,863 58,083 49,882
------------ ------------ ------------ ------------ -------------
Total interest income 193,659 181,459 169,404 159,116 133,870
------------ ------------ ------------ ------------ -------------
Interest Expense:
Deposits 74,464 66,150 60,625 57,612 48,193
Federal funds purchased and
securities sold under
agreements to repurchase 7,217 5,383 4,013 3,082 1,472
Bonds, notes and other 61 165 166 468 332
------------ ------------ ------------ ------------ -------------
Total interest expense 81,742 71,698 64,804 61,162 49,997
------------ ------------ ------------ ------------ -------------
Net Interest Income 111,917 109,761 104,600 97,954 83,873
Provision for loan losses 6,229 6,399 6,154 4,425 1,998
------------ ------------ ------------ ------------ -------------
Net interest income after
provision for loan losses 105,688 103,362 98,446 93,529 81,875
Non-interest income 32,331 32,168 28,421 26,709 22,788
Non-interest expense 93,782 87,554 80,094 80,156 71,040
------------ ------------ ------------ ------------ -------------
Earnings before income taxes
and cumulative effect of
accounting change 44,237 47,976 46,773 40,082 33,623
Income taxes 14,428 17,352 15,170 13,065 10,493
------------ ------------ ------------ ------------ -------------
Earnings before cumulative
effect of accounting change 29,809 30,624 31,603 27,017 23,130
Cumulative effect of accounting
change 1,151 - - - -
------------ ------------ ------------ ------------ -------------
Net Earnings $ 30,960 $ 30,624 $ 31,603 $ 27,017 $ 23,130
============ ============ ============ ============ =============
Per Common Share*:
Earnings before cumulative
effect of accounting change:
Basic $ 2.79 $ 2.82 $ 3.08 $ 2.65 $ 2.48
Diluted 2.78 2.82 3.08 2.65 2.48
Net earnings:
Basic 2.90 2.82 3.08 2.65 2.48
Diluted 2.89 2.82 3.08 2.65 2.48
Cash dividends paid 1.00 1.00 0.88 0.84 0.80
Weighted average number of shares*:
Basic 10,693 10,870 10,277 10,181 9,314
Diluted 10,705 10,877 10,277 10,181 9,314
Return on average assets 1.15% 1.25% 1.38% 1.22% 1.13%
Dividend payout 34.48% 35.46% 28.57% 31.70% 32.26%
Balance Sheet Data:
Total assets $ 2,814,695 $ 2,537,957 $ 2,289,582 $ 2,234,286 $ 2,026,929
Total deposits and deposit-
related liabilities 2,514,798 2,233,181 2,014,185 1,991,069 1,800,810
Total long-term bonds and notes - 1,279 1,050 2,035 2,955
Stockholders' equity 286,807 288,573 261,938 224,179 182,277
<FN>
* Per common share data is 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 and 1994 were $1.00, $0.96 and $0.92, respectively.
</FN>
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 $2.8
billion at December 31, 1998. The Company operates a total of 81 banking offices
and over 125 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 in addition to 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 (1)
(in thousands, except per share data)
1998 1997
--------------------------------------------- ---------------------------------------------
First Second Third Fourth First Second Third Fourth
--------- ---------- ---------- ---------- --------- --------- --------- -----------
Interest income (2) $ 48,589 $ 48,809 $ 49,863 $ 50,608 $ 44,352 $ 45,743 $ 46,440 $ 47,588
Interest expense (19,217) (20,796) (21,223) (20,506) (17,003) (17,783) (18,158) (18,754)
--------- ---------- ---------- ---------- --------- --------- --------- -----------
Net interest income 29,372 28,013 28,640 30,102 27,349 27,960 28,282 28,834
Provision for loan losses (1,359) (929) (1,203) (2,738) (836) (1,508) (2,993) (1,062)
Non-interest income 7,311 8,287 8,147 8,586 7,686 8,130 8,485 7,867
Non-interest expense (22,270) (21,717) (24,314) (25,481) (21,318) (21,137) (22,617) (22,483)
Taxable equivalent adjustment (846) (1,032) (1,124) (1,208) (600) (627) (680) (757)
--------- ---------- ---------- ---------- --------- --------- --------- -----------
Earnings before income taxes and
cumulative effect of accounting
change 12,208 12,622 10,146 9,261 12,281 12,818 10,477 12,399
Income taxes (4,155) (4,087) (3,297) (2,889) (4,024) (4,625) (3,790) (4,912)
--------- ---------- ---------- ---------- --------- --------- --------- -----------
Earnings before cumulative effect
of accounting change 8,053 8,535 6,849 6,372 8,257 8,193 6,687 7,487
Cumulative effect of accounting change - - - 1,151 - - - -
--------- ---------- ---------- ---------- --------- --------- --------- -----------
Net earnings $ 8,053 $ 8,535 $ 6,849 $ 7,523 $ 8,257 $ 8,193 $ 6,687 $ 7,487
========= ========== ========== ========== ========= ========= ========= ===========
Basic earnings per share:
Before cumulative effect of
accounting change $ 0.74 $ 0.78 $ 0.66 $ 0.61 $ 0.76 $ 0.76 $ 0.61 $ 0.69
Net earnings $ 0.74 $ 0.78 $ 0.66 $ 0.72 $ 0.76 $ 0.76 $ 0.61 $ 0.69
Diluted earnings per share:
Before cumulative effect of
accounting change $ 0.74 $ 0.78 $ 0.65 $ 0.61 $ 0.76 $ 0.76 $ 0.61 $ 0.69
Net earnings $ 0.74 $ 0.78 $ 0.65 $ 0.72 $ 0.76 $ 0.76 $ 0.61 $ 0.69
<FN>
(1) Certain quarterly amounts have been reclassified to conform with current
presentation.
(2) Fully taxable equivalent basis (FTE).
</FN>
Market Information
The Company's common stock trades on the Nasdaq Stock Market under the symbol
"HBHC" and is quoted in publications under "HancHd". The following table sets
forth the high and low sale prices of the Company's common stock as reported on
the Nasdaq Stock Market. These prices do not reflect retail mark-ups, mark-downs
or commissions.
Cash
High Low Dividends
Sale Sale Paid
------- ------- -----------
1998
1st quarter $ 62.75 $ 58.88 $ 0.25
2nd quarter $ 63.50 $ 52.50 $ 0.25
3rd quarter $ 55.50 $ 45.25 $ 0.25
4th quarter $ 49.50 $ 40.88 $ 0.25
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
There were 5,471 holders of record of common stock of the Company at January 4,
1999 and 11,072,770 shares issued. On January 4, 1999, the high and low sale
prices of the Company's common stock as reported on the Nasdaq Stock Market were
$46.50 and $45.00, respectively. The principal source of funds to the Company to
pay cash dividends are the dividends received from the Banks. Consequently,
dividends are dependent upon earnings, capital needs, regulatory policies and
statutory limitations affecting the Banks. Federal and state banking laws and
regulations restrict the amount of dividends and loans a bank may make to its
parent company. Dividends paid to the Company by Hancock Bank are subject to
approval by the Commissioner of Banking and Consumer Finance of the State of
Mississippi. The Company's management does not expect regulatory restrictions to
affect its policy of paying cash dividends. Although no assurance can be given
that Hancock Holding Company will continue to declare and pay regular quarterly
cash dividends on its common stock, the Company has paid regular cash dividends
since 1937.
Acquisitions
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), Baker, Louisiana. On February 1, 1995, the Company merged
Hancock Bank of Louisiana with Washington Bank and Trust Company (Washington),
Franklinton, Louisiana. These mergers were accounted for using the pooling-of-
interests method and 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). On November 15, 1996, the Company acquired Community
Bancshares, Inc. (Community), Independence, Louisiana, which owned 100% of the
stock of Community State Bank. On January 17, 1997, the Company acquired
Southeast National Bank (Southeast), Hammond, Louisiana, and 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.
The transactions were accounted for using the purchase method of accounting and
the results of operations since acquisition are included in the consolidated
statements of earnings. The excess of the purchase price over the value of net
tangible assets acquired in each transaction was assigned to goodwill and is
being amortized over 15 years.
Hancock Holding Company and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------------------
1998 1997
--------------- ---------------
Assets:
Cash and due from banks $ 161,293,659 $ 113,124,897
Interest-bearing time deposits with
other banks 96,000 2,067,500
Securities available for sale
(amortized cost of $462,876,000
and $163,531,000) 463,120,442 163,633,434
Securities held to maturity
(fair value of $790,379,000 and
$924,958,000) 781,248,857 916,361,847
Federal funds sold - 35,500,000
Loans 1,330,283,979 1,245,355,439
Less:
Allowance for loan losses (21,800,000) (21,000,000)
Unearned income (24,729,271) (24,725,896)
--------------- ---------------
Loans, net 1,283,754,708 1,199,629,543
Property and equipment, net 44,546,636 42,810,352
Other real estate 2,245,711 2,357,399
Accrued interest receivable 23,798,439 20,976,878
Goodwill and other intangibles 26,449,170 28,632,744
Other assets 28,141,852 12,861,951
--------------- ---------------
Total Assets $ 2,814,695,474 $ 2,537,956,545
================ ================
Liabilities and Stockholders' Equity:
Deposits:
Non-interest bearing demand $ 546,684,623 $ 462,730,852
Interest-bearing savings, NOW,
money market and time 1,827,905,922 1,599,916,793
---------------- ----------------
Total deposits 2,374,590,545 2,062,647,645
Securities sold under agreements to
repurchase 140,207,246 170,533,618
Other liabilities 13,090,483 14,922,683
Long-term bonds and notes - 1,279,402
---------------- ----------------
Total Liabilities 2,527,888,274 2,249,383,348
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 shares issued 36,872,324 36,872,324
Capital surplus 200,536,282 200,766,498
Retained earnings 71,498,714 51,401,100
Unrealized gain on securities available
for sale, net of deferred taxes 158,878 65,742
Unearned compensation (1,009,949) (532,467)
Treasury stock, 402,409 shares, at cost (21,249,049) -
---------------- ---------------
Total Stockholders' Equity 286,807,200 288,573,197
---------------- ---------------
Total Liabilities and Stockholders'
Equity $ 2,814,695,474 $ 2,537,956,545
================ ================
See notes to consolidated financial statements.
Hancock Holding Company and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31,
---------------------------------------------
1998 1997 1996
--------------- -------------- -------------
Interest Income:
Loans $ 118,502,095 $ 115,037,735 $ 104,960,423
U.S. Treasury securities 14,469,447 14,733,156 13,567,085
Obligations of U.S. government
agencies 29,962,683 34,699,383 34,885,873
Obligations of states and
political subdivisions 6,864,947 4,150,307 3,543,436
Federal funds sold 3,089,792 2,733,341 5,580,275
Other investments 20,769,588 10,105,014 6,866,644
--------------- -------------- -------------
Total interest income 193,658,552 181,458,936 169,403,736
--------------- -------------- -------------
Interest Expense:
Deposits 74,463,671 66,149,396 60,624,862
Federal funds purchased and
securities sold under
agreements to repurchase 7,216,677 5,383,358 4,013,259
Bonds and notes 61,483 165,449 165,840
--------------- -------------- -------------
Total interest expense 81,741,831 71,698,203 64,803,961
--------------- -------------- -------------
Net Interest Income 111,916,721 109,760,733 104,599,775
Provision for loan losses 6,228,965 6,399,481 6,153,753
--------------- -------------- -------------
Net interest income after
provision for loan losses 105,687,756 103,361,252 98,446,022
Non-Interest Income:
Service charges on deposit
accounts 19,164,074 18,528,677 16,877,678
Other service charges,
commissions and fees 10,161,475 9,775,185 8,907,368
Securities gains, net 167,139 278,651 30,531
Other 2,838,834 3,586,377 2,605,950
--------------- -------------- -------------
Total non-interest income 32,331,522 32,168,890 28,421,527
--------------- -------------- -------------
Non-Interest Expense:
Salaries and employee benefits 50,832,743 46,472,455 42,384,113
Net occupancy expense of premises 5,559,608 4,882,277 4,764,473
Equipment rentals, depreciation
and maintenance 7,707,028 7,259,428 7,365,090
Amortization of intangibles 2,404,914 2,281,666 2,330,082
Other 27,278,170 26,658,497 23,250,787
-------------- -------------- -------------
Total non-interest expense 93,782,463 87,554,323 80,094,545
-------------- -------------- -------------
Earnings before income taxes
and cumulative effect of
accounting change 44,236,815 47,975,819 46,773,004
Income taxes 14,427,427 17,351,400 15,170,000
-------------- -------------- -------------
Earnings before cumulative effect
of accounting change 29,809,388 30,624,419 31,603,004
Cumulative effect of accounting
change 1,150,811 - -
--------------- -------------- -------------
Net Earnings $ 30,960,199 $ 30,624,419 $ 31,603,004
=============== ============== =============
Basic earnings per common share:
Before cumulative effect of
accounting change $ 2.79 $ 2.82 $ 3.08
Cumulative effect of accounting
change 0.11 - -
--------------- -------------- -------------
Net Earnings $ 2.90 $ 2.82 $ 3.08
=============== ============== =============
Diluted earnings per common
share:
Before cumulative effect of
accounting change $ 2.78 $ 2.82 $ 3.08
Cumulative effect of
accounting change 0.11 - -
--------------- -------------- -------------
Net Earnings $ 2.89 $ 2.82 $ 3.08
=============== ============== =============
See notes to consolidated financial statements.
Hancock Holding Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
---------------------------------------------------------------------------------------------------
Unrealized
Common Stock Gain (Loss)
------------------------ on Securities
Shares Capital Retained Available For Unearned Treasury
Issued Amount Surplus Earnings Sale, Net Compensation Stock
---------- ------------ ------------- ------------- ------------- -------------- ------------
Balance, January 1, 1996 9,021,949 $ 30,043,090 $ 130,000,000 $ 63,823,349 $ 312,078 $ - $ -
Net earnings 31,603,004
Cash dividends - $0.88 per
share (9,193,395)
Change in unrealized gain
(loss) on securities
available for sale, net (944,839)
15% stock dividend 1,351,960 4,502,027 49,914,363 (54,416,390)
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, net 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) -
Net earnings 30,960,199
Cash dividends - $1.00 per
share (10,862,585)
Change in unrealized gain
(loss) on securities
available for sale, net 93,136
Transactions relating to
restricted stock grants, net (477,482)
Purchase of treasury stock, net (230,216) (21,249,049)
---------- ------------ -------------- -------------- ---------- ------------- --------------
Balance, December 31, 1998 11,072,770 $ 36,872,324 $ 200,536,282 $ 71,498,714 $ 158,878 $ (1,009,949) $ (21,249,049)
========== ============ ============== ============== ========== ============= ==============
Hancock Holding Company and Subsidiaries
Consolidated Statements of Comprehensive Earnings
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net earnings $ 30,960,199 $ 30,624,419 $ 31,603,004
Other comprehensive earnings (loss):
Unrealized gain (loss) on
securities
available for sale, net:
Unrealized holding gains
(losses) arising during
the year 114,136 879,503 (924,839)
Less reclassification
adjustment for gains
included in net earnings (21,000) (181,000) (20,000)
------------- ------------- -------------
Total other
comprehensive
earnings (loss) 93,136 698,503 (944,839)
------------- ------------- -------------
Total
Comprehensive
Earnings $ 31,053,335 $ 31,322,922 $ 30,658,165
============= ============= =============
See notes to consolidated financial statements.
Hancock Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash Flows from Operating Activities:
Net earnings $ 30,960,199 $ 30,624,419 $ 31,603,004
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 5,188,749 4,705,432 4,818,532
Provision for loan losses 6,228,965 6,399,481 6,153,753
Provision for deferred income taxes (435,000) (395,000) (754,000)
Cumulative effect of accounting change
(before income taxes) (1,863,662) - -
Gains on sales of securities (167,139) (278,651) (30,531)
Increase in interest receivable (2,821,561) (282,032) (117,042)
Amortization of intangible assets 2,404,914 2,281,666 2,330,082
Increase (decrease) in interest payable 847,700 14,102 (215,863)
Other, net (6,894,964) 1,140,190 (834,320)
-------------- ------------- ------------
Net cash provided by operating
activities 33,448,201 44,209,607 42,953,615
-------------- ------------- ------------
Cash Flows from Investing Activities:
Net decrease (increase) in interest-
bearing time deposits 1,971,500 (2,056,716) 1,395,000
Proceeds from maturities of securities
held to maturity 225,302,135 261,488,556 372,251,124
Purchase of securities held to
maturity (99,464,050) (359,318,934)(375,169,554)
Proceeds from sales and maturities of
trading and available-for-sale
securities 83,297,803 31,441,417 25,122,385
Purchase of securities available for
sale (375,620,262) (97,379,020) (34,102,782)
Net decrease (increase) in federal
funds sold 35,500,000 (18,525,000) 147,175,000
Net increase in loans (91,010,541) (11,363,057)(109,554,135)
Purchase of property, equipment and
software, net (12,675,267) (5,206,091) (5,029,439)
Proceeds from sales of other real
estate 802,512 1,737,568 1,169,568
Net cash received in connection with
purchase transactions - 2,288,000 201,830
-------------- ------------- ------------
Net cash (used) provided by
investing activities (231,896,170) (196,893,277) 23,458,997
-------------- ------------- ------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 311,942,900 75,490,602 (82,051,076)
Dividends paid (10,862,585) (11,039,887) (9,193,395)
Treasury stock transactions, net (22,857,810) - -
Repayments of long-term bonds and
notes (1,279,402) (1,050,000) (985,000)
Net (decrease) increase in federal
funds purchased, securities sold
under agreements to repurchase
and other temporary funds (30,326,372) 82,924,580 21,023,725
-------------- ------------- ------------
Net cash provided (used) by
financing activities 246,616,731 146,325,295 (71,205,746)
-------------- ------------- ------------
Net increase (decrease) in cash
and due from banks 48,168,762 (6,358,375) (4,793,134)
Cash and due from banks, beginning 113,124,897 119,483,272 124,276,406
------------- ------------- -------------
Cash and due from banks, ending $ 161,293,659 $ 113,124,897 $119,483,272
============= ============= =============
Supplemental Information
Income taxes paid $ 16,460,355 $ 16,410,052 $ 17,185,000
Interest paid 80,894,131 71,684,101 65,019,824
See notes to consolidated financial statements.
Hancock Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Hancock Holding Company (the Company) is a bank holding company
headquartered in Gulfport, Mississippi operating in the states of Mississippi
and Louisiana through two wholly-owned bank subsidiaries, Hancock Bank,
Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana (the
Banks). The Banks are community oriented and focus primarily on offering
commercial, consumer and mortgage loans and deposit services to individuals and
small to middle market businesses in their respective market areas. The
Company's operating strategy is to provide its customers with the financial
sophistication and breadth of products of a regional bank, while successfully
retaining the local appeal and level of service of a community bank.
Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices within the banking
industry. The following is a summary of the more significant of those policies.
Consolidation - The consolidated financial statements of the Company
include the accounts of the Company, the Banks and other subsidiaries.
Significant intercompany transactions and balances have been eliminated in
consolidation.
Comprehensive Income - The Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS No. 130)
effective January 1, 1998 and has provided the required information for all
periods presented. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its major components. Comprehensive income includes
net earnings and other comprehensive income which, in the case of the Company,
includes only unrealized gains and losses on securities available for sale.
Use of Estimates - In preparing the financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates. The determination of the allowance for loan losses is a
material estimate that is particularly subject to significant change.
Cash - For the purpose of presentation in the statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and Due from Banks".
Securities - Securities have been classified into one of three categories:
trading, available-for-sale, or held-to-maturity. Management determines the
appropriate classification of debt securities at the time of purchase and re-
evaluates this classification periodically. Trading account securities are held
for resale in anticipation of short-term market movements. Debt securities are
classified as held to maturity when the Company has the positive intent and
ability to hold the securities to maturity. Securities not classified as held to
maturity or trading are classified as available for sale.
With the exception of securities reclassified from held to maturity to
trading and subsequently sold upon adoption of Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(SFAS No.133), the Company had no trading account securities during the three
years ended December 31, 1998.
Held-to-maturity securities are stated at amortized cost. Available-for-
sale securities are stated at fair value with unrealized gains and losses, net
of income taxes, reported as a separate component of stockholders' equity until
realized.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Amortization, accretion and accrued interest are
included in interest income on securities. Realized gains and losses, and
declines in value judged to be other than temporary, are included in net
securities gains and losses. Gains and losses on the sale of securities
available for sale are determined using the specific-identification method.
Derivative Instruments - Effective October 1, 1998, the Company adopted
SFAS No. 133. The Statement was issued in June 1998 and requires the Company to
recognize all derivatives as either assets or liabilities in the Company's
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specially designated as a hedge. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Further, SFAS No. 133 permits, at the
time of implementation, the reclassification of securities currently classified
as held to maturity without calling into question the Company's original intent.
The Company is not currently engaged in any significant activities with
derivatives; therefore, management believes that the impact of the adoption of
this Statement is not significant. However, at the time of implementation of
this Statement, the Company reclassified a portion of its held-to-maturity
portfolio to trading securities. The securities that were transferred to trading
had an amortized cost of $5,126,000 and unrealized gross gains of $1,864,000
($1,151,000 net of income taxes) at October 1, 1998. This amount is reported as
a cumulative effect of accounting change in the 1998 consolidated statement of
earnings. These securities were sold subsequent to the transfer.
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 loans is recorded to income as earned. Where doubt exists as to
collectibility of a loan, the accrual of interest is discontinued, all unpaid
accrued interest is reversed and payments subsequently received are applied
first to principal. Interest income is recorded after principal has been
satisfied and as payments are received.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. The Company's impaired loans include troubled debt restructurings,
and performing and non-performing major loans for which full payment of
principal or interest is not expected. Non-major homogenous loans, which are
evaluated on an overall basis, generally include all loans under $500,000. The
Company calculates an allowance required for impaired loans based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price or the fair value of its collateral. If
the recorded investment in the impaired loan exceeds the measure of fair value,
a valuation allowance is required as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of the
provision for loan losses.
Generally, loans of all types which become 90 days delinquent are deemed
currently uncollectible unless such loans are in the process of collection
through repossession or foreclosure. 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.
Allowance for Loan Losses - The allowance for loan losses is a valuation
account available to absorb losses on loans. All losses are charged to the
allowance for loan losses when the loss actually occurs or when a determination
is made that a loss is likely to occur; recoveries are credited to the allowance
for loan losses at the time of receipt. Periodically during the year management
estimates the probable level of future losses to determine whether the allowance
is adequate to absorb reasonably foreseeable, anticipated losses in the existing
portfolio based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, the estimated value of any underlying collateral and current
economic conditions. The allowance for loan losses is increased by charges to
expense and decreased by loan charge-offs (net of recoveries).
Property and Equipment - Property and equipment are recorded at amortized
cost. Depreciation is computed principally by the straight-line method based on
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the term of the lease or the asset's useful life.
Other Real Estate - Other real estate acquired through foreclosure is
stated at the fair market value at the date of acquisition, net of the costs of
disposal. When a reduction to fair market value at the time of foreclosure is
required, a charge is made to the allowance for loan losses. Any subsequent
adjustments are charged to expense.
Intangible Assets - Intangible assets include the values assigned to 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.
Trust Fees - Trust fees are recorded as earned.
Income Taxes - Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable income such as
interest on state and municipal securities) and deferred taxes on temporary
differences between the amount of taxable income and pre-tax financial income.
Deferred taxes on temporary differences are calculated at the currently enacted
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Pension and Other Plans - The Company adopted Statement of Financial
Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other
Post-Retirement Benefits" (SFAS No. 132) effective January 1, 1998 and has
provided the required information for all periods presented. SFAS No. 132
establishes revised disclosure standards for pension and other post-retirement
plan information.
Stock Based Compensation - The Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock options. The pro forma
disclosures required by Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" (SFAS No. 123) are included in Note 9.
Basic and Diluted Earnings Per Common Share - Basic earnings per share
(EPS) excludes dilution and is computed by dividing earnings 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.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
NOTE 2 - ACQUISITIONS
Completed Acquisitions
On November 15, 1996, the Company acquired Community Bancshares, Inc.
(Community), Independence, Louisiana, for approximately $5,000,000 cash and
513,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of
the Company. On January 17, 1997, the Company acquired Southeast National Bank
(Southeast), Hammond, Louisiana for approximately $3,700,000 cash and 121,000
shares of common stock of the Company. 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, 65,000 shares of the Company's common stock and the assumption of
Commerce debt owed to certain individuals in the aggregate principal amount of
$1,250,000. These transactions were accounted for using the purchase method of
accounting and the results of operations since the date of acquisition were
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 Community, Southeast and Commerce as though they
had occurred on January 1, 1996 (in thousands, except per share data):
Years Ended December 31,
-----------------------------
1997 1996
------------- ------------
Interest income $ 182,688 $ 180,253
Interest expense (72,162) (69,278)
Provision for loan losses (6,565) (6,179)
------------- ------------
Net interest income after provision
for loan losses 103,961 104,796
Net earnings $ 30,643 $ 32,624
Basic and diluted earnings per common
share $ 2.81 $ 2.99
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, 1996 or of future results of operations of the combined companies.
In connection with the 1997 and 1996 acquisitions, liabilities were assumed
as follows (in thousands):
1997 1996
----------- -----------
Fair value of all assets, excluding cash $ 68,815 $ 96,623
Cash acquired, net of amount paid 2,288 202
Market value of common stock issued (6,885) (16,295)
----------- -----------
Liabilities assumed $ 64,218 $ 80,530
=========== ===========
Pending Acquisition
During 1998, Hancock Holding Company entered into an agreement to acquire
American Security Bancshares of Ville Platte, Inc.(ASB), Ville Platte,
Louisiana. Terms of the agreement call for the acquisition of ASB stock in
return for approximately $13,800,000 cash and 672,000 shares of common stock of
the Company. The acquisition will be accounted for using the purchase method.
ASB had total assets of approximately $230,000,000 (unaudited) and stockholders'
equity of approximately $23,000,000 (unaudited) at December 31, 1998 and net
earnings of approximately $3,000,000 (unaudited) for the year then ended. The
results of operations of ASB will be included in the 1999 consolidated
statements of earnings from the date of acquisition. It is expected that this
acquisition will result in the recognition of goodwill amounting to
approximately $20,000,000, which will be amortized over 15 years.
Following is certain selected unaudited pro forma combined financial
information at December 31, 1998 and for the year then ended, assuming that the
acquisition had been effective January 1, 1998 (in thousands, except per share
data):
Total assets $ 3,062,000
Stockholders' equity 316,000
Net interest income 119,000
Net earnings 32,000
Basic and diluted earnings per share $ 2.81
NOTE 3 - SECURITIES
The amortized cost and fair value of securities classified as available for
sale were as follows (in thousands):
December 31, 1998 December 31, 1997
---------------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ----------- ---------- ----------
U.S. Treasury $ 101,493 $ 692 $ 23 $ 102,162 $ 54,637 $ 79 $ 8 $ 54,708
U.S. government agencies 272,564 288 518 272,334 46,039 5 126 45,918
Municipal obligations 5,851 101 35 5,917 1,496 30 - 1,526
Mortgage-backed securities 31,652 79 395 31,336 27,538 318 29 27,827
CMOs 45,347 92 37 45,402 21,427 - 162 21,265
Other debt securities - - - - 6,305 - 5 6,300
Equity securities 5,969 - - 5,969 6,089 - - 6,089
--------- ---------- --------- --------- --------- -------- ---------- ----------
$ 462,876 $ 1,252 $ 1,008 $ 463,120 $ 163,531 $ 432 $ 330 $ 163,633
========= ========== ========= ========= ========= ======== ========== =========
The amortized cost and fair value of debt securities classified as
available for sale at December 31, 1998, by contractual maturity, were as
follows (in thousands):
Amortized Cost Fair Value
-------------- ----------
Due in one year or less $ 134,436 $ 134,242
Due after one year through five years 193,733 194,481
Due after five years through ten years 73,916 73,934
Due after ten years 54,822 54,494
--------- ---------
$ 456,907 $ 457,151
========= =========
The amortized cost and fair value of securities classified as held to
maturity were as follows (in thousands):
December 31, 1998 December 31, 1997
--------------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
U.S. Treasury $ 114,506 $ 1,043 $ - $ 115,549 $ 210,525 $ 2,533 $ 127 $ 212,931
U.S. government agencies 200,149 2,250 97 202,302 267,437 1,112 312 268,237
Municipal obligations 167,997 4,136 73 172,060 88,062 2,979 37 91,004
Mortgage-backed securities 114,747 851 177 115,421 133,925 1,943 137 135,731
CMOs 177,796 1,346 150 178,992 190,539 1,245 602 191,182
Other debt securities 6,054 1 - 6,055 25,874 19 20 25,873
--------- ---------- -------- --------- --------- ---------- --------- ---------
$ 781,249 $ 9,627 $ 497 $ 790,379 $ 916,362 $ 9,831 $ 1,235 $ 924,958
========= ========== ======== ========= ========= ========== ========= =========
The amortized cost and fair value of securities classified as held to
maturity at December 31, 1998, by contractual maturity, were as follows (in
thousands):
Amortized Cost Fair Value
-------------- ----------
Due in one year or less $ 195,115 $ 196,134
Due after one year through five years 140,033 142,978
Due after five years through ten years 198,146 200,667
Due after ten years 247,955 250,600
--------- ---------
$ 781,249 $ 790,379
========= =========
Proceeds from sales of available-for-sale securities were $19,222,000 in
1998, $12,919,000 in 1997 and $20,425,000 in 1996. Gross gains of $540,000 in
1998, $321,000 in 1997 and $178,000 in 1996 and gross losses of $508,000 in
1998, $42,000 in 1997 and $147,000 in 1996 were realized on such sales. Gross
gains of $135,000 were recognized on held-to-maturity securities called during
1998.
Securities with an amortized cost of approximately $547,491,000 at
December 31, 1998 and $600,264,000 at December 31, 1997, were pledged primarily
to secure public deposits and securities sold under agreements to repurchase.
The Company's collateralized mortgage obligations (CMOs) generally consist
of first and second tranche sequential pay and/or planned amortization class
(PAC) instruments. Interest income on CMOs and mortgage-backed securities is
generally included in other investment income.
NOTE 4 - LOANS
Loans consisted of the following (in thousands):
December 31,
-----------------------------
1998 1997
----------- -----------
Real estate loans - primarily mortgage $ 482,418 $ 476,612
Commercial and industrial loans 224,686 175,721
Loans to individuals for household, family
and other consumer expenditures 583,211 558,147
Leases 17,324 16,889
Other loans 22,645 17,986
----------- -----------
$ 1,330,284 $ 1,245,355
=========== ===========
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, executive officers and their associates on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. Such loans did not involve more
than normal risk of collectibility. The balance of loans to the Company's
directors, executive officers and their affiliates at December 31, 1998 and 1997
was approximately $2,898,000 and $3,652,000, respectively.
Changes in the allowance for loan losses were as follows (in thousands):
Years Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Balance at January 1 $ 21,000 $ 19,800 $ 17,391
Balance acquired through acquisitions - 833 654
Recoveries 1,701 2,181 2,068
Loans charged off (7,130) (8,213) (6,466)
Provision charged to operating expense 6,229 6,399 6,153
--------- --------- ---------
Balance at December 31 $ 21,800 $ 21,000 $ 19,800
========= ========= =========
Non-accrual and renegotiated loans amounted to approximately 0.46% of total
loans at December 31, 1998 and 0.41% at December 31, 1997. In addition, the
Company's other individually evaluated impaired loans amounted to approximately
0.45% and 0.25% of total loans at December 31, 1998 and 1997, respectively.
Related reserve amounts were not significant and there was no significant change
in these amounts during the years ended December 31, 1998, 1997 or 1996. The
amount of interest not accrued on these loans did not have a significant effect
on earnings in 1998, 1997 or 1996.
Transfers from loans to other real estate amounted to approximately
$656,000, $1,894,000 and $1,952,000 in 1998, 1997 and 1996, respectively.
Valuation allowances associated with other real estate amounted to $1,088,000
and $812,000 at December 31, 1998 and 1997, respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, stated at cost less accumulated depreciation and
amortization, consisted of the following (in thousands):
December 31,
-------------------------
1998 1997
--------- ---------
Land, buildings and leasehold improvements $ 49,414 $ 47,073
Furniture, fixtures and equipment 46,245 42,022
--------- ---------
95,659 89,095
Accumulated depreciation and amortization (51,112) (46,285)
--------- ---------
$ 44,547 $ 42,810
========= =========
NOTE 6 - STOCKHOLDERS' EQUITY
Basic and diluted earnings per common share were based on the weighted
average number of shares outstanding of approximately 10,693,000 and 10,705,000
in 1998, 10,870,000 and 10,877,000 in 1997 and 10,277,000 and 10,277,000 in
1996. Outstanding amounts reflect reductions for treasury stock and shares of
stock owned by subsidiaries and give retroactive effect to the 15% stock
dividend paid in 1996. At December 31, 1998 and 1997, subsidiaries owned 162,200
shares of stock.
Stockholders' equity of the Company includes the undistributed earnings of
the bank subsidiaries. Dividends are payable only out of undivided profits or
current earnings. Moreover, dividends to the Company's stockholders can
generally be paid only from dividends paid to the Company by the Banks.
Consequently, dividends are dependent upon earnings, capital needs, regulatory
policies and statutory limitations affecting the Banks. Federal and state
banking laws and regulations restrict the amount of dividends and loans a bank
may make to its parent company. With respect to Hancock Bank, dividends paid 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, 1998 was approximately $100 million.
The Company and its bank subsidiaries are required to maintain certain
minimum capital levels. At December 31, 1998 and 1997, the Company and the Banks
were in compliance with their respective statutory minimum capital requirements.
Following is a summary of the actual capital levels at December 31, 1998 and
1997 (amounts in thousands):
To be Well
Required for Capitalized Under
Minimum Capital Prompt Corrective
Actual Adequacy Action Provisions
------------------- ------------------- ------------------
Amount Ratio % Amount Ratio % Amount Ratio %
--------- ------- --------- ------- -------- -------
At December 31, 1998
Total capital
(to risk weighted assets)
Company $ 277,846 17.41 $ 122,600 8.00 $ N/A N/A
Hancock Bank 172,127 17.44 79,000 8.00 98,700 10.00
Hancock Bank of Louisiana 105,864 19.46 43,600 8.00 54,400 10.00
Tier I capital
(to risk weighted assets)
Company $ 258,663 16.88 $ 61,300 4.00 $ N/A N/A
Hancock Bank 159,771 16.19 39,500 4.00 59,300 6.00
Hancock Bank of Louisiana 99,053 18.21 21,800 4.00 32,700 6.00
Tier I leveraged capital
Company $ 258,663 9.69 $ 80,100 3.00 $ N/A N/A
Hancock Bank 159,771 8.83 54,400 3.00 90,600 5.00
Hancock Bank of Louisiana 99,053 10.46 28,500 3.00 47,400 5.00
To be Well
Required for Capitalized Under
Minimum Capital Prompt Corrective
Actual Adequacy Action Provisions
------------------- ------------------- ------------------
Amount Ratio % Amount Ratio % Amount Ratio %
--------- ------- --------- ------- -------- -------
At December 31, 1997
Total capital
(to risk weighted assets)
Company $ 276,977 20.33 $ 109,000 8.00 $ N/A N/A
Hancock Bank 168,498 19.71 68,400 8.00 85,500 10.00
Hancock Bank of Louisiana 109,671 20.42 43,000 8.00 53,800 10.00
Tier I capital
(to risk weighted assets)
Company $ 259,900 19.08 $ 54,500 4.00 $ N/A N/A
Hancock Bank 157,791 18.46 34,200 4.00 51,300 6.00
Hancock Bank of Louisiana 102,934 19.16 21,500 4.00 32,300 6.00
Tier I leveraged capital
Company $ 259,900 10.41 $ 75,000 3.00 $ N/A N/A
Hancock Bank 157,791 9.79 48,400 3.00 80,600 5.00
Hancock Bank of Louisiana 102,934 11.63 26,600 3.00 44,300 5.00
Risk-based capital requirements are intended to make regulatory capital
more sensitive to risk elements of the Company. Currently, the Company and its
bank subsidiaries are required to maintain a minimum risk-based capital ratio of
8.0%, with not less than 4.0% in Tier 1 capital. In addition, the Company and
its bank subsidiaries must maintain a minimum Tier 1 leveraged ratio (Tier 1
capital to total average assets) of at least 3.0% based upon the regulators
latest composite rating of the institution.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required each federal banking agency to implement prompt corrective actions for
institutions that it regulates. The rules provide that an institution is "well
capitalized" if its total risk-based capital ratio is 10.0% or greater, its Tier
1 risked-based capital ratio is 6.0% or greater, its leveraged ratio is 5.0% 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, 1998 and 1997 based upon the most recent notifications from
their regulators. There are no conditions or events since those notifications
that management believes would change these classifications.
NOTE 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 were as follows (in
thousands):
December 31,
---------------------
1998 1997
-------- --------
Deferred tax assets:
Post-retirement benefit obligation $ 1,167 $ 993
Allowance for loan losses 6,200 6,022
Other real estate valuation allowances 420 284
Deferred compensation 746 725
Lease accounting 344 195
Other 292 242
-------- --------
9,169 8,461
-------- --------
Deferred tax liabilities:
Property and equipment depreciation (3,234) (3,325)
Prepaid pension (1,206) (1,088)
Unrealized gain on securities available for sale (85) (36)
Discount accretion on securities (1,567) (1,321)
-------- ---------
(6,092) (5,770)
-------- ---------
Net deferred tax asset $ 3,077 $ 2,691
======== =========
Income taxes consisted of the following components (in thousands):
Years Ended December 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
Currently payable $ 14,862 $ 17,746 $ 15,924
Deferred (435) (395) (754)
--------- --------- ---------
$ 14,427 $ 17,351 $ 15,170
========= ========= =========
The reason for differences in income taxes reported compared to amounts
computed by applying the statutory income tax rate of 35% to earnings before
income taxes were as follows (in thousands):
December 31,
---------------------------------------------
1998 1997 1996
------------- -------------- --------------
Amount % Amount % Amount %
-------- -- -------- -- -------- ---
Taxes computed at statutory rate $ 15,483 35 $ 16,792 35 $ 16,371 35
Increases (decreases) in taxes
resulting from:
State income taxes, net of
federal income tax benefit 410 1 550 1 - -
Tax-exempt interest (2,380) (5) (1,501) (3) (1,583) (3)
Goodwill amortization 840 2 831 2 400 -
Other, net 74 - 679 1 (18) -
--------- --- --------- --- --------- ---
Income tax expense $ 14,427 33 $ 17,351 36 $ 15,170 32
========= === ========= === ========= ===
The related deferred income tax provision (credit) on unrealized gains
(losses) on securities available for sale included in other comprehensive income
was $50,000 in 1998, $375,000 in 1997 and $(510,000) in 1996.
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):
Years Ended December 31,
--------------------------
1998 1997
---------- ----------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 26,742 $ 24,687
Service cost 1,041 942
Interest cost 2,018 1,871
Actuarial loss 588 450
Benefits paid (1,269) (1,208)
---------- ----------
Benefit obligation at end of year 29,120 26,742
---------- ----------
Change in Plan Assets:
Fair value of plan assets at
beginning of year 26,524 23,251
Actual return on plan assets 2,249 3,091
Employer contributions 1,486 1,567
Benefits paid (1,268) (1,208)
Expenses (200) (177)
---------- ----------
Fair value of plan assets at end of year 28,791 26,524
---------- ----------
Funded status (329) (218)
---------- ----------
Unrecognized portion of net obligation being
amortized over 15 years 137 183
Unrecognized prior service cost 3,072 2,484
Unrecognized net actuarial loss 567 659
---------- ----------
Prepaid pension cost included in other assets $ 3,447 $ 3,108
========== ==========
Rate assumptions at December 31:
Discount rate 7.00% 7.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.00% 3.00%
Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
Net pension expense included the following
(income) expense components:
Service cost - benefits earned during the period $ 1,041 $ 942 $ 850
Interest cost on projected benefit obligation 2,018 1,871 1,628
Return on plan assets (2,249) (3,091) (2,222)
Net amortization and deferral 92 92 92
Amortization of prior service cost 244 1,386 655
-------- -------- --------
Net pension expense $ 1,146 $ 1,200 $ 1,003
======== ======== ========
The Company sponsors two defined benefit post-retirement plans, other than
the pension plan, that cover full-time employees who have reached 45 years of
age. One plan provides medical benefits and the other provides life insurance
benefits. The post-retirement health care plan is contributory, with retiree
contributions adjusted annually and subject to certain employer contribution
maximums; the life insurance plan is non-contributory. Data relative to these
post-retirement benefits, none of which have been funded, were as follows (in
thousands):
Years Ended December 31,
----------------------------
1998 1997
---------- ------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 5,509 $ 4,640
Service cost 293 233
Interest cost 374 357
Actuarial loss 324 428
Benefits paid (262) (149)
--------- ------------
Benefit obligation at end of year 6,238 5,509
Fair value of plan assets - -
--------- ------------
Amount unfunded (6,238) (5,509)
Unrecognized transition obligation being
amortized over 20 years 1,863 2,006
Unrecognized net actuarial (gain) loss 976 665
---------- ------------
Accrued post-retirement benefit cost $ (3,399) $ (2,838)
========== ============
Rate assumptions at December 31:
Discount rate 6.50% 7.00%
Years Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
Net Periodic Post-Retirement Benefit Cost:
Amortization of unrecognized net gain (loss) $ 12 $ - $ (30)
Service cost - benefits attributed to service
during the year 293 233 219
Interest costs on accumulated post-retirement
benefit obligation 375 357 254
Amortization of transition obligation over 20 years 143 143 143
------- ------- --------
Net periodic post-retirement benefit cost $ 823 $ 733 $ 586
======= ======= ========
For measurement purposes in 1998, an 8.0% 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 5 years and remain at that level
thereafter. In 1997, rates of 8.5% and 5.5% were assumed and in 1996, rates of
9.0% 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 at December 31, 1998, by $841,000 and the
aggregate of the service and interest cost components of net periodic post-
retirement benefit cost for the year then ended by $106,000. A 1% decrease in
the rate would decrease those items by $701,000 and $89,000, respectively.
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 $569,000 in 1998 and $568,500 in both 1997 and
1996.
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. 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 $101,300 in 1998, $84,500 in 1997 and $71,000 in 1996.
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 1996, the stockholders of the Company approved the Hancock Holding
Company 1996 Long-Term Incentive Plan (the Plan) to provide incentives and
awards for employees of the Company and its subsidiaries. Awards as defined in
the Plan include, with limitations, stock options (including restricted stock
options), restricted and performance shares, and performance stock awards, all
on a stand-alone, combination or tandem basis. A total of 5,000,000 common
shares can be granted under the Plan with an annual grant maximum of 1% of the
Company's outstanding common stock (as reported for the fiscal year ending
immediately prior to such plan year). The exercise price is equal to the market
price on the date of grant, except for certain of those granted to major
shareholders where the option price is 110% of the market price.
On December 24, 1998, options to purchase 25,950 shares were granted, of
which 23,861 are exercisable at $43.50 per share and 2,089 are exercisable at
$47.85 per share. Options totalling 23,861 are exercisable at a vesting rate of
25% per year on the anniversary of the date of grant and 2,089 are exercisable
six months after the date of grant.
On December 11, 1997, options to purchase 62,375 were granted, of which
60,860 shares are exercisable at $60.00 per share and 1,515 are exercisable at
$66.00 per share. Options totalling 48,288 are exercisable on the first
anniversary of the date of grant and 14,087 options are exercisable six months
after the date of grant.
On December 15, 1996, options to purchase 35,250 shares were granted, of
which 32,978 are exercisable at $40.00 per share and 2,272 are exercisable at
$44.00 per share. Options totalling 27,522 are exercisable on the first
anniversary of the date of grant and 7,728 options are exercisable six months
after the date of grant. The options generally expire ten years after the date
of grant.
Following is a summary of the transactions:
Number of Average Aggregate
Options Exercise Price Exercise
Outstanding Per Share of Options
----------- -------------- ------------
Balance January 1, 1996 - $ - $ -
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
Granted 25,950 43.89 1,138,939
Exercised (8,800) 40.00 (352,000)
Cancelled (4,425) 60.00 (265,500)
----------- -------------- ------------
Balance December 31, 1998 109,050 $ 51.72 $ 5,640,439
=========== ============== ============
Options on 83,400 shares were exercisable at December 31, 1998 with a
weighted average exercise price of $54.12 per share. The weighted average
remaining contractual life of options outstanding at December 31, 1998 was 7.25
years.
The Company has adopted the disclosure-only option under SFAS No. 123. The
weighted average fair value of options granted during 1998, 1997 and 1996 was
$12.38, $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 No. 123, the Company's net earnings
and earnings per share would have been as indicated below:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------- --------- ----------
Net earnings (in thousands):
As reported $30,960 $ 30,624 $ 31,603
Pro forma 29,936 30,220 31,584
Basic earnings per share:
As reported $ 2.90 $ 2.82 $ 3.08
Pro forma 2.80 2.78 3.07
Diluted earnings per share:
As reported $ 2.89 $ 2.82 $ 3.08
Pro forma 2.80 2.78 3.07
The fair value of the options granted under the Company's stock option
plans during the years ended December 31, 1998, 1997 and 1996 was estimated
using the Black-Scholes Pricing Model with the following assumptions used:
dividend yield of 1.9%, 1.6% and 2.3%, expected volatility of 24%, 25% and 22%,
risk-free interest rates of 4.9%, 5.5% and 5.6%, respectively and expected lives
of 8 years in 1998, 1997 and 1996.
During 1998, the Company granted 12,070 restricted shares which vest at 12,
18 and 24 month intervals, and 7,050 restricted shares were granted which vest
at the end of three years. The Company also granted 12,300 restricted shares
during 1997 which vest at the end of three years. Vesting is contingent upon
continued employment by the Company. On December 31, 1998, 29,745 of these
grants were outstanding. The 1998 shares had respective market values of $46.00
and $43.50 at the dates of grant. The 6,100 and 6,200 shares granted in 1997 had
respective market values of $42.00 and $60.00 per share at the dates of grant.
Compensation expense related to the grants totalled $308,000 for 1998 and
$96,000 for 1997. The remaining unearned compensation of $1,010,000 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:
Cash, Short-Term Investments and Federal Funds Sold - For cash and 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 was not available, a reasonable estimate of
fair value was used.
Loans - The fair value of loans was estimated by discounting the future
cash flows using the current rates at which similar loans with the same
remaining maturities would be made to borrowers with similar credit ratings.
Deposits - The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit was 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 were used to estimate fair
value of existing debt.
Commitments - The fair value of commitments to extend credit was not
significant.
The estimated fair values of the Company's financial instruments were as follows
(in thousands):
December 31,
-----------------------------------------------
1998 1997
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Financial assets:
Cash, short-term investments
and federal funds sold $ 161,390 $ 161,390 $ 150,692 $ 150,692
Securities available for sale 463,120 463,120 163,633 163,633
Securities held to maturity 781,249 790,379 916,362 924,958
Loans, net of unearned income 1,305,555 1,308,412 1,220,630 1,208,958
Less: allowance for loan
losses (21,800) (21,800) (21,000) (21,000)
----------- ----------- ----------- -----------
Loans, net 1,283,755 1,286,612 1,199,630 1,187,958
Financial liabilities:
Deposits $2,374,591 $2,375,718 $2,062,648 $2,063,604
Securities sold under
agreements to repurchase 140,207 140,207 170,534 170,534
Long-term bonds and notes - - 1,279 1,279
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. Such instruments are not reflected in the
accompanying consolidated financial statements until they are funded and
involve, to varying degrees, elements of credit risk not reflected in the
consolidated balance sheets. The contract amounts of these instruments reflect
the Company's exposure to credit loss in the event of non-performance by the
other party on whose behalf the instrument has been issued. The Company
undertakes the same credit evaluation in making commitments and conditional
obligations as it does for on-balance-sheet instruments and may require
collateral or other credit support for off-balance-sheet financial instruments.
These obligations are summarized below (in thousands):
December 31,
--------------------------
1998 1997
------------ ----------
Commitments to extend credit $ 244,135 $ 241,000
Letters of credit 13,425 8,950
Approximately $172,000,000 and $181,000,000 of commitments to extend credit
at December 31, 1998 and 1997, respectively, were at variable rates and the
remainder were at fixed rates. A commitment to extend credit is an agreement to
lend to a customer as long as the conditions established in the agreement have
been satisfied. A commitment to extend credit generally has a fixed expiration
date or other termination clauses and may require payment of a fee by the
borrower. Since commitments often expire without being fully drawn, the total
commitment amounts do not necessarily represent future cash requirements at the
Company. The Company continually evaluates each customer's credit worthiness on
a case-by-case basis. Occasionally, a credit evaluation of a customer requesting
a commitment to extend credit results in the Company obtaining collateral to
support the obligation.
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 - 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 statements of the Company.
NOTE 13 - SUPPLEMENTAL INFORMATION
The following is selected supplemental information (in thousands):
Years Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- -------
Other service charges, commissions and fees:
Trust fees $ 3,071 $ 2,946 $ 2,412
Other non-interest expense:
Postage $ 3,312 $ 3,051 $ 2,327
Communication 3,405 3,184 2,451
Data processing 3,562 3,823 4,245
Professional fees 2,889 2,485 1,781
Taxes and licenses 2,698 2,695 1,543
Printing and supplies 2,131 2,001 2,464
NOTE 14 - SEGMENT REPORTING
The Company's primary segments are geographically divided into the
Mississippi (MS) and Louisiana (LA) markets. Each segment offers the same
products and services but are managed separately due to different pricing,
product demand and consumer markets. Both segments offer commercial, consumer
and mortgage loans and deposit services. Following is selected information for
the Company's segments (in thousands):
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
MS LA MS LA MS LA
--------- --------- --------- -------- --------- --------
Interest income $ 122,813 $ 67,271 $ 112,294 $ 66,299 $ 107,408 $ 59,597
Interest expense 56,896 24,789 48,349 23,350 44,944 19,970
--------- --------- --------- -------- --------- --------
Net interest income 65,917 42,482 63,945 42,949 62,464 39,627
Provision for loan
losses 2,731 2,854 1,929 4,260 2,970 3,018
Non-interest income 18,822 13,261 18,524 13,711 17,068 11,626
Depreciation and
amortization 3,517 1,671 3,118 1,587 3,344 1,404
Other non-interest
expense 48,661 36,727 46,003 34,893 41,744 32,068
--------- --------- --------- -------- --------- --------
Earnings before
income taxes and
cumulative effect
of accounting
change 29,830 14,491 31,419 15,920 31,474 14,763
Income taxes 9,390 5,062 11,209 6,347 9,976 5,039
-------- --------- --------- -------- --------- --------
Earnings before
cumulative effect of
accounting change 20,440 9,429 20,210 9,573 21,498 9,724
Cumulative effect of
accounting change 1,151 - - - - -
--------- --------- --------- -------- --------- --------
Net earnings $ 21,591 $ 9,429 $ 20,210 $ 9,573 $ 21,498 $ 9,724
========= ========= ========= ======== ========= ========
At and For Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Net Interest Income:
MS $ 65,917 $ 63,945 $ 62,464
LA 42,482 42,949 39,627
Other 3,518 2,866 2,509
----------- ----------- -----------
Consolidated net interest income $ 111,917 $ 109,760 $ 104,600
=========== =========== ===========
Net Earnings:
MS $ 21,591 $ 20,210 $ 21,498
LA 9,429 9,573 9,724
Other (60) 841 381
----------- ----------- -----------
Consolidated net earnings $ 30,960 $ 30,624 $ 31,603
=========== =========== ===========
Assets:
MS $1,833,064 $1,612,805 $1,433,698
LA 1,003,620 937,060 868,444
Other 27,487 30,043 25,505
Intersegment (49,476) (41,951) (38,065)
----------- ----------- -----------
Consolidated assets $2,814,695 $2,537,957 $2,289,582
=========== =========== ===========
NOTE 15 - SUMMARIZED FINANCIAL INFORMATION OF HANCOCK HOLDING COMPANY
(PARENT COMPANY ONLY)
Balance Sheets
December 31,
------------------------------
1998 1997
-------------- --------------
Assets:
Investment in subsidiaries $ 285,464,704 $ 289,423,238
Other 1,342,496 811,280
-------------- --------------
$ 286,807,200 $ 290,234,518
============== ==============
Liabilities and Stockholders' Equity:
Accrued expenses $ - $ 381,919
Note payable - 1,279,402
Stockholders' equity 286,807,200 288,573,197
-------------- --------------
$ 286,807,200 $ 290,234,518
============== ==============
Statements of Earnings
Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
Dividends received from subsidiaries $ 36,555,000 $ 17,150,000 $ 15,391,000
Equity in earnings of subsidiaries
greater than (less than) dividends
received (5,209,781) 14,793,067 16,632,753
Interest and other expenses (1,689,631) (1,847,491) (555,788)
Income tax credit 153,800 528,843 135,039
------------- ------------- -------------
Earnings before cumulative effect
of accounting change 29,809,388 30,624,419 31,603,004
Cumulative effect of accounting change 1,150,811 - -
------------- ------------- -------------
Net earnings $ 30,960,199 $ 30,624,419 $ 31,603,004
============= ============= =============
Statements of Cash Flows
Years Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -------------
Cash flows from operating activities
- principally dividends received
from subsidiaries $ 35,952,990 $ 15,116,205 $ 14,872,899
Cash flows from investing activities
- principally purchase transactions - (4,062,524) (5,622,371)
Cash flows from financing activities:
Dividends paid (10,862,585) (11,039,887) (9,193,395)
Purchase of treasury stock (22,857,810) - -
Repayment of note (1,279,402) - -
------------- ------------ ------------
Net cash used by financing activities (34,999,797) (11,039,887) (9,193,395)
------------- ------------ ------------
Net increase in cash 953,193 13,794 57,133
Cash, beginning 171,101 157,307 100,174
------------ ------------ -------------
Cash, ending $ 1,124,294 $ 171,101 $ 157,307
============ ============ =============
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, 1998 and 1997, and the related
consolidated statements of earnings, comprehensive earnings, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company changed its method of accounting for derivative instruments to conform
with the Statement of Financial Accounting Standards No. 133 and in conjunction
therewith reclassified certain securities from its held-to-maturity portfolio to
trading securities.
Deloitte & Touche LLP
New Orleans, Louisiana
January 15, 1999
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, 1998 and 1997
The Company's net earnings were $31.0 million, or $2.90 per share, for the year
ended December 31, 1998, compared to $30.6 million, or $2.82 per share, for the
year ended December 31, 1997. The $2.2 million increase in net interest income
for the current year was primarily due to volume increases which were somewhat
offset by lower yields on interest earning assets and a slightly higher cost of
funds. The Company's net interest margin on a fully taxable equivalent basis
decreased to 4.67% in 1998, compared to 5.03% in 1997, partially due to the
repricing of and investment in interest-earning assets during a period of short-
term market interest rate declines and a deposit growth that surpassed the
Company's loan growth. The provision for loan losses decreased to $6.2 million
in the current year, compared to $6.4 million in the prior year, due to
decreased loan charge-offs. Operating expenses, primarily compensation costs,
increased as the Company concentrated on new lines of business and broadened its
market area.
For the Years Ended December 31, 1997 and 1996
The Company's net earnings were $30.6 million, or $2.82 per share, for the year
ended December 31, 1997, compared to $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
5.10% in 1996 to 5.03% in 1997. Revenue increases were offset by higher levels
of operating costs and income taxes. Income taxes increased $2.2 million in 1997
compared to 1996 due to increased taxable income, state income taxes and higher
levels of non-deductible goodwill amortization associated with three recent
acquisitions. 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 417% of non-performing
loan balances at December 31,1997.
Financial Condition
- -------------------
Securities
The Company generally purchases securities with a maturity schedule that
provides ample liquidity. Certain securities have been classified as available
for sale based on management's internal assessment of the portfolio after
considering the Company's liquidity requirements and the portfolio's exposure to
changes in market interest rates and prepayment activity. The December 31, 1998
carrying value of the held-to-maturity portfolio was $781.2 million and the
market value was $790.4 million. The available-for-sale portfolio was $463.1
million at December 31, 1998. Investment in securities increased by
approximately $164.4 million during 1998, primarily due to the availability of
investable funds generated from increased deposits.
Loans
Loans increased $84.9 million to $1.3 billion at December 31, 1998, compared to
balances a year earlier. Non-accruing loans were $4.6 million, or 0.35%, of the
outstanding loans at December 31, 1998. Restructured loans were $1.4 million at
December 31, 1998 and a significant portion was current with the modified terms.
The Company generally makes loans in its market areas of South Mississippi and
Southeastern Louisiana.
Deposits and Deposit-Related Liabilities
Deposits increased from $2.1 billion at December 31, 1997 to $2.4 billion at
December 31, 1998. Non-interest-bearing demand accounts increased 18.1%, to
$546.7 million in 1998. Increases to other transaction and time deposits were
partially offset by a decrease in securities sold under agreements to
repurchase. Certificates of deposit of $100,000 or more outstanding at
December 31, 1998 amounted to $278.4 million. Deposits and deposit-related
liabilities are the Company's primary source of funds supporting its earning
asset 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
loans, maturities and sales of securities, earnings and borrowings. The Company
has a line of credit with the Federal Home Loan Bank in excess of $30 million,
providing an additional liquidity source. At December 31, 1998, cash and due
from banks and securities available for sale were in excess of 26.3% of total
deposits.
Capital Resources
- -----------------
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 I leverage ratios of at least 3%, subject
to increase up to 5%, depending on the composite rating. At December 31, 1998,
the Company's and the Banks' capital balances were in excess of current
regulatory minimum requirements.
Year 2000
- ---------
In 1996, the Company began addressing all the systems and business methods
requiring modifications to accommodate the turn of the century. Since there is
concern that computer systems will not properly recognize dates or date
sensitive information when the digit year value rolls over to "00", virtually
every computer operation and every system that has an embedded microchip is
potentially at risk for failure or improper performance. Many software programs
assume the "19" in storing the year and only utilized the last two digits of the
year for calculations and date storage. The year "2000" may be recognized by
some systems as "1900" which could adversely affect a significant portion of a
company's daily operations, especially those of financial institutions.
Identification of the Company's major Year 2000 issues is substantially complete
and a plan, including replacement of certain systems, has been implemented to
resolve the issues of which management is aware. Written assurances of expected
Year 2000 readiness have been requested from all material third party vendors,
including, but not limited to, correspondent banks, software providers and
utility companies. If any of the companies providing services, software or
equipment to the Company fail to adequately address the Year 2000 issue at a
reasonable cost, the result could be a significant adverse effect on the
Company's business and operational results. The readiness of all third parties,
including customers and suppliers, is inherently uncertain and cannot be
assured.
The Company recognized the importance of its customers' need to address Year
2000 issues. Relationships considered material to the Company's financial
position have been identified and appropriate documentation from borrowers
received. A committee, specifically established for this project, is in the
process of reviewing the information obtained and assessing the risk of
repayment impairment.
Testing of information systems and review of property equipment functions,
except those slated for replacement or vendor upgrade, is near completion. It is
anticipated that fully integrated systems testing of current and newly-acquired
systems will be completed by June 1999.
Contingency plans for the most reasonably likely worst-case scenarios, including
provisions for liquidity needs due to potentially significant deposit
withdrawals during the fourth quarter of 1999, are substantially complete. Plans
may be updated as testing and implementation continue. Issues regarding material
equipment and applications failure have been addressed.
Management believes it has dedicated adequate resources to address the issues
associated with the turn of the century. The total amount of expenditures for
Year 2000 compliance, including those incurred since 1997, and those anticipated
during the next two years, is expected to be less than $4.0 million (before
income taxes) but cannot be predicted with certainty at this time.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than interest-
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when interest-
earning assets mature or reprice more quickly than interest-bearing liabilities,
falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Company's interest rate
management policy is designed to produce a stable net interest margin in periods
of interest rate fluctuations. Interest sensitive assets and liabilities are
those that are subject to maturity or repricing within a given time period.
Management also reviews the Company's securities portfolio, formulates
investment strategies and oversees the timing and implementation of transactions
to assure attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing net interest
margins. At times, depending on the level of general interest rates, the
relationship between long and short-term interest rates, market conditions and
competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to increases in interest rates and to fluctuations in the
difference between long and short-term interest rates.
The Company also controls interest rate risk reductions by emphasizing non-
certificate depositor accounts. The Board and management believe that such
accounts carry a lower interest cost than certificate accounts and that a
material portion of such accounts may be more resistant to changes in interest
rates. At December 31, 1998, the Company had $298 million of regular savings and
club accounts and $647 million of money market and NOW accounts, representing
51.7% of total interest-bearing depositor accounts.
One approach used to quantify interest rate risk is the net portfolio value
(NPV) analysis. NPV includes shareholders' equity of the Company as reported in
the financial statements, adjusted for changes in the carrying value of
investments, loans and certificates of deposit, when considering changes in
market values on a pre-tax basis. In essence, this analysis calculates the
difference between the present value of liabilities and the present value of
expected cash flows from assets and off-balance sheet contracts. The following
table sets forth, at December 31, 1998, an analysis of the Company's interest
rate risk as measured by the estimated changes in NPV resulting from an
instantaneous and sustained parallel shift in the yield curve (+ or - 400 basis
points, measured in 100 basis point increments).
December 31,
-----------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Estimated Increase Estimated Increase
Change in (Decrease) in NPV (Decrease) in NPV
Interest Estimated ------------------ Estimated ------------------
Rates NPV Amount Amount Percent NPV Amount Amount Percent
- -------------- ---------- ------ ------- ---------- ------ -------
(basis points) (amounts in thousands)
+400 105,291 $ (188,460) (64.2) $ 125,143 $(159,398) (56.0)
+300 148,425 (145,326) (49.5) 167,841 (116,700) (41.0)
+200 192,969 (100,782) (34.3) 205,447 (79,094) (27.8)
+100 238,923 (54,828) (18.7) 244,874 (39,667) (13.9)
---- 293,751 - - 284,541 - -
-100 331,661 37,910 12.9 315,631 31,090 10.9
-200 337,171 43,420 14.8 346,406 61,865 21.7
-300 344,122 50,371 17.1 378,736 94,195 33.1
-400 352,514 58,763 20.0 411,955 127,414 44.8
Certain assumptions in assessing the interest rate risk were employed in
preparing data for the Company included in the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Company's assets and liabilities would perform as
anticipated. In addition, a change in U. S. Treasury rates in the designated
amounts accompanied by a change in the shape of the U. S. Treasury yield curve
would cause significantly different changes to the NPV than indicated above.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate loans, have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. The Company considers all of these factors in monitoring its exposure
to interest rate risk.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Forward Looking Statements
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Congress passed the Private Securities Litigation Act of 1995 in an effort to
encourage corporations to provide information about a company's anticipated
future financial performance. This act provides a safe harbor for such
disclosure which protects the companies from unwarranted litigation if actual
results are different from management expectations. This report contains
forward-looking statements and reflects management's current views and estimates
of future economic circumstances, industry conditions, Company performance and
financial results. These forward-looking statements are subject to a number of
factors and uncertainties which could cause the Company's actual results and
experience to differ from the anticipated results and expectations expressed in
such forward-looking statements.