|
|
|
|
|
|
|
|
|
|
|
|
|
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(amounts in thousands, except per share data)
At and For the Years Ended December 31,
--------------------------------------------------
1999 1998 % Change
-------------- ------------- ------------
Earnings Data:
Net interest income $ 123,713 $ 111,917 10.54
Provision for loan losses 7,585 6,229 21.77
Earnings before income taxes and cumulative
effect of accounting change 46,298 44,237 4.66
Net earnings 31,710 30,960 2.42
Per Share Data:
Earnings before cumulative effect of accounting change:
Basic $ 2.91 $ 2.79 4.30
Diluted 2.91 2.78 4.68
Net earnings:
Basic 2.91 2.90 0.34
Diluted 2.91 2.89 0.69
Cash dividends paid 1.00 1.00 --
Book value (period end) 28.55 27.29 4.62
Weighted average number of shares outstanding 10,887 10,693 1.81
Number of shares outstanding 10,873 10,508 3.47
Balance Sheet Data (period end):
Securities $1,148,722 $1,244,369 (7.69)
Loans, net of unearned income 1,541,521 1,305,555 18.07
Allowance for loan losses 25,713 21,800 17.95
Total assets 2,991,874 2,814,695 6.29
Total deposits and deposit-related liabilities 2,611,427 2,514,798 3.84
Long-term notes 2,714 -- 100.00
Total stockholders' equity 310,427 286,807 8.24
Balance Sheet Data (average):
Securities $1,246,800 $1,184,698 5.24
Loans, net of unearned income 1,452,305 1,243,617 16.78
Allowance for loan losses 23,939 21,040 13.78
Total assets 2,997,493 2,696,107 11.18
Total deposits and deposit-related liabilities 2,671,550 2,390,036 11.78
Long-term notes 2,795 586 376.96
Total stockholders' equity 308,097 289,878 6.29
Performance Ratios (%):
Return on average assets 1.06 1.15 (7.83)
Return on average assets, excluding
cumulative effect of accounting change 1.06 1.11 (4.50)
Return on average equity 10.29 10.68 (3.65)
Return on average equity, excluding cumulative
effect of accounting change 10.29 10.28 0.10
Allowance for loan losses to period-end loans 1.67 1.67 --
Allowance for loan losses to non-performing loans 364.56 364.43 0.04
Net chargeoffs to average loans 0.52 0.44 18.18
Net interest margin (1) 4.75 4.67 1.71
Regulatory Capital Ratios (%): Requirement
-----------
Tier I leveraged 9.50 9.69 3.00
Tier I risk-based 13.85 16.88 4.00
Total risk-based 14.47 17.41 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,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------
Interest Income:
Loans $133,420 $118,502 $115,038 $104,961 $95,213
Federal funds sold 1,290 3,090 2,733 5,580 5,820
Other investments 72,964 72,067 63,688 58,863 58,083
------- ------- ------- ------- -------
Total interest income 207,674 193,659 181,459 169,404 159,116
------- ------- ------- ------- -------
Interest Expense:
Deposits 76,810 74,464 66,150 60,625 57,612
Federal funds purchased, securities sold
under agreements to repurchase and advances 6,961 7,217 5,383 4,013 3,082
Bonds, notes and other 190 61 165 166 468
------- ------- ------- ------- -------
Total interest expense 83,961 81,742 71,698 64,804 61,162
------- ------- ------- ------- -------
Net Interest Income 123,713 111,917 109,761 104,600 97,954
Provision for loan losses 7,585 6,229 6,399 6,154 4,425
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 116,128 105,688 103,362 98,446 93,529
Non-interest income 45,612 32,331 32,168 28,421 26,709
Non-interest expense 115,442 93,782 87,554 80,094 80,156
------- ------- ------- ------- -------
Earnings before income taxes and
cumulative effect of accounting change 46,298 44,237 47,976 46,773 40,082
Income taxes 14,588 14,428 17,352 15,170 13,065
------- ------- ------- ------- -------
Earnings before cumulative effect
of accounting change 31,710 29,809 30,624 31,603 27,017
Cumulative effect of accounting change -- 1,151 -- -- --
------- ------- ------- ------- -------
Net Earnings $ 31,710 $ 30,960 $ 30,624 $ 31,603 $ 27,017
======= ======= ======= ======= =======
Weighted average number of shares*:
Basic 10,887 10,693 10,870 10,277 10,181
Diluted 10,902 10,705 10,877 10,277 10,181
Per Common Share*:
Earnings before cumulative effect
of accounting change:
Basic $ 2.91 $ 2.79 $ 2.82 $ 3.08 $ 2.65
Diluted 2.91 2.78 2.82 3.08 2.65
Net earnings:
Basic 2.91 2.90 2.82 3.08 2.65
Diluted 2.91 2.89 2.82 3.08 2.65
Cash dividends paid 1.00 1.00 1.00 0.88 0.84
Return on average assets 1.06% 1.15% 1.25% 1.38% 1.22%
Dividend payout 34.36% 34.48% 35.46% 28.57% 31.70%
Balance Sheet Data:
Total assets $ 2,991,874 $2,814,695 $ 2,537,957 $ 2,289,582 $2,234,286
Total deposits and deposit-related
liabilities 2,611,427 2,514,798 2,233,181 2,014,185 1,991,069
Long-term bonds and notes 2,714 -- 1,279 1,050 2,035
Stockholders' equity 310,427 286,807 288,573 261,938 224,179
* 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 and 1995 were $1.00 and $0.96, respectively.
Hancock Holding Company (the Company) is a bank holding company headquartered in Gulfport, Mississippi with total consolidated assets of approximately $3.0 billion at December 31, 1999. The Company operates a total of 94 banking offices and 134 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
(in thousands, except per share data)
1999 1998
------------------------------------------ -------------------------------------------
First Second Third Fourth First Second Third Fourth
------------------------------------------ -------------------------------------------
Interest income (1) $52,612 $53,105 $53,649 $53,970 $48,589 $ 48,809 $49,863 $50,608
Interest expense (21,170) (20,998) (20,626) (21,167) (19,217) (20,796) (21,223) (20,506)
------- ------- ------ ------- ------ ------- ------ -------
Net interest income 31,442 32,107 33,023 32,803 29,372 28,013 28,640 30,102
Provision for loan losses (1,420) (1,621) (1,918) (2,626) (1,359) (929) (1,203) (2,738)
Non-interest income 10,016 10,912 11,762 12,922 7,311 8,287 8,147 8,586
Non-interest expense (27,820) (28,213) (29,740) (29,669) (22,270) (21,717) (24,314) (25,481)
Taxable equivalent adjustment (1,360) (1,400) (1,401) (1,501) (846) (1,032) (1,124) (1,208)
------- ------- ------ ------- ------- ------- ------- -------
Earnings before income taxes and
cumulative effect of
accounting change 10,858 11,785 11,726 11,929 12,208 12,622 10,146 9,261
Income taxes (3,227) (3,975) (3,882) (3,504) (4,155) (4,087) (3,297) (2,889)
------ ------- ------- ------- ------- ------- ------- -------
Earnings before cumulative effect
of accounting change 7,631 7,810 7,844 8,425 8,053 8,535 6,849 6,372
Cumulative effect of accounting
change -- -- -- -- -- -- -- 1,151
------ ------- ------- ------- ------- ------- ------- -------
Net earnings $7,631 $7,810 $7,844 $8,425 $8,053 $8,535 $6,849 $7,523
====== ======= ======= ======= ======= ======= ======= =======
Basic earnings per share:
Before cumulative effect of
accounting change $ 0.70 $ 0.72 $ 0.72 $ 0.77 $ 0.74 $ 0.78 $ 0.66 $ 0.61
Net earnings 0.70 0.72 0.72 0.77 0.74 0.78 0.66 0.72
Diluted earnings per share:
Before cumulative effect of
accounting change 0.70 0.72 0.72 0.77 0.74 0.78 0.65 0.61
Net earnings 0.70 0.72 0.72 0.77 0.74 0.78 0.65 0.72
(1) Fully taxable equivalent basis (FTE).
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 markups, markdowns or commissions.
Cash
High Low Dividends
--------------------------------------------------
1999
1st quarter $ 48.00 $ 41.00 $0.25
2nd quarter 47.00 42.00 0.25
3rd quarter 45.00 37.75 0.25
4th quarter 41.50 37.12 0.25
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
There were 5,661 holders of record of common stock of the Company at January 3, 2000 and 11,072,770 shares issued. On January 3, 2000, the high and low sale prices of the Company's common stock as reported on the Nasdaq Stock Market were $40.375 and $37.875, 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. Dividends paid by Hancock Bank of Louisiana are subject to approval by the Commissioner of Financial Institutions for the State of Louisiana. The Company’s management does not expect regulatory restrictions to affect its policy of paying cash dividends. Although no assurance can be given that Hancock Holding Company will continue to declare and pay regular quarterly cash dividends on its common stock, the Company has paid regular cash dividends since 1937.
On February 1, 1995, the Company merged Hancock Bank of Louisiana with Washington Bank and Trust Company (Washington), Franklinton, Louisiana. This merger was 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. American Security Bancshares of Ville Platte, Inc., Ville Platte, Louisiana (ASB), which owned 100% of the stock of American Security Bank, was acquired by the Company on January 15, 1999. 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,
----------------------------------------------
1999 1998
------------------- -------------------
Assets:
Cash and due from banks $156,738,459 $ 161,293,659
Interest-bearing time deposits with other banks 100,000 96,000
Securities available for sale
(amortized cost of $660,591,000 and $462,876,000) 639,415,961 463,120,442
Securities held to maturity
(fair value of $498,467,000 and $790,379,000) 509,306,344 781,248,857
Federal funds sold 3,000,000 --
Loans 1,558,435,659 1,330,283,979
Less:
Allowance for loan losses (25,712,557) (21,800,000)
Unearned income (16,915,072) (24,729,271)
--------------- ----------------
Loans, net 1,515,808,030 1,283,754,708
Property and equipment, net 55,007,662 44,546,636
Other real estate 1,616,490 2,245,711
Accrued interest receivable 23,805,308 23,798,439
Goodwill and other intangibles, net 44,512,562 26,449,170
Other assets 42,563,268 28,141,852
---------------- ----------------
Total Assets $ 2,991,874,084 $2,814,695,474
================ ================
Liabilities and Stockholders' Equity:
Deposits:
Non-interest bearing demand $527,218,971 $546,684,623
Interest-bearing savings, NOW,
money market and time 1,870,434,519 1,827,905,922
------------------- -------------------
Total deposits 2,397,653,490 2,374,590,545
Securities sold under agreements to repurchase 213,773,219 140,207,246
Federal Home Loan Bank advance 50,000,000 --
Other liabilities 17,305,727 13,090,483
Long-term notes 2,714,220 --
------------------- -------------------
Total Liabilities 2,681,446,656 2,527,888,274
Commitments and contingencies (notes 12 and 13) -- --
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 196,047,463 200,536,282
Retained earnings 92,153,278 71,498,714
Unrealized (loss) gain on securities available
for sale, net of deferred taxes (13,764,053) 158,878
Unearned compensation (808,203) (1,009,949)
Treasury stock, 1,906 shares in 1999 and 402,409
shares in 1998, at cost (73,381) (21,249,049)
------------------- -------------------
Total Stockholders' Equity 310,427,428 286,807,200
------------------- -------------------
Total Liabilities and Stockholders' Equity $2,991,874,084 $2,814,695,474
=================== ===================
See notes to consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Interest Income:
Loans $133,420,326 $118,502,095 $115,037,735
U.S. Treasury securities 10,059,273 14,469,447 14,732,898
Obligations of U.S. government agencies 25,175,384 26,180,328 26,210,546
Obligations of states and political subdivisions 9,448,205 6,864,952 4,150,309
Mortgage-backed securities 10,044,833 9,799,653 4,415,564
CMOs 17,091,380 13,631,324 7,072,602
Federal funds sold 1,290,135 3,089,792 2,733,341
Other investments 1,145,199 1,120,961 7,105,941
---------- ----------- ------------
Total interest income 207,674,735 193,658,552 181,458,936
---------- ----------- ------------
Interest Expense:
Deposits 76,809,975 74,463,671 66,149,396
Federal funds purchased, securities sold
under agreements to repurchase and advances 6,975,740 7,216,677 5,383,358
Long-term bonds, and other notes 175,667 61,483 165,449
---------- ----------- ------------
Total interest expense 83,961,382 81,741,831 71,698,203
---------- ----------- ------------
Net Interest Income 123,713,353 111,916,721 109,760,733
Provision for loan losses 7,585,294 6,228,965 6,399,481
---------- ----------- ------------
Net interest income after provision for loan losses 116,128,059 105,687,756 103,361,252
Non-Interest Income:
Service charges on deposit accounts 24,978,788 19,164,074 18,528,677
Other service charges, commissions and fees 17,739,001 10,161,475 9,775,185
Securities gains, net 66,937 167,139 278,651
Other 2,827,518 2,838,834 3,586,377
---------- ----------- ------------
Total non-interest income 45,612,244 32,331,522 32,168,890
---------- ----------- ------------
Non-Interest Expense:
Salaries and employee benefits 61,595,623 50,832,743 46,472,455
Net occupancy expense of premises 7,267,740 5,559,608 4,882,277
Equipment rentals, depreciation and maintenance 9,538,585 7,707,028 7,259,428
Amortization of intangibles 3,775,255 2,404,914 2,281,666
Other 33,264,877 27,278,170 26,658,497
---------- ----------- ------------
Total non-interest expense 115,442,080 93,782,463 87,554,323
---------- ----------- ------------
Earnings before income taxes and cumulative effect
of accounting change 46,298,223 44,236,815 47,975,819
Income taxes 14,588,153 14,427,427 17,351,400
---------- ----------- ------------
Earnings before cumulative effect of accounting change 31,710,070 29,809,388 30,624,419
Cumulative effect of accounting change -- 1,150,811 --
---------- ----------- ------------
Net Earnings $ 31,710,070 $ 30,960,199 $ 30,624,419
========== =========== ============
Basic earnings per common share:
Before cumulative effect of accounting change $ 2.91 $ 2.79 $ 2.82
Cumulative effect of accounting change -- 0.11 --
---------- ----------- ------------
Net Earnings $ 2.91 $ 2.90 $ 2.82
========== =========== ============
Diluted earnings per common share:
Before cumulative effect of accounting change $ 2.91 $ 2.78 $ 2.82
Cumulative effect of accounting change -- 0.11 --
---------- ----------- ------------
Net Earnings $ 2.91 $ 2.89 $ 2.82
========== =========== ============
See notes to consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
-----------------------------------------------------------------------------------------------------------------------------------
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, 1997 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)
Net earnings 31,710,070
Cash dividends - $1.00 per share (11,055,506)
Change in unrealized gain (loss) on
securities available for sale, net (13,922,931)
Transactions relating to restricted
stock grants, net 201,746
Issuance of treasury stock, net (4,488,819) 21,175,668
--------- --------- ---------- ---------- --------- -------- ---------
Balance, December 31, 1999 11,072,770 $36,872,324 $196,047,463 $ 92,153,278 $(13,764,053) $(808,203) $(73,381)
========= ========= ========== ========== ========= ======== =========
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Years Ended December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Net earnings $31,710,070 30,960,199 $30,624,419
Other comprehensive earnings (loss):
Unrealized gain (loss) on securities
available for sale, net:
Unrealized holding gains (losses)
arising during the year (13,916,931) 114,136 879,503
Less reclassification adjustment for
gains included in net earnings (6,000) (21,000) (181,000)
------------ ------------ ------------
Total other comprehensive earnings (loss) (13,922,931) 93,136 698,503
------------ ------------ ------------
Total Comprehensive Earnings $17,787,139 $31,053,335 $31,322,922
============ ============ ============
See notes to consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 31,710,070 $ 30,960,199 $ 30,624,419
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and software amortization 7,693,612 5,188,749 4,705,432
Provision for loan losse 7,585,294 6,228,965 6,399,481
Provision for deferred income taxes (2,039,000) (435,000) (395,000)
Cumulative effect of accounting change
(before income taxes) -- (1,863,662) --
Securities gains, net (66,937) (167,139) (278,651)
Decrease (increase) in interest receivable 1,373,210 (2,821,561) (282,032)
Amortization of intangible assets 3,775,255 2,404,914 2,281,666
(Decrease) increase in interest payable (52,540) 847,700 14,102
Other, net (3,730,918) (6,894,964) 1,140,190
-------- --------- -----------
Net cash provided by operating activities 46,248,046 33,448,201 44,209,607
-------- --------- -----------
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing time deposits (4,000) 1,971,500 (2,056,716)
Proceeds from maturities of securities held to maturity 350,002,513 225,302,135 261,488,556
Purchase of securities held to maturity (79,243,000) (99,464,050) (359,318,934)
Proceeds from sales and maturities of trading
and available-for-sale securities 207,189,122 83,297,803 31,441,417
Purchase of securities available for sale (330,963,660) (375,620,262) (97,379,020)
Net decrease (increase) in federal funds sold 4,825,000 35,500,000 (18,525,000)
Net increase in loans (135,992,653) (91,010,541) (11,363,057)
Purchase of property, equipment and software, net (8,688,754 (12,675,267) (5,206,091)
Proceeds from sales of other real estate 1,098,664 802,512 1,737,568
Net cash received in connection with
business acquisitions 23,927,000 -- 2,288,000
-------- --------- -----------
Net cash provided (used) by investing activities 32,150,232 (231,896,170) (196,893,277)
-------- --------- -----------
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (183,514,994) 311,942,900 75,490,602
Dividends paid (11,055,506) (10,862,585) (11,039,887)
Purchase of treasury stock, net (11,484,087) (22,857,810) --
Repayments of long-term bonds and notes (464,864) (1,279,402) (1,050,000)
Net increase (decrease) in federal funds purchased,
securities sold under agreements to repurchase
and other temporary fund 73,565,973 (30,326,372) 82,924,580
Proceeds from Federal Home Loan Bank advance 50,000,000 -- --
-------- --------- -----------
Net cash (used) provided by financing activities (82,953,478) 246,616,731 146,325,295
------- --------- -----------
Net (decrease) increase in cash and due from banks (4,555,200) 48,168,762 (6,358,375)
Cash and due from banks, beginning 161,293,659 113,124,897 119,483,272
-------- --------- -----------
Cash and due from banks, ending $ 156,738,459 $161,293,659 $113,124,897
======== ========= ===========
Supplemental Information
Income taxes paid $14,839,133 $ 16,460,355 $16,410,052
Interest paid 84,013,922 80,894,131 71,684,101
See notes to consolidated financial statements.
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.
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-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 reevaluates 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) during 1998, the Company had no trading account securities during the three years ended December 31, 1999.
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 required 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 permitted, 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 in 1998 subsequent to the transfer.
Loans-Certain loan origination fees and certain direct origination costs are deferred and recognized as an adjustment to the yield on the related loan. Interest on loans is recorded to income as earned. Where doubt exists as to collectibility of a loan, the accrual of interest is discontinued, all unpaid accrued interest is reversed and payments subsequently received are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's impaired loans include troubled debt restructurings, and performing and non-performing major loans for which full payment of principal or interest is not expected. Non-major homogenous loans, which are evaluated on an overall basis, generally include all loans under $500,000. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.
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 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 chargeoffs (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 and bank acquisitions is stated at the fair market value at the date of acquisition, net of the costs of disposal. When a reduction to fair market value at the time of foreclosure is required, it is charged to the allowance for loan losses. Any subsequent adjustments are charged to expense.
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. Accumulated amortization of intangible assets amounted to approximately $12.6 million and $8.8 million at December 31, 1999 and 1998, respectively.
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 nontaxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable income and pretax financial income. Deferred taxes on temporary differences are calculated at the currently enacted tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Stock Based Compensation-The Company applies 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 10.
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 1999 presentation.
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. On January 15, 1999, Hancock Holding Company acquired American Securities Bancshares of Ville Platte, Inc.(ASB), Ville Platte, Louisiana which owned 100% of the stock of American Security Bank for approximately $15,200,000 cash and 644,000 shares of common stock of the Company. These transactions were accounted for using the purchase method of accounting and the results of operations since the date of acquisition are included in the consolidated statements of earnings. The excess of the purchase price over the value of the net tangible assets acquired was assigned to goodwill and is being amortized over 15 years.
The following unaudited pro forma consolidated results of operations give effect to the acquisitions of Southeast and Commerce as though they had occurred on January 1, 1997 and ASB as of January 1, 1998 (in thousands, except per share data):
Years Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ -----------
Interest income $ 208,362 $ 208,359 $ 182,688
Interest expense (84,331) (89,104) (72,162)
Provision for loan losses (7,610) (8,811) (6,565)
---------- ---------- ----------
Net interest income after provision for loan losse 116,421 110,444 103,961
Net earnings $31,318 $30,867 $30,643
Basic earnings per common share 2.87 2.72 2.81
Diluted earnings per common share 2.87 2.71 2.81
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, 1997 or January 1, 1998, as appropriate, or of future results of operations of the combined companies.
In connection with the 1999 and 1997 acquisitions, liabilities were assumed as follows (in thousands):
1999 1997
------------ ------------
Fair value of all assets, excluding cash $214,573 $68,815
Cash acquired, net of amount paid 23,927 2,288
Market value of common stock issued (28,006) (6,885)
------------ ------------
Liabilities assumed $210,494 $ 64,218
============ ============
The amortized cost and fair value of securities classified as available for sale were as follows (in thousands):
December 31, 1999 December 31, 1998
------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------- ------------ ----------- ---------- ---------- ---------- --------- --------
U.S. Treasury $84,341 $8 $ 875 $83,474 $101,493 $692 $23 $102,162
U.S. government agencies 302,450 -- 12,326 290,124 272,564 288 518 272,334
Municipal obligations 33,382 121 1,475 32,028 5,851 101 35 5,917
Mortgage-backed securities 70,465 88 1,561 68,992 31,652 79 395 31,336
CMOs 151,693 -- 5,128 146,565 45,347 92 37 45,402
Other debt securities 10,601 -- 27 10,574 -- -- -- --
Equity securities 7,659 -- -- 7,659 5,969 -- -- 5,969
------- ------- ------- ------- ------- ------- ------- -------
$660,591 $217 $21,392 $ 639,416 $ 462,876 $ 1,252 $ 1,008 $ 463,120
======= ======= ======= ======= ======= ======= ======= =======
The amortized cost and fair value of debt securities classified as available for sale at December 31, 1999, by contractual maturity, were as follows (in thousands):
Amortized Cost Fair Value
---------------------------------
Due in one year or less $141,754 $138,079
Due after one year through five years 205,021 198,476
Due after five years through ten years 102,788 98,277
Due after ten years 203,369 196,925
---------- ---------
$652,932 $631,757
========== =========
The amortized cost and fair value of securities classified as held to maturity were as follows (in thousands):
December 31, 1999 December 31, 1998
-------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- -------- -------- --------- ---------- --------- -------- ----------
U.S. Treasury $24,277 $ 105 $2 $24,380 $ 114,506 $1,043 $-- $115,549
U.S. government agencies 95,409 5 2,794 92,620 200,149 2,250 97 202,302
Municipal obligations 165,891 597 5,282 161,206 167,997 4,136 73 172,060
Mortgage-backed securities 81,340 195 1,411 80,124 114,747 851 177 115,421
CMOs 136,286 93 2,345 134,034 177,796 1,346 150 178,992
Other debt securities 6,103 1 1 6,103 6,054 1 -- 6,055
------ ----- ------ ------ ------ ------ ------ ------
$509,306 $ 996 $11,835 $498,467 $781,249 $9,627 $497 $790,379
====== ===== ====== ====== ====== ====== ====== ======
The amortized cost and fair value of securities classified as held to maturity at December 31, 1999, by contractual maturity, were as
follows (in thousands):
Amortized Cost Fair Value
---------------------------------------
Due in one year or less $47,184 $46,788
Due after one year through five years 115,548 113,827
Due after five years through ten years 156,629 153,572
Due after ten years 189,945 184,280
---------- ---------
$ 509, 306 $498,467
========== =========
Proceeds from sales of available-for-sale securities were $18,693,000 in 1999, $19,222,000 in 1998 and $12,919,000 in 1997. Gross gains of $9,000 in 1999, $540,000 in 1998 and $321,000 in 1997 and gross losses of $508,000 in 1998 and $42,000 in 1997 were realized on such sales. Gross gains of $58,000 and $135,000 were recognized on held-to-maturity securities called during 1999 and 1998, respectively.
Securities with an amortized cost of approximately $598,998,000 at December 31, 1999 and $547,491,000 at December 31, 1998, 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.
Loans consisted of the following (in thousands):
December 31,
------------------------------------------------
1999 1998
----------------------- ---------------------
Real estate loans - primarily mortgage $ 599,455 $ 482,423
Commercial and industrial loans 298,179 245,755
Loans to individuals for household, family
and other consumer expenditures 634,547 583,208
Leases 24,727 17,324
Other loans 1,528 1,574
----------- -----------
$1,558,436 $1,330,284
=========== ===========
The Company generally makes loans in its market areas of South Mississippi and Southern Louisiana. Loans are made in the normal course of business to its directors, executive officers and their associates on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Such loans did not involve more than normal risk of collectibility. The balance of loans outstanding to the Company’s directors, executive officers and their affiliates at December 31, 1999 and 1998 was approximately $3,745,000 and $2,898,000, respectively.
Changes in the allowance for loan losses were as follows (in thousands):
Years Ended December 31,
----------------------------------------------------------
1999 1998 1997
--------------- ------------- ----------------
Balance at January 1 $21,800 $21,000 $19,800
Balance acquired through acquisitions 3,815 -- 833
Recoveries 2,484 1,701 2,181
Loans charged off (9,971) (7,130) (8,213)
Provision charged to operating expense 7,585 6,229 6,399
---------- ----------- -----------
Balance at December 31 $25,713 $21,800 $21,000
========== =========== ===========
Non-accrual and renegotiated loans amounted to approximately 0.46% of total loans at December 31, 1999 and December 31, 1998. In addition, the Company's other individually evaluated impaired loans amounted to approximately 0.23% and 0.45% of total loans at December 31, 1999 and 1998, respectively. Related reserve amounts were not significant and there was no significant change in these amounts during the years ended December 31, 1999, 1998, or 1997. The amount of interest not accrued on these loans did not have a significant effect on earnings in 1999, 1998 or 1997.
Transfers from loans to other real estate amounted to approximately $764,000, $656,000 and $1,894,000 in 1999, 1998 and 1997, respectively. Valuation allowances associated with other real estate amounted to $1,199,000, $1,088,000 and $812,000 at December 31, 1999, 1998 and 1997, respectively.
Property and equipment, stated at cost less accumulated depreciation and amortization, consisted of the following (in thousands):
December 31,
-------------------------------------
1999 1998
-------------------------------------
Land, buildings and leasehold improvements $ 57,608 $ 49,414
Furniture, fixtures and equipment 53,667 46,245
------------ -----------
111,275 95,659
Accumulated depreciation and amortization (56,267) (51,112)
------------ -----------
$55,008 $ 44,547
============ ===========
At December 31, 1999, the Company had a $50,000,000 advance outstanding under a $147,000,000 line of credit with the Federal Home Loan Bank of Dallas. This advance bears interest at 5.85% and is due January 21, 2000. The advance is collateralized by a blanket floating lien on the Company's residential first mortgage loans.
Basic and diluted earnings per common share were based on the weighted average number of shares outstanding of approximately 10,887,000 and 10,902,000 in 1999, 10,693,000 and 10,705,000 in 1998 and 10,870,000 and 10,877,000 in 1997. Outstanding amounts reflect reductions for treasury stock and 162,200 shares of stock owned by subsidiaries.
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 and with respect to Hancock Bank of
Louisiana, dividends paid are subject to approval by the Commissioner of Financial Institutions for the State of Louisiana. The amount of capital of the subsidiary banks available for dividends at December 31, 1999 was approximately $110 million. The Company and its bank subsidiaries are required to maintain certain minimum capital levels. At December 31, 1999 and 1998, 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, 1999 and 1998 (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, 1999
Total capital (to risk weighted assets)
Company $ 292,071 14.47 $ 161,600 8.00 $ N/A N/A
Hancock Bank 187,527 17.62 85,150 8.00 106,438 10.00
Hancock Bank of Louisiana 116,573 15.7 59,100 8.00 73,900 10.00
Tier I capital (to risk weighted assets)
Company $ 279,678 13.85 $ 88,800 4.00 $ N/A N/A
Hancock Bank 174,214 16.37 42,575 4.00 63,862 6.00
Hancock Bank of Louisiana 107,302 14.52 29,600 4.00 44,400 6.00
Tier I leveraged capital
Company $ 279,678 9.50 $ 88,300 3.00 $ N/A N/A
Hancock Bank 174,214 9.71 53,832 3.00 89,720 5.00
Hancock Bank of Louisiana 107,302 9.34 34,500 3.00 57,500 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, 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
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, 1999 and 1998 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.
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,
--------------------------------------
1999 1998
--------------------------------------
Deferred tax assets:
Unrealized loss on securities available for sale $ 7,411 $ --
Post-retirement benefit obligation 1,408 1,167
Allowance for loan losses 8,300 6,200
Other real estate valuation allowances 268 420
Deferred compensation 1,090 746
Lease accounting 330 344
Other 599 292
---------- -----------
19,406 9,169
---------- -----------
Deferred tax liabilities:
Property and equipment depreciation (3,960) (3,234)
Prepaid pension (1,322) (1,206)
Unrealized gain on securities available for sale -- (85)
Discount accretion on securities (1,512) (1,567)
---------- -----------
(6,794) (6,092)
---------- -----------
Net deferred tax asset $ 12,612 $ 3,077
========== ===========
Income taxes consisted of the following components (in thousands):
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
Currently payable $16,627 $ 14,862 $17,746
Deferred (2,039) (435) (395)
--------- -------- ---------
$ 14,588 $ 14,427 $ 17,351
========= ======== =========
The reason for differences in income taxes reported compared to amounts computed by applying the statutory income tax rate of 35% to earnings before income taxes were as follows (in thousands):
Years Ended December 31,
-----------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------
Amount % Amount % Amount %
-----------------------------------------------------------------
Taxes computed at statutory rate $ 16,204 35 $ 15,483 35 $ 16,792 35
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income tax benefit 283 1 410 1 550 1
Tax-exempt interest (3,260) (7) (2,380) (5) (1,501) (3)
Goodwill amortization 1,300 3 840 2 831 2
Other, net 61 -- 74 -- 679 1
-------- -------- -------- -------- -------- --------
Income tax expense $ 14,588 32 $ 14,427 33 $ 17,351 36
======== ======== ======== ======== ======== ========
The income tax provisions related to other items included in the Statements of Comprehensive Earnings were as follows (in thousands):
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
Unrealized holdings gains (losses) $ (7,493) $ 60 $ 473
Less reclassification adjustments (3) (11) (98)
----------- -------- ---------
Total other comprehensive earnings (loss) $ (7,496) $ 49 $ 375
=========== ======== =========
The Company has a noncontributory 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,
---------------------------
1999 1998
---------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 29,120 $ 26,742
Service cost 1,183 1,041
Interest cost 1,986 2,018
Actuarial loss 67 588
Benefits paid (1,486) (1,269)
---------- ----------
Benefit obligation at end of year 30,870 29,120
---------- ----------
Change in Plan Assets:
Fair value of plan assets at
beginning of year 28,791 26,524
Actual return on plan assets 2,343 2,249
Employer contributions 1,537 1,486
Benefits paid (1,486) (1,268)
Expenses (248) (200)
---------- ----------
Fair value of plan assets at end of year 30,937 28,791
---------- ----------
Funded (unfunded) status 67 (329)
---------- ----------
Unrecognized portion of net obligation being
amortized over 15 years 91 137
Unrecognized net actuarial loss 2,963 3,072
Unrecognized prior service cost 476 567
---------- ----------
Prepaid pension cost included in other assets $3,597 $3,447
========== ==========
Rate assumptions at December 31:
Discount rate 7.25% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.00% 3.00%
Years Ended December 31,
------------------------------------------------
1999 1998 1997
---------- ---------- ----------
Net pension expense included the following
(income) expense components:
Service cost benefits earned during the period $1,183 $1,041 $ 942
Interest cost on projected benefit obligation 1,986 2,018 1,871
Return on plan assets (2,343) (2,249) (3,091)
Amortization of prior service cost 92 92 92
Net amortization and deferral 174 244 1,386
---------- ---------- ----------
Net pension expense $ 1,092 $ 1,146 $ 1,200
========== ========== ==========
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,
-------------------------
1999 1998
---------- ----------
Change in Benefit Obligation:
Benefit obligation at beginning of year $6,238 $5,509
Service cost 397 293
Interest cost 412 374
Actuarial (gain) loss (667) 324
Benefits paid (286) (262)
---------- ----------
Benefit obligation at end of year 6,094 6,238
Fair value of plan assets -- --
Amount unfunded (6,094) (6,238)
Unrecognized transition obligation being
amortized over 20 years 1,680 1,863
Unrecognized net actuarial loss 318 976
Accrued post-retirement benefit cost $(4,096) $ (3,399)
============ =========
Rate assumptions at December 31:
Discount rate 7.75% 6.50%
Years Ended December 31,
-------------------------------------
1999 1998 1997
--------- ---------- ----------
Net Periodic Post-Retirement Benefit Cost:
Amortization of unrecognized net loss $30 $12 $--
Service cost benefits attributed to service during the year 397 293 233
Interest costs on accumulated post-retirement benefit obligation 412 375 357
Amortization of transition obligation over 20 years 143 143 143
------ ------ ------
Net periodic post-retirement benefit cost $982 $ 823 $733
====== ====== ======
For measurement purposes in 1999, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5.5% for 5 years and remain at that level thereafter. In 1998, rates of 8.0% and 5.5% were assumed and in 1997, rates of 8.5% and 5.5% were assumed. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation at December 31, 1999 by $768,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $133,000. A 1% decrease in the rate would decrease those items by $646,000 and $109,000, respectively.
The Company has a noncontributory 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 $504,000 in 1999, $569,000 in 1998 and $568,500 in 1997.
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 $116,300 in 1999, $101,300 in 1998 and $84,500 in 1997.
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.
In February 1996, the stockholders of the Company approved the Hancock Holding Company 1996 Long-Term Incentive Plan (the Plan) to provide incentives and awards for employees of the Company and its subsidiaries. Awards as
defined in the Plan include, with limitations, stock options (including restricted stock options), restricted and performance shares, and performance stock awards, all on a stand-alone, combination or tandem basis. A total of 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 21, 1999, options to purchase 86,526 shares were granted, of which 84,150 are exercisable at $38.25 per share and 2,376 are exercisable at $42.075 per share. Options totaling 84,150 are exercisable at a vesting rate of 25% per year on the anniversary date of grant and 2,376 are exercisable six months after the date of grant.
On December 24, 1998, options to purchase 72,125 shares were granted, of which 70,036 are exercisable at $43.50 per share and 2,089 are exercisable at $47.85 per share. Options totaling 70,036 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 totaling 46,773 were exercisable on the first anniversary of the date of grant and 15,602 options were 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 totaling 25,250 were exercisable on the first anniversary of the date of grant and 10,000 options were 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 Exercise
Options Exercise Price of Options
Outstanding Per Share Aggregate
----------- -------------- ------------
Balance January 1, 1997 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 72,125 43.63 3,146,525
Exercised (8,500) 40.00 (340,000)
Cancelled (4,425) 60.00 (265,500)
--------- --------- ------------
Balance December 31, 1998 155,525 49.25 7,660,025
Granted 86,526 38.35 3,318,681
Cancelled (1,775) 60.00 (106,500)
--------- --------- ------------
Balance December 31, 199 240,276 $45.25 $10,872,206
========= ========= ============
At December 31, 1999 options on 101,173 shares were exercisable at $40.00 to $60.00 per share, with a weighted average price of $52.04 per share. At December 31, 1998 options on 83,400 shares were exercisable at $40.00 to $60.00 per share, with a weighted average exercise price of $54.12 per share. The weighted average remaining contractual life of options outstanding at December 31, 1999 was 8.75 years.
The Company has adopted the disclosure-only option under SFAS No. 123. The weighted average fair value of options granted during 1999, 1998 and 1997 was $12.20, $13.48 and $20.36, 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,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
Net earnings (in thousands):
As reported $ 31,710 $ 30,960 $ 30,624
Pro forma 31,496 29,936 30,220
Basic earnings per share:
As reported $ 2.91 $2.90 $2.82
Pro forma 2.89 2.80 2.78
Diluted earnings per share:
As reported $ 2.91 $2.89 $2.82
Pro forma 2.89 2.80 2.78
The fair value of the options granted under the Company’s stock option plans during the years ended December 31, 1999, 1998 and 1997 was estimated using the Black-Scholes Pricing Model with the following assumptions used: dividend yield of 2.4%, 1.9% and 1.6%, expected volatility of 25%, 24% and 25%, risk-free interest rates of 6.2%, 4.9% and 5.5%, respectively and expected lives of 8 years in 1999, 1998 and 1997.
During 1999, the Company granted 434 restricted shares which vest at 12, 18 and 24 month intervals and 11,827 shares which vest at the end of three years. During 1998, the Company granted 12,070 restricted shares which vest at 12, 18 and 24 month intervals, and 7,050 shares were granted which vest at the end of three years. The Company 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, 1999, 37,716 of these grants were not vested. The 1999 shares had respective market values of $38.25 and $42.075 at the date of grant. 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 totaled $630,000 for 1999, $308,000 for 1998 and $96,000 for 1997. The remaining unearned compensation of $808,000 is being amortized over the life of the grants.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:
Cash, Short-Term Investments and Federal Funds Sold-For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities-For securities, fair value equals quoted market price, if available. If a quoted market price is not available, a reasonable estimate of fair value is used.
Loans-The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities would be made to borrowers with similar credit ratings.
Deposits-The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Short-Term Borrowings and Long-Term Notes-Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments-The fair value of commitments to extend credit was not significant.
The estimated fair values of the Company's financial instruments were as follows (in thousands):
December 31,
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------------------
Financial assets:
Cash, short-term investments and federal
funds sold $ 159,838 $ 159,838 $ 161,390 $ 161,390
Securities available for sale 639,416 639,416 463,120 463,120
Securities held to maturity 509,306 498,407 781,249 790,379
Loans, net of unearned income 1,541,521 1,542,738 1,305,555 1,308,412
Less: allowance for loan losses (25,713) (25,713) (21,800) (21,800)
----------- ----------- ----------- -----------
Loans, net 1,515,808 1,517,025 1,283,755 1,286,612
Financial liabilities:
Deposit $ 2,397,653 $ 2,398,858 $ 2,374,591 $ 2,375,718
Securities sold under agreements to repurchase 213,773 213,773 140,207 140,207
Federal Home Loan Bank advances 50,000 50,000 -- --
Long-term notes 2,714 2,714 -- --
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,
-----------------------------------
1999 1998
-----------------------------------
Commitments to extend credit $ 439,718 $ 244,135
Letters of credit 18,148 13,425
Approximately $254,000,000 and $172,000,000 of commitments to extend credit at December 31, 1999 and 1998, 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 of the Company. The Company continually evaluates each customer's credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in the Company obtaining collateral to support the obligation.
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.
The Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on the financial statements of the Company.
The following is selected supplemental information (in thousands):
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
Other service charges, commissions and fees:
Trust fees $ 4,445 $ 3,071 $ 2,946
Investment commissions and fees 3,328 508 376
Other non-interest expense:
Postage $ 3,857 $ 3,312 $ 3,051
Communication 4,692 3,405 3,184
Data processing 5,026 3,562 3,823
Professional fees 2,906 2,889 2,485
Taxes and licenses 2,401 1,873 1,909
Printing and supplies 2,459 2,131 2,001
Marketing 2,750 1,961 1,790
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,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
MS LA MS LA MS LA
------------------------------------------------------------------------------------
Interest income $122,626 $80,366 $122,813 $67,271 $112,294 $66,299
Interest expense 53,171 30,945 56,896 24,789 48,349 23,350
---------- --------- --------- --------- ---------- ---------
Net interest income 69,455 49,421 65,917 42,482 63,945 42,949
Provision for loan losses 2,295 4,626 2,731 2,854 1,929 4,260
Non-interest income 21,72 19,86 18,822 13,261 18,524 13,711
Depreciation and amortization 5,013 2,474 3,517 1,671 3,118 1,587
Other non-interest expense 53,674 47,051 48,661 36,727 46,003 34,893
---------- --------- --------- --------- ---------- ---------
Earnings before income taxes and
cumulative effect of accounting change 30,201 15,136 29,830 14,49 31,419 15,920
Income taxes 8,637 5,519 9,390 5,062 11,209 6,347
---------- --------- --------- --------- ---------- ---------
Earnings before cumulative effect
of accounting change 21,564 9,617 20,440 9,429 20,210 9,573
Cumulative effect of accounting change -- -- 1,151 -- -- --
---------- --------- --------- --------- ---------- ---------
Net earnings $21,564 $ 9,617 $21,591 $9,429 $20,210 $9,573
========== ========= ========= ========= ========== =========
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
Net Interest Income:
MS $69,455 $65,917 $63,945
LA 49,421 42,482 42,949
Other 4,837 3,518 2,866
----------- --------- ---------
Consolidated net interest income $123,713 $111,917 $109,760
=========== ========= =========
Net Earnings:
MS $21,564 $21,591 $20,210
LA 9,617 9,429 9,573
Other 529 (60) 841
----------- --------- ---------
Consolidated net earnings $31,710 $30,960 $30,624
=========== ========= =========
Assets:
MS $1,826,006 $1,833,064 $1,612,805
LA 1,216,238 1,003,620 937,060
Other 31,172 27,487 30,043
Intersegment (81,542) (49,476) (41,951)
----------- ---------- ---------
Consolidated assets $2,991,874 $2,814,695 $2,537,957
=========== ========== ==========
Balance Sheets
December 31,
-----------------------------------------------
1999 1998
-----------------------------------------------
Investment in subsidiaries $312,282,926 $285,464,704
Other 430,788 1,342,496
-------------- -------------
$312,713,714 $286,807,200
============== =============
Liabilities and Stockholders' Equity:
Due to subsidiaries $2,286,286 $ --
Stockholders' equity 310,427,428 286,807,200
-------------- -------------
$312,713,714 $286,807,200
============ ============
Statements of Earnings
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
Dividends received from subsidiaries $35,368,193 $36,555,000 $17,150,000
Equity in earnings of subsidiaries greater than
(less than) dividends received (1,914,920) (5,209,781) 14,793,067
Interest and other expenses (1,823,036) (1,689,631) (1,847,491)
Income tax credit 79,833 153,800 528,843
------------ ----------- -----------
Earnings before cumulative effect of
accounting change 31,710,070 29,809,388 30,624,419
Cumulative effect of accounting change -- 1,150,811 --
------------ ----------- -----------
Net earnings $31,710,070 $30,960,199 $30,624,419
============ =========== ===========
Statements of Cash Flows
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
Cash flows from operating activities - principally
dividends received from subsidiaries $36,868,662 $35,952,990 $15,116,205
Cash flows from investing activities - principally
business acquisitions (15,176,495) -- (4,062,524)
Cash flows from financing activities:
Dividends paid (11,055,506) (10,862,585) (11,039,887)
Purchase of treasury stock (11,484,047) (22,857,810) --
Repayment of note -- (1,279,402) --
------------- ------------- -----------
Net cash used by financing activities (22,539,553) (34,999,797) (11,039,887)
------------- ------------- -----------
Net (decrease) increase in cash (847,386) 953,193 13,794
Cash, beginning 1,124,294 171,101 157,307
------------- ------------- -----------
Cash, ending $276,908 $1,124,294 $171,101
============= ============== ==========
We have audited the accompanying consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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 18, 2000
The Company's net earnings were $31.7 million, or $2.91 per share, for the year ended December 31, 1999, compared to $31.0 million, or $2.90 per share, for the year ended December 31, 1998. Reflecting a 10.5% increase from the prior year, net interest income totaled $123.7 million for the current annual period. The Company's net interest margin increased from 4.67% reported in 1998 to 4.75% in 1999. Yields on interest-earning assets decreased to 7.83% in 1999 compared to 7.96% in 1998 and rates on interest-bearing liabilities decreased to 3.98% in 1999 compared to 4.31% the prior year. Subdued decreases in asset yield were partially due to the loan portfolio, which increased as a percentage of total interest-earning assets in 1999 and experienced only a slight decrease in yield to 9.53% during the current year compared to 9.57% in 1998. Average loan balances, which yield a higher rate of interest than investments, increased to $1.4 billion during 1999, compared to $1.2 billion during 1998. Deposit pricing initiatives implemented during the year contributed to the decrease in the Company’s cost of funds. The provision for loan losses increased 21.8% to $7.6 million for the year ended December 31, 1999, compared to $6.2 million for the same period a year ago. Net charge offs for the current year totaled $7.5 million and included losses amounting to $1.1 million on two loans acquired from American Security Bank (ASB) through merger on January 15, 1999. Non-interest income for the year ended December 31, 1999 increased to $45.6 million, compared to $32.3 million for the year ended December 31, 1998. This increase was primarily due to an increased customer base and several deposit pricing initiatives implemented during the second quarter of the current year. The Company’s emphasis on building new Trust relationships resulted in an increase of $1.4 million in trust fees which totaled $4.4 million for the year ended December 31, 1999. Investment sales commissions and fees earned by the Company totaled $3.3 million for the current annual period. This increase in commissions was primarily the result of internalizing the investment services subsidiary’s sales force and offering a broader array of products to the Banks’ customer base. Non-interest expense for the year ended December 31, 1999 increased to $115.4 million, compared to $93.8 million in 1998. Personnel increases during the current year can be attributed to increased benefit cost and an increased number of employees. Due to 13 additional full service retail branches in new market areas and the expansion of several lines of business, such as Trust and finance company operations, the Company added to its work force during the year. Similar expense increases occurred in occupancy, equipment, supply, communication and other costs. Data processing expense increased to $5.0 million for the year ended December 31, 1999, compared to $3.6 million, primarily due to the costs associated with the 1999 implementation of a new sales platform system. Additional direct expenses of approximately $900,000 were incurred as the result of the merger and data processing conversion of ASB. Amortization of intangibles increased $1.4 million due to the amortization of goodwill associated with the current year’s acquisition of ASB. The Company’s recent focus has been on expense control and management is committed to address concerns for this trend into the Year 2000.
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, 1999 carrying value of the held-to-maturity portfolio was $509.3 million and the market value was $498.5 million. The available-for-sale portfolio had a carrying value of $639.4 million and a cost of $660.6 million at December 31, 1999. The rise in overall interest rates during 1999 had a negative effect on the fair value of securities. Management is not aware of any permanent impairment of its securities. Investment in securities increased approximately $95.6 million during the year, primarily due to the acquisition of ASB.
Loans, net of unearned income, increased $236.0 million to $1.5 billion at December 31, 1999, compared to the balances a year prior. Approximately $104.0 million of this increase was due to the acquisition of ASB. The Company generally makes loans in its market areas of South Mississippi and South Louisiana. The majority of the loan origination activity during the
current year was in small to middle market commercial loans and personal consumer loans. Loans outstanding and originated by the Company's expanding finance company subsidiary increased approximately $9.5 million, or 84.3%, at December 31, 1999, compared to the subsidiary's outstanding loans on December 31, 1998. Non-accruing and restructured loans were $7.1 million, or 0.46%, of the outstanding loans at December 31, 1999. Included in non-accruing loans was a $1.1 million commercial loan outstanding from a borrower currently in bankruptcy but for which management believes there is sufficient collateral.
Deposits increased slightly to $2.4 billion at December 31, 1999, compared to the balance at December 31, 1998. Non-interest bearing demand accounts decreased 3.6%, to $527.2 million in 1999. Decreases to transaction accounts were partially offset by increases in savings, certificates of deposits and securities sold under agreements to repurchase. Certificates of deposit of $100,000 or more outstanding at December 31, 1999 amounted to $253.9 million. Deposits and deposit-related liabilities are the Company's primary source of funds supporting its earning asset base.
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 an unused line of credit with the Federal Home Loan Bank of nearly $100 million and has borrowing capacity at the Federal Reserve's Discount Window in excess of $100 million. At December 31, 1999, cash and due from banks and securities available for sale were 33.2% of total deposits.
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, 1999, the Company's and the Banks' capital balances were in excess of current regulatory minimum requirements.
In 1996 the Company began addressing all the systems and business methods requiring modifications to accommodate the turn of the century. Identification of the Company's major Year 2000 issues and replacement of certain systems were completed in 1999 which resolved the issues of which management was aware. Written assurances of expected Year 2000 readiness was 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 failed to adequately address possible Year 2000 issues at a reasonable cost, the result could have had a significant adverse effect on the Company's business and operational results. The readiness of all third parties, including customers and suppliers, was inherently uncertain and could not be assured. The Company also recognized the importance of its customers' need to address Year 2000 issues. Relationships considered material to the Company's financial position were identified and appropriate documentation from borrowers received.
Testing of information systems and review of property equipment functions, including those slated for replacement or vendor upgrade, was completed in February 1999. In addition to testing required by regulatory agencies, which included fully integrated systems testing, the Company completed a second test of all mission critical systems in September 1999. Contingency plans for the most reasonably likely worst-case scenarios were completed and issues regarding material equipment and applications failure were addressed. Contingency plans for liquidity needs due to potentially significant deposit withdrawals during the fourth quarter of 1999 were also complete.
As of January 10, 2000 the Company has not experienced any system errors other than those typically encountered and corrected by banks daily. Management is not aware of any significant issues related to Year 2000 that adversely affect the Company's vendors or borrowers at this time. The Company plans to continue to monitor and assess operating systems for possible remaining uncertainties.
Management dedicated 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 twelve months, is expected to be approximately $4.0 million (before income taxes).
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 relatively stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company’s securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
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 attempts to limit interest rate risk 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, 1999, the Company had $311 million of regular savings and club accounts and $648 million of money market and NOW accounts, representing 51.3% of total interest-bearing depositor accounts.
One approach used to quantify interest rate risk is the net portfolio value ("NPV") analysis. NPV includes shareholder 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, 1999 and 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).
1999 1998
--------------------------------------------------------------------------------------------
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 $79,033 $(205,832) (72.3) $105,291 $(188,460) (64.2)
+300 126,105 (158,760) (55.7) 148,425 (145,326) (49.5)
+200 175,719 (109,146) (38.3) 192,969 (100,782) (34.3)
+100 227,875 (56,990) (20.0) 238,923 (54,828) (18.7)
-- 284,865 293,751 -- --
-100 330,670 45,805 16.1 331,661 37,910 12.9
-200 353,151 68,286 24.0 337,171 43,420 14.8
-300 376,280 91,415 32.1 344,122 50,371 17.1
-400 400,057 115,192 40.4 352,514 58,763 20.0
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.
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.
|
|