-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TheWW0c1w3wOUZnIWBOTsVYiNqKU8g60KLr3hIfbYoiJ/wT9gjt2PCZ7seJnshbK ZcbFWBfsWczYWnhHk5Zlpw== 0001030798-98-000062.txt : 19980401 0001030798-98-000062.hdr.sgml : 19980401 ACCESSION NUMBER: 0001030798-98-000062 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK HOLDING CO CENTRAL INDEX KEY: 0000750577 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 640693170 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13089 FILM NUMBER: 98581338 BUSINESS ADDRESS: STREET 1: ONE HANCOCK PLZ STREET 2: P.O. BOX 4019 CITY: GULFPORT STATE: MS ZIP: 39502 BUSINESS PHONE: 6018684605 MAIL ADDRESS: STREET 1: ONE HANCOCK PLZ STREET 2: P O BOX 4019 CITY: GULFPORT STATE: MS ZIP: 39502 10-K 1 HANCOCK HOLDING COMPANY 1998 FORM 10-K FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 . OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . Commission file number 0-13089 Hancock Holding Company Mississippi 64-0693170 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) One Hancock Plaza, Gulfport, Mississippi 39501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (228) 868-4715 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $3.33 PAR VALUE (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Continued The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 2, 1998, was approximately $539,171,000. For purposes of this calculation only, shares held by non-affiliates are deemed to consist of (a) shares held by all shareholders other than directors and executive officers of the registrant plus (b) shares held by directors and officers as to which beneficial ownership has been disclaimed. On December 31, 1997, the registrant had outstanding 10,916,770 shares of common stock for financial statement purposes. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference into Part II of this report. Portions of the definitive Proxy Statement used in connection with the Registrant's Annual Meeting of Shareholders held on February 19, 1998, filed by the Registrant on January 20, 1998, are incorporated by reference into Part III of this report. Page 2 of 50 CONTENTS PART I Item 1. Business 4 Item 2. Properties 38 Item 3. Legal Proceedings 39 Item 4. Submission of Matters to a Vote of Security Holders 39 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 39 Item 6. Selected Financial Data 39 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 39 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 40 Item 8. Financial Statements and Supplementary Data 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 PART III Item 10. Directors and Executive Officers of the Registrant 43 Item 11. Executive Compensation 43 Item 12. Security Ownership of Certain Beneficial Owners and Management 43 Item 13. Certain Relationships and Related Transactions 43 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44 Page 3 of 50 PART I Item 1 - Business BACKGROUND AND CURRENT OPERATIONS Background General: Hancock Holding Company (the "Company"), organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is headquartered in Gulfport, Mississippi. The Company operates 82 banking offices and over 100 automated teller machines ("ATM's") in the states of Mississippi and Louisiana through two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi ("Hancock Bank MS") and Hancock Bank of Louisiana, Baton Rouge, Louisiana ("Hancock Bank LA"). Hancock Bank MS and Hancock Bank LA are referred to collectively as 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. At December 31, 1997, the Company had total assets of $2.5 billion and employed on a full-time basis 834 persons in Mississippi and 434 persons in Louisiana. Hancock Bank MS was originally chartered as Hancock County Bank in 1899. Since its organization, the strategy of Hancock Bank MS has been to achieve a dominant market share on the Mississippi Gulf Coast. Prior to a series of acquisitions begun in 1985, growth was primarily internal and was accomplished by concentrating branch expansions in areas of population growth where no dominant financial institution previously served the market area. Economic expansion on the Mississippi Gulf Coast has resulted primarily from growth of military and government-related facilities, tourism, port facility activities, industrial complexes and the gaming industry. Hancock Bank MS currently has the largest market share in each of the four counties in which it operates: Harrison, Hancock, Jackson and Pearl River. With assets of $1.6 billion at December 31, 1997, Hancock Bank MS currently ranks as the fourth largest bank in Mississippi. Page 4 of 50 In August 1990, the Company formed Hancock Bank LA to assume the deposit liabilities and acquire the consumer loan portfolio, corporate credit card portfolio and non-adversely classified securities portfolio of American Bank and Trust, Baton Rouge, Louisiana, ("AmBank"), from the Federal Deposit Insurance Corporation ("FDIC"). Economic expansion in East Baton Rouge Parish has resulted from growth in state government and related service industries, educational and medical complexes, petrochemical industries, port facility activities and transportation and related industries. With assets of $.9 billion at December 31, 1997, Hancock Bank LA is the largest bank headquartered in East Baton Rouge Parish. In November 1996, the Company expanded the Baton Rouge market area into the Hammond area, where many of the people who work in Baton Rouge live, with the acquisition of Community Bancshares, Inc. Community Bancshares, Inc., Independence, Louisiana, owned 100% of the stock of Community State Bank ("Community"). Beginning with the 1985 acquisition of the Pascagoula-Moss Point Bank ("PMP") in Pascagoula, Mississippi, the Company has acquired approximately $1,045 million in assets and approximately $938 million in deposit liabilities through selected acquisitions or purchase and assumption transactions. Recent Acquisition Activity: In August 1991, Hancock Bank MS acquired certain assets and deposit liabilities of Peoples Federal Savings Association, Bay St. Louis, Mississippi, from the RTC. As a result of this transaction, the Bank acquired assets of approximately $39.0 million and deposit liabilities of approximately $38.5 million. The Company borrowed $18,750,000 from Whitney National Bank, New Orleans, Louisiana ("Whitney"), to partially fund the acquisition of Metropolitan National Bank and AmBank in 1990. On November 28, 1991, the Company sold 1,785,375 shares of its common stock at $14.78 per share (adjusted for a 15% stock dividend in 1996). This followed a two-for-one stock split in the form of a 100% stock dividend on October 15, 1991, and an increase in authorized shares to 20,000,000. The net proceeds of this sale, after underwriting discount and expenses, of approximately $24,700,000, were Page 5 of 50 used to pay the principal and interest on $18,500,000 of principal debt on the Whitney loan and increase Hancock Bank LA's capital by $5,000,000. In April 1994, the Company merged Hancock Bank LA with First State Bank and Trust Company of East Baton Rouge Parish, Baker, Louisiana ("Baker"). The merger was consummated by the exchange of all outstanding common stock of Baker in return for approximately 606,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The merger was accounted for using the pooling-of-interests method; therefore, all prior years' financial information has been restated. On January 13, 1995, the Company acquired First Denham Bancshares, Inc. ("Bancshares") which owned 100% of the stock of First National Bank of Denham Springs ("Denham"), Denham Springs, Louisiana. The acquisition was in return for approximately $4,000,000 cash and 890,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The acquisition was accounted for using the purchase method. Bancshares had total assets of approximately $111,000,000 and stockholders' equity of approximately $11,300,000 as of December 31, 1994 and net earnings of approximately $2,600,000 for the year then ended. On August 15, 1996, Denham was merged into Hancock Bank LA. On February 1, 1995, the Company merged Hancock Bank LA with Washington Bank & Trust Company, Franklinton, Louisiana ("Washington"). The merger was consummated by the exchange of all outstanding common stock of Washington in return for approximately 624,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The merger was accounted for using the pooling-of-interests method; therefore, all prior years' financial information has been restated. Washington had total assets of approximately $86,100,000 and stockholders' equity of approximately $12,400,000 as of December 31, 1994, and net earnings of approximately $1,300,000 for the year then ended. In November 1996, the Company acquired Community Bancshares, Inc., Independence, Louisiana, ("Community") which owned 100% of the stock of Community State Bank. The acquisition was in return for approximately $5,000,000 cash and 513,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The acquisition was accounted for using the purchase method. Community had total assets of approximately Page 6 of 50 $91,000,000 and stockholders' equity of approximately $11,000,000 as of December 31, 1995 and net earnings of approximately $900,000 for the year then ended. On January 17, 1997, the Company acquired Southeast National Bank, Hammond, Louisiana ("Southeast"). The acquisition was in return for approximately $3,700,000 cash and 121,000 shares of common stock of the Company. The acquisition was accounted for using the purchase method. Southeast had total assets of approximately $40,000,000 and stockholders' equity of approximately $4,000,000 as of December 31, 1996 and net earnings of approximately $500,000 for the year then ended. On July 15, 1997, the Company acquired Commerce Corporation, Inc., St Francisville, Louisiana ("Commerce"), which owned 100% of the stock of Bank of Commerce and Trust Company, for approximately $330,000 cash, 65,000 shares of common stock of the Company and the assumption of Commerce debt owed to certain individuals in the aggregate principal amount of $1,250,000. The transaction was accounted for using the purchase method. Commerce had total assets of approximately $29,000,000 and stockholders' equity of approximately $800,000 as of December 31, 1996 and net earnings of approximately $260,000 for the year then ended. Current Operations Loan Production and Credit Review: The Banks' primary lending focus is to provide commercial, consumer, leasing and real estate loans to consumers and to small and middle market businesses in their respective market areas. The Banks have no concentrations of loans to particular borrowers or loans to any foreign entities. Each loan officer has Board approved loan limits on the principal amount of secured and unsecured loans he or she can approve for a single borrower without prior approval of a loan committee. All loans, however, must meet the credit underwriting standards and loan policies of the Banks. For Hancock Bank MS, all loans over an individual loan officer's Board approved lending authority and below a regional approved limit must be approved by his or her region's loan committee or by another loan officer with greater lending authority. Both the regional loan committee and the Page 7 of 50 Bank's senior loan committee must review and approve any loan for a borrower whose total indebtedness exceeds the region's approved limit. Each loan file is reviewed by the Bank's loan operations quality assurance function, a component of its loan review system, to ensure proper documentation and asset quality. For Hancock Bank LA, all loans over an individual loan officer's Board approved lending authority must be approved by the Bank's, his or her region's loan committee or by another loan officer with greater lending authority. Both the regional loan committee and the Bank's senior loan committee must review and approve any loan for a borrower whose total indebtedness exceeds $500,000. Each loan file is reviewed by the Bank's loan operations quality assurance function, a component of its loan review system, to ensure proper documentation and asset quality. Loan Review and Asset Quality: Each Bank's portfolio of loan relationships aggregating $250,000 or more is annually reviewed by the respective Bank to identify any deficiencies and to take corrective actions as necessary. Periodically, selected loan relationships aggregating less than $250,000 are reviewed. As a result of such reviews, each Bank places on its Watchlist loans requiring close or frequent review. All loans classified by a regulator are also placed on the Watchlist. All Watchlist and past due loans are reviewed monthly by the Banks' senior lending officers and by the Banks' Board of Directors. In addition, all loans to a particular borrower are reviewed, regardless of classification, each time such borrower requests a renewal or extension of any loan or requests a new loan. All lines of credit are reviewed annually before renewal. The Banks currently have mechanisms in place that allow for at least an annual review of the financial statements and the financial condition of all borrowers, except borrowers with secured installment and residential mortgage loans. Consumer loans which become 60 days delinquent are reviewed regularly by management. Generally, a consumer loan which is delinquent 120 days is Page 8 of 50 in process of collection through repossession and liquidation of collateral or has been deemed currently uncollectible. Loans deemed currently uncollectible are charged-off against the allowance account. As a matter of policy, loans are placed on a nonaccrual status when the loan is 1) maintained on a cash basis due to the deterioration in the financial condition of the borrower, 2) payments, in full, of principal or interest are not expected or 3) the principal or interest has been in default for a period of 90 days, unless the loan is well secured and in the process of collection. The Banks follow the standard FDIC loan classification system. This system provides management with (1) a general view of the quality of the overall loan portfolio (each branch's loan portfolio and each commercial loan officer's loan portfolio) and (2) information on specific loans that may need individual attention. The Banks hold nonperforming assets, consisting of real property, vehicles and other items held for resale, which were acquired generally through the process of foreclosure. At December 31, 1997, the book value of nonperforming assets held for resale was approximately $2.4 million. Securities Portfolio: The Banks maintain portfolios of securities consisting primarily of U.S. Treasury securities, U.S. government agency issues, mortgage-backed securities, CMOs and tax-exempt obligations of states and political subdivisions. The portfolios are designed to enhance liquidity while providing acceptable rates of return. Therefore, the Banks invest only in high grade investment quality securities with acceptable yields and generally with durations of less than 7 years. The Banks' policies limit investments to securities having a rating of no less than "Baa" by Moody's Investors' Service, Inc., except for certain obligations of Mississippi or Louisiana counties and municipalities. Deposits: The Banks have several programs designed to attract depository accounts offered to consumers and to small and middle market businesses at interest Page 9 of 50 rates generally consistent with market conditions. Additionally, the Banks offer over 100 ATMs: over 65 ATMs at the 80 banking offices and over 40 free-standing ATMs at other locations. As members of regional and international ATM networks such as "PULSE", "PLUS" and "CIRRUS," the Banks offer customers access to their depository accounts from regional, national and international ATM facilities. Deposit flows are controlled by the Banks primarily through pricing, and to a certain extent, through promotional activities. Management believes that the rates it offers, which are posted weekly on deposit accounts, are generally competitive with or, in some cases, slightly below other financial institutions in the Banks' respective market areas. Trust Services: The Banks', through their respective Trust Departments, offer a full range of trust services on a fee basis. The Banks act as executor, administrator or guardian in administering estates. Also provided are investment custodial services for individuals, businesses and charitable and religious organizations. In their trust capacities, the Banks provide investment management services on an agency basis and act as trustee for pension plans, profit sharing plans, corporate and municipal bond issues, living trusts, life insurance trusts and various other types of trusts created by or for individuals, businesses and charitable and religious organizations. As of December 31, 1997, the Trust Departments of the Banks had approximately $1.5 billion of assets under management, of which $0.7 billion were corporate accounts and $0.8 billion were personal, employee benefit, estate and other trust accounts. Operating Efficiency Strategy: The primary focus of the Company's operating strategy is to increase operating income and to reduce operating expense. Beginning in January of 1988, management has taken steps to improve operating efficiencies. As a result, employees at Hancock Bank MS have been reduced from .78 per $1 million in assets in February 1988 to .51 as of December 31, 1997. Since its acquisition in August 1990, Hancock Bank LA employees have been reduced from .97 per $1 million of assets to .46 as of December 31, 1997. Management annually establishes an employee to asset goal for each Bank. The Banks also have set an internal long range goal of at least covering Page 10 of 50 total salary and benefit costs by fee income. The ratio of fee income to total salary and benefit costs is $.54 to $1.00 at Hancock Bank MS. Hancock Bank LA has a higher level of fee income and through December 31, 1997, has achieved a ratio of $.90 to $1.00. Other Activities: Hancock Bank MS has seven subsidiaries through which it engages in the following activities: providing consumer financing services; mortgage lending; owning, managing and maintaining certain real property; providing general insurance agency services; holding investment securities; marketing credit life insurance; and providing discount investment brokerage services. The income of these subsidiaries generally accounts for less than 10% of the Company's total annual income. During 1994, the Company began offering alternative investments through a third party vendor. The Investment Center is now located in several branch locations in Mississippi and Louisiana to accommodate the investment needs of customers whose needs fall outside the traditional commercial bank product line. Hancock Bank MS also owns approximately 3,700 acres of timberland in Hancock County, Mississippi, most of which was acquired through foreclosure in the 1930's. Timber sales and oil and gas leases on this acreage generate less than 1% of the Company's annual income. Competition: The deregulation of the financial services industry, the elimination of many previous distinctions between commercial banks and other financial institutions and legislation enacted in Mississippi, Louisiana and other states allowing state-wide branching, multi-bank holding companies and regional interstate banking has created a highly competitive environment for commercial banking in the Company's market area. The principal competitive factors in the markets for deposits and loans are interest rates paid and charged. The Company also competes through the efficiency, quality, range of services and products it provides, convenience of office and ATM locations and office hours. Page 11 of 50 In attracting deposits and in its lending activities, the Company competes generally with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, mutual funds, insurance companies and other financial institutions. Many of these institutions have greater available resources than the Company. SUPERVISION AND REGULATION Bank Holding Company Regulation General: The Company is subject to extensive regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve") pursuant to the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). The Company also is required to file certain reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission (the "Commission") under federal securities laws. Federal Regulation: The Bank Holding Company Act generally prohibits the Company from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries. Acquiring or obtaining control of any company engaged in activities other than those activities determined by the Federal Reserve to be so closely related to banking, managing or controlling banks as to be proper incident thereto is also prohibited. In determining whether a particular activity is permissible, the Federal Reserve considers whether the performance of the activity can reasonably be expected to produce benefits to the public that outweigh possible adverse effects. For example: making, acquiring or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance, and performing certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities. The Bank Holding Company Act does not place territorial limitations on permissible bank-related activities of bank holding Page 12 of 50 companies. Despite prior approval, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when it has reasonable cause to believe that continuation of such activity or control of such subsidiary constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve: (1) before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, such bank holding company will own or control more than 5% of the voting shares of such bank, (2) before it or any of its subsidiaries other than a bank may acquire all of the assets of a bank, or (3) before it may merge with any other bank holding company. In reviewing a proposed acquisition, the Federal Reserve considers financial, managerial and competitive aspects. The future prospects of the companies and banks concerned and the convenience and needs of the community to be served must also be considered. The Federal Reserve also reviews the indebtedness to be incurred by a bank holding company in connection with the proposed acquisition to ensure that the holding company can service such indebtedness without adversely affecting the capital requirements of the holding company or its subsidiaries. The Bank Holding Company Act further requires that consummation of approved acquisitions or mergers must be delayed at least 30 days following the date of approval. During such 30-day period, complaining parties may obtain a review of the Federal Reserve's order granting its approval by filing a petition in the appropriate United States Court of Appeals petitioning that the order be set aside. The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies. The regulatory capital of a bank holding company under applicable federal capital adequacy guidelines is particularly important in the Federal Reserve's evaluation of a bank holding company and any applications by the bank holding company to the Federal Reserve. If regulatory capital falls below minimum guideline levels, a bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open additional facilities. In addition, a financial institution's failure to meet minimum regulatory capital standards can lead to other penalties, including termination of deposit insurance or appointment of a conservator or receiver Page 13 of 50 for the financial institution. There are two measures of regulatory capital presently applicable to bank holding companies, (1) risk-based capital and (2) leverage capital ratios. The Federal Reserve rates bank holding companies by a component and composite 1-5 rating system. This system is designed to help identify institutions which require special attention. Financial institutions are assigned ratings based on evaluation and rating of their financial condition and operations. Components reviewed include capital adequacy, asset quality, management capability, the quality and level of earnings, and the adequacy of liquidity. Effective January 1, 1997, a sixth component was added to the rating system - Sensitivity to market risk. This component addresses primarily the issue of a bank's sensitivity to interest rate fluctuations. The leverage ratios adopted by the Federal Reserve require all but the most highly rated bank holding companies to maintain Tier 1 Capital at 4% to 5% of total assets. Certain bank holding companies having a composite 1 rating and not experiencing or anticipating significant growth may satisfy the Federal Reserve guidelines by maintaining Tier 1 Capital of at least 3% of total assets. Tier 1 Capital for bank holding companies includes: stockholders' equity, minority interest in equity accounts of consolidated subsidiaries and qualifying perpetual preferred stock. In addition, Tier 1 Capital excludes goodwill and other disallowed intangibles. The Company's leverage capital ratio at December 31, 1997, was 10.24%. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the risk- based capital guidelines, assets are assigned to one of four risk categories; 0%, 20% 50% and 100%. As an example, U.S. Treasury securities are assigned to the 0% risk category while most categories of loans are assigned to the 100% risk category. A two-step process determines the risk weight of off-balance sheet items such as standby letters of credit. First, the amount of the off-balance sheet item is multiplied by a credit conversion factor of either 0%, 20%, 50% or 100%. The result is then assigned to one of the four risk categories. At December 31, 1997, the Company's off-balance sheet items aggregated $262 million; however, after Page 14 of 50 the credit conversion these items represented $32 million of balance sheet equivalents. The primary component of risk-based capital is Tier 1 Capital, which is essentially equal to common stockholders' equity, plus a certain portion of perpetual preferred stock. Tier 2 Capital, which consists primarily of the excess of any perpetual preferred stock, mandatory convertible securities, subordinated debt and general allowances for loan losses, is a secondary component of risk-based capital. The risk-weighted asset base is equal to the sum of the aggregate dollar values of assets and off-balance sheet items in each risk category, multiplied by the weight assigned to that category. A ratio of Tier 1 Capital to risk-weighted assets of at least 4% and a ratio of Total Capital (Tier 1 and Tier 2) to risk-weighted assets of at least 8% must be maintained by bank holding companies. At December 31, 1997, the Company's Tier 1 and Total Capital ratios were 18.22% and 19.18%, respectively. The prior approval of the Federal Reserve must be obtained before the Company may acquire substantially all the assets of any bank, or ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In no case, however, may the Federal Reserve approve an acquisition of any bank located outside Mississippi unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. The banking laws of Mississippi presently permit out-of-state banking organizations to acquire Mississippi banking organizations, provided the out-of-state banking organization's home state grants similar privileges to banking organizations in Mississippi. This reciprocity privilege is restricted to banking organizations in specified geographic regions that encompass the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas, Virginia and West Virginia. In addition, Mississippi banking organizations are permitted to acquire certain out-of-state financial institutions. A bank holding company is additionally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. With the passage of The Interstate Banking and Branching Efficiency Act Page 15 of 50 of 1994, adequately capitalized and managed bank holding companies are permitted to acquire control of banks in any state, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. Beginning June 1, 1997, federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; except that, mergers may not be approved with respect to banks located in states that, before June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. The legislation further provides that a bank holding company may not, following an interstate acquisition, control more than 10% of nationwide insured deposits or 30% of deposits in the relevant state. States have the right to adopt legislation to lower the 30% limit. Additional provisions require that interstate activities conform to the Community Reinvestment Act. The Company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The Federal Reserve may disapprove such a transaction if it determines that the proposal constitutes an unsafe or unsound practice, would violate any law, regulation, Federal Reserve order or directive or any condition imposed by, or written agreement with, the Federal Reserve. In November 1985, the Federal Reserve adopted its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the "Policy Statement"). The Policy Statement sets forth various guidelines that the Federal Reserve believes that a bank holding company should follow in establishing its dividend policy. In general, the Federal Reserve stated that bank holding companies should pay dividends only out of current earnings. It also stated that dividends should not be paid unless the prospective rate of earnings retention by the holding company appears consistent with its capital needs, asset quality and overall financial condition. The activities of the Company are also restricted by the provisions of Page 16 of 50 the Glass-Steagall Act of 1933 (the "Act"). The Act prohibits the Company from owning subsidiaries engaged principally in the issue, floatation, underwriting, public sale or distribution of securities. Regulators and legislators are currently reviewing the interpretation, scope and application of the provisions of the Act. The outcome of the current examination and the effect of the outcome on the ability of bank holding companies to engage in securities related activities cannot be predicted. The Company is a legal entity separate and distinct from the Banks. There are various restrictions that limit the ability of the Banks to finance, pay dividends or otherwise supply funds to the Company or other affiliates. In addition, subsidiary banks of holding companies are subject to certain restrictions on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, or leases or sales of property or furnishing of services. Bank Regulation: The operations of the Banks are subject to state and federal statutes applicable to state banks and national banks, respectively, and the regulations of the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency ("OCC"). Such statutes and regulations relate to, among other things, required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the Banks' operations. Hancock Bank MS is subject to regulation and periodic examinations by the FDIC and the State of Mississippi Department of Banking and Consumer Finance. Hancock Bank LA is subject to regulation and periodic examinations by the FDIC and the Office of Financial Institutions, State of Louisiana. These regulatory authorities examine such areas as reserves, loan and investment quality, management policies, procedures and practices and other aspects of operations. These examinations are designed for the protection of the Banks' depositors, rather than their stockholders. In addition to these regular examinations, the Company and the Banks must furnish periodic Page 17 of 50 reports to their respective regulatory authorities containing a full and accurate statement of their affairs. As a result of the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a financial institution insured by the FDIC can be held liable for any losses incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured financial institution or (2) any assistance provided by the FDIC to a commonly controlled financial institution in danger of default. The Banks are members of the FDIC, and their deposits are insured as provided by law by the Bank Insurance Fund ("BIF"). On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. The Federal Deposit Insurance Act, as amended by Section 302 of FDICIA, calls for risk-related deposit insurance assessment rates. The risk classification of an institution will determine its deposit insurance premium. Assignment to one of three capital groups, coupled with assignment to one of three supervisory sub-groups, determines which of the nine risk classifications is appropriate for an institution. Effective in the first quarter of 1996, the FDIC lowered banks' deposit insurance premiums from 4 to 31 cents per hundred dollars in insured deposits to a rate of 0 to 27 cents. The Banks have received a risk classification of 1A for assessment purposes. Total assessments paid to the FDIC amounted to $236 thousand in 1997. The Banks paid BIF premiums of 1.26 cents per hundred dollars of insured deposits during 1997. Premiums for the first and second quarters of 1998 have decreased to 1.256 cents per hundred dollars of insured deposits. Premiums on OAKAR deposits from the 1991 acquisition of Peoples Federal Savings Association totalled $20 thousand. In general, FDICIA subjects banks and bank holding companies to significantly increased regulation and supervision. FDICIA increased the borrowing authority of the FDIC in order to recapitalize the Bank Insurance Fund, and the future borrowings are to be repaid by increased assessments on FDIC member banks. Other significant provisions of FDICIA require a new regulatory emphasis linking supervision to bank capital levels. Also, federal banking regulators are required to take prompt regulatory action Page 18 of 50 with respect to depository institutions that fall below specified capital levels and to draft non-capital regulatory measures to assure bank safety. FDICIA contains a "prompt corrective action" section intended to resolve problem institutions at the least possible long-term cost to the deposit insurance funds. Pursuant to this section, the federal banking agencies are required to prescribe a leverage limit and a risk-based capital requirement indicating levels at which institutions will be deemed to be "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." In the case of a depository institution that is "critically undercapitalized" (a term defined to include institutions which still have positive net worth), the federal banking regulators are generally required to appoint a conservator or receiver. FDICIA further requires regulators to perform annual on-site bank examinations, places limits on real estate lending and tightens audit requirements. The new legislation eliminated the "too big to fail" doctrine, which protects uninsured deposits of large banks, and restricts the ability of undercapitalized banks to obtain extended loans from the Federal Reserve Board discount window. FDICIA also imposes new disclosure requirements relating to fees charged and interest paid on checking and deposit accounts. Most of the significant changes brought about by FDICIA required new regulations. In addition to regulating capital, the FDIC and the OCC have broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC and OCC have adopted regulations that restrict preferential loans and loan amounts to "affiliates" and "insiders" of banks, require banks to keep information on loans to major stockholders and executive officers and bar certain director and officer interlocks between financial institutions. The FDIC is also authorized to approve mergers, consolidations and assumption of deposit liability transactions between insured banks and between insured banks and uninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continuing or assumed bank is an insured nonmember state bank, like Hancock Bank MS and Hancock Bank LA. Although the Hancock Bank MS and Hancock Bank LA are not members of the Page 19 of 50 Federal Reserve System, they are subject to Federal Reserve regulations that require the Banks to maintain reserves against transaction accounts (primarily checking accounts). Because reserves generally must be maintained in cash or in noninterest-bearing accounts, the effect of the reserve requirements is to increase the cost of funds for the Banks. The Federal Reserve regulations currently require that reserves be maintained against net transaction accounts in the amount of 3% of the aggregate of such accounts up to $43.1 million, or, if the aggregate of such accounts exceeds $43.1 million, $1.293 million plus 10% of the total in excess of $43.1 million. This regulation is subject to an exemption from reserve requirements on a limited amount of an institution's transaction accounts. The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Banks. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of such entities. Effect of Governmental Policies: The difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities will comprise most of a bank's earnings. Due to recent deregulation of the industry, however, the banking business is becoming increasingly dependent on the generation of fee and service charge revenue. The earnings and growth of a bank will be affected by both general economic conditions and the monetary and fiscal policy of the United States Government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb inflation and combat recession. This is accomplished by its open-market operations in United States Government securities, adjustments in the amount of reserves that financial institutions are required to maintain and adjustments to the discount rates on borrowings and target rates for federal funds transactions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits. The nature and timing of any future changes in monetary policies and their potential impact on the Company cannot be predicted. Page 20 of 50 STATISTICAL INFORMATION The following tables and other material present certain statistical information regarding the Company. This information is not audited and should be read in conjunction with the Company's consolidated financial statements and the accompanying notes. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY AND INTEREST RATES AND DIFFERENTIALS Net interest income, the difference between interest income and interest expense, is the most significant component of the Banks earnings. For internal analytical purposes, management adjusts net interest income to a "taxable equivalent" basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans). Another significant statistic in the analysis of net interest income is the effective interest differential, which is the difference between the average rate of interest earned on earning assets and the effective rate paid for all funds, noninterest-bearing as well as interest-bearing. Since a portion of the Bank's deposits do not bear interest, such as demand deposits, the rate paid for all funds is lower than the rate on interest-bearing liabilities alone. The rate differential for the years 1997 and 1996 was 5.09% and 5.10%, respectively. Recognizing the importance of interest differential to total earnings, management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional, and area economic conditions, including the level of loan demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies. These policies are designed to maximize interest differential while maintaining sufficient liquidity and availability of funds for purposes of meeting existing commitments and for investment in loans and other investment opportunities that may arise. Page 21 of 50 The following table shows interest income on interest-earning assets and related average yields earned and interest expense on interest-bearing liabilities and related average rates paid for the periods indicated:
Comparative Average Balances - Yields and Rates Years Ended December 31, 1997 1996 1995 ---------------------------------- --------------------------------- --------------------------- Interest Average Interest Average Interest Average Average Income or Yield or Average Income or Yield or Average Income or Yield or Balance Expense Rate Balance Expense Rate Balance Expense Rate ----------- --------- ------ ---------- ---------- ------- ---------- ---------- --------- (Amounts in thousands) ASSETS Interest-earning assets: Investment securities: U.S. Treasury $ 240,539 $ 14,734 6.13% $ 221,120 $ 13,567 6.14% $ 257,228 $ 14,568 5.66% U.S. government obligations 552,154 34,699 6.28% 449,687 34,886 7.76% 493,315 33,726 6.84% Municipal obligations 74,838 6,385 8.53% 60,690 5,451 8.98% 57,001 5,426 9.52% Other securities 116,672 10,041 8.61% 171,889 6,780 3.94% 87,606 6,231 7.11% Federal funds sold & securities purchased under agreements to resell 50,256 2,733 5.44% 106,316 5,580 5.25% 99,559 5,820 5.85% Interest-bearing time deposits with other banks 996 64 6.43% 1,543 87 5.64% 500 31 6.20% Net loans (2)(3) 1,201,381 117,474 9.78% 1,083,165 107,079 9.89% 1,000,907 98,029 9.79% ---------- -------- ----- --------- ------- ----- ---------- ------- ----- Total interest-earning assets/interest income (1) 2,236,836 186,130 8.32% 2,094,410 173,430 8.28% 1,996,116 163,831 8.21% Less: Allowance for loan losses (20,410) -- -- (17,670) -- -- (16,532) -- -- Noninterest-earning assets: Cash and due from banks 119,271 -- -- 121,157 -- -- 104,854 -- -- Property and equipment 40,149 -- -- 37,185 -- -- 37,786 -- -- Other assets 67,107 -- -- 50,795 -- -- 93,302 -- -- ----------- ----- ----------- --------- ----------- ------- ---------------- Total assets $ 2,442,953 $ 186,130 7.62% $2,285,877 173,430 7.59% $2,215,526 163,831 7.39% =========== =========== ===== ========== ======== ===== =========== ======== ===== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Savings, NOW and money market $ 746,665 $ 20,714 2.77%$ 694,017 19,001 2.74%$ 739,091 20,515 2.78% Time 834,147 45,436 5.45% 778,602 41,624 5.35% 717,064 37,097 5.17% Federal funds purchased 2,304 107 4.64% 11,425 549 4.80% 15,284 863 5.65% Securities sold under agreements to repurchase 118,855 5,277 4.44% 79,411 3,465 4.36% 53,924 2,219 4.12% Long-term bonds 1,369 164 4.60% 1,795 158 8.80% 2,799 203 7.25% Capital notes -- -- -- -- 7 -- -- 265 0.00% ----------- ---------- ----- --------- -------- ----- --------- ------- ----- Total interest-bearing liabilities/interest expense 1,703,340 71,698 4.21% 1,565,250 64,804 4.14% 1,528,162 61,162 4.00% Noninterest-bearing liabilities: Demand deposits 453,218 -- -- 472,909 -- -- 439,495 -- -- Other liabilities 15,092 -- -- 17,667 -- -- 32,135 -- -- Stockholders' equity 271,303 -- -- 230,051 -- -- 215,734 -- -- ----------- ----------- ----- ---------- --------- ----- ----------- ------ ------ Total liabilities & stockholders' equity $ 2,442,953 $ 71,698 2.93% $2,285,877 64,804 2.83% $ 2,215,526 61,162 2.76% ========== =========== ===== ========== ========= ===== =========== ====== ===== Interest-earning assets $ 2,236,836 $ 2,094,410 $ 1,996,116 Interest-bearing liabilities 1,703,340 1,565,250 1,528,162 Interest income 186,130 173,430 163,831 Interest expense 71,698 64,804 61,162 ----------- --------- -------- Interest income/interest- earning assets 8.32% 8.28% 8.21% Interest expense/interest- bearing liabilities 4.21% 4.14% 4.00% Interest spread 4.11% 4.14% 4.21% Net interest income $ 114,432 $ 108,626 $102,669 =========== ========= ======== Net interest margin 5.12% 5.19% 5.14%
(1) Includes tax equivalent adjustments to interest income of $2.7 million, $1.9 million and $2.3 million in 1997, 1996 and 1995, respectively, using an effective tax rate of 35% . (2) Interest income includes fees on loans of $6.2 million, $5.7 million and $4.1 million in 1997, 1996 and 1995, respectively. (3) Includes nonaccrual loans. See "Nonperforming Assets." Page 23 of 50 The following table sets forth, for the periods indicated, a summary of the changes in interest income on interest-earning assets and interest expense on interest-bearing liabilities relating to rate and volume variances. Nonaccrual loans are included in average amounts of loans and do not bear interest for purposes of the presentation. Changes that are not solely due to volume or rate are allocated to volume.
Analysis of Changes in Net Interest Income Years Ended December 31, 1997 1996 1995 --------------------------- --- -------------------------------- ---------------------------- Volume Rate Total Volume Rate Total Volume Rate Total -------- ----------- ------ ----------- --------- ------- ---------- ------ -------- (Amounts in thousands) INTEREST INCOME Investment securities: U.S. Treasury $ 1,192 $ ( 25) $1,167 $ (2,044) $ 1,043 $(1,001) $( $3,327) 727 $( 2,600) U.S. government obligations 7,985 (8,172) ( 187) (2,984) 4,144 1,160 4,761 4,193 8,954 Municipal obligations (1) 1,270 ( 336) 934 351 ( 326) 25 837 ( 323) 514 Other securities (2,188) 5,449 3,261 5,992 (5,443) 549 827 691 1,518 Federal funds sold & securities purchased under agreements to resell (2,943) 96 (2,847) 395 ( 6 ( 240) 594 1,394 1,988 Interest bearing time deposits with other banks ( 31) 8 ( 23) 65 ( 9) 56 ( 14) 7 ( 7) Net Loans 11,692 (1,297) 10,395 8,053 997 9,050 9,261 5,801 15,062 -------- --------- -------- -------- -------- ------ -------- ------- -------- Total 16,977 (4,277) 12,700 9,828 ( 229) 9,599 12,939 12,490 25,429 -------- --------- -------- -------- -------- ------ -------- ------- -------- INTEREST EXPENSE Deposits: Savings, NOW and money market 1,489 224 1,713 (1,253) ( 261) (1,514) ( 490) 302 ( 188) Time 2,972 840 3,812 3,181 1,346 4,527 3,097 6,510 9,607 Federal funds purchased ( 438) ( 4) ( 442) ( 218) ( 96) ( 314) ( 189) 298 109 Securities sold under agreements to repurchase 1,720 92 1,812 1,050 196 1,246 1,202 299 1,501 Long-term bonds ( 39) 38 ( 1) ( 73) 28 ( 45) ( 62) 9 ( 53) Capital notes 0 0 0 ( 258) -- ( 258) 265 ( 76) 189 -------- -------- -------- -------- -------- ------- -------- ------- -------- Total 5,704 1,190 6,894 2,429 1,213 3,642 3,823 7,342 11,165 -------- -------- -------- -------- -------- -------- -------- ------- -------- Increase (decrease) in net interest income $ 11,273 $ (5,467) $ 5,806 $ 7,399 $ (1,442) $ 5,957 $ 9,116 $ 5,148 $ 14,264 ======== ========= ======== ======== ========= ======== ======== ======== =========
(1) Yields on tax-exempt investments have been adjusted to a tax equivalent basis utilizing a 35% effective tax rate. (2) Interest earned includes fees on loans of $6.2 million, $5.7 million and $4.1 million in 1997, 1996 and 1995, respectively. Page 24 of 50 Rate Sensitivity: To control interest rate risk, management regularly monitors the volume of interest sensitive assets compared with interest sensitive liabilities over specific time intervals. The Company's interest rate management policy is designed to produce a stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Interest rate risk is monitored, quantified and managed to produce a 5% or less impact on short-term earnings. The interest sensitivity gap is the difference between total interest sensitive assets and liabilities in a given time period. At December 31, 1997, the Company's cumulative interest sensitivity gap in the one year interval was (22.91%) as compared to a cumulative interest sensitivity gap in the one year interval of (21.75%) at December 31, 1996. The percentage reflects a higher level of interest sensitive liabilities than assets repricing within one year. Generally, when rate sensitive liabilities exceed rate sensitive assets, the net interest margin is expected to be positively affected during periods of decreasing interest rates and negatively affected during periods of increasing rates. The following tables set forth the Company's interest rate sensitivity gap at December 31, 1997 and December 31, 1996: Page 25 of 50
Analysis of Interest Sensitivity at December 31, 1997 After Three Within Through One After Five Three Twelve Through Years and Months Months Five Years Insensitive Total --------- --------- ---------- ---------- ---------- (Amounts in thousands) Net loans $ 252,135 $ 1165388 $ 623,655 $ 228,301 $1,220,629 Securities and time deposits 112,815 103,824 411,090 454,334 1,082,063 Federal funds 35,500 -- -- -- 35,500 --------- --------- ---------- --------- ---------- Total earning assets $ 400,450 $ 220,362 $1,034,745 $ 682,635 $2,338,192 ========= ========= ========== ========= ========== 17.13% 9.42% 44.25% 29.20% 100.00% Interest bearing deposits, excluding CDs greater than $100,000 $ 645,178 $ 272,983 $ 392,167 $ 29,311 $1,339,639 CDs greater than $100,000 100,267 91,361 68,650 -- 221,698 Short-term borrowings 44,867 -- -- 125,667 170,534 Other borrowings 500 1,279 -- -- 1,779 --------- --------- ---------- --------- ---------- Total interest-bearing funds 790,812 365,623 460,817 154,978 1,772,230 Interest-free funds -- -- -- 565,962 565,962 --------- --------- ---------- --------- ---------- Funds supporting earning assets $ 790,812 $ 365,623 $ 460,817 $ 720,940 $2,338,192 ========= ========= ========== ========= ========== 33.82% 15.64% 19.71% 30.84% 100.00% Interest sensitivity gap $(390,362) $(145,261) $ 573,928 $( 38,305) -- Cumulative gap $(390,362) $(535,623) $ 38,305 -- -- Percent of total earning assets (16.70%) (22.91%) 1.64% -- --
Analysis of Interest Sensitivity at December 31, 1996 After Three Within Through One After Five Three Twelve Through Years and Months Months Five Years Insensitive Total (Amounts in thousands) Net loans $ 302,553 $ 107,128 $ 531,015 $ 233,271 $1,173,967 Securities and time deposits 119,629 94,242 225,752 464,914 904,537 Federal funds 12,000 -- -- -- 12,000 --------- --------- --------- --------- ---------- Total earning assets $ 434,182 $ 201,370 $ 756,767 $ 698,185 $2,090,504 ========= ========= ========= ========= ========== 20.77% 9.64% 36.20% 33.39% 100.00% Interest bearing deposits, excluding CDs greater than $100,000 $ 542,277 $ 285,565 $ 440,733 $ 3,339 $1,271,914 CDs greater than $100,000 97,686 75,521 48,491 -- 221,698 Short-term borrowings 87,609 -- -- -- 87,609 Other borrowings 500 1,050 -- -- 1,550 --------- --------- --------- --------- ---------- Total interest-bearing funds 728,072 362,136 489,224 3,339 1,582,771 Interest-free funds -- -- -- 507,733 507,733 --------- --------- --------- --------- ---------- Funds supporting earning assets $ 728,072 $ 362,136 $ 489,224 $ 511,072 $2,090,504 ========= ========= ========= ========= ========== 34.82% 17.33% 23.40% 24.45% 100.00% Interest sensitivity gap $(293,890) $(160,766) $ 267,543 $ 187,113 -- Cumulative gap $(293,890) $(454,656) $(187,113) -- -- Percent of total earning assets (14.06%) (21.75%) (8.95%) -- --
Page 26 of 50 Income Taxes: The Company had income tax expense of $17.4 million and $15.2 million for the years ended December 31, 1997 and 1996, respectively. This represents effective tax rates of 36.2% and 32.4% for the years ended December 31, 1997 and 1996, respectively. The 15.2% increase in income tax expense is due to, among other things, increased taxable income, state income taxes, and higher levels of non-deductible goodwill amortization expense in conjunction with the most recent three mergers. Performance and Equity Ratios: The following table sets forth, for the periods indicated, the percentage of net income to average assets and average stockholders' equity, the percentage of common stock dividends to net income and the percentage of average stockholders' equity to average assets. Years Ended December 31, ------------------------ 1997 1996 1995 ----- ----- ----- Return on average assets (%) 1.25 1.38 1.22 Return on average stockholders' equity (%) 11.29 13.74 12.50 Dividend payout ratio (%) 36.05 28.90 31.45 Average stockholders' equity to average assets (%) 11.11 10.06 9.74 Securities Portfolio: The Company generally purchases securities to be held to maturity, with a maturity schedule that provides ample liquidity. Securities classified as held-to-maturity are carried at amortized cost. Certain securities have been classified as available-for-sale based on management's internal assessment of the portfolio considering future liquidity, earning requirements and capital position. The Company increased its available-for-sale portfolio during 1997. Generally, securities with a market risk have been placed in this category. The December 31, 1997 amortized cost of the held-to-maturity portfolio was $916 million and the market value was $925 million. The available-for-sale portfolio balance was $164 million at December 31, 1997. Page 27 of 50 The amortized cost of securities classified as available-for-sale as of December 31, 1997, 1996 and 1995, were as follows (in thousands): December 31 1997 1996 1995 -------- -------- ------ U.S. Treasury securities $ 54,637 $ 499 $ 1,493 Other U.S. gov. obligations 46,039 53,802 61,470 Municipal obligations 1,496 923 962 Other securities 6,305 --- 544 Mortgage-backed securities 27,538 5,373 5,140 CMOs 21,427 33,038 34,695 Equity securities 6,089 4,932 4,993 -------- -------- -------- $163,531 $ 98,567 $109,297 ======== ======== ======== The amortized cost, yield and market value of debt securities classified as available-for-sale as of December 31, 1997, by estimated maturity, were as follows (in thousands): Amortized Cost Yield (%) Market Value --------- --------- ------------ Due in one year or less $ 29,820 5.90 $ 29,774 Due after one year through five years 68,343 5.90 68,373 Due after five years through ten years 25,856 6.72 25,825 Due after ten years 33,423 6.21 33,572 -------- ---- -------- $157,442 6.10 $157,544 ======== ==== ======== The amortized cost of securities classified as held-to-maturity as of December 31, 1997, 1996 and 1995 were as follows (in thousands): December 31 1997 1996 1995 -------- -------- ------ U.S. Treasury securities $210,525 $175,171 $239,892 Other U.S. gov. obligations 267,437 338,796 317,140 Municipal obligations 88,062 66,367 56,961 Other securities 25,874 --- 11,027 Mortgage-backed securities 133,925 87,991 50,427 CMOs 190,539 135,673 63,082 -------- -------- -------- $916,362 $803,998 $738,529 ======== ======== ======== Page 28 of 50 The amortized cost, yield and market value of securities classified as held-to-maturity as of December 31, 1997, by contractual maturity, were as follows (in thousands): Amortized Cost Yield (%) Market Value --------- --------- ------------ Due in one year or less $194,406 6.30 $194,626 Due after one year through five years 305,508 6.36 307,880 Due after five years through ten years 177,870 6.49 179,584 Due after ten years 238,578 6.67 242,868 -------- ---- -------- $916,362 6.32 $924,958 ======== ==== ======== Loan Portfolio: The Banks' primary lending focus is to provide commercial, consumer and real estate loans to consumers and to small and middle market businesses in their respective market areas. Diversification in the loan portfolio is a means of reducing the risks associated with economic fluctuations. The Banks have no concentrations of loans to particular borrowers or loans to any foreign entities. Loan underwriting standards and loan loss allowance maintenance further reduce the impact of credit risk to the Company. Loans are underwritten on the basis of cash flow capacity and collateral market value. Generally, real estate mortgage loans are made when the borrower produces sufficient cash flow capacity and equity in the property to offset historical market devaluations. The loan loss allowance adequacy is tested monthly based on historical losses through different economic cycles and projected future losses specifically identified. Page 29 of 50 The following table sets forth, for the periods indicated, the composition of the loan portfolio of the Company:
Loan Portfolio December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Amounts in thousands) Real estate: Residential mortgages 1-4 family $ 260,432 $ 260,945 $ 224,646 $ 214,247 $ 213,216 Residential mortgages multifamily 10,881 7,642 9,674 7,302 7,124 Home equity lines 10,814 10,169 11,825 11,740 13,147 Construction and development 55,454 55,585 41,602 35,719 24,234 Nonresidential 139,332 131,578 127,027 112,957 119,094 Commercial, industrial and other 177,379 169,061 176,942 119,997 160,385 Consumer 513,362 494,456 409,608 397,879 366,401 Lease financing and depository institutions 16,889 15,881 13,811 10,074 6,673 Political subdivisions 16,327 12,142 14,394 12,806 11,668 Credit card 44,785 41,311 32,104 30,794 27,466 ---------- ---------- ---------- ---------- ---------- 1,245,355 1,198,770 1,061,633 953,515 949,408 Less, unearned income 24,726 24,803 26,656 27,850 26,396 ---------- ---------- ---------- ---------- ---------- Net loans $1,220,629 $1,173,967 $1,034,977 $ 925,665 $ 923,012 ========== ========== ========== ========== ==========
The following table sets forth, for the periods indicated, the approximate maturity by type of the loan portfolio of the Company:
Loan Maturity Schedule December 31, 1997 December 31, 1996 ----------------------------------------- ----------------------------------------- Maturity Range Maturity Range ----------------------------------------- ----------------------------------------- After One After One Within Through After Five Within Through After Five One Year Five Years Years Total One Year Five Years Years Total -------- ---------- -------- ---------- -------- ---------- -------- ---------- (Amounts in thousands) Commercial, industrial and other $ 65,974 $ 82,407 $ 20,680 $ 169,061 $ 68,436 $ 77,960 $ 23,418 $ 169,814 Real estate - construction 32,966 18,957 3,611 55,585 44,714 18,994 7,349 71,057 All other loans 157,382 578,526 284,802 1,020,709 148,232 557,936 251,731 957,899 -------- -------- -------- ---------- -------- -------- -------- ---------- Total loans $256,322 $679,890 $309,143 $1,245,355 $261,382 $654,890 $282,498 $1,198,770 ======== ======== ======== ========== ======== ======== ======== ==========
Page 30 of 50 The sensitivity to interest rate changes of that portion of the Company's loan portfolio that matures after one year is shown below: Loan Sensitivity to Changes in Interest Rates December 31, December 31, 1997 1996 ------------ ------------ (Amounts in thousands) Commercial, industrial, and real estate construction maturing after one year: Fixed rate $ 94,517 $ 89,399 Floating rate 31,187 38,323 Other loans maturing after one year: Fixed rate 831,716 784,875 Floating rate 31,610 24,791 -------- -------- Total $989,033 $937,388 ======== ======== Nonperforming Assets: The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, restructured loans, real estate owned and loans past due 90 days or more and still accruing: December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Amounts in thousands) Nonaccrual loans: Real estate $ 331 $ 753 $ 2,406 $ 1,914 $ 1,888 Commercial, industrial and other 319 169 1,144 525 1,424 Consumer 378 1,298 1,176 1,287 1,322 Lease financing 1 --- --- --- --- Depository institutions --- --- --- --- --- Political subdivisions --- --- --- --- --- Restructured loans 2,869 685 611 614 482 ------- ------- ------- ------- ------- Total nonperforming loans 3,898 2,905 5,337 4,340 5,116 Acquired real estate owned 435 147 140 --- --- Real estate owned 1,923 1,728 946 1,001 1,029 ------- ------- ------- ------- ------- Total nonperforming assets $ 6,256 $ 4,780 $ 6,423 $ 5,341 $ 6,145 ======= ======= ======= ======= ======= Loans 90+ days past due and still accruing $ 5,423 $ 8,361 $ 4,089 $ 2,692 $ 4,338 ======= ======= ======= ======= ======= Ratios (%): Nonperforming loans to net loans 0.32 0.25 0.52 0.47 0.55 Nonperforming assets to net loans and real estate owned 0.51 0.41 0.62 0.58 0.67 Nonperforming loans to average net loans 0.32 0.27 0.53 0.48 0.60 Allowance for loan losses to nonperformingloans 538.74 681.58 325.86 354.19 299.18
Page 31 of 50 The following table sets forth, for the periods indicated, the amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as "nonaccrual" as well as the interest that would have been recorded under the original terms of restructured loans: December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Amounts in thousands) Nonaccrual $ 101 $ 220 $ 463 $ 340 $ 441 Restructured 281 68 60 56 45 -------- -------- ------- ------- ------- Total $ 382 $ 288 $ 523 $ 396 $ 486 ======== ======= ======= ======= ======= Interest actually received on nonaccrual loans was insignificant. The amount of interest recorded on restructured loans did not differ significantly from the amount shown in the table above. Page 32 of 50 Analysis of Allowance for Loan Losses: The following table sets forth, for the periods indicated, average net loans outstanding, allowance for loan losses, amounts charged-off and recoveries of loans previously charged-off: December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Amounts in thousands) Net loans outstanding at end of period $1,220,629 $1,173,967 $1,034,978 $ 925,665 $ 923,012 ========== ========== ========== ========== ========== Average net loans outstanding $1,201,381 $1,083,165 $1,000,907 $ 904,342 $ 847,526 ========== ========== ========== ========== ========== Balance of allowance for loan losses at beginning of period 19,800 $ 17,391 $ 15,372 $ 15,306 $ 14,682 Loans charged-off: Real estate 22 73 210 106 318 Commercial 997 975 636 637 2,218 Consumer 7,145 5,417 4,524 2,706 3,087 Lease financing 49 1 13 --- 53 Depository institutions --- --- --- --- --- Political subdivisions --- --- --- --- --- ---------- ---------- ---------- ---------- ---------- Total charge-offs 8,213 6,466 5,383 3,449 5,676 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged-off: Real estate 5 186 15 53 102 Commercial 646 937 971 570 695 Consumer 1,529 945 839 886 869 Lease financing 1 0 5 8 2 Depository institutions --- --- --- --- --- Political subdivisions --- --- --- --- --- ---------- ---------- ---------- ---------- ---------- Total recoveries 2,181 2,068 1,830 1,517 1,668 ---------- ---------- ---------- --------- ---------- Net charge-offs 6,032 4,398 3,553 1,932 4,008 Provision for loan losses 6,399 6,153 4,425 1,998 4,632 Balance acquired through acquisition 833 654 1,147 --- --- ---------- ---------- ---------- ---------- ---------- Balance of allowance for loan losses at end of period $ 21,000 $ 19,800 $ 17,391 $ 15,372 $ 15,306 ========== ========== ========== ========== ==========
The following table sets forth, for the periods indicated, certain ratios related to the Company's charge-offs, allowance for loan losses and outstanding loans: Years Ended December 31, 1997 1996 1995 1994 1993 ----- ---- ----- ----- ----- Ratios (%): Net charge-offs to average net loans 0.50 0.41 0.35 0.21 0.47 Net charge-offs to period-end net loans 0.49 0.37 0.34 0.21 0.43 Allowance for loan losses to average net loans 1.75 1.83 1.74 1.70 1.81 Allowance for loan losses to period-end net loans 1.72 1.69 1.68 1.66 1.66 Net charge-offs to loan loss allowance 28.72 22.21 20.43 12.57 26.19 Net charge-offs to loan loss provision 94.26 71.47 80.29 96.70 86.53
Page 33 of 50 An allocation of the loan loss allowance by major loan category is set forth in the following table. The allocation is not necessarily indicative of the category of future losses, and the full allowance at December 31, 1997, is available to absorb losses occurring in any category of loans. December 31, 1997 1996 1995 1994 1993 ---------------- ---------------- ----------------- ------------------ -------------------- Allowance % of Allowance % of Allowance % of Allowance % of Allowance % of for Loans for Loans for Loans for Loans for Loans Loan to Total Loan to Total Loan to Total Loan to Total Loan to Total Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans ---------------- ---------------- ----------------- ------------------ -------------------- (Amounts in thousands) Real estate $ 2,500 38.05 $ 3,000 49.94 $ 2,000 39.08 $ 1,250 40.06 $ 1,250 39.69 Commercial, industrial and other $ 5,900 16.25 5,750 16.52 5,250 19.32 5,000 14.98 5,000 18.82 Consumer $ 9,300 42.03 8,250 31.11 7,500 38.58 6,500 41.73 6,500 38.60 Credit card $ 1,200 3.67 800 2.43 500 3.02 500 3.23 500 2.89 Unallocated 2,100 --- 2,000 --- 2,141 --- 2,122 --- 2,056 --- ------- ------ ----- ------ ----- ------ ----- ------ ----- ------ $21,000 100.00 $19,800 100.00 17,391 100.00 $15,372 100.00 $15,306 100.00 ======= ====== ======= ====== ====== ====== ======= ====== ======= ======
Deposits and Other Debt Instruments: The following table sets forth the distribution of the average deposit accounts for the periods indicated and the weighted average interest rates on each category of deposits: 1997 1996 1995 ------------------------------- --------------------------------- ------------------------- Percent Percent Percent of of of Amount Deposits Rate (%) Amount Deposits Rate (%) Amount Deposits Rate (%) (Amounts in thousands) Non-interest bearing accounts $ 453,218 22.28 --- $ 472,909 24.30 -- $ 439,495 23.18 --- NOW accounts 306,120 15.05 2.52 268,391 13.80 2.68 288,947 15.24 2.64 Money market and other savings accounts 440,545 21.66 2.95 425,626 21.88 2.78 450,144 23.75 2.86 Time deposits 834,147 41.01 5.45 778,602 40.02 5.34 717,064 37.83 5.17 ---------- ------ ---------- ------ ---------- ------- $2,034,030 100.00 $1,945,528 100.00 $1,895,650 100.00 ========== ====== ========== ====== ========== ======
The Banks traditionally price their deposits to position themselves in the middle of the local market. The Banks' policy is not to accept brokered deposits. Page 34 of 50 Time certificates of deposit of $100,000 and over at December 31, 1997 had maturities as follows: December 31, 1997 (Amounts in thousands) Three months or less $100,267 Over three through six months 51,402 Over six through twelve months 39,959 Over twelve months 68,650 -------- Total $260,278 ======== Short-Term Borrowings: The following table sets forth certain information concerning the Company's short-term borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase. Years ended December 31, 1997 1996 1995 --------- --------- ----------- (Amounts in thousands) Federal funds purchased: Amount outstanding at period-end $ 0 $ 0 $ 11,300 Weighted average interest at period-end 0.00% 0.00% 3.12% Maximum amount at any month-end during period $ 5,875 $ 19,725 $ 16,325 Average amount outstanding during period $ 2,304 $ 11,425 $ 15,284 Weighted average interest rate during period 4.64% 4.80% 5.65% Securities sold under agreements to repurchase: Amount outstanding at period-end $170,534 $ 87,609 $ 55,285 Weighted average interest at period-end 4.61% 4.25% 2.50% Maximum amount at any month end during-period $172,827 $156,595 $ 88,070 Average amount outstanding during period $118,855 $ 79,411 $ 53,924 Weighted average interest rate during period 4.44% 4.36% 4.12%
Liquidity: Liquidity represents an institution's ability to provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets into cash or accessing new or existing sources of incremental funds. The principal sources of funds that provide liquidity are customer deposits, payments of interest and principal on loans, maturities in and sales of investment securities, earnings and borrowings. At December 31, 1997, cash and due from banks, securities available-for-sale, federal funds sold and repurchase agreements were in excess of 15% of total deposits. The Company depends upon the dividends paid to it from the Banks as a Page 35 of 50 principal source of funds for its debt service and dividend requirements. As of December 31, 1997, there was approximately $100 million available to be dividended to the Company from the Banks. Capital Resources: Risk-based and leverage capital ratios for the Company and the Banks for the periods indicated are shown in the following table: Risk-Based Capital Ratios Tier 1 Leverage ----------------------------------------------------- -------------------------- Total Tier 1 Ratio -------------------------- ------------------------- --------------------------- December 31, December 31, December 31, December 31, December 31, December 31, 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Hancock Bank MS 18.45% 18.62% 17.65% 17.79% 9.75% 10.10% Hancock Bank LA 20.58 19.63 19.33 18.38 10.94 10.54 Company 19.18 19.02 18.22 18.03 10.24 10.37
Risk-based capital requirements are intended to make regulatory capital more sensitive to risk elements of the Company. Currently, the Company is 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 must maintain a minimum Tier 1 Leverage ratio (Tier 1 capital to total assets) of at least 3.0% based upon the regulator's latest composite rating of the institution. New Accounting Standards: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") "Reporting Comprehensive Income" which requires that an enterprise report by major components and as a single total, the change in net assets during the period from non-owner sources and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997. The Company is in the process of reviewing its operating segments. Page 36 of 50 Impact of Inflation: Unlike most industrial companies, the assets and liabilities of financial institutions such as the Banks are primarily monetary in nature. Interest rates, therefore, have a more significant effect on the Banks' performance than the effect of general levels of inflation on the price of goods and services. Interest rates earned and paid by the Banks are affected to a degree by the rate of inflation, and noninterest income and expenses can be affected by increasing rates of inflation; however, the Company believes that the effects of inflation are generally manageable through asset/liability management. Page 37 of 50 ITEM 2 - PROPERTIES The Company's main offices are located at One Hancock Plaza, Gulfport, Mississippi. The building has fourteen stories, of which seven are utilized by the Company. The remaining seven stories are presently leased to outside parties. The building has been leased from the City of Gulfport in connection with a urban development revenue bond issue. The bonds matured and were paid in full during 1997. Hancock Bank MS, however, effectively has had ownership of the building since title to the facility reverts when all outstanding bonds have been paid. For this reason, the Company has carried the building as an asset and the bonds as a long term payable on its balance sheet. Pending the filing of certain documents, ownership will legally transfer to the Company. The following banking offices in Mississippi and Louisiana are held in fee (number of locations shown in parenthesis): Albany, LA (1) Hammond, LA (2) Angie, LA (1) Independence, LA (1) Baker, LA (1) Long Beach, MS (2) Baton Rouge, LA (13) Loranger, LA (1) Bay St. Louis, MS (2) Lyman, MS (1) Biloxi, MS (3) Moss Point, MS (1) Bogalusa, LA (1) Mt. Hermon, LA (1) Denham Springs, LA (4) Ocean Springs, MS (2) D'Iberville, MS (1) Pascagoula, MS (4) Escatawpa, MS (1) Pass Christian, MS (1) Franklinton, LA (1) Picayune, MS (2) French Settlement, LA (1) Ponchatoula, LA (1) Gautier, MS (1) Poplarville, MS (1) Gulfport, MS (7) Walker, LA (1) Waveland, MS (1) The following banking offices in Mississippi and Louisiana are leased under agreements with unexpired terms of from one to thirty-four years including renewal options (number of locations shown in parenthesis): Baton Rouge, LA (5) Hammond, LA (1) Bay St. Louis, MS (3) Pascagoula, MS (1) Biloxi, MS (1) Picayune, MS (2) Diamondhead, MS (1) St. Francisville, LA (1) Gulfport, MS (4) Springfield, LA (1) Vancleave, MS (1) Page 38 of 50 In addition to the above, Hancock Bank MS owns land and other properties acquired through foreclosures of loans. The major item is approximately 3,700 acres of timber land in Hancock County, Mississippi, which Hancock Bank MS acquired by foreclosure in the 1930's. ITEM 3 - LEGAL PROCEEDINGS The Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with outside legal counsel, all such matters are adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on the financial condition of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1997. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information under the caption "Market Information" on page 6 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA The information under the caption "Consolidated Summary of Selected Financial Information" on Page 7 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Pages 35 and 36 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference. Page 39 of 50 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. The Company's interest rate management policy is designed to produce a stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company's securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long and short-term interest rates. The Company also controls interest rate risk reductions by emphasizing non-certificate depositor accounts. The Board and management believe that such accounts carry a lower cost than certificate accounts, and that a material portion of such accounts may be more resistant to changes in interest rates than are certificate accounts. At December 31, 1997 the Company had Page 40 of 50 $273 million of regular savings and club accounts and $470 million of money market and NOW accounts, representing 46.4% 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 1997, 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). Change in Estimated Increase Interest Estimated (Decrease) in NPV Rates NPV Amount Amount Percent - ----------- ----------- --------------------- (Basis Points) (Dollars in thousands) +400 $ 125,143 $( 159,398) (56) +300 167,841 ( 116,700) (41) +200 205,447 ( 79,094) (29) +100 244,874 ( 39,667) (14) ---- 284,541 ---- ---- -100 315,631 31,090 11 -200 346,406 61,865 22 -300 378,736 94,195 33 -400 411,955 127,414 45 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 set forth above. 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 above. For example, although certain assets and liabilities may have similar maturities or period Page 41 of 50 to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. Forward Looking Information - Congress passed the Private Securities Litigation Reform Act 0f 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 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. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company and subsidiaries, and the independent auditors' report, appearing on Pages 18 through 34 of the Company's 1997 Annual Report to Stockholders is incorporated herein by reference: Consolidated Balance Sheets on Page 18 Consolidated Statements of Earnings on Page 19 Consolidated Statements of Stockholders' Equity on Page 20 Consolidated Statements of Cash Flows on Page 21 Notes to Consolidated Financial Statements on Pages 22 through 33 Independent Auditors' Report on Page 34 Page 42 of 50 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with the Company's independent accountants and auditors on any matter of accounting principles or practices or financial statement disclosure. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning this item, see "Election of Directors" (Pages 3-7) and "Executive Compensation" (Pages 8-13) in the Proxy Statement for the Annual Meeting of Shareholders held February 19, 1998, which was filed by the Registrant in definitive form with the Commission on January 20, 1998 and is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION For information concerning this item see "Executive Compensation" (Pages 8-13) in the Proxy Statement for the Annual Meeting of Shareholders held February 19, 1998, which was filed by the Registrant in definitive form with the Commission on January 20, 1998 and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning this item see "Security Ownership of Certain Beneficial Owners" (Page 4) and "Election of Directors" (Pages 3-7) in the Proxy Statement for the Annual Meeting of Shareholders held February 19, 1998, which was filed by the Registrant in definitive form with the Commission on January 20, 1998 and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning this item see "Certain Transactions and Relationships" (Page 14) in the Proxy Statement for the Annual Meeting of Page 43 of 50 Shareholders held February 19, 1998, which was filed by the Registrant in definitive form with the Commission on January 20, 1998 and is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Hancock Holding Company and Consolidated Subsidiaries (a) 1. and 2. Consolidated Financial Statements: The following have been incorporated herein from the Company's 1997 Annual Report to Stockholders and are incorporated herein by reference: - Independent Auditors' Report - Consolidated Balance Sheets as of December 31, 1997 and 1996 - Consolidated Statements of Earnings for the three years ended December 31, 1997 - Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1997 - Consolidated Statements of Cash Flows for the three years ended December 31, 1997 - Notes to Consolidated Financial Statements for the three years ended December 31, 1997 All other financial statements and schedules are omitted as the required information is inapplicable or the required information is presented in the consolidated financial statements or related notes. (a) 3. Exhibits: (2.1) Agreement and Plan of Merger dated May 30, 1985 among Hancock Holding Company, Hancock Bank and Pascagoula-Moss Point Bank (filed as Exhibit 2 to the Registrant's Form 8-K dated June 6, 1985 and incorporated herein by reference). (2.2) Amendment dated July 9, 1985 to Agreement and Plan of Merger dated May 30, 1985 among Hancock Holding Company, Hancock Bank and Pascagoula-Moss Point Bank (filed as Exhibit 19 to Registrant's Form Page 44 of 50 10-Q for the quarter ended June 30, 1985 and incorporated herein by reference). (2.3) Stock Purchase Agreement dated February 12, 1990 among Hancock Holding Company, Metropolitan Corporation and Metropolitan National Bank (filed as Exhibit 2.3 to Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (2.4) Modified Purchase and Assumption Agreement dated August 2, 1990, among Hancock Bank of Louisiana and the Federal Deposit Insurance Corporation, receiver of American Bank and Trust Company of Baton Rouge, Louisiana (filed as Exhibit 2.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1990 and incorporated herein by reference). (2.5) Agreement and Plan of Reorganization dated November 30, 1993 among Hancock Holding Company, Hancock Bank of Louisiana and First State Bank and Trust Company of East Baton Rouge Parish, Baker, Louisiana (filed as Exhibit 2.5 to the Registrant's Form 10-K dated December 31, 1993). (2.6) Agreement and Plan of Reorganization dated July 6, 1994 among Hancock Holding Company and Washington Bancorp, Franklinton, Louisiana (filed as Exhibit 2 to the Registrant's Form S-4, Registration Number 33-56505, dated November 16, 1994). (2.7) Agreement and Plan of Reorganization dated August 20, 1994 among Hancock Holding Company and First Denham Bancshares, Inc., Denham Springs, Louisiana (filed as Exhibit 2 to the Registrant's Form S-4, Registration Number 33-56285, dated November 2, 1994). (2.8) Agreement and Plan of Reorganization dated November 15, 1996 among Hancock Holding Company, Hancock Bank of Louisiana, Community Bancshares, Inc. and Community State Bank, Hammond Louisiana (filed as Exhibit 2 to the Registrant's Form S-4, Registration Number 333- 11873, dated September 12, 1996). (2.9) Agreement and Plan of Reorganization dated January 17, 1997 among Hancock Holding Company, Hancock Bank of Louisiana and Southeast Page 45 of 50 National Bank, Hammond, Louisiana (filed as Exhibit 2 to the Registrant's Form S-4, Registration Number 333-14223, dated October 16, 1996). (2.10) Agreement and Plan of Reorganization dated July 16, 1997 among Hancock Holding Company, Hancock Bank of Louisiana and Commerce Corporation, St. Francisville, Louisiana (filed as Exhibit 2 to the Registrant's Form S-4, Registration Number 323-26577, dated May 6, 1997). (3.1) Amended and Restated Articles of Incorporation dated November 8, 1990 (filed as Exhibit 3.1 to the Registrant's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (3.2) Amended and Restated Bylaws dated November 8, 1990 (filed as Exhibit 3.2 to the Registrant's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (3.3) Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, dated October 16, 1991 (filed as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1991). (3.4) Articles of Correction, filed with Mississippi Secretary of State on November 15, 1991 (filed as Exhibit 4.2 to the Registrant's Form 10- Q for the quarter ended September 30, 1991). (3.5) Articles of Amendment to the Articles of Incorporation of Hancock Holding Company, adopted February 13, 1992 (filed as Exhibit 3.5 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). (3.6) Articles of Correction, filed with Mississippi Secretary of State on March 2, 1992 (filed as Exhibit 3.6 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). (3.7) Articles of Amendment to the Articles of Incorporation adopted February 20, 1997 (filed as Exhibit 3.7 to the Registrant's Form 10- K for the year ended December 31, 1996 and incorporated herein by Page 46 of 50 reference). (4.1) Specimen stock certificate (reflecting change in par value from $10.00 to $3.33, effective March 6, 1989) (filed as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1989 and incorporated herein by reference). (4.2) By executing this Form 10-K, the Registrant hereby agrees to deliver to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the Registrant or its consolidated subsidiaries or its unconsolidated subsidiaries for which financial statements are required to be filed, where the total amount of such securities authorized thereunder does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. (10.1) 1996 Long Term Incentive Plan (filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). (10.2) Description of Hancock Bank Executive Supplemental Reimbursement Plan, as amended (filed as Exhibit 10.2 to the Registrant's Form 10- K for the year ended December 31, 1996, and incorporated herein by reference). (10.3) Description of Hancock Bank Automobile Plan (filed as Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). (10.4) Description of Deferred Compensation Arrangement for Directors (filed as Exhibit 10.4 to the Registrant's Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). (10.5) Site Lease Agreement between Hancock Bank and City of Gulfport, Mississippi dated as of March 1, 1989 (filed as Exhibit 10.4 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (10.6) Project Lease Agreement between Hancock Bank and City of Gulfport, Page 47 of 50 Mississippi dated as of March 1, 1989 (filed as Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (10.7) Deed of Trust dated as of March 1, 1989 from Hancock Bank to Deposit Guaranty National Bank as trustee (filed as Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (10.8) Trust Indenture between City of Gulfport, Mississippi and Deposit Guaranty National Bank dated as of March 1, 1989 (filed as Exhibit 10.7 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (10.9) Guaranty Agreement dated as of March 1, 1989 from Hancock Bank to Deposit Guaranty National Bank as trustee (filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (10.10) Bond Purchase Agreement dated as of February 23, 1989 among Hancock Bank, J. C. Bradford & Co. and City of Gulfport, Mississippi (filed as Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). (13) Annual Report to Stockholders for year ending December 31, 1997 (furnished for the information of the Commission only and not deemed "filed" except for those portions which are specifically incorporated herein by reference). (21) Proxy Statement for the Registrant's Annual Meeting of Shareholders on February 19, 1998 (deemed "filed" for the purposes of this Form 10-K only for those portions which are specifically incorporated herein by reference). Page 48 of 50 (22) Subsidiaries of the Registrant. Jurisdiction Holder of Name Of Incorporation Outstanding Stock (1) - ------------ ---------------- ------------------------ Hancock Bank Mississippi Hancock Holding Company Hancock Bank of Louisiana Louisiana Hancock Holding Company Hancock Bank Securities Corporation Mississippi Hancock Bank Hancock Insurance Agency Mississippi Hancock Bank Hancock Investment Services Inc. Mississippi Hancock Bank Town Properties, Inc. Mississippi Hancock Bank The Gulfport Building, Inc. of Mississippi Mississippi Hancock Bank Harrison Finance Company Mississippi Hancock Bank Hancock Mortgage Corporation Mississippi Hancock Bank and Hancock Bank Securities Corporation Harrison Life Insurance Mississippi 79% owned by Hancock Company Bank (1) All are 100% owned except as indicated. (23) Consent of Independent Accountants. (27) Financial Data Schedule. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c): The response to this portion of Item 14 is submitted as a separate section of this report. (d): Not applicable. Page 49 of 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANCOCK HOLDING COMPANY DATE March 25, 1998 /s/ Leo W. Seal, Jr. ----------------------- --------------------- By Leo W. Seal, Jr., President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Leo W. Seal, Jr. President and Director March 25, 1998 - ------------------------------ Leo W. Seal, Jr. (Chief Executive Officer) /s/ Joseph F. Boardman, Jr. Director, March 25, 1998 - ------------------------------ Joseph F. Boardman, Jr. Chairman of the Board /s/ Thomas W. Milner, Jr. Director March 25, 1998 - ------------------------------ Thomas W. Milner, Jr. /s/ George A. Schloegel Director, March 25, 1998 - ------------------------------ George A. Schloegel Vice-Chairman of the Board Chief Financial Officer (Principal Accounting and Financial Officer) /s/ Dr. Homer C. Moody, Jr. Director March 25, 1998 - ------------------------------ Dr. Homer C. Moody, Jr. /s/ James B. Estabrook, Jr. Director March 25, 1998 - ------------------------------ James B. Estabrook, Jr. /s/ Charles H. Johnson Director March 25, 1998 - ------------------------------ Charles H. Johnson /s/ L. A. Koenenn, Jr. Director March 25, 1998 - ------------------------------ L. A. Koenenn, Jr. /s/ Victor Mavar Director March 25, 1998 - ------------------------------ Victor Mavar EXHIBIT INDEX 13 Only Pages 5,6,7 and 18-36 of the Registrant's Annual Report to Shareholders expressly incorporated by reference herein are included in this exhibit and, therefore, are filed as a part of this report of Form 10-K. 23 Independent Auditor's Consent. 27 Financial Data Schedule. EX-13 2 PGS 5,6,7 AND 18-36 1997 ANN. REPORT TO SHAREHOLD. Page 5 Hancock Holding Company and Subsidiaries Financial Highlights
Amounts in thousands (except per share data) 1997 1996 % Change ---------- ----------- ---------- Earnings statement data: Net interest income $ 112,197 $ 106,719 5.13 Provision for loan losses 6,399 6,154 3.98 Earnings before income taxes 47,975 46,773 2.57 Net earnings 30,624 31,603 (3.10) Per share data: Basic and diluted earnings* $ 2.82 $ 3.08 (8.44) Cash dividends paid* 1.00 0.88 13.64 Book value (period end) 26.44 24.42 8.27 Weighted average shares outstanding 10,870 10,277 5.77 Shares outstanding 12/31 10,916 10,725 1.78 Balance sheet data (period end): Securities $1,079,995 $ 901,592 19.79 Net loans 1,220,629 1,173,967 3.97 Allowance for loan losses 21,000 19,800 6.06 Total assets 2,537,957 2,289,582 10.85 Total deposits and deposit related liabilities 2,233,181 2,014,185 10.87 Long-term bonds and notes 1,279 1,050 21.81 Total stockholders' equity 288,573 261,938 10.17 Balance sheet data (average for the year): Securities $ 984,203 $ 903,386 8.95 Net loans 1,201,381 1,083,165 10.91 Allowance for loan losses 20,410 17,670 15.51 Total assets 2,442,953 2,285,877 6.87 Total deposits and deposit related liabilities 2,155,189 2,027,105 6.32 Long-term bonds and notes 1,369 1,795 (23.73) Total stockholders' equity 271,303 230,051 17.93 Performance ratios (%): Return on average assets 1.25 1.38 (9.42) Return on average stockholders' equity 11.29 13.74 (17.83) Allowance for loan losses to period-end loans 1.72 1.69 1.78 Allowance for loan losses to non-performing loans 538.74 681.58 (20.96) Net charge-offs to period-end loans 0.49 0.37 32.43 Net interest margin 5.14 5.20 (1.15) Regulatory Requirement ----------- Capital ratios (%): Primary capital 11.37 11.11 - Tier 1 leveraged 10.24 10.37 3% Tier 1 risk-based 18.22 18.03 4% Total risk-based 19.18 19.02 8%
* The Earnings and Cash Dividends Paid Per Common Share is based on the weighted average number of shares after giving retroactive effect for a 15% stock dividend in 1996. Actual Cash Dividends Paid in 1996 were $1.00. Page 6 Hancock Holding Company and Subsidiaries Description of Business Hancock Holding Company (the "Company") is a bank holding company headquartered in Gulfport, Mississippi with total consolidated assets of approximately $2.5 billion at December 31, 1997. The Company operates a total of 80 banking offices and over 100 automated teller machines ("ATMs") in the states of Mississippi and Louisiana through two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana (the "Banks"). The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. The Company's operating strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank.
Summary of Quarterly Operating Results 1997 1996 ------------------------------------- -------------------------------------- First Second Third Fourth First Second Third Fourth ------------------------------------- -------------------------------------- (Amounts in thousands, except per share data) Interest incom $ 44,300 $45,698 $46,356 $47,541 $42,320 $42,432 $43,138 $43,633 Interest expense 17,003 17,783 18,158 18,754 16,152 16,104 15,979 16,569 ------- ------- ------- ------- ------- ------- ------- ------- Net interest income 27,297 27,915 28,198 28,787 26,168 26,328 27,159 27,064 Provision for loan losses 836 1,508 2,993 1,062 1,004 797 1,036 3,317 Earnings before income taxes 12,282 12,818 10,477 12,398 11,623 11,934 12,005 11,211 Net earnings 8,257 8,193 6,687 7,487 7,768 8,032 8,082 7,721 Basic and diluted earnings per share $ 0.76 $ 0.76 $ 0.61 $ 0.69 $ 0.76 $ 0.79 $ 0.79 $ 0.74
Market Information The Company's common stock trades on the NASDAQ National Market System under the symbol"HBHC" and is listed in newspapers under NASDAQ market quotations under "HancHd". The following table sets forth the high and low sale prices of the Company's common stock as reported on the NASDAQ National Market System. These prices do not reflect retail mark-ups, mark-downs or commissions. Cash High Low Dividends Sale Sale Paid ------- ------- --------- 1997 1st Quarter $ 42.50 $ 39.25 $ 0.25 2nd Quarter $ 49.00 $ 39.50 $ 0.25 3rd Quarter $ 51.50 $ 46.00 $ 0.25 4th Quarter $ 63.25 $ 50.12 $ 0.25 1996 Actual Cash Restated* Dividends Paid ----------------------------------- --------------- 1st Quarter $32.83 $31.09 $0.22 $0.25 2nd Quarter $35.22 $31.09 $0.22 $0.25 3rd Quarter $35.00 $31.52 $0.22 $0.25 4th Quarter $42.50 $32.61 $0.22 $0.25 * The figures presented have been restated to reflect the effect of a 15% stock dividend paid in 1996. There were 5,488 holders of record of common stock of the Company at January 2, 1998 and 10,916,770 shares outstanding. On January 2, 1998, the high and low sale prices of the Company's common stock as reported on the NASDAQ National Market System were $60.50 and $59.17, respectively. The principal source of funds to the Company to pay cash dividends are the earnings of the Bank subsidiaries. Consequently, dividends are dependent upon earnings, capital needs, regulatory policies and other policies affecting the Banks. For example, federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Dividends paid to the Company by Hancock Bank are subject to approval by the Commissioner of Banking and Consumer Finance of the State of Mississippi. The Company's management does not expect regulatory restrictions to affect its policy of paying cash dividends, although no assurance can be given that Hancock Holding Company will continue to declare and pay regular quarterly cash dividends on its common stock. However, the Company has paid regular cash dividends since 1937. Page 7 Hancock Holding Company and Subsidiaries Consolidated Summary of Selected Financial Information
Amounts In Thousands (except for per share data) Years Ended December 31, --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ---------- ---------- Interest Income: Interest and fees on loans $ 117,474 $ 107,080 $ 97,626 $ 82,563 $ 80,176 Income on federal funds sold 2,733 5,580 5,820 3,832 3,603 Interest & dividends on investments 63,688 58,863 58,083 49,884 49,936 Total interest income 183,895 171,523 161,529 136,279 133,715 ------------ ----------- ---------- ---------- ---------- Interest Expense: Interest on deposits 66,150 60,625 57,612 48,193 46,935 Interest on federal funds purchased and securities purchased under agreements to resell 5,383 4,013 3,082 1,472 1,021 Interest on bonds, notes and other 165 166 468 332 44 ----------- ---------- ---------- ---------- ---------- Total interest expense 71,698 64,804 61,162 49,997 48,396 ----------- ---------- ---------- ---------- ---------- Net Interest Income 112,197 106,719 100,367 86,282 85,319 Provision for loan losses 6,399 6,154 4,425 1,998 4,632 ----------- ---------- ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 105,798 100,565 95,942 84,284 80,687 Other income 29,866 26,460 23,956 20,557 22,153 Other expenses 87,689 80,252 79,816 71,218 67,450 ----------- ---------- ---------- ---------- ---------- Earnings before income taxes 47,975 46,773 40,082 33,623 35,390 Income taxes 17,351 15,170 13,065 10,493 10,528 ----------- ---------- ---------- ---------- ---------- Net Earnings $ 30,624 $ 31,603 $ 27,017 $ 23,130 $ 24,862 =========== ========== ========== ========== ========== Per Common Share: Basic and diluted earnings $ 2.82 $ 3.08 $ 2.65 $ 2.48 $ 2.67 Cash dividends paid* 1.00 0.88 0.84 0.80 0.78 Weighted average number of shares 10,870 10,277 10,181 9,314 9,307 Return on Average Assets 1.25% 1.38% 1.22% 1.13% 1.27% Dividend payout 36.05% 28.90% 31.45% 32.21% 29.29% Balance Sheet Data December 31: Total assets $2,537,957 $2,289,582 $2,234,286 $2,026,929 $1,988,125 Total deposits and deposit related liabilities 2,233,181 2,014,185 1,991,069 1,800,810 1,790,338 Total long-term bonds and notes 1,279 1,050 2,035 2,955 4,300 Stockholders' equity 288,573 261,938 224,179 182,277 166,712
*Earnings and Cash Dividends Paid per Common Share are based on the weighted average number of shares after giving retroactive effect for a 15% stock dividend in December 1996. Actual Cash Dividends Paid in 1996, 1995, 1994 and 1993 were $1.00, $0.96, $0.92, and $0.90, respectively. On April 29, 1994, the Company merged Hancock Bank of Louisiana, a wholly-owned subsidiary of the Company, with First State Bank and Trust Company of East Baton Rouge Parish, Baker, Louisiana (Baker). On February 1, 1995, the Company merged Hancock Bank of Louisiana with Washington Bank and Trust Company, Franklinton, Louisiana (Washington). These mergers were accounted for using the pooling-of-interests method, and, therefore, all prior years financial information has been restated. On January 13, 1995, the Company acquired First Denham Bancshares, Inc., Denham Springs, Louisiana, which owned 100% of the stock of First National Bank of Denham Springs (Denham). This acquisition was accounted for using the purchase method and the results of operations since the date of acquisition have been included in the consolidated statements of earnings. On November 15, 1996, the Company acquired Community Bancshares, Inc., Independence, Louisiana, which owned 100% of the stock of Community State Bank (Community). This acquisition was accounted for using the purchase method and results of operations since the date of acquisition have been included in the consolidated statements of earnings. On January 17, 1997 the Company acquired Southeast National Bank, Hammond, Louisiana (Southeast) for approximately $3,700,000 cash and 121,000 shares of common stock of the Company. The acquisition was accounted for using the purchase method of accounting and the results of operations since January 17, 1997 are included in the consolidated statements of earnings. The excess of the purchase price over the value of net tangible assets acquired was assigned to goodwill and is being amortized over 15 years. On July 15, 1997 the Company acquired Commerce Corporation, Inc. (Commerce), St. Francisville, Louisiana, which owned 100% of the stock of Bank of Commerce and Trust Company, for approximately $330,000 cash and 65,000 shares of common stock and the assumption of Commerce debt owed to certain individuals in the aggregate principal amount of $1,250,000. The transaction was accounted for using the purchase method of accounting and the results of operations since July 15, 1997 are included in the consolidated statements of earnings. The excess of the purchase price over the value of net tangible assets acquired was assigned to goodwill and is being amortized over 15 years.
Page 18 Hancock Holding Company and Subsidiaries Consolidated Balance Sheets December 31, ---------------------------------- 1997 1996 --------------- --------------- Assets: Cash and due from banks (non-interest bearing) $ 113,124,897 $ 119,483,272 Interest bearing time deposits with other banks 2,067,500 2,945,001 Securities available-for-sale (amortized cost of $163,531,000 and $98,567,000) 163,633,434 97,594,689 Securities held-to-maturity (market value of $924,958,000 and $806,710,000) 916,361,847 803,997,535 Federal funds sold 35,500,000 12,000,000 Loans 1,245,355,439 1,198,769,903 Less: Allowance for loan losses (21,000,000) (19,800,000) Unearned income (24,725,896) (24,803,151) --------------- --------------- Loans, net 1,199,629,543 1,154,166,752 Property and equipment 42,810,352 40,412,254 Other real estate 2,357,399 1,875,683 Accrued interest receivable 20,976,878 20,188,062 Other assets 41,494,695 36,918,982 --------------- --------------- Total Assets $ 2,537,956,545 $ 2,289,582,230 =============== =============== Liabilities and Stockholders' Equity: Deposits: Non-interest bearing demand $ 462,730,852 $ 432,963,782 Interest-bearing savings, NOW, money market and other time 1,599,916,793 1,493,612,581 --------------- --------------- Total Deposits 2,062,647,645 1,926,576,363 Securities sold under agreements to repurchase 170,533,618 87,609,038 Other liabilities 14,922,683 12,408,884 Long-term bonds and notes 1,279,402 1,050,000 --------------- --------------- Total Liabilities 2,249,383,348 2,027,644,285 Commitments and Contingencies (Notes 11 and 12) Stockholders' Equity: Common stock: $3.33 par value per share; 75,000,000 shares authorized, 11,072,770 and 10,887,302 shares issued and outstanding 36,872,324 36,254,716 Capital surplus 200,766,498 194,499,422 Undivided profits 51,401,100 31,816,568 Unrealized gain (loss) on securities available-for-sale, net of deferred taxes 65,742 (632,761) Unearned compensation (532,467) --- --------------- --------------- Total Stockholders' Equity 288,573,197 261,937,945 --------------- --------------- Total Liabilities and Stockholders' Equity $ 2,537,956,545 $ 2,289,582,230 =============== ===============
See notes to consolidated financial statements. Page 19 Hancock Holding Company and Subsidiaries Consolidated Statements of Earnings Years Ended December 31, --------------------------------------------- 1997 1996 1995 ------------ ------------- ------------- Interest Income: Interest and fees on loans $ 117,473,854 $ 107,079,501 $ 97,626,040 Interest on: U.S. Treasury securities 14,733,156 13,567,085 14,567,927 Obligations of other U.S. government agencies 34,699,383 34,885,873 33,726,484 Obligations of states and political subdivisions 4,150,307 3,543,436 3,526,973 Interest on federal funds sold 2,733,341 5,580,275 5,820,225 Interest on time deposits and other 10,105,014 6,866,644 6,261,921 ------------- ------------- ------------- Total interest income 183,895,055 171,522,814 161,529,570 ------------- ------------- ------------- Interest Expense: Interest on deposits 66,149,396 60,624,862 57,612,465 Interest on securities sold under agreements to repurchase and federal funds purchased 5,383,358 4,013,259 3,081,896 Interest on bonds and notes 165,449 165,840 468,029 ------------- ------------- ------------- Total interest expense 71,698,203 64,803,961 61,162,390 ------------- ------------- ------------- Net Interest Income 112,196,852 106,718,853 100,367,180 Provision for loan losses 6,399,481 6,153,753 4,424,701 ------------- ------------- ------------- Net Interest Income after Provision for Loan Losses 105,797,371 100,565,100 95,942,479 Non-Interest Income: Service charges on deposit accounts 18,528,677 16,877,678 15,040,119 Other service charges, commissions and fees 4,657,517 4,412,938 4,693,062 Securities gains (losses) 278,651 30,531 (49,121) Other 6,401,572 5,139,145 4,271,598 ------------- ------------- ------------- Total non-interest income 29,866,417 26,460,292 23,955,658 ------------- ------------- ------------- Non-Interest Expense: Salaries and employee benefits 46,472,455 42,384,113 41,319,402 Net occupancy expense of premises 4,366,166 4,263,421 3,751,201 Equipment rentals, depreciation and maintenance 10,274,698 10,510,300 9,968,619 Other 26,574,650 23,094,554 24,777,018 ------------- ------------- ------------- Total non-interest expense 87,687,969 80,252,388 79,816,240 ------------- ------------- ------------- Earnings Before Income Taxes 47,975,819 46,773,004 40,081,897 Income Taxes 17,351,400 15,170,000 13,065,000 ------------- ------------- ------------- Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897 ============= ============= ============= Basic and Diluted Earnings Per Common Share $ 2.82 $ 3.08 $ 2.65 ============= ============= =============
See notes to consolidated financial statements. Page 20 Hancock Holding Company and Subsidiaries Consolidated Statements of Stockholders' Equity Years ended December 31, 1997, 1996 and 1995 Unrealized Common Stock Gain (Loss) ----------------------------- on Securities Shares Capital Undivided Available-for- Unearned Issued Amount Surplus Profits Sale, Net Compensation -------------- -------------- -------------- -------------- -------------- ------------ Balance, January 1, 1995 8,247,851 $ 27,465,344 $104,170,000 $ 51,056,611 $ (415,070) Net earnings 27,016,897 Cash dividends: $.84 per share (8,661,027) Change in unrealized gain(loss) on securities available-for-sale 727,148 Merger with Denham accounted for as a purchase 774,098 2,577,746 20,240,868 Transfer from undivided profits 5,589,132 (5,589,132) ------------ ------------ -------------- -------------- ------------- ------------ Balance, December 31, 1995 9,021,949 30,043,090 130,000,000 63,823,349 312,078 Net Earnings 31,603,004 Cash dividends: $.88 per share (9,134,130) Change in unrealized gain(loss) on securities available-for-sale (944,839) 15% Stock dividend 1,351,960 4,502,027 49,914,363 (54,475,655) Acquisition of Community accounted for as a purchase 513,393 1,709,599 14,585,059 ------------ ------------ ------------ ------------ ------------ ----------- Balance, December 31, 1996 10,887,302 36,254,716 194,499,422 31,816,568 (632,761) Net earnings 30,624,419 Cash Dividends: $1.00 per share (11,039,887) Change in unrealized gain(loss) on securities available-for-sale 698,503 Acquisition of Southeast accounted for as a purchase 120,900 402,597 3,486,530 Acquisition of Commerce accounted for as a purchase 64,568 215,011 2,780,546 Transactions relating to restricted stock grants, net (532,467) ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1997 11,072,770 $ 36,872,324 $200,766,498 $ 51,401,100 $ 65,742 $ (532,467) ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements. Page 21 Hancock Holding Company and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, ------------------------------------------------ 1997 1996 1995 -------------- -------------- -------------- Cash Flows from Operating Activities: Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 4,705,432 4,818,532 4,343,507 Provision for loan losses 6,399,481 6,153,753 4,424,701 Deferred income taxes (credit) (395,000) (754,000) (790,000) (Gains) losses on sales of securities (278,651) (30,531) 49,121 Increase in interest receivable (282,032) (117,042) (1,130,794) Amortization of intangible assets 2,281,666 2,230,082 2,450,553 Increase (decrease) in interest payable 14,102 (215,863) 1,869,527 Other: net 1,140,190 (734,320) 860,087 ------------- ------------- ------------- Net cash provided by operating activities 44,209,607 42,953,615 39,093,599 ------------- ------------- ------------- Cash Flows from Investing Activities: Net (decrease) increase in interest bearing time deposits (2,056,716) 1,395,000 (100,000) Proceeds from maturities of securities held-to-maturity 261,488,556 372,251,124 394,491,517 Purchases of securities held-to-maturity (359,318,934) (375,169,554) (363,531,311) Proceeds from sales and maturities of securities available-for-sale 31,441,417 25,122,385 10,164,925 Purchase of securities available-for-sale (97,379,020) (34,102,782) (1,831,268) Net (increase) decrease in federal funds sold and securities purchased under agreements to resell (18,525,000) 147,175,000 (96,725,000) Net increase in loans (11,363,057) (109,554,135) (39,410,863) Purchase of property and equipment, net (5,206,091) (5,029,439) (3,460,209) Proceeds from sales of other real estate 1,737,568 1,169,568 628,300 Net cash received in connection with purchase transactions 2,288,000 201,830 7,872,000 ------------- ------------- ------------- Net cash (used in) provided by investing activities (196,893,277) 23,458,997 (91,901,909) ------------- ------------- ------------- Cash Flows from Financing Activities: Net increase (decrease) in deposits 75,490,602 (82,051,076) 54,419,827 Dividends paid (11,039,887) (9,193,395) (8,661,027) Repayments of long-term bonds and notes (1,050,000) (985,000) (920,000) Net increase in federal funds purchased, securities sold under agreements to repurchase and other temporary funds 82,924,580 21,023,725 11,713,955 ------------- ------------- ------------- Net cash provided by (used in) financing activities 146,325,295 (71,205,746) 56,552,755 ------------- ------------- ------------- Net (Decrease) Increase in Cash and Due From Banks (6,358,375) (4,793,134) 3,744,445 Cash and Due From Banks, Beginning 119,483,272 124,276,406 120,531,961 ------------- ------------- ------------- Cash and Due From Banks, Ending $ 113,124,897 $ 119,483,272 $ 124,276,406 ============= ============= ============= Supplemental Information Income Taxes Paid $ 16,410,052 $ 17,185,000 $ 13,600,000 Interest Paid 71,684,101 65,019,824 60,910,863
See notes to consolidated financial statements. Page 22 Hancock Holding Company and Subsidiaries Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business. Hancock Holding Company (the "Company") is a bank holding company headquartered in Gulfport, Mississippi operating in the states of Mississippi and Louisiana through two wholly-owned bank subsidiaries, Hancock Bank, Gulfport, Mississippi and Hancock Bank of Louisiana, Baton Rouge, Louisiana (the "Banks"). The Banks are community oriented and focus primarily on offering commercial, consumer and mortgage loans and deposit services to individuals and small to middle market businesses in their respective market areas. The Company's operating strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank, while successfully retaining the local appeal and level of service of a community bank. Consolidation. The consolidated financial statements of the Company include the accounts of the Company, the Banks, and other subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities. Securities have been classified into one of three categories: Trading, Available-for-Sale, or Held-to-Maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates this classification periodically. Trading account securities are held for resale in anticipation of short-term market movements. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities not classified as held-to-maturity or trading are classified as available-for-sale. The Company had no trading account securities during the three years ended December 31, 1997. Held-to-maturity securities are stated at amortized cost. Available-for-sale securities are stated at market value, with unrealized gains and losses, net of income taxes, reported as a separate component of stockholders' equity until realized. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Amortization, accretion and accrued interest are included in interest income on securities. Realized gains and losses, and declines in value judged to be other than temporary, are included in net securities gains. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Allowance for Loan Losses. The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the allowance for loan losses at the time of recovery. Periodically during the year management estimates the probable level of future losses to determine whether the reserve is adequate to absorb anticipated losses in the existing portfolio based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. Based on these estimates, the allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Property and Equipment. Property and equipment are recorded at amortized cost. Depreciation is computed principally by the straight-line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the term of the lease or the asset's useful life. Intangible Assets. Intangible assets, which amounted to $28,633,000 and $24,582,000 at December 31, 1997 and 1996, respectively, include the values assigned to the core deposits of acquired banks which are being amortized over lives ranging from six to seven years using accelerated methods, and goodwill which is being amortized over fifteen years. Other Real Estate. Other real estate acquired through foreclosure and bank acquisitions is stated at the lower of cost or fair market value, net of the costs of disposal. When a reduction to fair market value is required, it is charged to the allowance for loan losses at the time of foreclosure and any subsequent adjustments are charged to expense. Loans. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the yield on the related loan. Interest on commercial and real estate mortgage loans is recorded as income as earned. Page 23 Unearned income on installment loans is recognized as income based on a method which approximates the interest method. Where doubt exists as to collectibility of a loan, the accrual of interest is discontinued and payments received are applied first to principal. Upon such discontinuances, all unpaid accrued interest is reversed. Interest income is recorded after principal has been satisfied and as payments are received. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's impaired loans include troubled debt restructurings, and performing and non-performing major loans in which full payment of principal or interest is not expected. Non major homogeneous loans, which are evaluated on an overall basis, generally include all loans under $500,000. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loans effective interest rate, or at the loan's observable market price or the fair value of its collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Generally, loans of all types which become 90 days delinquent are in the process of collection through repossession, foreclosure or have been deemed currently uncollectible. Loans deemed currently uncollectible are charged-off against the allowance account. As a matter of policy, loans are placed on a non-accrual status when doubt exists as to collectibility. Trust Fees. Trust fees are recorded when received, which is the general practice within the banking industry. Income Taxes. Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable income and pre-tax financial income and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred taxes on temporary differences are calculated at the currently enacted tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Stock Based Compensation. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized. The pro forma disclosures required by SFAS 123 are included in Note 9. Basic and Diluted Earnings Per Common Share. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 128, Earnings Per Share. This Statement simplifies the standards for computing earnings per share previously required under APB Opinion No. 15, Earnings Per Share. Basic earnings per share (EPS) excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for 1997 and required restatement of all prior period EPS data. Basic and diluted earnings per share as currently presented are the same amounts as primary earnings per share as previously reported. Cash. For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and Due from Banks". NOTE 2 - ACQUISITIONS Poolings On February 1, 1995, the Company merged Hancock Bank of Louisiana, a wholly-owned subsidiary of the Company, with Washington Bank and Trust Company, Franklinton, Louisiana (Washington). The merger was consummated by the exchange of all outstanding common stock of Washington in return for approximately 624,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The merger was accounted for using the pooling-of-interests method. Net interest income and net earnings of Washington was $372,000 and $114,000 for the period from January 1, 1995 to January 31, 1995, respectively. Page 24 Purchases On January 13, 1995, the Company acquired First Denham Bancshares, Inc. for approximately $4,000,000 cash and 890,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. First Denham Bancshares, Inc owned 100% of the stock of First National Bank of Denham Springs (Denham). The acquisition was accounted for using the purchase method and the results of operation since January 13, 1995 are included in the consolidated statements of earnings. The excess of the purchase price over the value of the net tangible assets acquired was assigned to goodwill and is being amortized over 15 years. On November 15, 1996, the Company acquired Community Bancshares, Inc. (Community) for approximately $5,000,000 cash and 513,000 shares (adjusted for a 15% stock dividend in 1996) of common stock of the Company. The acquisition was accounted for using the purchase method and the results of operations since November 15, 1996 are included in the consolidated statements of earnings. The excess of the purchase price over the value of the net tangible assets acquired was assigned to goodwill and is being amortized over 15 years. On January 17, 1997 the Company acquired Southeast National Bank, Hammond, Louisiana (Southeast) for approximately $3,700,000 cash and 121,000 shares of common stock of the Company. The acquisition was accounted for using the purchase method of accounting and the results of operations since January 17, 1997 are included in the consolidated statements of earnings. The excess of the purchase price over the value of net tangible assets acquired was assigned to goodwill and is being amortized over 15 years. On July 15, 1997 the Company acquired Commerce Corporation, Inc. (Commerce), St. Francisville, Louisiana, which owned 100% of the stock of Bank of Commerce and Trust Company, for approximately $330,000 cash and 65,000 shares of common stock and the assumption of Commerce debt owed to certain individuals in the aggregate principal amount of $1,250,000. The transaction was accounted for using the purchase method of accounting and the results of operations since July 15, 1997 are included in the consolidated statements of earnings. The excess of the purchase price over the value of the net tangible assets acquired was assigned to goodwill and is being amortized over 15 years. The following unaudited pro forma consolidated results of operations give effect to the acquisitions of Denham and Community as though they had occurred on January 1, 1995; and Southeast and Commerce as though they had occurred on January 1, 1996, (amounts in thousands, except for share amounts): Years ended December 31, --------------------------------- 1997 1996 1995 ---------- ---------- ---------- Interest income $ 185,124 $ 182,372 $ 167,275 Interest expense (72,162) (69,278) (63,772) Provision for loan losses (6,565) (6,179) (4,425) --------- --------- --------- Net interest income after provision for loan losses 106,397 106,915 99,078 Net earnings $ 30,643 $ 32,624 $ 27,977 Basic and diluted earnings per common share $ 2.81 $ 2.99 $ 2.65 The unaudited pro forma information is not necessarily indicative either of results of operations that would have occurred had the purchases been made as of January 1, 1995 or January 1, 1996, as appropriate, or of future results of operations of the combined companies. In connection with the 1997, 1996 and 1995 acquisitions, liabilities were assumed as follows (in thousands): 1997 1996 1995 ---------- ---------- ---------- Fair value of all assets, excluding cash $ 68,815 $ 96,623 $ 120,407 Cash acquired, net of amount paid 2,288 202 7,872 Market value of common stock issued (6,885) (16,295) (22,819) --------- --------- --------- Liabilities assumed $ 64,218 $ 80,530 $ 105,460 ========= ========= ========= Page 25 NOTE 3 - SECURITIES The book and market values of securities classified as available-for-sale were as follows (in thousands): December 31, 1997 December 31, 1996 ------------------------------------------------------ ---------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------- ------- -------- --------- --------- ------- -------- --------- U.S. Treasury securities $54,637 $ 79 $ 8 $54,708 $ 499 $ 3 $ 0 $ 502 Other U.S. gov. obligations 46,039 5 126 45,918 53,802 120 501 53,421 Municipal obligations 1,496 30 0 1,526 923 2 0 925 Other Securities 6,305 0 5 6,300 0 0 0 0 Mortgage-backed securities 27,538 318 29 27,827 5,373 317 391 5,299 CMOs 21,427 0 162 21,265 33,038 111 633 32,516 Equity securities 6,089 0 0 6,089 4,932 0 0 4,932 -------- ------- ------- ------- ------- ------- ------- ------- $163,531 $ 432 $ 330 163,633 $ 98,567 $ 553 $ 1,525 $97,595 ======== ======= ======= ======= ======= ======= ======= =======
The amortized cost and market value of the debt securities classified as available-for-sale at December 31, 1997, by estimated maturity, were as follows (in thousands): Amortized Cost Market Value -------------- ------------- Due in one year or less $ 29,820 $ 29,774 Due after one year through five years 68,343 68,373 Due after five years through ten years 25,856 25,825 Due after ten years 33,423 33,572 -------- -------- $157,442 $157,544 ======== ======== The amortized cost and market values of securities classified as held-to-maturity were as follows (in thousands): December 31, 1997 December 31, 1996 ------------------------------------------ ------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- -------- -------- --------- --------- --------- ------- -------- U.S. Treasury securities $ 210,525 $ 2,533 $ 127 $ 212,931 $ 175,171 $ 1,990 $ 60 $177,101 Other U.S. gov. obligations 267,437 1,112 312 268,237 338,796 618 1,863 337,551 Municipal obligations 88,062 2,979 37 91,004 66,367 2,088 47 68,408 Other Securities 25,874 19 20 25,873 0 0 0 0 Mortgage-backed securities 133,925 1,943 137 135,731 87,991 498 222 88,267 CMOs 190,539 1,245 602 191,182 135,673 300 590 135,383 -------- -------- -------- -------- ---------- --------- ------- -------- $916,362 $ 9,831 $ 1,235 $ 924,958 $ 803,998 $ 5,494 $ 2,782 $806,710 ======== ======== ======== ======== ======== ========= ======= ========
The amortized cost and market value of securities classified as held-to-maturity as of December 31, 1997, by contractual maturity, were as follows (in thousands): Amortized Cost Market Value -------------- ------------- Due in one year or less $ 194,406 $ 194,626 Due after one year through five years 305,508 307,880 Due after five years through ten years 177,870 179,584 Due after ten years 238,578 242,868 ------- ------- $ 916,362 $ 924,958 ======= ======= Proceeds from sales of available-for-sale securities were $12,919,000 in 1997, $20,425,000 in 1996 and $9,435,000 in 1995. Gross gains of $321,000 in 1997, $178,000 in 1996 and $16,000 in 1995 and gross losses of $42,000 in 1997, $147,000 in 1996 and $65,000 in 1995 were realized on those sales. Securities with a book value of approximately $600,264,000 at December 31, 1997 and $440,507,000 at December 31, 1996, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Page 26 The Company's collateralized mortgage obligations ("CMOs") generally consist of first and second tranche sequential pay and/or planned amortization class (PAC) instruments. Interest income on CMOs and mortgage-backed securities is generally included with interest on obligations of other U.S. government agencies and corporations due to their guarantees of the underlying mortgages. Note 4 - Loans Loans consisted of the following (in thousands): December 31, ----------------------- 1997 1996 ------------ ---------- Real estate loans - primarily mortgage $ 476,612 $ 465,919 Commercial and industrial loans 175,721 169,515 Loans to individuals for household, family and other consumer expenditures 558,147 534,560 Leases 16,889 15,881 Other loans 17,986 12,895 ---------- ---------- $1,245,355 $1,198,770 ========== ========== Changes in the allowance for loan losses are as follows (in thousands): 1997 1996 1995 -------- ---------- -------- Balance at January 1 $ 19,800 $ 17,391 $ 15,372 Balance acquired through acquisitions 833 654 1,147 Recoveries 2,181 2,068 1,830 Loans charged off (8,213) (6,466) (5,383) Provision charged to operating expense 6,399 6,153 4,425 -------- -------- -------- Balance at December 31 $ 21,000 $ 19,800 $ 17,391 ======== ======== ======== The Company generally makes loans in its market areas of South Mississippi and Southeastern Louisiana. Loans are made in the normal course of business to its directors and executive officers, and their associates on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Such loans did not involve more than normal risk of collectibility or contain other unfavorable features. The balance of loans to related parties at December 31, 1997 and 1996 was approximately $8,133,000 and $6,080,000, respectively. Non-accrual and renegotiated loans amounted to approximately .30% of total loans at December 31, 1997 and .25% at December 31, 1996. The amount of interest not accrued on these loans did not have a significant effect on earnings in 1997, 1996 or 1995. The Company's impaired loans amounted to less than .25% of total loans at December 31, 1997 and 1996, and the related reserve amounts were not significant at those dates. There was no significant change in these amounts during the years ended December 31, 1997, 1996 or 1995. Interest income recognized on these loans amounted to approximately $125,000, $100,000 and $300,000 for the years ended December 31, 1997, 1996 and 1995 respectively. Transfers from loans to other real estate amounted to approximately $1,894,000, $1,952,000 and $574,000 in 1997, 1996 and 1995, respectively. Reserve balances associated with other real estate amounted to $812,000 and $668,000 at December 31, 1997 and 1996, respectively. NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization as follows (in thousands): December 31, ----------------- 1997 1996 ------- ------- Land, buildings and leasehold improvements $47,073 $46,730 Furniture, fixtures and equipment 42,022 37,047 ------- ------- 89,095 83,777 Less accumulated depreciation and amortization 46,285 43,365 ------- ------- $42,810 $40,412 ======= ======= Following is a summary of the capital levels: To be Well Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ----------------- ---------------- Amount Ratio % Amount Ratio % Amount Ratio % -------- ------ ------ ----- ------ -------- As of December 31, 1997: Total Capital (to Risk Weighted Assets) Company $273,724 19.18 $ 114,200 8.00 $ N/A Hancock Bank 165,059 18.45 71,600 8.00 89,500 10.00 Hancock Bank of Louisiana 109,517 20.58 42,600 8.00 53,200 10.00 Tier I Capital (to Risk Weighted Assets) Company $259,940 18.22$ 57,100 4.00 $ N/A Hancock Bank 157,927 17.65 35,800 4.00 53,700 6.00 Hancock Bank of Louisiana 102,865 19.33 21,300 4.00 31,900 6.00 Tier I Leveraged Capital Company $259,940 10.24$ 76,100 3.00 $ N/A Hancock Bank 157,927 9.75 48,600 3.00 81,000 5.00 Hancock Bank of Louisiana 102,865 10.94 28,200 3.00 47,000 5.00 To be Well Required Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- -------------------- ----------------- Amount Ratio %Amount Ratio % Amount Ratio % -------- ----- ------- ------- ------ ------- As of December 31, 1996: Total Capital (to Risk Weighted Assets) Company $250,369 19.02$105,300 8.00 $ N/A Hancock Bank 152,370 18.62 65,500 8.00 81,800 10.00 Hancock Bank of Louisiana 97,801 19.63 39,800 8.00 49,800 10.00 Tier I Capital (to Risk Weighted Assets) Company $237,356 18.03$ 52,700 4.00 $ N/A Hancock Bank 145,583 17.79 32,700 4.00 49,100 6.00 Hancock Bank of Louisiana 91,575 18.38 20,000 4.00 29,900 6.00 Tier I Leveraged Capital Company $237,356 10.37$ 69,000 3.00 $ N/A Hancock Bank 145,583 10.10 43,200 3.00 72,100 5.00 Hancock Bank of Louisiana 91,575 10.54 26,000 3.00 43,400 5.00
Risk-based capital requirements are intended to make regulatory capital more sensitive to risk elements of the Company. Currently, the Company and its bank subsidiaries are required to maintain a minimum risk-based capital ratio of 8.0%, with not less than 4.0% in Tier 1 capital. In addition, the Company and Page 28 its bank subsidiaries must maintain a minimum Tier 1 leveraged ratio (Tier 1 capital to total assets) of at least 3.0% based upon the regulators latest composite rating of the institutions. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each federal banking agency to implement prompt corrective actions for institutions that it regulates. The rules provide that an institution is well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risked-based capital ratio is 6% or greater, its leveraged ratio is 5% or greater and the institution is not subject to a capital directive. Under this regulation, each of the subsidiary banks were deemed to be well capitalized as of December 31, 1997 and 1996 based upon the most recent notifications from their regulators. There are no conditions or events since those notifications that management believes would change their classifications. NOTE 7 - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31, -------------------- 1997 1996 ------- -------- Deferred tax assets: Post-retirement benefit obligation $ 993 $ 789 Reserve for loan losses not currently deductible 6,022 5,002 Reserve for other real estate not currently deductible 284 234 Deferred compensation 725 715 Lease accounting 195 159 Unrealized loss on securities available-for-sale 339 Other 242 547 ------- ------- 8,461 7,785 ------- ------- Deferred tax liabilities: Tax over book depreciation (3,325) (3,517) Prepaid pension (1,088) (959) Unrealized gain on securities available-for-sale (36) Market discount accretion (1,321) (638) ------- ------- (5,770) (5,114) ------- ------- Net deferred tax asset $ 2,691 $ 2,671 ======= ======= Income taxes consist of the following components (in thousands): 1997 1996 1995 ----------- ----------- --------- Currently payable $ 17,746 $ 15,924 $ 13,855 Deferred (395) (754) (790) -------- -------- -------- $ 17,351 $ 15,170 $ 13,065 ======== ======== ======== Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 35% to earnings before income taxes. The reasons for these differences are as follows (in thousands): 1997 1996 1995 ---------- ------------ ---------- Amount % Amount % Amount % ---------- -------- ------------ --- ---- ---------- -------- Taxes computed at statutory rate $ 16,792 35 $ 16,371 35 $ 14,029 35 Increases (decreases) in taxes resulting from: State income taxes 550 1 - - - - Tax exempt interest income (1,501) (3) (1,583) (3) (1,355) (3) Goodwill amortization 831 2 400 - 380 1 Miscellaneous items - net 679 1 (18) - 11 - -------- -------- -------- -------- -------- --------- Income tax expense $ 17,351 36 $ 15,170 32 $ 13,065 33 ======== ======== ======== ======== ======== =========
The related income tax provision (credit) on securities gains (losses) was $98,000 in 1997, $10,700 in 1996 and $(17,000) in 1995. Page 29 NOTE 8 - EMPLOYEE BENEFIT PLANS The Company has a non-contributory pension plan covering substantially all salaried full-time employees who have been employed by the Company the required length of time. The Company's current policy is to contribute annually the minimum amount that can be deducted for federal income tax purposes. The benefits are based upon years of service and employee's compensation during the last five years of employment. Data relative to the pension plan follows (in thousands): December 31, -------------------- 1997 1996 -------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 24,557 $ 22,702 ======== ======== Accumulated benefit obligation $ 24,650 $ 22,792 ======== ======== Projected benefit obligation for service rendered to date $(26,742) $(24,687) Plan assets at fair value 26,524 23,251 -------- -------- Projected benefit obligation in excess of plan assets (218) (1,436) Remaining unrecognized portion of net obligation being amortized over 15 years 183 228 Unrecognized prior service cost 659 751 Unrecognized net loss from past experience different from that assumed 2,484 3,197 -------- -------- Prepaid pension cost included in other assets $ 3,108 $ 2,740 ======== ======== Years Ended December 31, -------------------------------- Net pension expense included the 1997 1996 1995 -------- -------- -------- following (income) expense components: Service cost - benefits earned during the period $ 942 $ 850 $ 836 Interest cost on projected benefit obligation 1,871 1,628 1,555 Return on plan assets (3,091) (2,222) (2,411) Net amortization and deferral 1,478 747 1,275 -------- -------- -------- Net pension expense $ 1,200 $ 1,003 $ 1,255 ======== ======== ========
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.75% and 3.0% in 1997 and 1996, respectively. The expected rate of return on plan assets was 8% in 1997 and 1996. The Plan's assets consist primarily of U.S. government and agency obligations, certificates of deposit and other fixed income obligations. The Company sponsors two defined benefit post-retirement plans other than the pension plan that cover full time employees who have reached 45 years of age. One plan provides medical benefits and the other provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually and subject to certain employer contribution maximums; the life insurance plan is noncontributory. The actuarial and recorded liabilities for these post-retirement benefits, none of which have been funded, are as follows (in thousands): December 31, ------------------ Accumulated post-retirement benefit obligations: 1997 1996 ------- ------- Retirees $ 2,952 $ 2,159 Fully eligible active plan participants 1,051 1,071 Other active plan participants 1,506 1,410 ------- ------- 5,509 4,640 Unrecognized transition obligation (2,006) (2,150) Unrecognized net (loss) gain (665) (236) ------- ------- $ 2,838 $ 2,254 ======= ======= Net periodic post-retirement benefit costs included the following components (in thousands): 1997 1996 1995 ----- ------ ----- Amortization of unrecognized net gain (loss) $ 0 $ (30) $ 55 Service cost-benefits attributed to service during the year 233 219 264 Interest costs on accumulated post-retirement benefit obligations 357 254 390 Amortization of transition obligation over 20 years 143 143 143 ----- ----- ----- Net periodic post-retirement benefit cost $ 733 $ 586 $ 852 ===== ===== =====
Page 30 For measurement purposes in 1997, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed. The rate was assumed to decrease gradually to 5.5% for 2003 and remain at that level thereafter. In 1996, rates of 9.0% and 5.5% were assumed, and in 1995, rates of 9.5% and 5.5% were assumed. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1997, by $719,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $89,000. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7.0% in 1997 and 7.5% in 1996 and 1995. The Company has a non-contributory profit sharing plan covering substantially all salaried full-time employees who have been employed the required length of time. Contributions are made at the discretion of the Board of Directors and amounted to $568,500 in 1997, $568,500 in 1996 and $456,000 in 1995. In addition, the Company has an employee stock purchase plan that is designed to provide the employees of the Company a convenient means of purchasing common stock of the Company. Substantially all salaried, full-time employees, with the exception of Leo W. Seal, Jr., who have been employed by the Company the required length of time are eligible to participate, if they so elect. The Company contributes an amount equal to 25% of each participant's contribution, which contribution cannot exceed 5% of the employee's base pay. The Company's contribution amounted to $84,500 in 1997, $71,000 in 1996 and $58,000 in 1995. The post-retirement plans relating to health care payments and life insurance and the stock purchase plan are not guaranteed and are subject to immediate cancellation and/or amendment. These plans are predicated on future Company profit levels that will justify their continuance. Overall health care costs are also a factor in the level of benefits provided and continuance of these post-retirement plans. There are no vested rights under the post-retirement health or life insurance plans. NOTE 9 - EMPLOYEE STOCK PLANS In February 1996 the stockholders of the Company approved the Hancock Holding Company 1996 Long-Term Incentive Plan to provide incentives and awards for employees of the Company and it's subsidiaries. Awards as defined in the Plan includes, with limitations, stock options (including restricted stock options), restricted and performance shares, and performance stock awards, all on a stand-alone, combination or tandem basis. A total of 5,000,000 common shares can be granted under the Plan with a maximum of 1% of the outstanding common stock (as reported for the fiscal year ending immediately prior to such plan year) in any one year. The exercise price is equal to the market price on the date of grant except for certain of those granted to major shareholders where the option price is 110% of the market price. On December 15, 1996, options to purchase 35,250 shares were granted, of which 32,978 are exercisable at $40 per share and 2,272 are exercisable at $44 per share. 27,522 of these options are exercisable on the first anniversary of the date of grant and 7,728 are exercisable six months after date of grant. The options generally expire ten years after the date of grant. On December 11, 1997, options to purchase 62,375 were granted, of which 60,860 shares are exercisable at $66 per share and 1,515 are exercisable at $66 per share. 48,288 of these options are exercisable on the first anniversary of the date of grant and 14,087 are exercisable six months after the date of grant. Below is a summary of the transactions: Exercise Price ------------------------------------ Number of Options Average Price Outstanding Per Share Aggregate ----------- ------ ----------- Balance January 1, 1996 0 $ 0.00$ 0 Granted 35,250 40.26 1,419,000 ----------- ------ ----------- Balance December 31, 1996 35,250 40.26 1,419,000 Granted 62,375 60.15 3,752,000 Cancelled (1,300) 40.00 (52,000) ----------- ------ ----------- Balance December 31, 1997 96,325 $ 53.14$ 5,119,000 =========== ====== =========== Options on 33,950 shares were exercisable at December 31, 1997 with a weighted average exercise price of $40.27 per share. The weighted average contractual life of options outstanding at December 31, 1997 was 9.5 years. Page 31 The Company has adopted the disclosure-only option under SFAS No. 123 "Accounting for Stock Based Compensation". The weighted average fair value of options granted during 1997 and 1996 was $20.36 and $11.53, respectively. Had compensation costs for the Company's stock options been determined based on the fair value at the grant date consistent with the method under SFAS 123, the Company's net income and earnings per share would have been as indicated below: Year Ended December 31, ------------------------- 1997 1996 ---------- ---------- Net earnings As reported $ 30,624 $ 31,603 Pro Forma 30,220 31,584 Basic and diluted earnings per share As reported $ 2.82 $ 3.08 Pro Forma 2.78 3.07 The fair value of the options granted under the Company's stock option plans during the years ended December 31, 1997 and 1996 was estimated using the Black-Scholes Pricing Model with the following assumptions used: dividend yield of 1.6% and 2.3%, expected volatility of 25% and 22%, risk free interest rates of 5.5% and 5.6%, and expected lives of 8 years and 8 years, respectively. The Company also issued 12,300 restricted share grants during 1997 which vest at the end of three years. Vesting is contingent upon continued employment by the Company. All of these grants were outstanding at December 31, 1997. The 6,100 and 6,200 shares had respective market values of $42 and $60 per share at the dates of grant, and $96,000 of compensation expense relating to these grants was recorded in 1997. The remaining unearned compensation of $532,467 is being amortized over the life of the grants. NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash, Short-term Investments and Federal Funds Sold. For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities. For securities, fair value equals quoted market price, if available. If a quoted market price is not available, a reasonable estimate of fair value is used. Loans. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Long-Term Bond and Notes. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments. The fair value of commitments to extend credit was not significant. The estimated fair values of the Company's financial instruments are as follows (in thousands): December 31, -------------------------------------------------------- 1997 1996 -------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ----------- ------------ Financial Assets: Cash, short-term investments and federal funds sold $ 150,692 $ 150,692 $ 134,428 $ 134,428 Securities available-for-sale 163,633 163,633 97,595 97,595 Securities held-to-maturity 916,362 924,958 803,998 806,710 Loans 1,220,630 1,208,958 1,173,967 1,167,767 Less: allowance for loan losses (21,000) (21,000) (19,800) (19,800) ----------- ----------- ----------- ----------- Loans, net of reserve 1,199,630 1,187,958 1,154,167 1,147,967 Financial Liabilities: Deposits $ 2,062,648 $ 2,063,604 $ 1,926,576 $ 1,925,157 Securities sold under agreements to repurchase 170,534 170,534 87,609 87,609 Long-term bonds and notes 1,279 1,279 1,050 1,050
Page 32 NOTE 11 - OFF-BALANCE SHEET RISK In the normal course of business, the Company enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers which are not reflected in the accompanying consolidated financial statements, until they are funded or related fees are incurred or received. These instruments involve, to varying degrees, elements of credit risk not reflected in the consolidated balance sheets. The contract amounts of these instruments reflect the Company's exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. The Company undertakes the same credit evaluation in making commitments and conditional obligations as it does for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments. These obligations are summarized below (in thousands): December 31 ---------------------- 1997 1996 ---------- --------- Commitments to extend credit $241,000 $224,500 Letters of credit 8,950 7,700 Approximately $181,000,000 and $183,000,000 of commitments to extend credit at December 31, 1997 and 1996, respectively, were at variable rates and the remainder were at fixed rates. The difference between the interest rates on commitments to extend credit and market rates is reflected in the consolidated financial statements over the terms of the related loans when, and if, they are made. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company continually evaluates each customers' credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in the Company obtaining collateral to support the obligation. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. NOTE 12 - Commitments and CONTINGENCIES The Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with outside legal counsel, all such matters are adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on the financial condition of the Company. NOTE 13 - SUPPLEMENTAL INFORMATION The following is selected supplemental information (in thousands): Years Ended December 31, ------------------------- 1997 1996 1995 ------- ------ ------ Other non-interest income: Trust fee income $2,946 $2,412 $2,525 Other non-interest expense: Deposit insurance premium expense 236 285 2,221 Postage expense 3,088 2,327 2,354 NOTE 14 - IMPACT OF NEW ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial Standards No. 130 "Reporting Comprehensive Income" which requires that an enterprise report by major components and as a single total, the change in net assets during the period from non-owner sources and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes annual and interim reporting standards for an enterprises operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated Page 33 financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997. The Company is in the process of reviewing its operating segments. NOTE 15 - SUMMARIZED FINANCIAL INFORMATION OF HANCOCK HOLDING COMPANY (PARENT COMPANY ONLY) BALANCE SHEETS December 31, --------------------------- 1997 1996 ------------ -------------- Assets: Investment in subsidiaries $289,423,238 $261,740,752 Other 811,280 225,736 ------------ ------------ $290,234,518 $261,966,488 ============ ============ Liabilities and Stockholders' Equity: Accrued Expenses $ 381,919 $ 28,543 Note Payable 1,279,402 - Stockholders' Equity 288,573,197 261,937,945 ------------ ------------ $290,234,518 $261,966,488 ============ ============
STATEMENTS OF EARNINGS Years Ended December 31, --------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Dividends received from subsidiaries $ 17,150,000 $ 15,391,000 $ 9,112,361 Excess equity in earnings of subsidiaries over dividends received 14,793,067 16,632,753 18,201,558 Interest and other expenses (1,847,491) (555,788) (398,472) Income tax credit 528,843 135,039 101,450 ------------ ------------ ------------ Net Earnings $ 30,624,419 $ 31,603,004 $ 27,016,897 ============ ============ ============
STATEMENTS OF CASH FLOWS Years Ended December 31, --------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Cash Flows from Operating Activities: principally dividends from subsidiaries $ 15,116,205 $ 14,813,634 $ 10,054,361 Cash Flows from Investing Activities: purchase transactions (4,062,524) (5,622,371) Cash Flows from Financing Activities: principally dividends paid (11,039,887) (9,134,130) (10,028,311) ------------ ------------ ------------ Net increase in cash 13,794 57,133 26,050 Cash, Beginning 157,307 100,174 74,124 ------------ ------------ ------------ Cash, Ending $ 171,101 $ 157,307 $ 100,174 ============ ============ ============
Page 34 INDEPENDENT AUDITORS REPORT Board of Directors and Stockholders Hancock Holding Company Gulfport, Mississippi We have audited the accompanying consolidated balance sheets of Hancock Holding Company and subsidiaries as of December 31, 1997 and 1996, and the related statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hancock Holding Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP New Orleans, Louisiana January 13, 1998 Page 35 HANCOCK HOLDING COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the years ended December 31, 1997 and 1996 The Company's net income was $30.6 million, or $2.82 per share for the year ended December 31, 1997, compared with $31.6 million, or $3.08 per share, for the year ended December 31, 1996. Net interest income and non interest income increased as a result of increased volume. Net interest margin declined from 5.20% in 1996 to 5.14% in 1997. Revenue increases were offset by higher levels of operating costs and income taxes. Income taxes increased $2.2 million over 1996 due to, among other things, increased taxable income, state income taxes, and higher levels of non-deductible goodwill amortization expense in conjunction with the most recent three mergers. The provision for loan losses increased from $6.2 million to $6.4 million as a result of increased loan charge-off activity. The loan loss allowance was 1.72% of period-end loans and represented 539% of non-performing loan balances at December 31, 1997. For the years ended December 31, 1996 and 1995 The Company's net income was $31.6 million, or $3.08 per share, for the year ended December 31, 1996, compared with $27.0 million, or $3.05 per share, for the year ended December 31, 1995. The increase in net income can be primarily attributed to increased loan volume and an increase in the net interest margin from an average of 5.13% in 1995 to 5.20% in 1996. The Bank's balance sheets are liability sensitive with deposits repricing faster than loans and investment securities. Non-interest income increased $2.5 million or 10.4% while non-interest expenses increased 0.6% or $500 thousand. FDIC premium expense in 1996 was $2 million lower than in 1995, which offset acquisition related expenses and other normal expense increases. The provision for loan loss increased from $4.4 million to $6.2 million in 1996 as a result of increased loan charge-off activity and increased loan volume. The loan loss allowance was 1.69% of period-end loans and represented 682% of non-performing loan balances at December 31, 1996. Financial Condition Securities The Company generally purchases securities to be held to maturity, with a maturity schedule that provides ample liquidity. Securities classified as held-to-maturity are carried at amortized cost. Certain securities have been classified as available-for-sale based on management's internal assessment of the portfolio considering future liquidity and earning requirements. The December 31, 1997 book value of the held-to-maturity portfolio was $916 million and the market value was $925 million. The available-for-sale portfolio balance was $164 million at December 31, 1997. Total securities increased by approximately $178 million during 1997. Loans Loans outstanding increased $46.7 million in 1997 bringing the December 31, 1997, net loan portfolio balances to $1.2 billion or 52% of earning assets. Loans acquired through the Southeast and Commerce transactions accounted for as purchases amounted to $41 million or 88% of the increase. Non-performing loans were $3.9 million or less than 1/2% of the December 31, 1997, loan balances. Restructured loans were insignificant and the amount of interest not accrued on non-performing loans did not significantly effect earnings in 1997, 1996 or 1995. The Company generally makes loans in its market areas of South Mississippi and Southeastern Louisiana. Deposits and Deposit Related Liabilities Deposits increased to $2.1 billion on December 31, 1997. Interest bearing deposit balances increased 7%. Deposits acquired through the Southeast and Commerce transactions accounted for as purchases amounted to $62 million. Other deposit related liabilities, principally securities purchased under agreements to resell, increased from $88 million in 1996 to $171 million in 1997, or 94%. Deposits and deposit related liabilities are the Company's primary source of funds supporting its earning assets base. Liquidity Liquidity represents the Company's ability to provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing funds. The principal sources of funds which provide liquidity are customer deposits, payments of principal and interest on Page 36 loans, maturities and sales of securities, earnings and borrowings. During 1995, the Company established a line of credit with the Federal Home Loan Bank in excess of $30 million, providing an additional liquidity source. At December 31, 1997, cash and due from banks, securities available-for-sale and federal funds sold were in excess of 62% of total deposits. Capital Resources Composite ratings by the respective regulatory authorities of the Company and Banks establish minimum capital levels. Currently, the Company and the Banks are required to maintain minimum Tier I leveraged ratios of at least 3%, subject to increase to at least 4% to 5%, depending on the composite rating. As of December 31, 1997, the Company and the Banks capital balances were in excess of current regulatory minimum requirements and showed increases over the prior year. Year 2000 In 1997 the Company began addressing all the systems requiring modifications to accomodate the turn of the century. Testing of these systems will begin during 1998 with a complete year end test to be accomplished at the end of 1998. Management believes it has dedicated adequate resources to this project and does not believe that the cost of implementation will be a significant amount. New Accounting Standards In June 1997, the FASB issued Statement of Financial Standards No. 130 "Reporting Comprehensive Income" which requires that an enterprise report by major components and as a single total, the change in net assets during the period from non-owner sources and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes annual and interim reporting standards for an enterprises operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997. The Company is in the process of reviewing its operating segments. Form 10-K Annual Report Hancock Holding Company files an annual report with the Securities and Exchange Commission on Form 10-K. A copy of the report filed on Form 10-K, when completed, will be sent free of charge to any shareholder by writing to George A. Schloegel, Vice-Chairman, Hancock Holding Company, P. O. Box 4019, Gulfport, MS 39502. EX-23 3 CONSENT OF DELOITTE & TOUCHE LLP Exhibit (23) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement of Hancock Holding Company on Form S-8 (No. 2-99863) and on Form S-3 (No. 33- 31782) of our report dated January 13, 1998 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1997. DELOITTE & TOUCHE LLP New Orleans, Louisiana March 25, 1998 EX-27 4 FINANCIAL DATA SCHEDULE FOR HHC 1998 FORM 10-K
9 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 113,125 2,068 35,500 0 163,633 916,362 924,958 1,220,629 (21,000) 2,537,957 2,062,648 170,534 14,923 1,279 36,872 0 0 251,701 2,537,957 117,418 56,316 10,105 183,895 66,149 71,698 112,197 6,399 279 87,688 47,976 47,976 0 0 30,624 2.82 2.82 5.12 3,898 5,423 0 0 19,800 8,213 2,181 21,000 21,000 0 2,100
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