UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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, 2003.
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
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Hancock Holding Company
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(Exact name of registrant as specified in its charter)
Mississippi 64-0693170
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Hancock Plaza, Gulfport, Mississippi 39501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (228) 868-4727
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $3.33 PAR VALUE
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(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. X
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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 75 days.
Yes X No
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Continued
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of February 29, 2004 was approximately $686,036,940 (based on an average market price of $59.47). 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, 2003, the registrant had outstanding 15,225,468 shares of common stock for financial statement purposes.
DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Annual Report to Stockholders for the year ended December 31, 2003 are incorporated by reference into Part I and 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 26, 2004, filed by the Registrant on January 30, 2004, are incorporated by reference into Part III of this report.
CONTENTS
PART I
Item 1. Business 4
Item 2. Properties 31
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters 33
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 7a Quantitative and Qualitative Disclosures About
Market Risk 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 35
Item 9a Controls and Procedures 36
PART III
Item 10. Directors and Executive Officers of the
Registrant 36
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
Item 14. Principal Accountant Fees and Services 38
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 38
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. At December 31, 2003 the Company operated 101 banking offices and 140 automated teller machines (ATMs) 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 also operates a loan production office in the State of Alabama. 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, 2003, the Company had total assets of $4.15 billion and employed on a full-time equivalent basis 1,245 persons in Mississippi and 489 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 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. Based on the most current available published data, Hancock Bank MS has the largest deposit market share in each of the following four counties: Harrison, Hancock, Jackson and Pearl River. In addition, Hancock Bank MS has a significant presence in the following counties: Lamar, Forrest and Jefferson Davis. With assets of $2.5 billion at September 30, 2003, Hancock Bank MS was ranked the third largest bank in Mississippi.
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 $1.6 billion at September 30, 2003, Hancock Bank LA was ranked the fourth largest bank in Louisiana.
Beginning with the 1985 acquisition of the Pascagoula-Moss Point Bank in Pascagoula, Mississippi, the Company has acquired approximately $1.6 billion in assets and approximately $1.4 billion in deposit liabilities through selected acquisitions or purchase and assumption transactions.
Recent Acquisition Activity:On December 31, 2003, the Company completed the acquisition of Magna Insurance Company, formerly a wholly owned subsidiary of Union Planters Corporation, Memphis, Tennessee. Chartered in 1987, Magna Insurance Company is a well-capitalized life insurance company headquartered in Mississippi and licensed to conduct business in 16 states. The acquisition will enable the Company to offer Magna products and services through the Banks and other client banks across the entire southeastern United States and much of the Midwest. With assets of $41.4 million, Magna is rated B++, or very good, by A.M. Best. The net purchase price was $19.4 million.
On February 22, 2003, the Company completed the acquisition of two Dryades Savings Bank branches located in Metairie, LA and Kenner, LA (both suburbs of New Orleans, LA). Both locations are within minutes of the Causeway connecting metropolitan Jefferson Parish to St. Tammany Parish’s thriving Northshore communities. The two acquired facilities have a combined total deposit base of approximately $40 million. The Company acquired $4.2 million in assets, which includes the core deposit intangible totaling $2.4 million. The core deposit intangible resulting from this acquisition has a weighted average life of 10 years. Amortization of the core deposit intangible was approximately $436,000 in 2003. Amortization is estimated to be approximately $476,000 in 2004, $381,000 in 2005, $305,000 in 2006, $244,000 in 2007, $195,000 in 2008 and the remainder of $343,000 thereafter.
Current OperationsThe 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 significant 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 that can be approved 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.
All loans over an individual loan officer’s Board approved lending authority must be approved by the Bank’s loan committee, the 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 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.
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 regulatory auditor 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 considered, 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 in process of collection through repossession and liquidation of collateral or has been deemed currently uncollectible. Loans deemed currently uncollectible are charged-off. 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, 2003, the book value of real estate held for resale was approximately $5.4 million.
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 5 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, parishes 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 rates generally consistent with market conditions. Additionally, the Banks offer 140 ATMs: ATMs at the Company’s banking offices and free-standing ATMs at other locations. As members of regional and international ATM networks such as “STAR”, “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 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, 2003, the Trust Departments of the Banks had approximately $4.7 billion of assets under administration compared to $4.4 billion as of December 31, 2002. $3.1 billion of administered assets as of December 31, 2003 were corporate accounts and the remaining balances were personal, employee benefit, estate and other trust accounts.
The primary focus of the Company’s operating strategy is to increase operating income and to reduce operating expense. A Company’s operating efficiency ratio indicates the percentage of each dollar of net revenue that is used to fund operating expenses. Net revenue for a financial institution is the total of net interest income plus non-interest income, excluding securities transactions gains or losses. Operating expenses exclude the amortization of intangibles. The Company’s operating efficiency ratio was 57.83% for both years ended December 31, 2003 and December 31, 2002.
Other Activities:Hancock Bank MS has 9 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 net earnings.
In 1994, the Company began offering alternative investments through a third party vendor. The investment centers are now located in several branch locations in Mississippi and Louisiana to accommodate the investment needs of customers whose financial portfolio requirements fall outside the traditional commercial bank product line. During 1999, the investment sales force was internalized and the management structure reorganized in order to align sales activity with Company objectives.
During 2001, the Company began servicing mortgage loans for the Federal National Mortgage Association. The loans serviced are originated and closed by the Company’s mortgage subsidiary. The servicing activity is also performed by this same subsidiary. However, in the middle of 2003 the Company changed its strategy and reverted to selling the majority of its conforming loans with servicing released.
In July 2003, Hancock Bank MS opened a loan processing office in Mobile, Alabama. No deposits are currently accepted at this location.
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.
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.
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 and insurance companies and other financial institutions. Many of these institutions have greater available resources than the Company.
Available InformationThe Company maintains an internet website at www.hancockbank.com. The Company makes available free of charge on the website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission. The Company’s Annual Report to Stockholders is also available on the Company’s website. These reports are made available on the Company’s website as soon as reasonably practical after the reports are filed with the Commission. Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not part of them.
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). On January 26, 2002 the Company qualified as a financial holding company, giving it broader powers as discussed below. To date the Company has exercised its powers as a financial holding company to acquire a non-controlling interest in a third party service provider for insurance companies and, in December 2003 acquired Magna Insurance Company. The Company also is required to file certain reports with, and otherwise complies with the rules and regulations of, the Securities and Exchange Commission (the Commission) under federal securities laws.
The Bank Holding Company Act generally prohibits a corporation owning a bank from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries. Acquiring or obtaining control of more than 5% of the voting shares 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 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, (3) before it may merge with any other bank holding company, or (4) before it may engage in permissible non-banking activities. 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 bank holding company or bank acquisitions or mergers must be delayed for a period of not less than 15 nor more than 30 days following the date of approval. During such 15 to 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.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among qualified bank holding companies, commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities
through a new entity known as a Financial Holding Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
• Repeals historical restrictions on, and eliminates many federal and state law barriers
to, affiliations among banks, securities firms, insurance companies, and other financial
service providers;
• Provides a uniform framework for the functional regulation of the activities of banks,
savings institutions, and their holding companies;
• Broadens the activities that may be conducted by national banks, banking subsidiaries
of bank holding companies, and their financial subsidiaries;
• Provides an enhanced framework for protecting the privacy of consumer information;
• Adopts a number of provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan Bank system;
• Modifies the laws governing the implementation of the Community Reinvestment Act
("CRA"); and
• Addresses a variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions.
The Financial Services Modernization Act requires that each bank subsidiary of a financial holding company be well capitalized and well managed as determined by the subsidiary bank’s principal regulator. To be considered well managed, the bank must have received at least a satisfactory composite rating and a satisfactory management rating at its last examination. To be well capitalized, the bank must have a leverage capital ratio of 5%, a Tier 1 Risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. These ratios are discussed further below. In the event a financial holding company becomes aware that a subsidiary bank ceases to be well capitalized or well managed, it must notify the Federal Reserve and enter into an agreement to cure such condition. The consequences of a failure to cure such condition are that the Federal Reserve Board may order divestiture of the bank. Alternatively, a financial holding company may comply with such order by ceasing to engage in the financial holding company activities that are unrelated to banking or otherwise impermissible for a bank holding company.
The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies and financial holding companies. The regulatory capital of a bank holding company or financial holding company under applicable federal capital adequacy guidelines is particularly important in the Federal Reserve’s evaluation of a holding company and any applications by the bank holding company to the Federal Reserve. If regulatory capital falls below minimum guideline levels, a financial holding company may lose its status as a financial holding company and 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 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, the adequacy of liquidity and 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% 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, 2003 was 9.29% and 9.19% at December 31, 2002.
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, 2003, the Company’s off-balance sheet items aggregated $581.2 million; however, after the credit conversion these items represented $117.1 million of balance sheet equivalents.
The primary component of risk-based capital is Tier 1 Capital, which for the Company is essentially equal to common stockholders’ equity, less goodwill and other intangibles. 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, 2003, the Company’s Tier 1 and Total Capital ratios were 14.21% and 15.60%, respectively. At December 31, 2002, the Company’s Tier 1 and Total Capital ratios were 14.88% and 16.11%, 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. In addition, Mississippi banking organizations were granted similar powers to acquire certain out-of-state financial institutions pursuant to the Interstate Bank Branching Act, which was adopted in 1996.
With the passage of The Interstate Banking and Branching Efficiency Act 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 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 RegulationThe 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), to the extent states banks are granted parity with national banks. 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 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. In 1997 an assessment for the Financing Corporation’s debt service was added to the FDIC quarterly premium payment. That assessment averaged 4.12 cents per hundred dollars of insured deposits during 2003 and 3.98 (annualized) for the first quarter of 2004. Total assessments paid to the FDIC amounted to $531 thousand in 2003. For the year ended December 31, 2003, premiums on OAKAR deposits from the acquisitions of Peoples Federal Savings Association, Lamar Bank and two Dryades Savings Bank branches totaled $14 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 BIF, 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 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 has broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC has 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 Hancock Bank MS and Hancock Bank LA are not members of the 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 $38.8 million, or, if the aggregate of such accounts exceeds $38.8 million, $1.164 million plus 10% of the total in excess of $38.8 million. This regulation is subject to an exemption from reserve requirements on a limited amount of an institution’s transaction accounts.
The Financial Services Modernization Act also permits national banks, and through state parity statutes, state banks, to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be “well-capitalized” and “well-managed.” The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank’s total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank’s assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in “activities as principal that would only be permissible” for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Mississippi permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
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.
The Company’s management has exercised its powers as a financial holding company to acquire a non-controlling interest in a third party service company for the insurance industry and, in December 2003, acquired Magna Insurance Company. Management continues to examine its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Banks, regulatory capital requirements, general economic conditions, and other factors, the Company or Banks desire to further utilize any of their expanded powers provided in the Financial Services Modernization Act.
The Company does not believe that the Financial Services Modernization Act will have a material adverse effect on the Company’s operations in the near-term. However, to the extent that it permits holding companies, banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Banks face from larger institutions and other types of companies offering financial products, some of which may have substantially more financial resources than the Company and the Banks.
Finally, additional bills may be introduced in the future in the United States Congress and state legislatures to alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and what form any of these proposals will be adopted or the extent to which the business of the Company and the Banks may be affected thereby.
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 comprise most of a bank’s earnings. In order to mitigate the interest rate risk inherent in the industry, 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.
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 Stockholders' 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 (also referred to as the net interest margin), which is the average of net interest earned, net interest income (te) less net interest expense, on the Company’s average earning assets. The difference between the average yield on earning assets and the effective rate paid for all deposits and borrowed funds, non-interest-bearing as well as interest-bearing, is the net interest spread. Since a portion of the Bank’s deposits does not bear interest, such as demand accounts, the rate paid for all funds is lower than the rate on interest-bearing liabilities alone. The net interest margin (te) for the years 2003 and 2002 was 4.45% and 4.70%, 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 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.
“Table 10 - Summary of Average Balance Sheets, Net Interest Income (te) & Interest Rates” included under the caption “Results of Operations” on pages 43 through 45 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
Information regarding the changes in interest income on interest-earning assets and interest expense on interest-bearing liabilities relating to rate and volume variances is included in “Table 11 - Summary of Changes in Net Interest Income (te)” under the caption “Results of Operations” on pages 43 through 45 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
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 risk management policy is designed to reduce the exposure to changes in its net interest margin in periods of interest rate fluctuations. Interest rate risk is monitored, quantified and managed to produce an acceptable 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, 2003, the Company’s cumulative interest sensitivity gap in the one year interval was (8.0%). The percentage reflects a higher level of interest sensitive liabilities than assets re-pricing 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 scheduled re-pricing or maturity of the Company’s assets and liabilities at December 31, 2003 and December 31, 2002. The assumed prepayment of investments and loans were based on the Company’s assessment of current market conditions on such dates. Estimates have been made for the re-pricing of savings, NOW and money market accounts. Actual prepayments and deposit withdrawals will differ from the following analysis due to variable economic circumstances and consumer behavior. Although assets and liabilities may have similar maturities or re-pricing periods, reactions will vary as to timing and degree of interest rate change.
Analysis of Interest Sensitivity at December 31, 2003
Non-
Within 6 months 1 to 3 > 3 Sensitive
Overnight 6 months to 1 year years years Balance Total
--------- ---------- ---------- ---------- ---------- ---------- ----------
(amounts in thousands)
Assets
Securities $ - $ 222,439 $ 184,857 $ 415,614 $ 455,139 $ - $1,278,049
Federal funds sold & Short-term investments 11,138 - 150 - - - 11,288
Loans 31,477 1,190,556 213,713 514,248 498,650 - 2,448,644
Other assets - - - - - 412,377 412,377
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $ 42,615 $1,412,995 $ 398,720 $ 929,862 $ 953,789 $ 412,377 $4,150,358
========= ========== ========== ========== ========== ========= ==========
Liabilities
Interest bearing transaction deposits $ - $ 811,256 $ 212,119 $ 612,678 $ 62,661 $ - $1,698,714
Time deposits - 351,459 118,889 330,758 311,281 - 1,112,387
Non-interest bearing deposits - 310,781 133,810 188,406 3,748 - 636,745
Federal funds purchased - - - - - - -
Borrowings 159,496 78 77 15 50,258 - 209,924
Other liabilities - - - - - 57,707 57,707
Shareholders' Equity - 37,067 - - 397,814 - 434,881
--------- ---------- ---------- ---------- ---------- --------- ----------
Total Liabilities & Equity $ 159,496 $1,510,641 $ 464,895 $1,131,857 $ 825,762 $ 57,707 $4,150,358
========= ========== ========== ========== ========== ========= ==========
Interest sensitivity gap $(116,881) $ (97,646) $ (66,175) $(201,995) $ 128,027 $ 354,670
Cumulative interest rate sensitivity gap $(116,881) $(214,527) $(280,702) $(482,697) $(354,670) $ -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets ( 3.0)% (6.0)% (8.0)% (13.0)% (10.0)%
Analysis of Interest Sensitivity at December 31, 2002
Non-
Within 6 months 1 to 3 > 3 Sensitive
Overnight 6 months to 1 year years years Balance Total
--------- ---------- ---------- ---------- ---------- ---------- ----------
(amounts in thousands)
Assets
Securities $ - $ 264,002 $ 235,338 $ 467,133 $ 494,965 $ - $1,461,438
Federal funds sold & Short-term investments 22,214 - 216 - 24,827 - 47,257
Loans 26,512 1,072,824 279,728 511,423 214,494 - 2,104,981
Other assets - - - - 66,807 292,664 359,471
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $ 48,726 $1,336,826 $ 515,282 $ 978,556 $ 801,093 $ 292,664 $3,973,147
========= ========== ========== ========== ========== ========= ==========
Liabilities
Interest bearing transaction deposits $ - $ 736,755 $ 192,087 $ 554,900 $ 57,729 $ - $1,541,471
Time deposits - 432,127 149,750 277,138 270,223 - 1,129,238
Non-interest bearing deposits - 264,865 126,270 220,209 19,446 - 630,790
Federal funds purchased - - - - - - -
Borrowings 165,237 - - - 46,840 - 212,077
Other liabilities - - - - - 34,989 34,989
Shareholders' Equity - - 9,774 - 414,808 - 424,582
--------- ---------- ---------- ---------- ---------- --------- ----------
Total Liabilities & Equity $ 165,237 $1,433,747 $ 477,881 $1,052,247 $ 809,046 $ 34,989 $3,973,147
========= ========== ========== ========== ========== ========= ==========
Interest sensitivity gap $(116,511) $ (96,921) $ (37,401) $ (73,691) $ (7,953) $ 257,675
Cumulative interest rate sensitivity gap $(116,511) $(213,432) $(176,031) $(249,722) $ (257,675) $ -
Cumulative interest rate
sensitivity gap as a percentage of
total earning assets ( 3.0)% (6.0)% (5.0)% (7.0)% (7.0)%
The Company had income tax expense of $24.6 million, $22.5 million and $17.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. This represents an effective income tax rate of 30.9% for 2003, 30.6% for 2002 and 31.3% for 2001. The effective income tax rates are lower than the statutory rates since the Company earns a portion of its income on tax-exempt loans and securities.
Performance and Equity Ratios:Information regarding performance and equity ratios is contained in the “Financial Highlights” on pages 10 and 11 of the Company’s 2003 Annual Report to Stockholders incorporated herein by reference.
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 available-for-sale portfolio balance was $1.1 billion at December 31, 2003. At December 31, 2003, the amortized cost of the held-to-maturity portfolio was $160.0 million and the fair value was $169.5 million.
The amortized cost of securities classified as available-for-sale at December 31, 2003, 2002 and 2001, were as follows (in thousands):
December 31,
---------------------------------------
2003 2002 2001
----------- ----------- ------------
U.S.Treasury $ 9,966 $ 49,970 $ 30,258
U.S. government agencies 346,836 517,482 440,481
Municipal obligations 70,070 74,270 85,284
Mortgage-backed securities 348,266 43,820 69,704
CMOs 321,324 524,414 422,368
Other debt securities 7,219 12,288 19,338
Equity securities 11,723 11,216 10,696
----------- ----------- ------------
$ 1,115,404 $ 1,233,460 $ 1,078,129
=========== =========== ============
The amortized cost, yield and fair value of debt securities classified as available-for-sale at December 31, 2003, by contractual maturity, were as follows (amounts in thousands):
Over Five Over Five
One Year Year Year Over Weighted
or Through Through Ten Fair Average
Less Five Years Ten Years Years Total Value Yield
--------- ----------- ----------- ---------- ---------- ----------- ---------
U.S. Treasury $ - $ 9,966 $ - $ - $ 9,966 $ 10,001 1.82%
U.S. government agencies 189,986 120,426 35,576 848 346,836 347,654 3.91%
Municipal obligations 3,869 22,824 36,001 7,376 70,070 73,336 4.41%
Mortgage-backed securities - 4,871 65,559 277,836 348,266 346,474 4.62%
CMOs - 2,745 69,567 249,012 321,324 321,239 4.62%
Other debt securities - 4,879 - 2,340 7,219 7,796 6.71%
--------- ----------- ----------- ---------- ---------- -----------
$ 193,855 $ 165,711 $ 206,703 $ 537,412 $ 1,103,681 $ 1,106,500 4.37%
========= =========== =========== ========== =========== ===========
Fair Value $ 194,866 $ 168,654 $ 207,890 $ 535,090 $ 1,106,500
Weighted Average Yield 3.94% 3.98% 4.38% 4.65% 4.37%
The amortized cost of securities classified as held-to-maturity at December 31, 2003, 2002 and 2001 were as follows (in thousands):
December 31,
-----------------------------------------------
2003 2002 2001
---------- ----------- ------------
U.S. Treasury $ 574 $ 294 $ 293
U.S. government agencies 14,737 16,350 35,746
Municipal obligations 117,484 136,122 148,545
Mortgage-backed securities 18,727 35,950 37,749
CMOs 1,403 30,087 58,508
Other debt securities 7,058 9,176 6,529
---------- ----------- ------------
$ 159,983 $ 227,979 $ 287,370
========== =========== ============
The amortized cost, yield and fair value of securities classified as held-to-maturity at December 31, 2003, by contractual maturity, were as follows (amounts in thousands):
Over Five Over Five
One Year Year Year Over Weighted
or Through Through Ten Fair Average
Less Five Years Ten Years Years Total Value Yield
--------- ----------- ----------- ---------- ---------- ----------- ---------
U.S. Treasury $ 344 $ 230 $ - $ - $ 574 $ 574 6.11%
U.S. government agencies 3,954 4,048 2,858 3,877 14,737 15,079 5.65%
Municipal obligations 7,292 32,897 75,676 1,619 117,484 125,550 4.82%
Mortgage-backed securities 876 6,196 3,539 8,116 18,727 19,667 6.82%
CMOs - 1,403 - - 1,403 1,458 6.81%
Other debt securities 3,218 3,253 587 - 7,058 7,123 6.65%
--------- ----------- ----------- ---------- ---------- -----------
$ 15,684 $ 48,027 $ 82,660 $ 13,612 $ 159,983 $ 169,451 5.23%
========= =========== =========== ========== =========== ===========
Fair Value $ 15,964 $ 50,531 $ 88,851 $ 14,105 $ 169,451
Weighted Average Yield 5.77% 5.22% 4.99% 6.05% 5.23%
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 significant concentrations of loans to particular borrowers or loans to any foreign entities.
Loan underwriting standards and loan loss allowance maintenance further reduces 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 quarterly based on historical losses through different economic cycles and projected future losses specifically identified.
The following table sets forth, for the periods indicated, the composition of the loan portfolio of the Company:
Loan Portfolio
----------------
December 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ----------- ------------- -------------
(in thousands)
Real estate:
Residential mortgages 1-4 family $ 645,123 $ 539,808 $ 458,372 $ 410,716 $ 342,443
Residential mortgages multifamily 22,803 20,305 21,875 20,510 18,939
Home equity lines/loans 110,634 86,609 56,887 42,644 29,549
Construction and development 235,049 197,166 184,750 171,009 136,179
Nonresidential 536,389 445,733 398,704 328,005 309,488
Commercial, industrial and other 395,678 346,808 308,306 281,701 214,041
Consumer 463,642 434,407 435,205 396,112 417,594
Lease financing and depository
Institutions 34,388 29,565 23,632 27,394 24,727
Political subdivisions - - - 21,755 24,687
Credit cards and other revolving credit 15,437 14,085 12,333 11,393 40,789
------------ ------------ ------------ ------------- -------------
2,459,143 2,114,486 1,900,064 1,711,239 1,558,436
Less, unearned income 10,499 9,504 10,025 11,398 16,915
------------ ------------ ------------ ------------- -------------
Net loans $ 2,448,644 $ 2,104,982 $ 1,890,039 $ 1,699,841 $ 1,541,521
============ ============ ============ =============
The following table sets forth, for the periods indicated, the approximate contractual maturity by type of the loan portfolio of the Company:
Loan Maturity Schedule
December 31, 2003 December 31, 2002
----------------------------------------------------- -----------------------------------------------
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
---------- ---------- ----------- ---------- --------- ---------- ----------- ----------
(in thousands)
Commercial, industrial
and other $ 710,699 $ 338,733 $ 103,541 $1,152,973 $ 132,706 $ 184,926 $ 29,176 $ 346,808
Real estate - construction 129,970 32,019 7,716 169,705 140,322 44,852 11,992 197,166
All other loans 295,743 479,093 361,629 1,136,465 391,972 839,214 339,326 1,570,512
---------- ---------- ----------- ----------- --------- ---------- ----------- ----------
Total loans $1,136,412 $ 849,845 $ 472,886 $2,459,143 $ 665,000 $1,068,992 $ 380,494 $2,114,486
========== ========== =========== =========== ========= ========== =========== ==========
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,
---------------------------------
2003 2002
------------ -----------
(in thousands)
Commercial, industrial, and real estate construction
maturing after one year:
Fixed rate $ 224,616 $ 180,020
Floating rate 257,393 90,926
Other loans maturing after one year:
Fixed rate 649,609 815,612
Floating rate 191,113 362,928
------------ -----------
Total $ 1,322,731 $ 1,449,486
============ ===========
The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, restructured loans and real estate owned. Loans past due 90 days or more and still accruing are also disclosed.
December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ----------- ---------- ---------- ------------
(Amounts in thousands)
Nonaccrual loans:
Real estate $ 10,031 $ 10,521 $ 14,358 $ 7,856 $ 5,129
Commercial, industrial and other 2,088 1,276 2,877 2,296 1,236
Consumer, credit card and other
revolving credit 42 73 93 30 536
Lease financing - - - - -
Depository institutions - - - - -
Political subdivisions - - - - -
Restructured loans - - - - 152
---------- ----------- ---------- ---------- ------------
Total nonperforming loans 12,161 11,870 17,328 10,182 7,053
Acquired other real estate - - 1,330 - 794
Foreclosed assets 5,809 5,936 1,673 1,492 822
---------- ----------- ---------- ---------- ------------
Total nonperforming assets $ 17,970 $ 17,806 $ 20,331 $ 11,674 $ 8,669
========== =========== ========== ========== ============
Loans 90+ days past due and still accruing $ 3,682 $ 6,407 $ 12,591 $ 9,277 $ 4,442
========== =========== ========== ========== ============
Ratios (%):
Nonperforming loans to net loans 0.50% 0.56% 0.92% 0.60% 0.46%
Nonperforming assets to net loans and
foreclosed assets 0.73% 0.84% 1.07% 0.69% 0.56%
Nonperforming loans to average net loans 0.54% 0.61% 0.97% 0.63% 0.49%
Allowance for loan losses to nonperforming 302% 293% 199% 281% 365%
loans
The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as “nonaccrual” was $762,000, $662,000, $735,000, $686,000 and $462,000 for the years ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively.
Interest actually received on nonaccrual loans was not material. The amount of interest recorded on restructured loans did not differ significantly from the interest that would have been recorded under the original terms of those loans.
Analysis of Allowance for Loan Losses:The allowance for loan losses is a valuation account available to absorb losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the allowance for loan losses at the time of receipt. Periodically, management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, and the estimated value of any underlying collateral and current economic conditions. All commercial loans in lending relationships with an aggregate balance of $250,000 or more are risk rated and evaluated on an individual basis, as well as,
all consumer and mortgage real estate loans with a balance of $100,000 or more. All consumer and mortgage real estate loans under $100,000 are risk rated as pools of homogeneous loans and classified according to past due status. Commercial loans are reviewed for impairment at the time a loan is no longer current or at the time management is made aware of a degradation in a borrower’s financial status or a deficiency in collateral. Loss factors recommended by the Banks’ regulators are applied to loans graded by standard loan classifications in determining a general allowance. Unclassified loans are categorized and reserved for at the greater of a five-year average net charge-off ratio or a minimum threshold stated as a percentage of loans outstanding. The allowance for loan loss stated as a percentage of period end loans, used in conjunction with the evaluation of current and anticipated economic conditions, composition of the Company’s present loan portfolio, and trends in both delinquencies and nonaccruals, is a measurement standard utilized by management in determining the adequacy of the allowance. The unallocated portion of the allowance for loan losses is available to compensate for the uncertainties in estimating the potential 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:
At and For The Years Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Net loans outstanding at end of period $ 2,448,644 $ 2,104,982 $ 1,890,039 $ 1,699,841 $ 1,541,521
=========== =========== =========== =========== ===========
Average net loans outstanding $ 2,238,245 $ 1,961,299 $ 1,792,559 $ 1,611,046 $ 1,452,305
=========== =========== =========== =========== ===========
Balance of allowance for loan losses
at beginning of period $ 34,740 $ 34,417 $ 28,604 $ 25,713 $ 21,800
Loans charged-off:
Real estate 291 109 45 80 85
Commercial 4,868 9,143 6,386 6,803 3,112
Consumer, credit cards and other
revolving credit 14,311 14,291 9,853 6,802 8,999
Lease financing 73 10 14 34 5
Depository institutions - - - - -
Political subdivisions - - - - -
----------- ----------- ----------- ----------- -----------
Total charge-offs 19,543 23,553 16,298 13,719 12,201
----------- ----------- ----------- ----------- -----------
Recoveries of loans previously
charged-off:
Real estate 180 7 2 1 5
Commercial 1,112 639 319 1,333 808
Consumer, credit cards and other
revolving credit 5,103 5,135 4,365 2,814 2,797
Lease financing 4 - 1 - 1
Depository institutions - - - - -
Political subdivisions - - - - -
----------- ----------- ----------- ----------- -----------
Total recoveries 6,399 5,781 4,687 4,148 3,611
----------- ----------- ----------- ----------- -----------
Net charge-offs 13,144 17,772 11,611 9,571 8,590
Provision for loan losses 15,154 18,495 9,082 12,609 8,688
Balance acquired through acquisition &
other - (400) 8,342 (147) 3,815
----------- ----------- ----------- ----------- -----------
Balance of allowance for loan losses
at end of period $ 36,750 $ 34,740 $ 34,417 $ 28,604 $ 25,713
=========== =========== =========== =========== ===========
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:
At and For The Years Ended December 31,
----------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------ ------- ---------
Ratios:
Net charge-offs to average net loans 0.59% 0.91% 0.65% 0.59% 0.59%
Net charge-offs to period-end net loans 0.54% 0.84% 0.61% 0.56% 0.56%
Allowance for loan losses to average net loans 1.64% 1.77% 1.92% 1.78% 1.77%
Allowance for loan losses to period-end net loans 1.50% 1.65% 1.82% 1.68% 1.67%
Net charge-offs to loan loss allowance 35.77% 51.16% 33.74% 33.46% 33.41%
Loan loss provision to net charge-offs 115.29% 104.07% 78.22% 131.74% 101.14%
An allocation of the loan loss allowance by major loan category is set forth in the following table. Except for an increase in the outstanding loan portfolio balance, there were no relevant variations in loan concentrations, quality or terms. The allocation is not necessarily indicative of the category of future losses, and the full allowance at December 31, 2003 is available to absorb losses occurring in any category of loans.
December 31,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ---------------- ----------------- ---------------- ------------------
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
-------- -------- -------- -------- --------- -------- -------- -------- --------- --------
Real estate $9,711 63.30 $7,664 61.26 $6,701 42.73 $5,700 57.26 $4,300 53.68
Commercial, industrial
and other 15,311 17.41 11,610 17.71 14,380 22.13 8,200 19.39 7,900 16.71
Consumer and other
revolving credit 10,718 19.29 10,174 21.02 9,848 35.14 11,444 23.35 11,200 29.61
Unallocated 1,010 - 5,292 - 3,488 - 3,260 - 2,313 -
-------- -------- -------- -------- --------- -------- -------- -------- --------- --------
$36,750 100.00 $34,740 100.00 $34,417 100.00 $28,604 100.00 $25,713 100.00
======== ======== ======== ======== ========= ======== ======== ======== ========= ========
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 rate paid on each category of deposits:
2003 2002 2001
---------------------------- -------------------------- ---------------------------
Percent Percent Percent
Average of Rate Average of Rate Average of Rate
Balance Deposits (%) Balance Deposits (%) Balance Deposits (%)
---------- -------- ----- ---------- -------- ---- -------- -------- ----
(amounts in thousands)
Non-interest bearing accounts $604,448 17.74 - $601,374 18.94 - $562,989 19.96 -
NOW accounts 694,681 20.39 1.14 552,419 17.40 1.84 195,079 6.92 1.76
Money market and other
savings accounts 984,667 28.90 0.99 887,357 27.95 1.60 917,024 32.51 2.74
Time deposits 1,123,409 32.97 3.25 1,133,796 35.71 3.80 1,145,259 40.61 5.47
---------- ------ ---------- ------ ---------- ------
$3,407,205 100.00 $3,174,946 100.00 $2,820,351 100.00
========== ====== ========== ====== ========== ======
The Banks traditionally price their deposits to position themselves competitively with the local market. The Banks’ policy is not to accept brokered deposits.
Time certificates of deposit of $100,000 and greater at December 31, 2003 had maturities as follows:
December 31, 2003
-----------------
(in thousands)
Three months or less $ 136,384
Over three through six months 49,668
Over six months through one year 32,692
Over one year 229,159
----------
Total $ 447,903
==========
The following table sets forth certain information concerning the Company’s short-term borrowings, which consist of federal funds purchased and Federal Home Loan Bank (“FHLB”) advances as well as securities sold under agreements to repurchase.
Years Ended December 31,
------------------------------------
2003 2002 2001
--------- ------- ---------
(amounts in thousands)
Federal funds purchased and FHLB advances:
Amount outstanding at period-end $0 $0 $125
Weighted average interest at period-end 0.00% 0.00% 1.30%
Maximum amount at any month-end during period $37,000 $1,550 $2,000
Average amount outstanding during period $5,335 $1,832 $1,316
Weighted average interest rate during period 1.19% 1.57% 3.58%
Securities sold under agreements to repurchase:
Amount outstanding at period-end $150,096 $161,058 $161,208
Weighted average interest at period-end 0.80% 0.92% 1.45%
Maximum amount at any month end during-period $105,641 $189,858 $195,905
Average amount outstanding during period $177,535 $173,084 $159,511
Weighted average interest rate during period 0.81% 1.28% 3.29%
Liquidity:
Liquidity management encompasses the Company’s ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring that the Company has adequate cash flow to meet it’s various needs, including operating, strategic and capital. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would not be able to meet the needs of the communities in which it has a presence and serves. In addition, the parent holding company’s principal source of liquidity is dividends from its subsidiary banks. Liquidity is required at the parent holding company level for the purpose of paying dividends to stockholders, servicing of any debt the Company may have, business combinations as well as general corporate expenses. As of December 31, 2003, all liquidity ratios approved and tracked by the Company’s Asset Liability Committee were within policy limits.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest-bearing deposits with other banks are additional sources of liquidity funding. As of December 31, 2003 and 2002, free securities stood at 41.4% or $529.1 million and 42.6% or $633.4 million, respectively.
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and non-interest-bearing deposit accounts. Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity and represent the Company’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. The Company’s short-term borrowing capacity includes a line of credit with the Federal Home Loan Bank of over $264 million and borrowing capacity at the Federal Reserve’s Discount Window in excess of $100 million. As of December 31, 2003, the Company’s core deposits were $2.905 billion and Net Wholesale Funding stood at $620.9 million.
More information on liquidity can be found under the caption “Liquidity” - Table 5. Liquidity Ratios on pages 39 through 40 of the Company’s 2003 Annual Report to Stockholders, which is incorporated herein by reference.
Capital Resources:The information under the caption “Notes to Consolidated Financial Statements”, Note 9 - Common Stockholders’ Equity on page 25 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
The Company’s non-interest income and expenses can be affected by increasing rates of inflation; however, 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 impact on the Banks’ performance than the effect of general levels of inflation on the price of goods and services.
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure, which protects the companies from unwarranted litigation, if actual results are different from management expectations. In addition to historical information, this report contains forward-looking statements and information, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. Forward-looking statements and information presented reflects management’s views and estimates of future economic circumstances, industry conditions, Company performance and financial results. The words “may”, “should”, “expect”, “anticipate”, “intend”, “plan”, “continue”, “believe”, “seek”, “estimate” and similar expressions used in this report do not relate to historical facts and are intended to identify forward-looking statements. These statements appear in a number of places in this report, including, but not limited to, statements found in Item 1 “Business” and in Item 7 “Management’s Discussion and Analysis”. All phases of the Company’s operations are subject to a number of risks and uncertainties. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in the Company’s other public reports and filings and public statements, many of which are beyond the control of the Company, and any of which, or a combination of which, could materially affect the results of the Company’s operations and whether forward-looking statements made by the Company ultimately prove accurate.
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.
Title to the following banking offices in Mississippi and Louisiana is owned in fee (number of locations shown in parenthesis):
Albany, LA (1) Loranger, LA (1) Alexandria, LA (2) Lyman, MS (1) Baker, LA (1) Mamou, LA (1) Baton Rouge, LA (13) Mandeville, LA (1) Bay St. Louis, MS (2) Metairie, LA (1) Biloxi, MS (3) Moss Point, MS (1) Bogalusa, LA (1) Oakdale, LA (1) Bunkie, LA (1) Ocean Springs, MS (2) Covington, LA (1) Opelousas, LA (1) Denham Springs, LA (3) Pascagoula, MS (2) D'Iberville, MS (1) Pass Christian, MS (1) Escatawpa, MS (1) Petal, MS (1) Eunice, LA (1) Picayune, MS (1) Franklinton, LA (1) Pineville, LA (1) Gautier, MS (1) Poplarville, MS (1) Glenmora, LA (1) Prentiss, MS (1) Gonzales, LA (1) Purvis, MS (2) Gulfport, MS (6) St. Francisville, LA (1) Hammond, LA (2) Sumrall, MS (1) Hattiesburg, MS (2) Vancleave, MS (1) Independence, LA (1) Walker, LA (1) Long Beach, MS (1) Waveland, MS (1)
The following banking offices in Mississippi and Louisiana are leased under agreements with unexpired terms of from four to forty-nine years including renewal options (number of locations shown in parenthesis):
Baton Rouge, LA (4) Long Beach, MS (1) Bay St. Louis, MS (3) Pascagoula, MS (2) Biloxi, MS (1) Picayune, MS (2) Diamondhead, MS (1) Ponchatoula, LA (1) Gulfport, MS (5) Saucier, MS (1) Hammond, LA (1) Slidell, LA (1) Hattiesburg, MS (2) Springfield, LA (1) Kiln, MS (1) Ville Platte, LA (1) Kenner, LA (1)
In addition to the above, Hancock Bank MS owns land and other properties acquired through foreclosures of loan collateral. 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.
The Company is party to various legal proceedings arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, all such matters are adequately covered by insurance or, if not so covered, are not expected to have a material adverse effect on the financial statements of the Company.
There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.
On July 12, 2002 the Company’s Board of Directors declared a three-for-two stock split in the form of a 50% common stock dividend. The additional shares were payable August 5, 2002 to shareholders of record at the close of business on July 23, 2002.
All information concerning earnings per share, dividends per share, and number of shares outstanding have been adjusted to give effect to this split.
The information under the caption “Market Information” on page 12 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
The information under the caption “Financial Highlights” on pages 10 and 11 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on Pages 36 through 47 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
In the normal course of business, the Company enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded and involve, to varying degrees, elements of credit risk not reflected in the consolidated balance sheets. The contract amounts of these instruments reflect the Company’s exposure to credit loss in the event of non-performance by the other party on whose behalf the instrument has been issued. The Company undertakes the same credit evaluation in making commitments and conditional obligations as it does for on-balance-sheet instruments and may require collateral or other credit support for off-balance-sheet financial instruments.
At December 31, 2003 the Company had $547.4 million in unused loan commitments outstanding, of which approximately $345.9 million were at variable rates and the remainder was at fixed rates. A commitment to extend credit is an agreement to lend to a customer as long as the conditions established in the agreement have been satisfied. A commitment to extend credit generally has a fixed expiration date or other termination clauses and may require payment of a fee by the borrower. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company continually evaluates each customer’s credit worthiness on a case-by-case basis. Occasionally, a credit evaluation of a customer requesting a commitment to extend credit results in the Company obtaining collateral to support the obligation.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing a letter of credit is essentially the same as that involved in extending a loan. At December 31, 2003 the Company had $33.7 million in letters of credit issued and outstanding.
The information under the caption “Asset/Liability Management” on pages 40 through 42 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference.
The following consolidated financial statements of the Company and subsidiaries, and the independent auditors’ report, appearing on Pages 10 through 47 of the Company’s 2003 Annual Report to Stockholders is incorporated herein by reference:
Financial Highlights on Pages 10 through 12
Independent Auditors' Report on Page 13
Consolidated Balance Sheets on Page 14
Consolidated Statements of Earnings on Page 15
Consolidated Statements of Stockholders’ Equity on Page 16
Consolidated Statements of Comprehensive Earnings on Page 16
Consolidated Statements of Cash Flows on Page 17
Notes to Consolidated Financial Statements on Pages 18 through 35
Management’s Discussion and Analysis of Financial Condition
And Results of Operations on Pages 36 through 47.
On January 20, 2004 the Company dismissed Deloitte & Touche LLP as its independent auditors, after Deloitte & Touche LLP completed its audit of the financial statements of the Company for the fiscal year ended December 31, 2003. The Audit Committee of the Board of Directors of the Company approved the decision to change auditors.
During the two fiscal years ended December 31, 2003 and 2002 and the interim period from January 1, 2004 to January 20, 2004, there were no disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Deloitte & Touche LLP’s satisfaction, would have caused Deloitte & Touche LLP to make a reference to the subject matter of the disagreements in their reports on the financial statements fo such years.
During the two most recent fiscal years and the interim period from January 1, 2004 to January 20, 2004, Deloitte & Touche LLP’s reports on the financial statements of the Company did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified to uncertainty, audit scope, or accounting principles.
During the two most recent fiscal years and the interim period from January 1, 2004 to January 20, 2004, the Company did not consult with Deloitte & Touche LLP regarding any of the matters or events set forth in Item 304(a)(1)(v) of Regulation S-K.
On January 20, 2004, the Board of Directors appointed KPMG LLP, a firm of independent certified public accountants, as auditors for the fiscal year ending December 31, 2004, and until their successors are selected. The Audit Committee of the Company’s Board of Directors approved the decision to change auditors.
The Company has been advised that neither the firm nor any of its partners has any direct or any material indirect financial interest in the securities of the Company or any of its subsidiaries, except as auditors and consultants on accounting procedures and tax matters. Additionally, during the two fiscal years ended December 31, 2003 and 2002, there were no consultations between the Company and KPMG LLP regarding application of an accounting principle, the type of audit opinion that might be issued on the Company’s financial statements, or on any other matter.
Although not required to do so, the Board of Directors chose to submit its appointment of KPMG LLP for ratification by the Company’s shareholders. This matter was submitted to the Company’s shareholders for ratification during the Company’s annual meeting held on February 26, 2004 and is more fully described in the Company’s proxy statement to be filed with the Commission.
As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-14(c) and 15d-14(c), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of December 31, 2003, (the “Evaluation Date”), the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Changes in Internal ControlsSubsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
For information concerning directors who are not also executive officers of the registrant, see “Directors of HHC” (Pages 6 & 7) in the Proxy Statement for the Annual Meeting of Shareholders held February 26, 2004, which was filed by the Registrant in definitive form with the Commission on January 30, 2004 and is incorporated herein by reference.
Information concerning executive officers of the registrant is listed below.
Leo W. Seal, Jr.Director of the Company since 1984. President, Hancock Bank, Gulfport, Mississippi from 1963 to 1990; President of Hancock Holding Company since 1984, Chief Executive Officer from 1984 to 2000, Advisory Director, Hancock Bank of Louisiana since 1993. Mr. Seal has been employed with Hancock Bank since 1947. He was elected to the Board of Directors of Hancock Bank in 1961 and named President in 1963 and in 1977 he was named Chief Executive Officer.
George A. SchloegelDirector of the Company since 1984. President, Hancock Bank, Gulfport, Mississippi, since 1990, Vice Chairman of the Board of Hancock Holding Company since 1984 and named Chief Executive Officer, Hancock Holding Company 2000; Director of Hancock Bank of Louisiana, since 1990 and named President in July 2003; Director of Mississippi Power Company, Gulfport, Mississippi. Mr. Schloegel was employed part-time with Hancock Bank from 1956-1959 and began full-time employment in 1962. He served in various capacities until being named President in 1990.
A. Hartie SpenceChairman of the Board, Hancock Bank of Louisiana since 1996. President, Hancock Bank of Louisiana from 1997 through June 2003. Prior to that Mr. Spence served as President, Calcasieu Marine National Bank, Lake Charles, Louisiana from 1987 to 1996.
Executive Vice President and Secretary, Hancock Holding Company since 1992; Director Hancock Bank since 1995; Executive Vice President, Hancock Bank since 1977 and named Vice Chairman in July 2003; Director, Hancock Bank of Louisiana since 1990. Mr. Webb has been employed with Hancock Bank since 1948. He served as Vice President and Secretary of the Company from 1984 until 1992.
Robert E. EasterlyExecutive Vice President, Hancock Bank of Louisiana since 1995; President and Chief Executive Officer, First National Bank of Denham Springs from 1981-1996; Chairman of the Board, First National Bank of Denham Springs from 1993-1996; Director, Hancock Bank since 1995.
Carl J. ChaneyChief Financial Officer, Hancock Holding Company and Hancock Bank since 1998; Executive Vice President, Hancock Holding Company and Hancock Bank since 2001; Senior Vice President, Hancock Holding Company and Hancock Bank from 1999 to 2001. Prior to Mr. Chaney joining Hancock, he was Director and Shareholder of the law firm, Watkins Ludlam Winter & Stennis, P.A., Jackson Mississippi from 1995 to 1998, where he specialized in Investment Banking and Merger and Acquisitions in the Banking Industry.
John M. HairstonChief Operating Officer, Hancock Holding Company and Hancock Bank since 1997; Executive Vice President, Hancock Holding Company and Hancock Bank since 2001; Senior Vice President, Hancock Holding Company and Hancock Bank from 1996 to 2001; Vice President, Hancock Bank from 1994 to 1995; Senior Operations Officer, Hancock Holding Company from 1994 to 1996. Prior to Mr. Hairston joining Hancock, he was a Manager with Financial Services Consulting, a Division of Andersen Consulting, headquartered in Chicago, Illinois.
Richard T. HillExecutive Vice President, Hancock Holding Company, since February 2002; Senior Vice President and Louisiana Retail Banking Executive, Hancock Bank of Louisiana, from June 1998 to January 2002; Executive Vice President and Retail Banking Executive, City National Bank (a subsidiary of First Commerce Corporation), November 1993 -June 1998.
Clifton J. SaikExecutive Vice President, Hancock Holding Company, since February 2002; Senior Vice President and Director, Trust and Financial Services Group, Hancock Bank from July 1998 to January 2002. Prior to coming to Hancock Bank, Mr. Saik served in the following capacities at First Commerce Corporation, New Orleans, Louisiana: Executive Vice President and Director, Card Services; CEO, Marquis Insurance Agency, L.L.C.; and Member, Marquis Investments, L.L.C. Management Committee, June 1997 - June 1998; Executive Vice President and Director, Trust and Retail Brokerage Services Group, Senior Vice President and Director, Trust Group; October 1994 to June 1997; Senior Vice President and Senior Trust Officer, October 1992 to October 1994.
Code of EthicsThe Company’s Board of Directors has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. A copy of this Code of Ethics can be found at the Company’s internet website at www.hancockbank.com. The Company intends to disclose any amendments to its Code of Ethics, and any waiver from a provision of the Code of Ethics granted to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, on the Company’s internet website within five business days following such amendment or waiver. The information contained on or connected to the Company’s internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
For information concerning this item see “Executive Compensation” (pages 10-16) in the Proxy Statement for the Annual Meeting of Shareholders held February 26, 2004, which was filed by the Registrant in definitive form with the Commission on January 30, 2004 and is incorporated herein by reference.
For information concerning this item see “Security Ownership of Certain Beneficial Owners” (page 8) and “Security Ownership of Management” (page 9) in the Proxy Statement for the Annual Meeting of Shareholders held February 26, 2004, which was filed by the Registrant in definitive form with the Commission on January 30, 2004 and is incorporated herein by reference.
For information concerning this item see “Certain Transactions and Relationships” (Page 16) in the Proxy Statement for the Annual Meeting of Shareholders held February 26, 2004, which was filed by the Registrant in definitive form with the Commission on January 30, 2004 and is incorporated herein by reference.
For information concerning this item, see “Principal Accounting Firm Fees” on Page 20 of the Company’s Proxy Statement for the Annual Meeting of Shareholders held February 26, 2004, which was filed by the Registrant in definitive form with the Commission on January 30, 2004 and is incorporated herein by reference.
The following have been incorporated herein from the Company’s 2003 Annual Report to Stockholders and are incorporated herein by reference:
- - Independent Auditors' Report - - Consolidated Balance Sheets as of December 31, 2003 and 2002 - - Consolidated Statements of Earnings for the three years ended December 31, 2003 - - Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2003 - - Consolidated Statements of Comprehensive Earnings for the three years ended December 31, 2003 - - Consolidated Statements of Cash Flows for the three years ended December 31, 2003 - - Notes to Consolidated Financial Statements for the three years ended December 31, 2003 - - Financial Highlights at and as of each of the five years ended December 31, 2003
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 between Hancock Holding Company and Lamar Capital Corporation dated
February 21, 2001 (Appendix C to the Prospectus contained in the S-4 Registration Statement
333-60280 filed on May 4, 2001 and incorporated by reference herein).
(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
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, 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, 2003 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 26, 2004 (deemed "filed"
for the purposes of this Form 10-K only for those portions which are specifically incorporated
herein by reference).
(22) Subsidiaries of the Registrant.
Jurisdiction Holder of
Name of Incorporation Outstanding Stock*
---- ---------------- -----------------
Hancock Bank Mississippi Hancock Holding Company
Hancock Bank of Louisiana Louisiana Hancock Holding Company
Magna Insurance Company Mississippi Hancock Holding Company
Hancock Bank Securities Corporation Mississippi Hancock Bank
Hancock Insurance Agency Mississippi Hancock Bank
Hancock Investment Services, Inc. Mississippi Hancock Bank
Hancock Investment Services of MS, Inc. Mississippi Hancock Investment Services, Inc.
Hancock Investment Services of LA, Inc. Louisiana Hancock Investment Services, Inc.
Town Properties, Inc. Mississippi Hancock Bank
The Gulfport Building, Inc. Mississippi Hancock Bank
Harrison Finance Company Mississippi Hancock Bank
Hancock Mortgage Corporation Mississippi Hancock Bank and
Hancock Bank Securities Corporation
HBLA Properties, LLC Louisiana Hancock Bank of Louisiana
Harrison Life Insurance Company Mississippi 79% owned by Hancock Bank
* All are 100% owned except as indicated.
(23) Independent Auditors' Consent
(31) Rule 13a-14(a)/15d-14(a) - Certifications of George A. Schloegel and Carl J. Chaney
(32) Section 1350 Certifications of George A. Schloegel and Carl J. Chaney
(b) Reports on Form 8-K:
1. A Form 8-K was filed on October 1, 2003 for the purpose of announcing, by press release, the Company's
CEO, George Schloegel's participation in the Wall Street Reporters' analysts roundtable
conference call on September 30, 2003.
2. A Form 8-K was filed on October 15, 2003 for the purpose of announcing, by press release, that the
Company's earnings for the first 9 months of 2003 were up 6 percent compared to the first 9
months of 2002.
3. A Form 8-K was filed on January 6, 2004 for the purpose of announcing, by press release, that the
Company had completed the purchase of Magna Insurance Company on December 31, 2003.
(c):
Not applicable.
(d):
Not applicable.
SIGNATURES
Pursuant to the requirements 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
--------------------------------
Registrant
March 11, 2004 By: /s/ George A. Schloegel
- ----------------- ------------------------------
Date George A. Schloegel
Vice-Chairman of the Board
Chief Executive Officer
March 11, 2004 By: /s/ Carl J. Chaney
- ----------------- ------------------------------
Date Carl J. Chaney
Executive Vice President &
Chief Financial Officer
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, March 11, 2004
Leo W. Seal, Jr. Director
/s/ Joseph F. Boardman, Jr.
- ------------------------------
Joseph F. Boardman, Jr. Chairman of the Board, March 11, 2004
Director
/s/ George A. Schloegel
- ------------------------------ Vice Chairman of the Board, March 11, 2004
George A. Schloegel Director,
Chief Executive Officer
- ------------------------------ Director , Emeritus March 11, 2004
Dr. Homer C. Moody, Jr.
- ------------------------------ Director March 11, 2004
James B. Estabrook, Jr.
/s/ Charles H. Johnson
- ------------------------------ Director March 11, 2004
Charles H. Johnson
/s/ L. A. Koenenn, Jr.
- ------------------------------ Director, Emeritus March 11, 2004
L. A. Koenenn, Jr.
(signatures continued) /s/ Victor Mavar - ------------------------------ Director, Emeritus March 11, 2004 Victor Mavar /s/ Christine L. Smilek - ------------------------------ Director March 11, 2004 Christine L. Smilek /s/ Frank E. Bertucci - ------------------------------ Director March 11, 2004 Frank E. Bertucci /s/ James H. Horne - ------------------------------ Director March 11, 2004 James H. Horne /s/ Carl J. Chaney - ------------------------------ Executive Vice President and March 11, 2004 Carl J. Chaney Chief Financial Officer /s/ Robert W. Roseberry - ------------------------------ Director March 11, 2004 Robert W. Roseberry
Exhibit (23) INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of Hancock Holding Company on Form S-8 (No. 333-11831) and on Form S-3 (No. 33-31782) of our report dated January 19, 2004 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2003.
/s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP