Net earnings increased approximately $2.2 million or 19.6% for the first quarter of 2003 compared to the first quarter of 2002. Following is selected information for quarterly comparison:
Net interest income (te) for the first quarter of 2003 decreased $278,000, or 0.7%, from the first quarter of 2002, and was $1.9 million, or 4.5% lower than the fourth quarter of 2002. The Company's net interest margin (te) was 4.34% in the first quarter of 2003, 34 basis points lower than the same quarter a year ago, and 31 basis points lower than the previous quarter.
Compared to the same quarter a year ago, the primary driver of the decreased level of net interest income (te) was the 34 basis point narrowing of the Company's net interest margin (te). The net interest margin narrowed as the overall yield on loans and securities fell more rapidly (90 basis points) than the Company's ability to reduce total funding costs (56 basis points). Somewhat mitigating the narrowing of the net interest margin was $210.6 million of average loan growth from first quarter 2002 to first quarter 2003, which was funded by $256.0 million of average deposit growth for the same period.
The lower level of net interest income (te) and net interest margin (te) compression compared to the previous quarter was due to a larger reduction in the yield on loans and securities (45 basis points) than the reduction in funding costs (15 basis points). Another factor impacting the levels of net interest income (te) and net interest margin (te) as compared to the previous quarter was average deposit growth of $145.2 million. As loan growth slowed to $35.8 million in the current quarter, a greater percentage of the aforementioned deposit growth was invested in the securities portfolio at historically low yields. The Company is focused on efforts to further reduce deposit costs, resume loan growth at levels consistent with previous quarters, and slow the overall reductions in the yield on the securities portfolio.
The following tables detail the components of the Company's net interest spread and net interest margin.
Three Months Ended March 31, Three Months Ended March 31,
------------------------------------ ------------------------------------
2003 2002
------------------------------------ ------------------------------------
(dollars in thousands) Interest Volume Rate Interest Volume Rate
------------ ------------ ------- ------------ ------------ -------
Average Earning Assets
Commercial & real estate loans (TE) $16,188 $1,061,644 6.18% $16,314 $948,905 6.97%
Mortgage loans 4,723 294,611 6.41% 4,106 222,235 7.39%
Consumer loans 15,691 736,954 8.64% 16,628 711,476 9.48%
Loan fees & late charges 2,381 - 0.00% 2,284 - 0.00%
------------ ------------ ------- ------------ ------------ -------
Total loans (TE) 38,983 2,093,209 7.54% 39,331 1,882,615 8.46%
============ ============ ======= ============ ============ =========
US treasury securities 412 50,265 3.33% 353 42,358 3.38%
US agency securities 5,706 522,735 4.37% 6,406 492,033 5.21%
CMOs 4,419 544,997 3.24% 6,448 518,689 4.97%
Mortgage backed securities 1,474 109,890 5.37% 1,634 110,229 5.93%
Municipals (TE) 3,740 206,975 7.23% 4,129 230,562 7.16%
Other securities 336 31,498 4.33% 599 39,362 6.17%
------------ ------------ ------- ------------ ------------ -------
Total securities (TE) 16,087 1,466,360 4.39% 19,569 1,433,234 5.47%
============ ============ ======= ============ ============ ========= ------------ ------------ ------- ------------ ------------ -------
Fed funds sold 330 113,667 1.18% 299 74,701 1.62%
Cds with banks 13 5,204 1.04% 75 9,267 3.30%
Other short-term investments 65 21,935 1.21% 222 53,394 1.69%
------------ ------------ ------- ------------ ------------ -------
Total short-term investments 408 140,805 1.18% 596 137,362 1.76%
============ ============ ======= ============ ============ ========= ------------ ------------ ------- ------------ ------------ -------
Average earning assets yield (TE) $55,479 $3,700,374 6.05% $59,496 $3,453,211 6.95%
Interest-Bearing Liabilities
Interest-bearing transaction deposits $5,118 $1,651,450 1.26% $6,283 $1,379,692 1.85%
Time deposits 9,499 1,122,536 3.43% 11,903 1,112,291 4.33%
------------ ------------ ------- ------------ ------------ -------
Total interest bearing deposits 14,618 2,773,986 2.14% 18,186 2,491,983 2.96%
============ ============ ======= ============ ============ ========= ------------ ------------ ------- ------------ ------------ -------
Customer repos 369 171,072 0.87% 536 166,538 1.31%
Other borrowings 594 52,823 4.56% 598 53,777 4.51%
------------ ------------ ------- ------------ ------------ -------
Total borrowings 963 223,895 1.74% 1,135 220,314 2.09%
============ ============ ======= ============ ============ ========= ------------ ------------ ------- ------------ ------------ -------
Total interest bearing liab cost $15,581 $2,997,881 2.11 % $19,320 $2,712,297 2.89%
Noninterest-bearing deposits 582,992 609,041
Other net interest-free funding sources 119,501 131,873
Total Cost of Funds $15,581 $3,700,374 1.71% $19,320 $3,453,211 2.27%
Net Interest Spread (TE) $39,898 3.94% $40,176 4.06%
Net Interest Margin (TE) $39,898 $3,700,374 4.34% $40,176 $3,453,211 4.68%
Page 15 of 23
Provision for Loan Losses
The amount of the allowance for loan losses equals the cumulative total of the provisions for loan losses, reduced by actual loan charge-offs, and increased by allowances acquired in acquisitions and recoveries of loans previously charged-off. Provisions are made to the allowance to reflect the currently perceived risks of loss associated with the bank's loan portfolio. A specific loan is charged-off when management believes, after considering, among other things, the borrower's financial condition and the value of any collateral, that collection of the loan is unlikely.
The following information is useful in determining the adequacy of the loan loss allowance and loan loss provision. The ratios are calculated using average loan balances. (Amounts shown are in thousands)
At and For the
------------------------------------
Three Months Ended March 31,
------------------------------------
2003 2002
------------------------------------
Annualized net charge-offs to average loans 0.59% 1.67%
Annualized provision for loan losses to average
loans (1) 0.59% 1.15%
Average reserve for loan losses to average loans 1.66% 1.68%
Gross charge-offs (2) $ 4,770 $ 9,200
Gross recoveries $ 1,750 $ 1,438
Non-accrual loans $ 11,949 $ 14,119
Accruing loans 90 days or more past due $ 6,039 $ 6,805
(1) The 2003 provision decreased as a result of management's periodic review of the allowance for
loan losses. This review considered the effect of changes in the mix and the size of the loan
portfolio. Provision for loan losses was significantly higher in 2002 as the reserve was
replenished for large credits written off that were due to the Lamar acquisition. As overall credit
quality has improved, the need for higher reserves has decreased.
(2) Gross charge-offs were higher in 2002 primarily due to the removal of credits acquired in the
Lamar Capital Corporation acquisition that were determined to be uncollectible.
Non-Interest Income
Non-interest income for the first quarter of 2003 was up $404,000, or 2.3%, compared to the same quarter a year ago, but was down $1.2 million, or 6.4%, compared to the previous quarter. The first quarter 2003 levels did include a pretax net securities gain of $455,000 related to the sale of $65 million of floating rate securities. These securities were reinvested at a yield advantage of approximately 187 basis points.
Other factors impacting the lower levels of non-interest income as compared to the prior quarter were lower service charges on deposit accounts (down $996,000) and other income (down $589,000). Service charges on deposit accounts are seasonally lower in the first quarter of each year and return to more normalized levels in the second quarter. Other income was impacted by income recorded in the fourth quarter relating to oil & gas royalties and timber properties.
The components of non-interest income for the three months ended March 31, 2003 and 2002 are presented in the following table.
Page 16 of 23
Three Months Ended March 31,
---------------------------------
(dollars in thousands) 2003 2002
--------------- -----------------
Service charges on deposit accounts $ 10,155 $ 9,448
Trust fees 1,940 2,086
Credit card merchant discount fees 801 754
Insurance fees 516 514
Investment & annuity fees 931 1,778
ATM fees 966 861
Secondary mortgage market operations 640 679
Other income 1,390 1,270
Securities transactions gains 455 -
--------------- -----------------
Total non-interest income $ 17,794 $ 17,390
=============== =================
Non-Interest Expense
Operating expenses for the first quarter of 2003 were $605,000, or 1.8% lower, compared to the same quarter a year ago and were $2.45 million, or 6.9%, lower than the previous quarter. The vast majority of these decreases was reflected in other operating expenses and were spread over a wide range of operating expense categories. Continuation of focused expense control efforts was the primary reason for the operating expense reductions from the same quarter a year ago and from the previous quarter.
Primarily due to the aforementioned operating reductions from the first quarter of 2002 and from the previous quarter, the Company's efficiency ratio (expressed as non-interest expense, before amortization of purchased intangibles, as a percent of total revenue before securities transactions) was reduced to 57.3% in the first quarter of 2003. This was compared to 58.0% for the same quarter a year ago, and 57.9% for the previous quarter.
The following table presents the components of non-interest expense for the three months ended March 31, 2003 and 2002.
Three Months Ended March 31,
---------------------------------
(dollars in thousands) 2003 2002
--------------- -----------------
Employee compensation $ 16,293 $ 15,151
Employee benefits 3,878 3,915
--------------- -----------------
Total personnel expense 20,171 19,066
--------------- -----------------
Equipment and data processing expense 3,782 3,428
Net occupancy expense 2,117 2,037
Postage and communications 2,138 1,869
Ad valorem and franchise taxes 737 1,225
Legal and professional services 830 1,049
Stationery and supplies 509 496
Amortization of intangible assets 178 188
Advertising 765 1,202
Deposit insurance and regulatory fees 218 218
Training expenses 141 103
Other real estate owned expense 207 814
Other expense 1,198 1,901
--------------- -----------------
Total non-interest expense $ 32,991 $ 33,596
=============== =================
Page 17 of 23
Income Taxes
The effective federal income tax rate of the Company continues to be less than the statutory rate of 35%, due primarily to tax-exempt interest income. The amount of tax-exempt income earned during the first three months of 2003 and 2002 was approximately $3.5 million.
Net Earnings Per Common Share
Following is a summary of the information used in the computation of earnings per common share (in thousands).
Three Months Ended March 31,
-------------------------------
2003 2002
-------------- ---------------
Net earnings - used in computation of diluted
earnings per common share $ 13,662 $ 11,421
Preferred dividend requirement 663 663
-------------- ---------------
Net earnings available to common stockholders -
used in computation of basic earning
per common share $ 12,999 $ 10,758
=============== ===============
Weighted average number of common shares
outstanding - used in computation of
basic earnings per common share 15,442 15,892
Effect of dilutive securities
Stock options 208 105
Convertible preferred stock 1,106 1,106
-------------- ---------------
Weighted average number of common shares
outstanding plus effect of dilutive
securities - used in computation of
diluted earnings per common share 16,756 17,103
============== ===============
Forward Looking Information
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 disclosures that protects the companies from unwarranted litigation if the actual results are different from management expectations. This report contains forward-looking statements and reflects management's current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties that could cause the Company's actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net earnings are dependent, in part, on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
Page 18 of 23
In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. The Company's interest rate management policy is designed to produce a relatively stable net interest margin in periods of interest rate fluctuations. Interest sensitive assets and liabilities are those that are subject to maturity or repricing within a given time period. Management and liabilities are those that are subject to maturity or repricing within a given time period. Management also reviews the Company's securities portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income and the fair value of the Company's investment securities.
In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long and short-term interest rates.
The Company also controls interest rate risk reductions by emphasizing non-certificate depositor accounts. The Board and management believe that a material portion of such accounts may be more resistant to changes in interest rates than are certificate accounts. At March 31, 2003 the Company had $250.7 million of regular savings and club accounts and $1.2 billion of money market and NOW accounts, representing 49.9% of total interest-bearing depositor accounts.
The Company does not currently engage in significant trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31, 2003. Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls.
Page 19 of 23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The Company's Annual Meeting was held on February 27, 2003.
B. The Directors elected at the Annual Meeting held on February 27, 2003 were:
Votes Cast
----------
Affirmed Withheld
---------- ---------
1. James H. Horne 14,285,663 139,069
2. George A. Schloegel 14,281,159 561,566
3. Christine L. Smilek 14,106,113 163,881
Continuing Directors:
4. Frank E. Bertucci, Jr.
5. Joseph F. Boardman, Jr.
6. James B. Estabrook, Jr.
7. Charles H. Johnson, Sr.
8. Robert W. Roseberry
9. Leo W. Seal, Jr.
C. Deloitte & Touche LLP was approved as the independent public accountants of the
Company and the approval was made with a favorable vote of 95%.
For Against Abstained
---------- ------- -------------
14,276,567 60,573 86,246
D. The amendment to the 1996 Long Term Incentive Plan, providing for an increase in th
annual number of shares reserved for issuance under the Plan, was approved.
For Against Abstained
---------- --------- -------------
10,356,996 1,770,516 115,134
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
1. Exhibit 99.1 - Certifications under Section 906 of the Sarbanes Oxley Act of 2002.
Reports on Form 8-K:
1. A Form 8-K was filed on April 14, 2003 for the purpose of announcing, by
press release, earnings for the first quarter ended March 31, 2003.
2. A Form 8-K was filed on May 2, 2003 for the purpose of announcing, by press
release, a presentation by the Company's officers at the Gulf South Bank
Conference on May 5, 2003 in New Orleans, LA.
Page 20 of 23
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
May 13, 2003 By: /s/ George A. Schloegel
- ------------------------- --------------------------------------
Date George A. Schloegel
Vice-Chairman of the Board and
Chief Executive Officer
May 13, 2003 By: /s/ Carl J. Chaney
- -------------------------- --------------------------------------
Date Carl J. Chaney
Executive Vice President and
Chief Financial Officer
Page 21 of 23
CERTIFICATIONS
I, George A. Schloegel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hancock Holding Company.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ George A. Schloegel
- ------------------ --------------------------------
George A. Schloegel
Vice-Chairman of the Board &
Chief Executive Officer
Page 22 of 23
I, Carl J. Chaney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hancock Holding Company.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Carl J. Chaney
- ------------------ ------------------------------
Carl J. Chaney
Executive Vice President &
Chief Financial Officer
Page 23 of 23
