UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
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Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
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For Quarter Ending March 31, 2003
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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
incorporation or organization) Number)
ONE HANCOCK PLAZA, P.O. BOX 4019, GULFPORT, MISSISSIPPI 39502
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(Address of principal executive offices) (Zip Code)
(228) 868-4872
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable
date.
15,726,740 common shares were outstanding as of April 30, 2003 for financial statement purposes.
HANCOCK HOLDING COMPANY
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INDEX
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PART I. FINANCIAL INFORMATION PAGE NUMBER
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ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets --
March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Earnings --
Three Months Ended March 31, 2003 and 2002 4
Condensed Statements of Common Stockholder's Equity
Three Months Ended March 31, 2003 and Year Ended December 31, 2002 5
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 18
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
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ITEM 4. Submission of matters to a vote of Security Holders 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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CERTIFICATIONS 21
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PART I FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(amounts in thousands)
(Unaudited)
March 31, December 31,
2003 2002*
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ASSETS:
Cash and due from banks (non-interest bearing) $ 178,562 $ 187,786
Interest-bearing time deposits with other banks 6,528 4,268
Securities available for sale (amortized cost of
$1,441,576 and $1,233,459) 1,461,412 1,258,831
Securities held to maturity (fair value of $211,926
and $238,196) 200,214 227,979
Federal funds sold 33,843 42,989
Loans, net of unearned income 2,121,338 2,104,982
Less: Allowance for loan losses (34,740) (34,740)
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Loans, net 2,086,598 2,070,242
Property and equipment, net of accumulated
depreciation of $68,333 and $66,720 71,870 71,355
Other real estate, net 4,879 5,936
Accrued interest receivable 25,930 25,480
Core deposit intangibles, net 6,346 4,144
Goodwill, net 49,400 49,100
Other assets 27,604 25,037
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TOTAL ASSETS $ 4,153,186 $ 3,973,147
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing demand $ 611,901 $ 630,790
Interest-bearing savings, NOW, money market
and time 2,846,994 2,670,710
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Total deposits 3,458,895 3,301,500
Securities sold under agreements to repurchase 174,848 161,058
Other liabilities 38,749 34,988
Long-term notes 50,860 51,020
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TOTAL LIABILITIES 3,723,352 3,548,566
CONVERTIBLE PREFERRED STOCK:
Preferred Stock - $20 par value per share; 50,000,000
shares authorized and 1,658,275 issued 37,069 37,069
COMMON STOCKHOLDERS' EQUITY:
Common Stock-$3.33 par value per share; 75,000,000
shares authorized and 16,608,120 issued 55,305 55,305
Capital surplus 145,334 145,949
Retained earnings 217,955 208,253
Accumulated other comprehensive income 6,458 10,049
Unearned compensation (1,358) (552)
Treasury stock (868,582 and 881,607 shares, respectively) (30,929) (31,492)
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TOTAL COMMON STOCKHOLDERS' EQUITY 392,765 387,512
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TOTAL LIABILITIES, PREFERRED STOCK
AND COMMON STOCKHOLDERS EQUITY $ 4,153,186 $ 3,973,147
============ ==============
* The balance sheet at December 31, 2002 has been taken from the audited balance sheet at that date
See notes to unaudited condensed consolidated financial statements.
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
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(UNAUDITED)
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(amounts in thousands except per share)
Three Months Ended March 31
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2003 2002
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INTEREST INCOME:
Loans $ 38,368 $ 38,814
U. S. Treasury securities 412 353
Obligations of U. S. government agencies 5,706 6,406
Obligations of states and political subdivisions 2,493 2,755
Mortgage-backed securities 1,474 1,634
CMOs 4,419 6,448
Federal funds sold 395 521
Other investments 349 674
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Total interest income 53,616 57,605
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INTEREST EXPENSE:
Deposits 14,618 18,186
Federal funds purchased and securities sold
under agreements to repurchase 371 539
Long-term notes and other interest 592 595
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Total interest expense 15,581 19,320
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NET INTEREST INCOME 38,035 38,285
Provision for loan losses 3,020 5,329
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 35,015 32,956
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NON-INTEREST INCOME
Service charges on deposit accounts 10,155 9,448
Other service charges, commissions and fees 5,154 5,993
Other income 2,485 1,949
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Total non-interest income 17,794 17,390
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NON-INTEREST EXPENSE
Salaries and employee benefits 20,171 19,066
Net occupancy expense of premises 2,117 2,037
Equipment rentals, depreciation and maintenance 2,086 1,888
Amortization of intangibles 178 188
Other expense 8,439 10,417
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Total non-interest expense 32,991 33,596
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EARNINGS BEFORE INCOME TAXES 19,818 16,750
Income taxes 6,156 5,329
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NET EARNINGS 13,662 11,421
PREFERRED DIVIDEND REQUIREMENT 663 663
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NET EARNINGS AVAILABLE TO COMMON STOCKHOLDERS $ 12,999 $ 10,758
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BASIC EARNINGS PER COMMON SHARE $ 0.84 $ 0.68
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DILUTED EARNINGS PER COMMON SHARE $ 0.82 $ 0.67
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DIVIDENDS PAID PER COMMON SHARE $ 0.21 $ 0.20
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WEIGHTED AVG. COMMON SHARES OUTSTANDING-BASIC 15,442 15,892
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WEIGHTED AVG. COMMON SHARES OUTSTANDING-DILUTED 16,756 17,103
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See notes to unaudited condensed consolidated financial statements
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
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UNAUDITED
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(amounts in thousands, except per share data)
Accumulated
Other
Common Capital Retained Comprehensive Unearned Treasury
Stock Surplus Earnings Income Compensation Stock
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Balance, January 1, 2002 $ 55,305 $ 146,252 $172,584 $ 4,742 $ (433) $(10,902)
Net earnings 51,043
Cash dividends - $.80 per common share (12,721)
Cash dividends - $1.60 per preferred share (2,653)
Minimum pension liability adjustment, net (6,442)
Change in unrealized gain on
securities available for sale, net 11,749
Transactions relating to restricted
stock grants, net (119)
Treasury stock transactions, net (303) (20,590)
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Balance, December 31, 2002 55,305 145,949 208,253 10,049 (552) (31,492)
Net earnings 13,663
Cash dividends - $0.21 per common share (3,298)
Cash dividends - $0.40 per preferred share (663)
Change in unrealized gain on
securities available for sale, net (3,591)
Transactions relating to restricted
stock grants, net (806)
Treasury stock transactions, net (615) 563
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Balance, March 31, 2003 $ 55,305 145,334 $217,955 $ 6,458 $ (1,358) $(30,929)
========== ========== ========= ============== ============ =========
See notes to unaudited condensed consolidated financial statements
HANCOCK HOLDING COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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UNAUDITED
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(amounts in thousands)
Three Months Ended March 31,
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 13,662 $ 11,421
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 1,682 1,536
Amortization of software 674 546
Provision for loan losses 3,020 5,329
Provision for losses on other real estate owned 8 748
Gain on sales of securities available for sale (455) --
(Increase) decrease in interest receivable (450) 737
Amortization of intangible assets 178 188
Increase in accrued expenses 6,316 5,832
(Decrease) increase in other liabilities (1,666) 2,666
Decrease in interest payable (889) (2,184)
Other, net (7,673) 2,654
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Net cash provided by operating activities 14,407 29,473
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing time deposits (2,260) (1,231)
Proceeds from maturities of securities held
to maturity 27,765 24,169
Proceeds from sales and maturities of securities
available for sale 385,456 353,883
Purchase of securities available for sale (593,571) (458,731)
Net decrease (increase) in federal funds sold 9,146 (95,959)
Net increase in loans (15,558) (1,512)
Purchase of property, equipment and software, net (2,775) (4,243)
Proceeds from sales of other real estate 1,395 318
Net cash received in connection with purchase transaction (38,933) --
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Net cash used in investing activities (151,469) (183,306)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 118,221 122,195
Dividends paid (3,961) (3,900)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 13,790 11,403
Treasury stock transactions, net (52) 407
Reductions of long-term notes (160) (119)
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Net cash provided by financing activities 127,838 129,986
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NET DECREASE IN CASH AND DUE FROM BANKS (9,224) (23,847)
CASH AND DUE FROM BANKS, BEGINNING 187,786 164,808
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CASH AND DUE FROM BANKS, ENDING $ 178,562 $ 140,961
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See notes to unaudited condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements include the accounts of Hancock Holding Company, its wholly-owned banks, Hancock Bank and Hancock Bank of Louisiana and other subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and notes thereto of Hancock Holding Company's 2002 Annual Report to Shareholders.
COMPREHENSIVE EARNINGSFollowing is a summary of the Company's comprehensive earnings for the three months ended March 31, 2003 and 2002.
(Amounts in thousands)
Three Months Ended March 31,
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2003 2002
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Net earnings $ 13,662 $ 11,421
Other comprehensive income
(net of income tax):
Unrealized holding gains on (3,295) (2,445)
securities available for sale
Reclassification adjustments for gains
included in earnings, net (296) -
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TotalComprehensive Earnings $10,071 $8,976
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ACQUISITIONSOn 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 aggregate purchase price was approximately $39 million. The core deposit intangible was approximately $2.4 million and goodwill was approximately $300,000. No amortization of the goodwill related to this acquisition was recorded in the first quarter of 2003 in accordance with Statement of Financial Accounting Standards No. 142.
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 has been adjusted to give effect to this split.
SELECTED FINANCIAL DATAThe following tables present selected comparative financial data. All share and per share data ha been restated to give effect of a 50% stock dividend made August 5, 2002.
(amounts in thousands, except per share data)
Three Months Ended March 31,
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2003 2002
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Per Common Share Data
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Earnings per share:
Basic $0.84 $0.68
Diluted $0.82 $0.67
Earnings per share before amortization of
purchased intangibles:
Basic $0.85 $0.69
Diluted $0.83 $0.68
Cash dividends per share $0.21 $0.20
Book value per share (period end) $25.45 $23.45
Weighted average number of shares:
Basic 15,442 15,892
Diluted 16,756 17,103
Period end number of shares 15,435 15,892
Market data:
High closing price $46.94 $36.17
Low closing price $42.80 $27.56
Period end closing price $43.06 $35.80
Trading volume 1,418 1,117
(amounts in thousands, except per share data) Three Months Ended March 31,
--------------------------------
2003 2002
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Performance Ratios
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Return on average assets 1.37% 1.23%
Return on average common equity 14.08% 12.25%
Earning asset yield (TE) 6.05% 6.95%
Total cost of funds 1.71% 2.27%
Net interest margin (TE) 4.34% 4.68%
Non-interest expense as a percent of total revenue (TE)
before amortization of purchased intangibles
and securities transactions 57.33% 58.03%
Average common equity as a percent of average total assets 9.73% 10.05%
Leverage ratio (period end) 9.21% 8.44%
FTE Headcount 1,746 1,731
Asset Quality Information
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Non-accrual loans $11,949 $14,119
Foreclosed assets $5,230 $5,718
Total nonperforming assets $17,179 $19,837
Nonperforming assets as a percent of loans and foreclosed assets 0.81% 1.05%
Accruing loans 90 days past due $6,039 $6,805
Accruing loans 90 days past due as a percent of loans 0.28% 0.36%
Nonperforming assets + accruing loans 90 days past due
to loans and foreclosed assets 1.09% 1.41%
Net charge-offs $3,020 $7,762
Net charge-offs as a percent of average loans 0.59% 1.67%
Allowance for loan losses $34,740 $31,585
Allowance for loan losses as a percent of period end loans 1.64% 1.68%
Allowance for loan losses to NPAs + accruing loans 90 days past due 149.63% 118.55%
Provision for loan losses $3,020 $5,329
Provision for loan losses to net charge-offs 100.00% 68.65%
Average Balance Sheet
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Total loans 2,093,209 1,882,615
Securities 1,466,360 1,433,234
Short-term investments 140,805 137,362
Earning assets 3,700,374 3,453,211
Allowance for loan losses (34,740) (34,282)
Other assets 379,632 343,007
Total assets $4,045,265 $3,761,936
Non-interest bearing deposits $582,992 $609,041
Interest bearing transaction deposits 1,651,450 1,379,692
Time deposits 1,122,536 1,112,291
Total interest bearing deposits 2,773,986 2,491,983
Total deposits 3,356,978 3,101,024
Other borrowed funds 223,895 220,314
Other liabilities 33,726 25,328
Preferred stock 37,069 37,069
Common shareholders' equity 393,597 378,201
Total liabilities, preferred stock & common shareholders' equity $4,045,265 $3,761,936
(amounts in thousands, except per share data)
Three Months Ended March 31
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2003 2002
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Period end Balance Sheet
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Commercial/real estate loans $1,073,526 $950,083
Mortgage loans 314,048 226,025
Direct consumer loans 495,388 499,392
Indirect consumer loans 190,719 165,892
Finance Company loans 47,657 38,328
Total loans 2,121,338 1,879,720
Securities 1,661,626 1,449,712
Short-term investments 40,371 197,626
Earning assets 3,823,335 3,527,058
Reserve for loan losses (34,740) (31,585)
Other assets 364,592 329,299
Total assets $4,153,186 $3,824,773
Non-interest bearing deposits $611,901 $629,844
Interest bearing transaction deposits 1,700,917 1,427,412
Time deposits 1,146,078 1,104,673
Total interest bearing deposits 2,846,995 2,532,085
Total deposits 3,458,895 3,161,929
Other borrowed funds 226,931 225,513
Other liabilities 37,526 27,581
Preferred stock 37,069 37,069
Common shareholders' equity 392,765 372,682
Total liabilities, preferred stock & common equity $4,153,186 $3,824,773
Net Charge-Off Information
- --------------------------
Net charge-offs:
Commercial/real estate loans $741 $5,295
Mortgage loans 35 1
Direct consumer loans 1,281 1,399
Indirect consumer loans 558 652
Finance company loans 405 415
Total net charge-offs $3,020 $7,762
Net charge-offs to average loans (annualized):
Commercial/real estate loans 0.28% 2.26%
Mortgage loans 0.05% 0.00%
Direct consumer loans 1.04% 1.11%
Indirect consumer loans 1.19% 1.63%
Finance Company loans 3.46% 4.42%
Total net charge-offs to average loans 0.59% 1.67%
(amounts in thousands except per share amounts)
The Months Ended March 31,
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2003 2002
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Averaqe Balance Sheet Composition
- ---------------------------------
Percentage of earning assets/funding sources:
Loans 56.57% 54.52%
Securities 39.63% 41.50%
Short-term investments 3.81% 3.98%
Earning assets 100.00% 100.00%
Non-interest bearing deposits 15.75% 17.64%
Interest bearing transaction deposits 44.63% 39.95%
Time deposits 30.34% 32.21%
Total deposits 90.72% 89.80%
Other borrowed funds 6.05% 6.38%
Other net interest-free funding sources 3.23% 3.82%
Total funding sources 100.00% 100.00%
Loan mix:
Commercial/real estate loans 50.72% 50.40%
Mortgage loans 14.07% 11.80%
Direct consumer loans 23.83% 27.14%
Indirect consumer loans 9.11% 8.63%
Finance Company loans 2.27% 2.02%
Total loans 100.00% 100.00%
Average dollars (in thousands)
Loans $2,093,209 $1,882,615
Securities 1,466,360 1,433,234
Short-term investments 140,805 137,362
Earning assets $3,700,374 $3,453,211
Non-interest bearing deposits $582,992 $609,041
Interest bearing transaction deposits 1,651,450 1,379,692
Time deposits 1,122,536 1,112,291
Total deposits 3,356,978 3,101,024
Other borrowed funds 223,895 220,314
Other net interest-free funding sources 119,501 131,873
Total funding sources $3,700,374 $3,453,211
Loans:
Commercial/real estate loans $1,061,644 $948,905
Mortgage loans 294,611 222,235
Direct consumer loans 498,822 510,982
Indirect consumer loans 190,648 162,422
Finance Company loans 47,484 38,071
Total average loans $2,093,209 $1,882,615
The following discussion provides management's analysis of certain factors that have affected the Company's financial condition and operating results during the periods included in the accompanying condensed consolidated financial statements.
CHANGES IN FINANCIAL CONDITIONThe Company manages liquidity through traditional funding sources of core deposits, federal funds, and maturities of loans and securities held to maturity and sales and maturities of securities available for sale.
The following liquidity ratios compare certain assets and liabilities to total deposits or total assets:
March 31, December 31,
2003 2002
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Total securities to total deposits 48.04% 45.03%
Total loans (net of unearned
income) to total deposits 61.33% 63.76%
Interest-earning assets
to total assets 92.06% 91.59%
Interest-bearing deposits
to total deposits 82.31% 80.89%
Loans and Allowance for Loan LossesThe 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:
Three Months Ended March 31,
----------------------------
2003 2002
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Balance of allowance for loan losses
at beginning of period $ 34,740 $ 34,418
Balance acquired through acquisition & other (400)
Provision for loan losses 3,020 5,329
Loans charged-off:
Commercial, Real Estate & Mortgage 1,103 5,408
Direct & Indirect Consumer 2,215 2,222
Finance Company 474 504
Demand Deposit Accounts 978 1,066
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Total charge-offs 4,770 9,200
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Recoveries of loans previously
charged-off:
Commercial, Real Estate & Mortgage 327 112
Direct & Indirect Consumer 601 439
Finance Company 69 89
Demand Deposit Accounts 753 798
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Total recoveries 1,750 1,438
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Net charge-offs 3,020 7,762
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Balance of allowance for loan losses
at end of period $ 34,740 $ 31,585
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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:
Three Months Ended March 31,
--------------------------------
2003 2002
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Ratios (%) (annualized):
Net charge-offs to average net loans 0.59 1.67
Net charge-offs to period-end net loans 0.59 1.52
Allowance for loan losses to average net loans 1.66 1.68
Allowance for loan losses to period-end net loans 1.64 1.68
Net charge-offs to loan loss allowance 8.69 24.57
Loan loss provision to net charge-offs 100.00 68.65
Capital ResourcesThe Company continues to maintain an adequate capital position. The ratios as of March 31, 2003 and December 31, 2002 are as follows:
March 31, December 31,
2003 2002
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Average equity to average assets (1) 9.73% 10.08%
Total capital to risk-weighted assets (2) 16.45% 17.25%
Tier 1 capital to risk-weighted 15.19% 15.73%
assets (3)
Leverage capital to average total assets (4) 9.21% 9.35%
(1) Equity capital consists of stockholder's equity (excluding unrealized gains/(losses)).
(2) Total capital consists of equity capital less intangible assets plus a limited amount of loan loss
allowance. Risk-weighted assets represent the assigned risk portion of all on and off-balance-
sheet assets. Based on Federal Reserve Board guidelines, assets are assigned a risk factor
percentage from 0% to 100%. A minimum ratio of total capital to risk-weighted assets of 8% is
required.
(3) Tier 1 capital consists of equity capital less intangible assets. A minimum ratio of tier 1 capital to
risk-weighted assets of 4% is required.
(4) Leverage capital consists of equity capital less goodwill and core deposit intangibles.
Regulations require a minimum 4% leverage capital ratio for an entity to be considered
adequately capitalized
RESULTS OF OPERATIONSNet 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:
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Results of Operations:
Return on average assets 1.37% 1.23%
Return on average equity 14.08% 12.25%
Net Interest Income:
Yield on average interest-earning assets (te) 6.05% 6.95%
Cost of average interest-bearing funds 2.11% 2.89%
---------- ----------
Net interest spread (te) 3.94% 4.06%
========== ==========
Net interest margin (te)
(net interest income on a tax-equivalent basis
divided by average interest-earning assets) 4.34% 4.68%
========== ==========
Net Interest IncomeNet 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%
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 IncomeNon-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.
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 ExpenseOperating 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
=============== =================
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 ShareFollowing 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 InformationCongress 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 RISKThe 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.
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 PROCEDURESThe 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.
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.
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
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
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