Hancock Holding Company — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; fourth-quarter results are also discussed. The filing identifies the registrant as Hancock Holding Company, a Mississippi bank holding company operating through banks in Mississippi, Louisiana and Alabama, with Florida operations incorporated into Mississippi in 2010. It serves customers across the Gulf South. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Net income | $52.2 million | $74.8 million |
| Diluted earnings per share | $1.40 | $2.26 |
| Net interest income | $270.2 million; $282.0 million tax-equivalent | $228.4 million; $240.5 million tax-equivalent |
| Tax-equivalent net interest margin | 3.88% | 3.78% |
| Provision for loan losses | $66.0 million | $54.6 million |
| Noninterest income | $136.9 million | $157.3 million |
| Noninterest expense | $279.3 million | $233.5 million |
| Total assets, year-end | $8.14 billion | $8.70 billion |
| Loans, net of unearned income, year-end | $4.96 billion | $5.11 billion |
| Deposits, year-end | $6.78 billion | $7.20 billion |
| Common stockholders’ equity, year-end | $856.5 million | $837.7 million |
- Net income declined 30.2% and diluted EPS declined 38.1%. Management attributed the main year-over-year difference to the $33.6 million pretax bargain-purchase gain from the 2009 Peoples First acquisition.
- Net interest income rose with higher average earning assets and lower funding costs; the tax-equivalent margin improved 10 basis points. Net interest income represented 55% of revenue, according to the filing.
- Noninterest expense increased 20%, driven in part by Peoples First integration, added employees and facilities, data-processing conversion, and higher legal, foreclosure and other real-estate-owned costs. The efficiency ratio before intangible amortization and securities transactions worsened to 66.00% from 58.34%.
- Operating cash flow was $194.8 million, investing cash flow was $334.4 million, and financing cash flow was negative $594.2 million. Cash and due from banks fell $65.0 million to $139.7 million.
- Year-end securities were $1.49 billion. Repurchase-agreement borrowings were $364.7 million and FHLB borrowings were $10.2 million; federal funds purchased were zero. Liquidity included a $774.8 million FHLB line and more than $136.8 million of discount-window borrowing capacity. Core deposits were $5.51 billion and net wholesale funding $1.00 billion.
- Regulatory capital remained above minimums: company Tier 1 leverage was 9.65%, Tier 1 risk-based capital 15.34%, and total risk-based capital 16.60%. The subsidiary banks were reported as well capitalized.
Material changes and asset quality
- Year-end assets declined 6.4%, loans declined about 3.1%, and deposits declined 5.8% from 2009. Management linked deposit runoff mainly to expected outflow of Peoples First time deposits that had been priced aggressively.
- Nonperforming assets increased to $158.2 million from $100.9 million; nonperforming assets to loans plus foreclosed assets rose to 3.17% from 1.97%. Nonaccrual loans, including acquired covered loans, totaled $112.3 million. Foreclosed assets were $33.3 million including covered properties.
- The allowance for loan losses rose to $82.0 million, or 1.65% of year-end loans, from $66.1 million, or 1.29%. Net charge-offs were $50.7 million, 1.01% of average loans, versus $50.3 million, 1.17%, in 2009. The allowance covered 51.35% of nonperforming loans and accruing loans 90 days past due, down from 58.69%.
- Average loans increased 16.1% in 2010, substantially reflecting Peoples First; however, period-end lending softened. Construction and development loans fell to $409.5 million from $521.7 million.
- Net income in fourth-quarter 2010 was $17.0 million, versus $31.8 million in fourth-quarter 2009, primarily reflecting the prior-year acquisition gain. Fourth-quarter tax-equivalent margin was 4.06%, up 9 basis points year over year.
Outlook, commentary, risks and unusual items
- Whitney merger: On December 22, 2010, Hancock and Whitney Holding Corporation agreed to a stock-for-stock merger, subject to shareholder, regulatory and other approvals. Whitney shareholders would receive 0.418 Hancock shares per Whitney share. Hancock planned an equity issuance expected to yield about $220 million net and, subject to approvals, expected to repurchase Whitney’s Treasury-held TARP preferred stock and warrants. The filing provides no firm completion date or quantified merger-synergy guidance.
- Interest-rate outlook: Management’s modeled “most likely” scenario indicated a 4.7% increase in net interest income over the next 12 months. This is scenario analysis, not guaranteed guidance; outcomes depend in part on execution of a certificate-of-deposit repricing strategy. A modeled 100-basis-point rate decline reduced NII by 5.4%, while a 100-basis-point increase raised it 6.0%.
- Credit and regional exposures: Management cited weak residential and commercial real estate markets, unemployment, uncertain collateral values and hurricane exposure. It also identified unresolved Gulf oil spill effects. A $5.2 million specific reserve was recorded for the spill in the second quarter; $1.0 million was reversed in the fourth quarter, leaving a stated $4.2 million reserve.
- Acquisition and contingencies: Peoples First was acquired in December 2009 with FDIC loss-sharing protection: 80% of covered losses up to $385 million and 95% above that amount, subject to agreement terms. The year-end FDIC loss-share receivable was $329.1 million. Related integration charges were $3.2 million in 2010. Pending litigation related to the acquisition was described as covered by the loss-share indemnification agreement; management said other ordinary-course proceedings were not expected to materially affect the financial statements.
- Regulatory and funding risks: The filing discusses potential cost and competitive effects of Dodd-Frank implementation and FDIC assessment changes. Management also highlighted interest-rate sensitivity, deposit funding, pension underfunding, acquisition integration, and local economic conditions as risks. It gave no formal full-year 2011 earnings guidance.
- Audit and controls: The independent auditor issued unqualified opinions on the 2010 and 2009 financial statements and on internal control over financial reporting as of December 31, 2010. Management also concluded controls were effective.
Investor verification priorities
- Track Whitney merger approvals, financing and share dilution, the Treasury securities repurchase, integration costs, and realized synergies.
- Monitor nonaccrual and classified loans, foreclosed assets, charge-offs, reserve adequacy, and the distinction between FDIC-covered and uncovered credit exposure.
- Verify whether deposits stabilize after Peoples First runoff and assess the cost and concentration of wholesale funding and large time deposits.
- Compare actual margin and funding repricing with management’s NII scenarios, especially if rates or deposit competition change.
- Assess whether operating costs and the efficiency ratio improve after acquisition-related conversion and integration work.
- Follow Gulf oil spill credit effects, pension contributions, regulatory assessment changes, and any material developments in litigation or merger contingencies.