Hancock Holding Company — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is by Hancock Holding Company, parent of Hancock Bank and Whitney Bank; it is not filed under the later Hancock Whitney name. Unless noted, financial amounts below are in U.S. dollars and rounded to millions.
Business context
The company operated a Gulf South regional banking business across Mississippi, Louisiana, Alabama, Florida and Texas, offering commercial, consumer and mortgage lending, deposits, trust, insurance and investment services. It reported $19.0 billion of assets and 3,978 full-time-equivalent employees at year-end. Its two bank subsidiaries were expected to consolidate their legal charters in the first quarter of 2014, subject to regulatory approval, while retaining their respective customer brands.
Financial results and condition
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Net income | $163.4 million | $151.7 million | Up 7.7% |
| Diluted earnings per share | $1.93 | $1.75 | Up $0.18 |
| Operating income (company-defined, non-GAAP) | $188.0 million | $184.0 million | Up 2% |
| Net interest income, taxable-equivalent basis | $691.1 million | $722.5 million | Down 4% |
| Net interest margin, taxable-equivalent basis | 4.20% | 4.48% | Down 28 basis points |
| Provision for loan losses | $32.7 million | $54.2 million | Lower, partly because 2012 included a bulk problem-loan sale |
| Noninterest income | $246.1 million | $253.7 million | Down 3% |
| Noninterest expense | $678.3 million | $713.1 million | Down 5%; includes $38.0 million of one-time items in 2013 |
| Efficiency ratio | 65.17% | 64.63% | Worsened 54 basis points |
- Balance sheet: Total assets were $19.0 billion, down about 2%. Loans were $12.3 billion, up 6% (8% excluding FDIC-covered loans); deposits were $15.4 billion, down 2%. Noninterest-bearing deposits were $5.5 billion, or 36% of deposits.
- Credit quality: Nonperforming assets fell to $185.9 million from $256.1 million; they were 1.50% of loans plus foreclosed assets, versus 2.19%. Non-covered net charge-offs declined to $24.3 million, or 0.21% of average loans, from $55.0 million, or 0.49%. The allowance was $133.6 million, 1.08% of period-end loans.
- Cash flow: Operating activities provided $473.5 million, compared with $443.0 million in 2012. Investing activities used $4.5 million and financing activities used $569.1 million. Cash and due from banks declined $100.1 million; this cash-flow measure is not the company’s full liquidity position.
- Debt and capital: Year-end long-term debt was $385.8 million and short-term borrowings were $658.0 million. Regulatory capital ratios were 11.76% Tier 1 risk-based, 13.11% total risk-based and 9.34% Tier 1 leverage. The company and banks were reported as well capitalized.
- Liquidity: Available, unused borrowing capacity was approximately $2.6 billion at the Federal Home Loan Bank and $0.8 billion at the Federal Reserve discount window. No amounts were borrowed on these lines at year-end. Free securities were 22% of total securities, compared with 27% in 2012.
Material changes and unusual items
- Despite higher loan balances, net interest income and margin declined, largely reflecting lower loan yields; the overall earning-asset yield fell to 4.45% from 4.80%. Lower funding costs partly offset the pressure.
- Loan growth was concentrated in commercial lending, commercial real estate and residential mortgages. The acquired Whitney loan portfolio continued to run off.
- Management attributed lower expenses to integration savings and branch and back-office consolidation. The company closed 28 branches in 2013 and completed sales of 10 additional branches in late 2013 and early 2014.
- In 2013, approximately $1.0 billion of available-for-sale securities were reclassified as held-to-maturity. The filing says the company considered them unnecessary for liquidity and intended to hold them to maturity. The associated unrealized loss remained in accumulated other comprehensive income and is being amortized into interest income.
- The company paid $115 million under an accelerated share repurchase agreement and initially received approximately 2.8 million shares. Final settlement was scheduled by May 2014; the final share amount remained subject to the agreement’s pricing formula.
- Year-end assets included $625.7 million of goodwill; the company reported no goodwill impairment in 2013.
Outlook, risks and contingencies
- Management expected 2014 loan growth in the mid-single-digit range. It targeted $50 million of annual expense reductions versus annualized first-quarter 2013 expense levels, with half targeted by first-quarter 2014 and the remainder by fourth-quarter 2014. Its longer-term efficiency-ratio target was 57%–59% for 2016.
- Management described market conditions as moderately improving overall, but noted competitive pressure for quality borrowers, slowing mortgage activity as rates rose, and uncertainty around housing and the economy. The filing does not provide formal earnings guidance.
- Credit exposure includes commercial real estate and energy-related lending. At year-end, commercial real estate and mining/oil-and-gas industry concentrations were 153% and 122% of total capital, respectively; oil-and-gas loans were approximately $1.5 billion. The filing also cites interest-rate, real-estate, hurricane, operational and cyber-security risks.
- The FDIC disputed aspects of certain previously reimbursed loss-share claims. The company accrued $2.1 million, reported $9.9 million of reimbursement claims awaiting processing, and said the matter could result in up to $11.5 million of additional loss beyond the accrual. Management believed it had defenses and expected resolution within a year.
- Management did not believe pending ordinary-course litigation or regulatory matters would materially affect consolidated financial position or liquidity. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether the planned bank-charter consolidation and expense-reduction milestones were completed, and whether the $50 million savings target translated into sustained operating improvement.
- Whether mid-single-digit loan growth was achieved without weakening underwriting or increasing commercial real estate and energy concentration risk.
- How net interest margin and core margin evolved as acquired-loan accretion declined and market rates changed.
- The final settlement of the $115 million share repurchase agreement and its effect on share count and regulatory capital.
- The outcome of the FDIC loss-share dispute, including recovery of delayed claims and any loss beyond the $2.1 million accrual.
- Liquidity and funding trends, including deposit seasonality, brokered-deposit use and securities pledged against deposits or repurchase agreements.