Hancock Holding Company (now Hancock Whitney Corporation) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; fourth-quarter results are also summarized. The filing is by Hancock Holding Company, the predecessor name reflected in this historical report.
Business context
The company operated Hancock Bank and Whitney Bank across Mississippi, Louisiana, Alabama, Florida and Texas, with approximately $19.5 billion in year-end assets. The 2011 Whitney acquisition substantially expanded the company; its systems integration was completed in March 2012, with branch consolidations and operating changes continuing during the year.
Financial results and position
| Metric | 2012 | 2011 |
|---|---|---|
| Net income | $151.7 million | $76.8 million |
| Diluted earnings per share | $1.75 | $1.15 |
| Operating diluted EPS, excluding specified items | $2.13 | $2.02 |
| Net interest income, taxable-equivalent basis | $722.5 million | $533.2 million |
| Net interest margin, taxable-equivalent basis | 4.48% | 4.25% |
| Provision for loan losses | $54.2 million | $38.7 million |
| Noninterest income | $253.7 million | $206.3 million |
| Noninterest expense | $713.1 million | $594.0 million |
| Operating cash flow | $443.0 million | $273.0 million |
Reported net income nearly doubled, primarily because 2012 included a full year of Whitney operations and lower merger costs. Merger-related expense was $45.8 million in 2012 versus $86.8 million in 2011. Operating income, as defined by management to exclude tax-effected merger costs, debt redemption costs and securities gains or losses, was $184.0 million, up from $133.2 million.
Net cash from investing activities was a use of $17.7 million and net cash from financing activities was a use of $414.8 million. Cash and due from banks ended the year at $448.5 million; interest-bearing bank deposits were $1.5 billion. The filing’s year-end balance sheet reports total assets of $19.46 billion, loans of $11.58 billion before allowance and unearned income, and deposits of $15.74 billion.
Long-term debt was $396.6 million and short-term borrowings were $639.1 million at year-end. The company drew a new $220 million, three-year term loan in December, at LIBOR plus 1.875%, and repaid a prior $140 million term loan. It repurchased approximately $52 million of Whitney subordinated debt, incurring $5.3 million in costs. The company reported compliance with debt covenants.
Company regulatory capital ratios were 9.10% Tier 1 leverage, 12.65% Tier 1 risk-based capital and 14.28% total risk-based capital; the company and banks were reported well capitalized. Year-end tangible common equity to assets was 8.77%. The quarterly cash dividend was $0.24 per share, or $0.96 for the year.
Material changes and credit quality
- Total loans rose 4% to $11.58 billion; excluding FDIC-covered loans, they increased 5%. Growth was concentrated in commercial and industrial, residential mortgage and consumer lending, partly offset by reductions in construction and commercial real estate loans.
- Net interest income growth reflected the full-year acquisition contribution, increased average earning assets and lower funding costs. Management reported a 3.74% full-year core margin excluding purchase-accounting adjustments; the core margin fell to 3.61% in Q4.
- Nonperforming assets were $256.1 million, down from $277.0 million; the ratio to loans plus foreclosed assets declined to 2.19% from 2.44%. Nonaccrual loans increased to $137.6 million from $103.3 million, while other real estate and foreclosed assets declined to $102.1 million from $159.8 million.
- The allowance for loan losses was $136.2 million, or 1.18% of period-end loans, compared with $124.9 million, or 1.12%, a year earlier. Non-covered net charge-offs rose to $55.0 million (0.49% of average loans) from $33.8 million (0.40%).
- In late 2012, the company sold about $40 million of problem loans, including approximately $36 million previously reported as nonperforming. The sale contributed $13.7 million to provision expense and $16.2 million to net charge-offs; the loans had about $56 million in remaining contractual principal.
- Reported commercial real estate industry exposure was 144% of regulatory capital, excluding specified FDIC-covered acquired loans; management identified CRE as an elevated risk and said it continued to limit the segment. Oil and gas loans were approximately $905 million, up about $300 million year over year.
Outlook, commentary and risks
- Management expected continued loan growth, but cautioned that growth could be slower than in the second half of 2012. Competition for quality borrowers remained strong.
- Management anticipated continued near-term compression in the core net interest margin and some compression in the reported margin, as asset yields reset lower and limited further deposit-cost reductions remained available.
- Q4 net income was $47.0 million, or $0.54 per diluted share. Q4 provision expense was $28.1 million, including the bulk-loan-sale impact; excluding that sale, provision was $14.4 million. Q4 net interest margin was 4.48%, down from 4.54% in Q3.
- The company had built liquidity ahead of the expiration of the FDIC Transaction Account Guarantee program, including $200 million of short-term brokered CDs. It reported no material deposit outflows after expiration and expected to redeploy excess liquidity in Q1 2013.
- Management said the Q4 operating expense level reflected 100% of targeted Whitney acquisition cost savings. Integration, branch closures and workforce reductions contributed to lower ongoing costs.
- Key risks include real-estate and commercial credit losses, oil-and-gas and other industry exposure, interest-rate and margin sensitivity, deposit volatility, regulatory and compliance costs, operational and cybersecurity disruption, hurricanes, pension funding and execution of future growth or acquisitions. Proposed Basel III rules and Dodd-Frank implementation remained sources of regulatory uncertainty.
- The filing says pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity. PwC issued an unqualified audit opinion on the financial statements and internal controls; management concluded internal controls were effective.
Important facts for investors to verify
- How much of earnings and margin depended on purchase-accounting accretion from acquired Whitney loans, and how that accretion changes over time.
- Whether the increase in nonaccrual loans, TDRs and non-covered charge-offs persists, and whether the allowance remains adequate after the bulk loan sale.
- Current CRE and oil-and-gas exposures, including concentrations, underwriting standards and performance by geography and loan vintage.
- Whether deposit levels normalize after year-end seasonality and whether liquidity redeployment, brokered deposits and funding costs evolve as management expected.
- Progress in sustaining the stated acquisition cost savings while controlling expenses, and the impact of further margin compression on earnings.
- Debt covenant headroom, repayment schedule, regulatory capital under any finalized Basel III rules, and the capacity of bank subsidiaries to continue funding parent-company dividends.