Item 1: BUSINESS
ORGANIZATION AND RECENT DEVELOPMENTS
Whitney Holding Corporation (the Company or Whitney) is a Louisiana corporation that is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA). The Company began operations in 1962 as the parent of Whitney National Bank (the Bank). The Bank is a national banking association headquartered in New Orleans, Louisiana, that has been in continuous operation in the greater New Orleans area since 1883. The Company has at times operated as a multi-bank holding company when it established new entities in connection with business acquisitions. The Company has merged all banking operations into the Bank and intends to continue merging the operations of future acquisitions at the earliest possible dates.
During 2007, Whitney completed its acquisition of Signature Financial Holdings, Inc. (Signature), headquartered in St. Petersburg, Florida, the parent of Signature Bank. Signature Bank operated seven banking centers in the Tampa Bay metropolitan area. Since early 1994, Whitney has acquired 20 separate banking operations involving over $3.7 billion of assets, with the more recent strategic focus on banks in faster-growing markets such as those in certain parts of Florida and Texas. The Company will continue to seek opportunities to leverage its current operations through acquisitions that expand existing market share or provide it access to new parts of its market area with attractive deposit bases and economic fundamentals.
NATURE OF BUSINESS AND MARKETS
The Company, through the Bank, engages in community banking and serves a market area that covers the five-state Gulf Coast region stretching from Houston, Texas, across southern Louisiana and the coastal region of Mississippi, to central and south Alabama, the western panhandle of Florida, and to the Tampa Bay metropolitan area of Florida. The Bank also maintains a foreign branch on Grand Cayman in the British West Indies.
The Bank provides a broad range of community banking services to commercial, small business and retail customers, offering a variety of transaction and savings deposit products, treasury management services, secured and unsecured loan products, including revolving credit facilities, and letters of credit and similar financial guarantees. The Bank also provides trust and investment management services to retirement plans, corporations and individuals and, together with its subsidiary, Whitney Securities, L.L.C., offers investment brokerage services and annuity products. Southern Coastal Insurance Agency, Inc., another Bank subsidiary, currently offers personal and business lines of insurance to customers mainly in northwest Florida.
The Company also owns Whitney Community Development Corporation (WCDC). WCDC was formed to provide financial support to corporations or projects that promote community welfare in areas with mainly low or moderate incomes. WCDC’s main activity has been to provide financing for the development of affordable housing.
THE BANK
All material funds of the Company are invested in the Bank. The Bank has a large number of customer relationships that have been developed over a period of many years. The loss of any single customer or a few customers would not have a material adverse effect on the Bank or the Company. The Bank has customers in a number of foreign countries, however, the revenue derived from these foreign customers is not a material portion of its overall revenues.
COMPETITION
There is significant competition within the financial services industry in general as well as with respect to the particular financial services provided by the Company and the Bank. Within its market, the Bank competes directly with major banking institutions of comparable or larger size and resources, as well as with various other smaller banking organizations. The Bank also has numerous local and national nonbank competitors, including savings and loan associations, credit unions, mortgage companies, personal and commercial finance companies, investment brokerage and financial advisory firms, and mutual fund companies. Entities that deliver financial services and access to financial products and transactions exclusively through the Internet are another source of competition. Technological advances have allowed the Bank and other financial institutions to provide electronic and Internet-based services that enhance the value of traditional financial products. Continued consolidation within the financial services industry will most likely change the nature and intensity of competition that Whitney faces, but can also create opportunities for Whitney to demonstrate and exploit competitive advantages.
The participants in the financial services industry are subject to varying degrees of regulation and governmental supervision. The following section summarizes certain important aspects of the supervision and regulation of banks and bank holding companies. Some of Whitney’s competitors that are not banks or bank holding companies may be subject to less regulation than the Company and the Bank, and this may give them a competitive advantage. The current system of laws and regulations can change over time and this would influence the competitive positions of the participants in the financial services industry. We cannot predict whether these changes will be favorable or unfavorable to the Company and the Bank.
SUPERVISION AND REGULATION
The Company and the Bank are subject to comprehensive supervision and regulation that affect virtually all aspects of their operations. This supervision and regulation is primarily designed to protect depositors and the Bank, and not the Company or its shareholders. The following summarizes certain of the more important statutory and regulatory provisions.
Supervisory Authorities
Whitney is a bank holding company, registered with and regulated by the Federal Reserve Board (FRB). The Bank is a national bank and, as such, is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (OCC) and secondarily by the Federal Deposit Insurance Corporation (FDIC). Ongoing supervision is provided through regular examinations by the OCC and FRB and other means that allow the regulators to gauge management’s ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. As a result, the scope of routine examinations of the Company and the Bank is rather extensive. To facilitate supervision, the Company and the Bank are required to file periodic reports with the regulatory agencies, and much of this information is made available to the public by the agencies.
Capital
The FRB and the OCC require that the Company and the Bank meet certain minimum ratios of capital to assets in order to conduct their activities. Two measures of regulatory capital are used in calculating these ratios - Tier 1 Capital and Total Capital. Tier 1 Capital generally includes common equity, retained earnings, a limited amount of qualifying preferred stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other intangible assets, such as core deposit intangibles, and certain other assets. Total Capital generally consists of Tier 1 Capital plus the allowance for loan losses, preferred stock that did not qualify as Tier 1 Capital, certain types of subordinated debt and a limited amount of other items.
The Tier 1 Capital ratio and the Total Capital ratio are calculated against an asset total weighted for risk. Certain assets, such as cash and U. S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, often have a 100% risk weighting. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations. The leverage ratio also provides a measure of the adequacy of Tier 1 Capital, but assets are not risk-weighted for this calculation. Assets deducted from regulatory capital, such as goodwill and other intangible assets, are also excluded from the asset base used to calculate capital ratios. The minimum capital ratios for both the Company and the Bank are generally 8% for Total Capital, 4% for Tier Capital and 4% for leverage.
To be eligible to be classified as “well-capitalized,” the Bank must generally maintain a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and a leverage ratio of 5% or more. If an institution fails to remain well-capitalized, it will be subject to a series of restrictions that increase as the capital condition worsens. For instance, federal law generally prohibits a depository institution from making any capital distribution, including the payment of a dividend or paying any management fee to its holding company, if the depository institution would be undercapitalized as a result. Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations, and must submit a capital restoration plan that is guaranteed by the institution’s parent holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.
The capital ratios for both the Company and the Bank exceed the required minimums, and the capital ratios for the Bank make it eligible for classification as “well-capitalized” under current regulatory criteria.
The federal bank regulatory authorities recently adopted risk-based capital rules known as “Basel II” which impose complex requirements on the largest U.S. banking organizations with more than $250 billion in assets or more than $10 billion in foreign exposures. Regulators have also proposed “Basel 1A” whose goal is to make the capital rules to which the Company and the Bank are subject more risk sensitive, without creating a system that is too complex and expensive. An adoption or effective date for Basel 1A rules is uncertain at this time.
FDICIA and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established a “prompt corrective action” program in which every depository institution is placed in one of five regulatory categories, depending primarily on its regulatory capital levels. The FDIC and the other federal banking regulators are permitted to take increasingly harsh action as a bank’s capital position or financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital, such as when the regulatory agency finds that the institution is engaging in an unsafe or unsound practice.
Expansion and Activity Limitations
With prior regulatory approval, Whitney may acquire other banks or bank holding companies and the Bank may merge with other banks. Acquisitions of banks domiciled in states other than Louisiana may be subject to certain restrictions, including restrictions related to the percentage of deposits that the resulting bank may hold in that state and nationally and the number of years that the bank to be acquired must have been operating. Whitney may also engage in or acquire an interest in a company that engages in activities that the FRB has determined by regulation or order to be so closely related to banking as to be a proper incident to banking activities. The FRB normally requires some form of notice or application to engage in or acquire companies engaged in such activities. Under the BHCA, Whitney is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in activities other than those referred to above.
Under the Gramm-Leach-Bliley Act (GLB Act), adopted in 1999, bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become financial holding companies. As financial holding companies, they and their subsidiaries are permitted to acquire or engage in certain activities that were not previously permitted for bank holding companies. These activities include insurance underwriting, securities underwriting and distribution, travel agency activities, broad insurance agency activities, merchant banking, and other activities that the FRB determines to be financial in nature or complementary to these activities. Whitney has not elected to become a financial holding company, but may elect to do so in the future. The GLB Act also permits well-capitalized and well-managed banks to establish financial subsidiaries that may engage in activities not previously permitted for banks. The Bank has established two financial subsidiaries for insurance agency activities.
Support of Subsidiary Banks by Holding Companies
Under current FRB policy, Whitney is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank in circumstances where it might not do so absent such a policy. In addition, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to depositors and certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority of payment.
Limitations on Acquisitions of Bank Holding Companies
As a general proposition, other companies seeking to acquire control of a bank holding company such as Whitney would require the approval of the FRB under the BHCA. In addition, individuals or groups of individuals seeking to acquire control of a bank holding company would need to file a prior notice with the FRB (which the FRB may disapprove under certain circumstances) under the Change in Bank Control Act. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control may exist under the Change in Bank Control Act if the individual or group of individuals acquires 10% or more of any class of voting securities of the bank holding company. A company may be presumed to have control under the BHCA if it acquires 5% or more of any class of voting securities of the bank holding company.
Deposit Insurance
The Bank is a member of the FDIC, and its deposits are insured by the FDIC up to the amount permitted by law. The Bank is thus subject to FDIC deposit insurance premium assessments. In November 2006, the FDIC adopted final regulations that set the deposit insurance assessment rates that took effect in 2007. The FDIC uses a risk-based assessment system that assigns insured depository institutions to one of four risk categories based on three primary sources of information - supervisory risk ratings for all institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have such ratings. The new premium rate structure imposes a minimum assessment of from five to seven cents for every $100 of domestic deposits on institutions that are assigned to the lowest risk category. This category currently encompasses substantially all insured institutions, including the Bank. A one-time assessment credit was available to offset 100% of the 2007 assessment. The $1.6 million remaining credit can be used to offset up to 90% of subsequent annual assessments through 2010, but it should be fully used in 2008. For institutions assigned to higher risk categories, the premiums that took effect in 2007 ranged from ten cents to forty-three cents per $100 of deposits.
The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of The Financing Corporation (FICO). The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2007 ranged from 1.22 cents to 1.14 cents per $100 of assessable deposits.
Other Statutes and Regulations
The Company and the Bank are subject to a myriad of other statutes and regulations affecting their activities. Some of the more important are:
Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications. The regulatory authorities have imposed “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.
Sections 23A and 23B of the Federal Reserve Act. The Bank is limited in its ability to lend funds or engage in transactions with the Company or other non-bank affiliates of the Company, and all such transactions must be on an arms-length basis and on terms at least as favorable to the Bank as those prevailing at the time for transactions with unaffiliated companies. Outstanding loans from the Bank to the Company or other non-bank affiliates of the Company may not exceed 10% of the Bank’s capital stock and surplus, and the total of such transactions between the Bank and all of its non-subsidiary affiliates may not exceed 20% of the Bank’s capital stock and surplus. These loans must be fully or over-collateralized.
Dividends. Whitney’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is the dividends that it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as well as to the Company’s payment of dividends to its shareholders. The Bank would need prior regulatory approval to pay the Company a dividend that exceeded the Bank’s current net income and retained net income from the two previous years. The Bank may not pay any dividend that would cause it to become undercapitalized or if it already is undercapitalized. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
Community Reinvestment Act. The Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA), and the related regulations issued by federal banking agencies. The CRA states that all banks have a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA also charges a bank’s primary federal regulator, in connection with the examination of the institution or the evaluation of certain regulatory applications filed by the institution, with the responsibility to assess the institution’s record in fulfilling its obligations under the CRA. The regulatory agency’s assessment of the institution’s record is made available to the public. The Bank received an “outstanding” rating following its most recent CRA examination.
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include provisions that:
·
limit the interest and other charges collected or contracted for by the Bank;
·
govern the Bank’s disclosures of credit terms to consumer borrowers;
·
require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
·
prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
·
require that the Bank safeguard the personal nonpublic information of its customers, provide annual notices to consumers regarding the usage and sharing of such information, and limit disclosure of such information to third parties except under specific circumstances; and
·
govern the manner in which the Bank may collect consumer debts.
As a result of the turmoil in the residential real estate and mortgage lending markets, there are several legislative and regulatory initiatives currently under discussion at both the federal and state levels that could, if adopted, alter the terms of existing mortgage loans, impose restrictions on future mortgage loan originations, diminish lenders’ rights against delinquent borrowers or otherwise change the ways in which lenders make and administer residential mortgage loans. If made final, any or all of these proposals could have a negative effect on the financial performance of Whitney’s mortgage lending operations, by, among other things, reducing the volume of mortgage loans that the Bank can originate and sell into the secondary market and impairing the Bank’s ability to proceed against certain delinquent borrowers with timely and effective collection efforts.
The deposit operations of the Bank are also subject to laws and regulations that:
·
require the Bank to adequately disclose the interest rates and other terms of consumer deposit accounts;
·
impose a duty on the Bank to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of financial records; and
·
govern automatic deposits to and withdrawals from deposit accounts with the Bank and the rights and liabilities of customers who use automated teller machines and other electronic banking services.
EMPLOYEES
At the end of 2007, the Company and the Bank had a total of 2,542 employees, or 2,474 employees on a full-time equivalent basis. Whitney affords its employees a variety of competitive benefit programs including retirement plans and group health, life and other insurance programs. The Company also supports training and educational programs designed to ensure that employees have the types and levels of skills needed to perform at their best in their current positions and to help them prepare for positions of increased responsibility.
AVAILABLE INFORMATION
The Company’s filings with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on Whitney’s website as soon as reasonably practicable after the Company files the reports with the SEC. Copies can be obtained free of charge by visiting the Company’s website at www.whitneybank.com. The Company’s website is not incorporated into this annual report on Form 10-K and it should not be considered part of this report.
EXECUTIVE OFFICERS OF THE COMPANY
Name and Age
Position Held and Recent Business Experience
William L. Marks, 64
Chief Executive Officer and Chairman of the Board of the Company
and the Bank since 1990
John C. Hope III, 59
President and Chief Operating Officer of the Company and the Bank since
2007; Executive Vice President of the Company from 1994 to 2007 and of the
Bank from 1998 to 2007
R. King Milling, 67
Vice-chairman of the Board of the Company and the Bank since 2007;
President of the Company and the Bank from 1994 to 2007;
Director of the Company and the Bank since 1978
Robert C. Baird, Jr., 57
Executive Vice President of the Company and the Bank since 1995,
Banking Services
Thomas L. Callicutt, Jr., 60
Executive Vice President and Chief Financial Officer of the Company
and the Bank since 1999 and Treasurer of the Company since
Rodney D. Chard, 65
Executive Vice President of the Company and the Bank since 1996,
Strategic Project Implementation
Francisco DeArmas, 46
Executive Vice President of the Company and the Bank since 2007,
Operations & Technology
Joseph S. Exnicios, 51
Executive Vice President of the Company and the Bank since 2004,
Senior Vice President of the Bank from 1994 to 2004,
New Orleans Banking
Kevin P. Reed, 47
Executive Vice President of the Company and the Bank since 2004,
Senior Vice President of the Bank from 1998 to 2004,
Trust & Wealth Management
Lewis P. Rogers, 55
Executive Vice President of the Company and the Bank since 2004,
Senior Vice President of the Bank from 1998 to 2004,
Credit Administration
John M. Turner, Jr., 46
Executive Vice President of the Company and the Bank since 2005,
Senior Vice President of the Bank from 1994 to 2005,
Banking Division
Joseph S. Schwertz, Jr., 51
Corporate Secretary of the Company and the Bank since 1993,
Senior Vice President of the Bank since 1994,
General Counsel
Item 1A:
Item 1A: RISK FACTORS
Whitney must recognize and attempt to manage a number of risks as it implements its strategies to successfully compete with other companies in the financial services industry. Some of the more important risks common to the industry and Whitney are:
·
credit risk, which is the risk that borrowers will be unable to meet their contractual obligations, leading to loan losses and reduced interest income;
·
market risk, which is the risk that changes in market rates and prices will adversely affect the results of operations or financial condition;
·
liquidity risk, which is the risk that funds will not be available at a reasonable cost to meet operating and strategic needs; and
·
operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or external events, such as natural disasters.
Although Whitney generally is not significantly more susceptible to adverse effects from these or other common risk factors than other industry participants, there are certain aspects of Whitney’s business model that may expose it to somewhat higher levels of risk. In addition to the other information contained in or incorporated by reference into this annual report on Form 10-K, these risk factors should be considered carefully in evaluating the Company's overall risk profile. Additional risks not presently known, or that are currently deemed immaterial, may also adversely affect Whitney's business, financial condition or results of operations.
Whitney’s profitability depends in substantial part on net interest income and on our ability to manage interest rate risk.
Whitney’s net interest income represented more than 75% of total revenues in each of the last five years. Net interest income is the difference between the interest earned on loans, investment securities and other earning assets, and interest owed on deposits and borrowings. Numerous and often interrelated factors influence Whitney’s ability to maintain and grow net interest income, and a number of these factors are addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations located in Item 7 of this annual report on Form 10-K. One of the most important factors is changes in market interest rates and in the relationship between these rates for different financial instruments and products and at different maturities. Such changes are generally outside the control of management and cannot be predicted with certainty. Although management applies significant resources to anticipating these changes and to developing and executing strategies for operating in an environment of change, they cannot eliminate the possibility that interest rate risk will negatively affect our net interest income and lead to earnings volatility.
For several years, Whitney has been positioned to be moderately asset sensitive over the near term, which would point to an expected improvement in net interest income in a rising rate environment and a reduction in net interest income as rates declined, holding other factors constant. Recent economic conditions have led to lower market rates toward the end of 2007 and into 2008, prompted in part by aggressive moves by the Federal Reserve as it attempts to counteract an economic slowdown associated in large part with the continued downturn in the housing market. These and possible further future rate reductions could have a negative impact on Whitney’s net interest income and net income.
Whitney’s market area is susceptible to hurricanes and tropical storms, which may increase the Company’s exposure to credit risk, operational risk and liquidity risk.
Most of Whitney’s market area lies within the coastal region of the five states bordering the Gulf of Mexico. This is a region that is susceptible to hurricanes and tropical storms. The two strong hurricanes that struck in 2005 had a major impact on the greater New Orleans area, southwest Louisiana and the Mississippi coast, with lesser impacts on coastal Alabama and the western panhandle of Florida. Within its broader market area, the greater New
Orleans area is Whitney’s primary base of operations and is home to branches and relationship officers that service approximately 40% of the Bank’s total loans and 50% of total deposits at December 31, 2007. The 2005 storms caused widespread property damage, required temporary or permanent relocations of a large number of residents and business operations, and severely disrupted normal economic activity in the impacted areas. Although the Bank was able to operate successfully in the aftermath of these storms, management carefully studied its risk posture and has taken a number of steps to reduce the Bank’s exposure to future natural disasters and make its disaster recovery plans and operating arrangement more resilient. Details of the storms’ impact on Whitney, both operationally and with respect to credit risk and liquidity, has been chronicled in Item 7 of the Company’s annual reports on Forms 10-K for 2006 and 2005 as well as in Item 2 of Part I of quarterly reports on Form 10-Q filed since the storms struck.
Whitney cannot predict the extent to which future storms may impact its exposure to credit risk, operational risk or liquidity risk.
The composition of Whitney’s loan portfolio could increase the volatility of our credit quality metrics and provisions for credit losses.
Whitney’s loan portfolio contains individual relationships, primarily with commercial customers, with outstanding balances that are relatively large in relation to our asset size. Changes in the credit quality of one or a few of these relationships could lead to increased volatility in our reported totals of loans with above-normal credit risk and in our provisions for credit losses over time.
Item 1B:
Item 1B: UNRESOLVED STAFF COMMENTS
None.
Item 2:
Item 2: PROPERTIES
The Company does not directly own any real estate, but it does own real estate indirectly through its subsidiaries. The Company’s executive offices are located in downtown New Orleans in the main office facility owned by the Bank. The Bank also owns an operations center in the greater New Orleans area. The Bank makes portions of its main office facility and certain other facilities available for lease to third parties, although such incidental leasing activity is not material to Whitney’s overall operations. The Bank maintained approximately 155 banking facilities in five states at December 31, 2007. The Bank owns approximately 70% of these facilities, and the remaining banking facilities are subject to leases, each of which management considers to be reasonable and appropriate for its location. Management ensures that all properties, whether owned or leased, are maintained in suitable condition. Management also evaluates its banking facilities on an ongoing basis to identify possible under-utilization and to determine the need for functional improvements, relocations or possible sales.
The Bank and a subsidiary of the Bank hold a variety of property interests acquired through the years in settlement of loans. Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K provides further information regarding such property interests and is incorporated here by reference.
Item 3:
Item 3: LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its subsidiaries is a party or to which any of their property is subject, other than ordinary routine litigation incidental to the Company’s business.
Item 4:
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5:
Item 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s stock trades on The Nasdaq Global Select Market under the ticker symbol “WTNY.” The Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K shows the high and low sales prices of the Company’s stock for each calendar quarter of 2007 and 2006, as reported on The Nasdaq Global Select Market, and is incorporated here by reference.
The approximate number of shareholders of record of the Company, as of February 29, 2008, was as follows:
Title of Class Shareholders of Record
Common Stock, no par value 5,353
Dividends declared by the Company are listed in the Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K, which is incorporated here by reference. For a description of certain restrictions on the payment of dividends see the section entitled “Supervision and Regulation” that appears in Item 1 of this annual report on Form 10-K.
The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of the Company’s common stock during the three months ended December 31, 2007.
Period
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
Maximum Number of
Shares that May Yet
Be Purchased under
the Plans or Programs (1)
October
4,425 (2)
$26.78
-
-
November
956,794
$25.55
956,794
3,043,206
December
938,297
$26.71
938,297
2,104,909
(1)
In November 2007, the Board of Directors authorized the Company to repurchase up to 4 million shares of its common stock. The program extends through December 2008.
(2)
Represents shares that were tendered to the Company as consideration for the exercise price of employee stock options.
STOCK PERFORMANCE GRAPH
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent the Company specifically incorporates it by reference into such filing.
The performance graph compares the cumulative five-year shareholder return on the Company’s common stock, assuming an investment of $100 on December 31, 2002 and the reinvestment of dividends thereafter, to that of the common stocks of United States companies reported in the Nasdaq Total Return Index and the common stocks of the KBW 50 Total Return Index. The KBW 50 Total Return Index is a proprietary stock index of Keefe, Bruyette & Woods, Inc., that tracks the returns of 50 large banking companies throughout the United States.
Item 7:
Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Whitney Holding Corporation and its subsidiaries (the Company or Whitney) and on their results of operations during 2007, 2006 and 2005. Nearly all of the Company’s operations are contained in its banking subsidiary, Whitney National Bank (the Bank). This discussion and analysis is intended to highlight and supplement information presented elsewhere in this annual report on Form 10-K, particularly the consolidated financial statements and related notes appearing in Item 8.
FORWARD-LOOKING STATEMENTS
This discussion contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide projections of results of operations or of financial condition or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future. Forward-looking statements often contain words such as “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project” or other words of similar meaning.
The forward-looking statements made in this discussion include, but may not be limited to, (a) comments on conditions impacting certain sectors of the loan portfolio; (b) information about changes in the duration of the investment portfolio with changes in market rates; (c) statements of the results of net interest income simulations run by the Company to measure interest rate sensitivity; (d) discussion of the performance of Whitney’s net interest income assuming certain conditions; (e) expectations about Whitney’s operational resiliency in the event of natural disasters; (f) comments on expected trends or changes in expense levels for retirement benefits; and (g) comments on expected benefits from cost control programs.
Whitney’s ability to accurately project results or predict the effects of plans or strategies is inherently limited. Although Whitney believes that the expectations reflected in its forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements.
Factors that could cause actual results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to:
·
Whitney’s ability to effectively manage interest rate risk and other market risk, credit risk and operational risk;
·
changes in interest rates that affect the pricing of Whitney’s financial products, the demand for its financial services and the valuation of its financial assets and liabilities;
·
Whitney’s ability to manage fluctuations in the value of its assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support its business;
·
possible changes in general economic and business conditions, including the real estate and financial markets, in the United States and in the region and communities Whitney serves;
·
the occurrence of natural disasters or acts of war or terrorism that directly or indirectly affect the financial health of Whitney’s customer base;
·
changes in laws and regulations that significantly affect the activities of the banking industry and its competitive position relative to other financial service providers;
·
technological changes affecting the nature or delivery of financial products or services and the cost of providing them;
·
Whitney’s ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by the Bank’s customers;
·
Whitney’s ability to effectively expand into new markets;
·
the cost and other effects of material contingencies;
·
the failure to attract or retain key personnel;
·
the failure to capitalize on growth opportunities and to realize cost savings in connection with business acquisitions; and
·
management’s inability to develop and execute plans for Whitney to effectively respond to unexpected changes.
You are cautioned not to place undue reliance on these forward-looking statements. Whitney does not intend, and undertakes no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.
OVERVIEW
Whitney earned $151 million for the year ended December 31, 2007, compared with annual net income of $145 million in 2006. Earnings were $2.23 per diluted share in 2007, compared to $2.20 for 2006.
Insurance Settlement
During the third quarter of 2007, Whitney reached a final settlement on insurance claims primarily arising from the hurricanes that struck portions of its market area in the late summer of 2005. With this settlement, the Company recognized a gain of $31.3 million ($19.9 million after-tax, or $.29 per diluted share.)
Mergers and Acquisitions
On March 2, 2007, Whitney completed its acquisition of Signature Financial Holdings, Inc. (Signature), the parent of Signature Bank. Signature Bank operated seven banking centers in the Tampa Bay metropolitan area with approximately $270 million in total assets, including $220 million of loans, and $210 million in deposits at acquisition. The transaction was valued at approximately $61 million, with $13 million paid to Signature’s shareholders in cash and the remainder in Whitney common stock totaling 1.49 million shares. Whitney’s financial information includes the results from these acquired operations since the acquisition date.
Loans and Earning Assets
Total loans at the end of 2007 were up 8%, or $535 million, from year-end 2006, with approximately 3%, or $203 million, associated with the operations acquired with Signature. Loan demand and customer development activity in Texas and Whitney’s Louisiana markets outside the metropolitan New Orleans area were the major contributors to the organic loan growth over this period. Market conditions continued to restrain the pace of new real estate financing in Florida and, since the end of 2006, have contributed to a decrease of approximately $100 million in loans serviced from Florida operations, excluding those acquired with Signature.
Loans, including loans held for sale, comprised 76% of average earning assets in compared to 73% in 2006. There was a similar decrease in the percentage of short-term investments in the earning-asset mix in 2007 compared to 2006 when the Company’s liquidity was still impacted by the deposit build-up following the 2005 hurricanes.
Deposits and Funding
Total deposits at December 31, 2007 were up 2%, or $150 million, compared to the end of 2006, mainly reflecting the deposits from the Signature acquisition. After some further reduction in the post-storm deposit accumulation in early 2007, Whitney has been returning to more normal deposit trends. Average deposits in 2007 declined 1% compared to 2006. Average noninterest-bearing deposits funded approximately 28% of average earning assets in 2007, and the percentage of funding from all noninterest-bearing sources was 33% for the year. These percentages, while down from 32% and 36%, respectively, in 2006, are comparable to pre-storm levels. Higher-cost interest-bearing funds, which include time deposits and borrowings, funded 34% of average earning assets in 2007, compared to 29% in 2006, and up somewhat from pre-storm levels. This reflected a number of factors, including the relative attractiveness of rates on the underlying deposit products in response to market rates, increased use of the Company’s treasury-management deposit products by commercial customers with excess liquidity, and the issuance by the Bank of $150 million in long-term subordinated debt in late March 2007.
Net Interest Income
Whitney’s net interest income (TE) for 2007 decreased $6.6 million, or 1%, from 2006. Average earning assets increased 3% between these years, and there was some favorable shift in the mix of assets. The net interest margin (TE) was 4.89% for 2007, down 22 basis points from 2006. The overall yield on earning assets in 2007 was up 26 basis points from 2006, mainly reflecting the shift in asset mix. The cost of funds increased 48 basis points between these years, mainly in response to the customer-driven shift in the funding mix to higher-cost sources.
Provision for Credit Losses and Credit Quality
Whitney provided $17.0 million for credit losses in 2007 compared to $3.7 million in 2006. Whitney’s nonperforming loans and loans criticized through its credit-risk rating process increased during 2007, mainly reflecting weaknesses identified in residential-related credits. In 2007, loan charge-offs, net of recoveries, were $8.4 million, or .11% of average loans, compared to $19.4 million, or .29% of average loans, in 2006.
Noninterest Income
Noninterest income in 2007 increased 9%, or $7.6 million, over 2006, excluding the insurance settlement gain and income associated with foreclosed assets and surplus property in each period. Improvement was noted in most all recurring revenue sources. Deposit service charge income grew by 9% compared to 2006, reflecting improved pricing and increased fee potential from business customers in 2007 as well as reduced charging opportunities in 2006 from the higher post-storm liquidity in the deposit base. Increases were also registered for bank card fees, trust service fees, and fees from investment services, mainly reflecting internal growth and contributions from acquired operations.
Noninterest Expense
Noninterest expense increased 3%, or $10.6 million, in 2007. Incremental operating costs associated with acquired operations, including amortization of intangibles, totaled approximately $8.5 million. Whitney’s personnel expense increased 7%, or $13.3 million, in total, including approximately $3.7 million for acquired staff. Compensation expense under management incentive programs increased by $2.7 million in 2007, largely related to share-based compensation. The cost of employee benefits decreased by $1.3 million compared to 2006, mainly reflecting the impact of the substantial elimination of postretirement health and life insurance benefits in 2007. The total of all other noninterest expense unrelated to personnel decreased a net $2.7 million, or 2%, compared to 2006. Whitney incurred nonrecurring or periodic expenses associated with the 2005 storms that totaled approximately $2 million in 2007 and $11 million in 2006.
CRITICAL ACCOUNTING POLICIES
Whitney prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. A discussion of certain accounting principles and methods of applying those principles that are particularly important to this process is included in Note 2 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. The Company is required to make estimates, judgments and assumptions in applying these principles to determine the amounts and other disclosures that are presented in the financial statements and discussed in this section.
Whitney believes that the determination of its estimate of the allowance for loan losses involves a higher degree of judgment and complexity than its application of other significant accounting policies. Factors considered in this determination and management’s process are discussed in Note 2 and in the following section on “Loans, Credit Risk Management and Allowance and Reserve for Credit Losses.” Although management believes it has identified appropriate factors for review and designed and implemented adequate procedures to support the estimation process that are consistently followed, the allowance remains an estimate about the effect of matters that are inherently uncertain. Over time, changes in economic conditions or the actual or perceived financial condition of Whitney’s credit customers or other factors can materially impact the allowance estimate, potentially subjecting the Company to significant earnings volatility.
Management makes a variety of assumptions in applying principles that govern the accounting for benefits under the Company’s defined benefit pension plans and other postretirement benefit plans. These assumptions are essential to the actuarial valuation that determines the amounts Whitney recognizes and certain disclosures it makes in the consolidated financial statements related to the operation of these plans (see Note 15 in Item 8). Two of the more significant assumptions concern the expected long-term rate of return on plan assets and the rate needed to discount projected benefits to their present value. Changes in these assumptions impact the cost of retirement benefits recognized in net income and comprehensive income. Certain assumptions are closely tied to current conditions and are generally revised at each measurement date. For example, the discount rate is reset annually with reference to market yields on high quality fixed-income investments. Other assumptions, such as the rate of return on assets, are determined, in part, with reference to historical and expected conditions over time and are not as susceptible to frequent revision. Holding other factors constant, the cost of retirement benefits will move opposite to changes in either the discount rate or the rate of return on assets. Recent trends in the cost of retirement benefits are discussed in the section on “Noninterest Expense.”
FINANCIAL CONDITION
LOANS, CREDIT RISK MANAGEMENT AND ALLOWANCE AND RESERVE FOR CREDIT LOSSES
Loan Portfolio Developments
Total loans at the end of 2007 were up 8%, or $535 million, from year-end 2006, with approximately 3%, or $203 million, associated with the operations acquired with Signature. Loan demand and customer development activity in Texas and Whitney’s Louisiana markets outside the metropolitan New Orleans area were the major contributors to organic loan growth over this period, with a smaller contribution from the Alabama market. Loans serviced by Whitney Bankers in Houston grew by 20% year over year, and those serviced in Louisiana markets outside New Orleans, grew by 14%. At December 31, 2007, the percentage of loans serviced from the Company’s geographic markets was as follows: metropolitan New Orleans, 37%; other Louisiana markets, 18%; Texas, 15%; Alabama and Mississippi, 12%; the Florida panhandle, 7%; and the Tampa Bay metropolitan area, 11%. Market conditions continue to restrain the pace of new real estate project financing in Florida and, since the end of 2006, have contributed to a decrease of approximately $100 million in loans serviced from Florida operations, excluding those acquired with Signature.
Table 1 shows loan balances by type of loan at December 31, 2007 and at the end of the previous four years. The following discussion provides an overview of the composition of the different portfolio sectors and the customers served in each as well as additional information on recent changes.
The portfolio of commercial loans, other than those secured by real property, increased 4%, or $97 million, between year-end 2006 and 2007, with only a limited contribution from the Signature acquisition. Overall, the portfolio has remained diversified, with customers in a range of industries, including oil and gas exploration and production, marine transportation and maritime construction, wholesale and retail trade in various durable and nondurable products and the manufacture of such products, financial services, and professional services. The organic growth in market areas outside of metropolitan New Orleans has increased the geographic diversification of customers represented in the commercial portfolio. Also included in the commercial loan category are loans to individuals, generally secured by collateral other than real estate, that are used to fund investments in new or expanded business opportunities.
Loans outstanding to oil and gas industry customers represented approximately 10% of total loans at December 31, 2007, up from approximately 9% at year-end 2006. The majority of Whitney’s customer base in this industry provides transportation and other services and products to support exploration and production activities. The Bank seeks service and supply customers who are quality operators that can manage through volatile commodity price cycles. With expectations of sustained higher commodity prices, Whitney has increased its attention to lending opportunities in the exploration and production sector in recent years, and loans outstanding to this sector comprised over one-third of the oil and gas industry portfolio at December 31, 2007 and 2006. The Bank contracts with a petroleum engineer who supports the underwriting of loans to exploration and production customers. Management, through the Bank’s Credit Policy Committee, monitors both industry fundamentals and portfolio performance and credit quality on a formal ongoing basis and establishes and adjusts internal exposure guidelines as a percent of capital both for the industry as a whole and for individual sectors within the industry. The level of activity in this
industry continues to have an important impact on the economies of certain portions of Whitney’s market area, particularly Houston and southern Louisiana.
Outstanding balances under participations in larger shared-credit loan commitments totaled $444 million at the end of 2007, including approximately $194 million related to the oil and gas industry. The total outstanding is up $61 million from year-end 2006. Substantially all of the shared credits are with customers operating in Whitney’s market area.
The commercial real estate portfolio includes loans for construction and real estate development, both commercial and residential, loans secured by multi-family residential properties and other income-producing properties, and loans secured by properties used in commercial or industrial operations. This portfolio sector grew 12%, or $384 million, during 2007. The Signature acquisition initially added approximately $140 million to this portfolio sector, mainly related to commercial mortgages. The Bank’s Credit Policy Committee has also set exposure guidelines for the overall portfolio of commercial real estate loans as well as for loans to developers or owner-users that are secured by various subcategories of property. As with lending to the oil and gas industry, management regularly monitors real estate industry fundamentals and portfolio credit quality.
Project financing is an important component of the activity in this portfolio sector, and sector growth is impacted by the availability of new projects as well as the anticipated refinancing of seasoned income properties in the secondary market and payments on residential development loans as inventory is sold. Whitney continues to develop new business in this highly competitive sector throughout its market area, although the pace of new financing has been restrained by recent weaknesses primarily affecting condominium and single-family residential development, particularly in certain parts of Florida. Much of this sector’s growth during 2007 came from customers in Louisiana markets outside the New Orleans metropolitan area and in the Houston market, and involved a variety of retail, commercial and industrial facilities, as well as some multi-family and single-family residential development. The future pace of new real estate project financing in Whitney’s market area will reflect the level of confidence by Whitney and its customers in the sustainability of economic conditions favorable to successful project completion.
At December 31, 2007, the percentage of the commercial real estate portfolio serviced from the Company’s geographic markets was as follows: metropolitan New Orleans, 25%; other Louisiana markets, 16%; Texas, 18%; Alabama and Mississippi, 13%; the Florida panhandle, 10%; and the Tampa Bay metropolitan area, 19%. Within the combined portfolios for Alabama, Mississippi and Florida, loans to investors or developers totaled approximately $360 million for construction project financing, $210 million to finance developed and undeveloped land for future construction projects, and $390 million to finance other commercial real estate holdings.
The residential mortgage loan portfolio increased 5%, or $41 million, from the end of 2006 to year-end 2007. Growth in this portfolio sector has mainly come both from acquisitions and from the promotion of tailored home mortgage loan products generally targeted to the private client and higher net worth customer base. The Bank continues to sell most conventional residential mortgage loan production in the secondary market. Whitney has no meaningful exposure to sub-prime home mortgage loans.
Loans to individuals include various consumer installment and credit line products. The 5% growth in this portfolio sector during 2007 came largely through the Signature acquisition.
Table reflects contractual loan maturities, unadjusted for scheduled principal reductions, prepayments or repricing opportunities. Approximately 60% of the value of loans with a maturity greater than one year carries a fixed rate of interest.
Credit Risk Management and Allowance and Reserve for Credit Losses
General Discussion of Credit Risk Management and Determination of Credit Loss Allowance and Reserve
Whitney manages credit risk mainly through adherence to underwriting and loan administration standards established by its Credit Policy Committee and through the efforts of the credit administration function to ensure consistent application and monitoring of standards throughout the Company. Written credit policies define underwriting criteria, concentration guidelines, and lending approval processes that cover individual authority and the appropriate involvement of regional loan committees and a senior loan committee. The senior loan committee includes the Bank’s senior lenders, senior officers in Credit Administration, the Chief Operating Officer and the Chief Executive Officer.
Commercial credits, including commercial real estate loans, are underwritten principally based upon cash flow coverage, but additional support is regularly obtained through collateralization and guarantees. Commercial loans are typically relationship-based rather than transaction-driven. Loan concentrations are monitored monthly by management and the Board of Directors. Consumer loans are centrally underwritten with reference to the customer’s debt capacity and with the support of automated credit scoring tools, including appropriate secondary review procedures.
A strong monitoring process is the key to early identification of problem credits. Lending officers are responsible for ongoing monitoring and the assignment of risk ratings to individual loans based on established guidelines. An independent credit review function reporting to the Audit Committee of the Board of Directors assesses the accuracy of officer ratings and the timeliness of rating changes and performs concurrent reviews of the underwriting processes. Once a problem relationship over a certain size threshold is identified, a quarterly watch committee process is initiated. The watch committee, composed of senior lending and credit administration management, must approve any substantive changes to identified problem credits and will assign relationships to a special credits department when appropriate.
Management’s evaluation of credit risk in the loan portfolio is reflected in the estimate of probable losses inherent in the portfolio that is reported in the Company’s financial statements as the allowance for loan losses. Changes in this evaluation over time are reflected in the provision for credit losses charged to expense. The methodology for determining the allowance involves significant judgment, and important factors that influence this judgment are re-evaluated quarterly to respond to changing conditions.
The recorded allowance encompasses three key elements: (1) allowances established for losses on criticized loans; (2) allowances based on historical loss experience for loans with acceptable credit quality and groups of homogeneous loans not individually rated; and (3) allowances based on general economic conditions and other qualitative risk factors internal and external to the Company.
Criticized loans are credits with above-average weaknesses as identified through the internal risk-rating process. Criticized loans include those that are deemed to be impaired because all contractual amounts probably will not be collected as they become due. Specific allowances are determined for impaired loans based on the present value of expected future cash flows discounted at the loan’s contractual interest rate, the fair value of the collateral if the loan is collateral dependent, or, when available, the loan’s observable market price. The allowance for the remainder of criticized loans is calculated by applying loss factors to loan balances aggregated by the severity of the internal risk rating. The loss factors applied to criticized loans are determined with reference to the results of migration analysis, which analyzes the charge-off experience over time for loans within each rating category.
For the second element of the allowance, loans assessed as having average or better credit quality with similar risk ratings and homogeneous loans not subject to individual rating, such as residential mortgage loans, consumer installment loans and draws under consumer credit lines, are grouped together and individual loss factors are applied to each group. The loss factors for homogeneous loan groups are based on average historical charge-off information. Industry-based factors are applied to other portfolio segments for which a migration analysis has not been implemented.
Determining the final element of the allowance involves assessing how other current factors, both internal and external, impact the accuracy of results obtained for the other two elements. Internally, management must consider whether trends have been identified in the quality of underwriting and loan administration as well as in the timely identification of credit quality issues. Management also monitors shifts in portfolio concentrations and other changes in portfolio characteristics that indicate levels of risk not fully captured in the loss factors. External factors include local and national economic trends, as well as changes in the economic fundamentals of specific industries that are well-represented in Whitney’s customer base. Management has established procedures to help ensure a consistent approach to this inherently judgmental process over time.
The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit, and management establishes reserves as needed for its estimate of probable losses on such commitments.
Credit Quality Statistics and Components of Credit Loss Allowance and Reserve
The total of loans criticized through the Company’s credit risk-rating process increased $78 million during 2007 to $305 million at December 31, 2007, or 4% of the total loan portfolio. Loans for residential development, investment and other residential purposes comprised approximately 40% of the criticized total at year-end 2007 and produced most of the overall net increase in criticized loans during the year. Nonresidential real estate loans accounted for approximately 30% of the criticized total, with the underlying collateral fairly evenly divided between income-producing properties and owner-occupied properties. Loans to traditional commercial and industrial relationships comprised approximately 25% of the criticized total, with no significant concentrations related to industries or markets. Whitney has no meaningful exposure to sub-prime home mortgage loans.
The criticized loan total at December 31, 2007 included $202 million of loans identified as having well-defined weaknesses that would likely result in some loss if not corrected, an increase of $45 million from the end of 2006. There was a $30 million increase in the total of loans warranting special attention since the end of 2006. The total for this rating category at year-end 2007 was $91 million. Loans for which full repayment is in doubt totaled $11 million at December 31, 2007, up $3 million from the end of 2006. The changes in each of these rating categories during 2007 mainly reflected weaknesses in residential-related loans. The allowance determined for criticized loans at December 31, 2007, including those separately evaluated for impairment, increased $12 million from year-end 2006.
Included in the total of criticized loans at December 31, 2007 is $120 million of nonperforming loans, which is up $64 million from year-end 2006. This increase also came predominantly from residential-related loans, mainly in Florida and Alabama, including one $13 million credit for a Florida development with project-specific issues not directly related to overall market conditions. Approximately 43% of the total of nonperforming loans at December 31, 2007 was from Whitney’s Florida operations and 14% from Alabama. Another 38% of the total was from Louisiana operations, mainly concentrated in commercial and industrial credits. Table 3 provides information on nonperforming loans and other nonperforming assets at the end of each of the five years in the period ended December 31, 2007. Nonperforming loans encompass substantially all loans separately evaluated for impairment.
A comparison of contractual interest income on nonperforming loans with the cash-basis and cost-recovery interest actually recognized on these loans for 2007, 2006 and 2005 is presented in Note 8 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. Whitney’s policy for placing loans on nonaccrual status is presented in Note 2 to the consolidated financial statements.
The overall allowance determined as of December 31, 2007 was $12.0 million above the allowance at year-end 2006, mainly reflecting the increase in the allowance determined for criticized loans noted above. The allowance for loans with average or better credit quality ratings and loans not subject to individual rating increased $1.5 million from the end of 2006 to December 31, 2007, mainly driven by loan growth. During 2007, Whitney reversed the remaining $1.1 million component of the allowance that had reflected the estimate of the incremental impact of the 2005 storms on losses in the consumer credit sectors of the portfolio. The performance of these portfolio sectors, which were not subject to individual detailed storm-impact reviews, proved better than anticipated and did not exhibit the delayed credit problems seen in the aftermath of similar disasters. Management’s relative assessment of economic and other qualitative risk factors between these dates had little impact, as reduced uncertainty regarding surrounding post-storm economic progress was offset by concerns over more recent economic trends, including both the severe downturn in the housing market and growing signs of a broader economic slowdown.
Table recaps activity in the allowance for loan losses and in the reserve for losses on unfunded credit commitments over the past five years. The allocation of the allowance to loan categories is included in Table 5, together with the percentage of total loans in each category.
INVESTMENT SECURITIES
The investment securities portfolio balance of $1.99 billion at December 31, was up $99 million, or 5%, compared to December 31, 2006. Average investment securities increased $69 million, or 4%, between 2006 and 2007. The composition of the average portfolio in investment securities and effective yields are shown in Table 12.
Information about the contractual maturity structure of investment securities at December 31, 2007, including the weighted-average yield on such securities, is shown in Table 6. The carrying value of securities with explicit call options totaled $163 million at year-end 2007. These call options and the scheduled principal reductions and projected prepayments on mortgage-backed securities are not reflected in Table 6. Including expected principal reductions on mortgage-backed securities, the weighted-average maturity of the overall securities portfolio was approximately 32 months at December 31, 2007, compared to 37 months at year-end 2006.
The weighted-average taxable-equivalent portfolio yield was approximately 4.88% at December 31, 2007, compared to 4.74% at December 31, 2006. A substantial majority of the securities in the investment portfolio bear fixed interest rates. The investment in mortgage-backed securities with final contractual maturities beyond ten years shown in Table 6 included approximately $225 million of adjustable-rate issues with a weighted-average yield of 4.42%. The initial reset dates on these securities are predominantly within three years of year-end 2007.
The mix of investments in the portfolio did not change significantly during 2007. The duration of the overall investment portfolio was 2.1 years at December 31, 2007, and would extend to 3.5 years assuming an immediate basis point increase in market rates, according to the Company’s asset/liability management model. Duration provides a measure of the sensitivity of the portfolio’s fair value to changes in interest rates. At December 31, 2006, the portfolio’s estimated duration was 2.4 years.
Securities available for sale made up the bulk of the total investment portfolio at December 31, 2007. Gross unrealized losses on securities available for sale totaled $10.4 million at December 31, 2007 and were mainly related to mortgage-backed securities. The gross losses represented 1.2% of the total amortized cost of the underlying securities. Note 5 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K provides information on the process followed by management to evaluate whether unrealized losses on securities, both those available for sale and those held to maturity, represent impairment that is other than temporary and that should be recognized with a charge to operations. Substantially all the unrealized losses at December 31, 2007 resulted from increases in market interest rates over the yields available at the time the underlying securities were purchased. Management identified no value impairment related to credit quality in the portfolio, and Whitney holds no securities that are tied to sub-prime home mortgage loans. In addition, management has the intent and ability to hold these securities until the market-based impairment is recovered; therefore, no value impairment was determined to be other than temporary.
The Company does not normally maintain a trading portfolio, other than holding trading account securities for short periods while buying and selling securities for customers. Such securities, if any, are included in other assets in the consolidated balance sheets.
Apart from securities issued or guaranteed by the U. S. government or its agencies, Whitney held no investment in the securities of a single issuer at December 31, 2007 that exceeded 10% of its shareholders’ equity.
DEPOSITS AND BORROWINGS
Total deposits at December 31, 2007 were up 2%, or $150 million, compared to a year earlier, mainly reflecting the deposits added with the Signature acquisition. This followed a decrease of 2%, or $172 million, from year-end 2005 to the end of 2006. The surge in deposits after the late-summer hurricanes of 2005 peaked around the end of the first quarter of 2006, and anticipated reductions became evident mainly over the second half of 2006. After some further reduction in early 2007 in the post-storm deposit accumulation, Whitney has been returning to more normal deposit trends later in the year, both with respect to seasonal fluctuations and overall growth rates. On average, total deposits decreased 1%, or approximately $79 million, in 2007 compared to 2006. Table 7 shows the composition of deposits at December 31, 2007 and at the end of the two previous years. The composition of average deposits and the effective rate paid on interest-bearing deposits for each of these years is presented in Table 12.
The post-storm influx of deposits was initially concentrated in noninterest-bearing and certain other lower-cost deposit products, particularly personal savings accounts. The anticipated reductions to these storm-related deposits as well as some migration to higher-yielding products contributed to a 3%, or $197 million, decrease in lower-cost deposits from December 31, 2006 to the end of 2007, and a decrease of 10%, or $639 million, in the two years since December 31, 2005. Noninterest-bearing demand deposits comprised 32% of total deposits at December 31, 2007, comparable to pre-storm levels, but down from 35% a year earlier and 38% at the end of 2005.
Higher-cost time deposits at December 31, 2007 were up 16%, or $348 million, compared to year-end 2006, with approximately $47 million associated with Signature. A portion of this growth reflected efforts to attract new customers in certain parts of Whitney’s market area where banking relationships were disrupted by mergers of competitors. Time deposits of $100,000 or more include competitively bid public funds and excess funds of certain commercial and private banking customers that are maintained in treasury-management deposit products pending redeployment for corporate or investment purposes. Whitney has attracted these funds partly as an alternative to other short-term borrowings. Customers held $705 million of funds in treasury-management deposit products at December 31, 2007, up $219 million from the total held at December 31, 2006. Strong liquidity among Whitney’s commercial customers, particularly those in the oil and gas industry and in heavy construction, has supported this growth. Public fund time deposits totaled $251 million at year-end 2007, which was $12 million lower than the end of 2006.
TABLE 8. MATURITIES OF TIME DEPOSITS
Deposits of
Deposits of
$100,000
less than
(in thousands)
or more
$100,000
Total
Three months or less
$1,184,157
$267,904
$1,452,061
Over three months through six months
315,616
239,574
555,190
Over six months through twelve months
231,872
224,273
456,145
Over twelve months
26,929
92,133
119,062
Total
$1,758,574
$823,884
$2,582,458
Short-term and other borrowings at December 31, 2007 were up 82%, or $410 million, from year-end 2006. The main source of short-term borrowings has been the sale of securities under repurchase agreements to customers using Whitney’s treasury management sweep product. Total borrowings from customers under repurchase agreements increased approximately 76%, or $333 million, from year-end 2006 to the end of 2007, reflecting in part certain large customer transactions at the end of the current year. Average borrowings under repurchase agreements increased 19%, or $92 million, between 2006 and 2007. The strong liquidity in the commercial customer base has also supported the growth in this source of funds. Because of the underlying customer relationship, these borrowings can be a relatively stable source of funds. Additional information on borrowings, including yields and maximum amounts borrowed, is presented in Note 12 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K.
In late March 2007, the Bank issued $150 million in ten-year subordinated notes to augment the Bank’s regulatory capital and enhance its capacity for future growth.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
Shareholders’ equity totaled $1.23 billion at December 31, 2007, which represented an increase of $116 million from the end of 2006. The 1.49 million shares issued in the acquisition of Signature in March 2007 were valued at $48 million. Whitney repurchased 1.90 million of its common shares during 2007 at a cost of $50 million under a program announced in November 2007 to repurchase up to four million shares. The Company retained $72 million of earnings, net of dividends declared, and recognized other comprehensive income of $18 million representing an unrealized net holding gain on securities available for sale during 2007. Whitney recognized $19 million in additional equity during 2007 from activity in share-based compensation plans for employees and directors, including option exercises. Total shareholders’ equity grew $152 million in 2006, to $1.11 billion at December 31, 2006. Whitney issued 2.16 million shares in the acquisition of First National Bancshares, Inc. in April 2006 that were valued at $75 million. During 2006, the Company retained $74 million of earnings, net of dividends declared, but this was partly offset by a $22 million charge to accumulated comprehensive income on the adoption of SFAS No. 158 as discussed in Note 15 in Item 8. Activity in share-based compensation plans during 2006 generated $20 million in additional equity for the year. The Company declared dividends during 2007 that represented a payout totaling 52% of earnings for the year. The dividend payout ratio was 49% in 2006 and 60% in 2005.
The ratios in Table 9 indicate that the Company remained strongly capitalized at December 31, 2007. Tier 2 and total regulatory capital at December 31, 2007 include $150 million in subordinated debt issued by the Bank in the first quarter of 2007. The increase in risk-weighted assets from the end of 2006 mainly reflected the impact of the Signature acquisition and organic loan growth. The goodwill and other intangible assets recognized in business acquisitions are excluded from risk-weighted assets. These intangible assets, however, are also deducted in determining regulatory capital and thereby serve to offset the addition to capital for the value of shares issued as consideration for the acquisition.
The regulatory capital ratios for the Bank exceed the minimum required ratios, and the Bank has been categorized as “well-capitalized” in the most recent notice received from its primary regulatory agency.
LIQUIDITY MANAGEMENT AND CONTRACTUAL OBLIGATIONS
Liquidity Management
The objective of liquidity management is to ensure that funds are available to meet cash flow requirements of depositors and borrowers, while at the same time meeting the operating, capital and strategic cash flow needs of the Company and the Bank. Whitney develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process, making full use of quantitative modeling tools available to project cash flows under a variety of possible scenarios. Projections are also made assuming credit-stressed conditions, although such conditions are not currently anticipated.
Liquidity management on the asset side primarily addresses the composition and maturity structure of the loan portfolio and the portfolio of investment securities and their impact on the Company’s ability to generate cash flows from scheduled payments, contractual maturities, and prepayments, through use as collateral for borrowings, and through possible sale or securitization. Table 2 above presents the contractual maturity structure of the loan portfolio and Table 6 presents contractual investment maturities.
On the liability side, liquidity management focuses on growing the base of core deposits at competitive rates, including the use of treasury-management products for commercial customers, while at the same time ensuring access to economical wholesale funding sources. The section above on “Deposits and Borrowings” discusses changes in these liability-funding sources in 2007. The Bank is a member of the Federal Home Loan Bank (FHLB) system, which provides the Bank access to a variety of FHLB advance products as an alternative source of funds. In addition, both the Company and the Bank have access to external funding sources in the financial markets, and the Bank has developed the ability to gather deposits at a nationwide level, although it has not used this ability to date.
Cash generated from operations is another important source of funds to meet liquidity needs. The consolidated statements of cash flows located in Item 8 of this annual report on Form 10-K present operating cash flows and summarize all significant sources and uses of funds for each year in the three-year period ended December 31, 2007.
At December 31, 2007, Whitney Holding Corporation had approximately $126 million in cash and demand notes from the Bank available to provide liquidity for acquisitions, dividend payments to shareholders, stock repurchases or other corporate uses, before consideration of any future dividends that may be received from the Bank. During 2008, the Bank will have available an amount equal to approximately $113 million plus its current net income to declare as dividends to the Company without prior regulatory approval.
Contractual Obligations
Table summarizes payments due from the Company and the Bank under specified long-term and certain other contractual obligations as of December 31, 2007. Obligations under deposit contracts and short-term borrowings are not included. The maturities of time deposits are scheduled in Table 8 above in the section on “Deposits and Borrowings.” Purchase obligations represent legal and binding contracts to purchase services or goods that cannot be settled or terminated without paying substantially all of the contractual amounts. Not included are a number of contracts entered into to support ongoing operations that either do not specify fixed or minimum amounts of goods or services or are cancelable on short notice without cause and without significant penalty. The consolidated statements of cash flows provide a picture of Whitney’s ability to fund these and other more significant cash operating expenses, such as interest expense and compensation and benefits, out of current operating cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
As a normal part of its business, the Company enters into arrangements that create financial obligations that are not recognized, wholly or in part, in the consolidated financial statements. Certain of these arrangements, such as noncancelable operating leases, are reflected in Table 10 above. The most significant off-balance sheet obligations are the Bank’s commitments under traditional credit-related financial instruments. Table 11 schedules these commitments as of December 31, 2007 by the periods in which they expire. Commitments under credit card and personal credit lines generally have no stated maturity.
Revolving loan commitments are issued primarily to support commercial activities. The availability of funds under revolving loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. A number of such commitments are used only partially or, in some cases, not at all before they expire. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates, and many lines remain partly or wholly unused. Unfunded balances on revolving loan commitments and credit lines should not be used to project actual future liquidity requirements. Nonrevolving loan commitments are issued mainly to provide financing for the acquisition and development or construction of real property, both commercial and residential, although many are not expected to lead to permanent financing by the Bank. Expectations about the level of draws under all credit-related commitments are incorporated into the Company’s liquidity and asset/liability management models.
Substantially all of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors. The Bank has historically had minimal calls to perform under standby agreements.
ASSET/LIABILITY MANAGEMENT
The objective of the Company’s asset/liability management is to implement strategies for the funding and deployment of its financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk.
Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company has developed a model to measure its interest rate sensitivity over the near term by running net interest income simulations and monitors longer-term interest rate risk by modeling the sensitivity of its economic value of equity. The model can be used to test the Company’s sensitivity in various economic environments. The model incorporates management’s assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates. Assumptions can also be entered into the model to evaluate the impact of possible strategic responses to changes in the competitive environment. Management, through the Company’s Investment and Asset & Liability Committee, monitors simulation results against rate sensitivity guidelines specified in Whitney’s asset/liability management policy.
The net interest income simulations run at the end of 2007 indicated that Whitney was moderately asset sensitive over the near term, similar to its position at year-end 2006. Based on these simulations, annual net interest income (TE) would be expected to increase $24.3 million, or 5.2%, and decrease $26.5 million, or 5.6%, if interest rates instantaneously increased or decreased, respectively, from current rates by 100 basis points. These changes are measured against the results of a base simulation run that uses growth forecasts as of the measurement date and that assumes a stable rate environment and structure. The comparable simulation run at year-end 2006 produced results that ranged from a positive impact on net interest income (TE) of $21.1 million, or 4.4%, to a negative impact of $22.1 million, or 4.6%.
The actual impact that changes in interest rates have on net interest income will depend on many factors. These factors include Whitney’s ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing when assets and liabilities reprice, the magnitude of interest rate changes and corresponding movement in interest rate spreads, and the level of success of asset/liability management strategies that are implemented.
Changes in interest rates affect the fair values of financial instruments. The earlier section on Investment Securities and Notes 5 and 19 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K contain information regarding fair values.
The Company has made minimal use of investments in financial instruments or participations in agreements with values that are linked to or derived from changes in the value of some underlying asset or index. These are commonly referred to as derivatives and include such instruments as interest rate swaps, futures, forward contracts, option contracts, and other financial arrangements with similar characteristics. Management continues to evaluate whether to make additional use of derivatives as part of its asset/liability and liquidity management processes.
RESULTS OF OPERATIONS
NET INTEREST INCOME (TE)
Whitney’s net interest income (TE) decreased $6.6 million, or 1%, in 2007 compared to 2006. Average earning assets were 3%, or $287 million, higher in 2007, while the net interest margin (TE) contracted 22 basis points to 4.89% from 2006. The net interest margin is net interest income (TE) as a percent of average earning assets. Tables 12 and 13 provide details on the components of the Company’s net interest income (TE) and net interest margin (TE).
The overall yield on earning assets increased 26 basis points to 6.92% in 2007, mainly reflecting the shift in the asset mix. Loans, which in Table 12 include loans held for sale, comprised 76% of average earning assets for compared to 73% in 2006. There was a similar decrease in the percentage of short-term investments in the earning-asset mix in 2007 compared to 2006, when the Company’s liquidity position was still impacted by the deposit build-up following the 2005 hurricanes. Loan yields (TE) for 2007 were up 14 basis points compared to 2006. Whitney’s loan portfolio includes a large variable-rate segment, and the underlying benchmark rates in 2007 were relatively stable on average compared to 2006, with declines noted toward the end of the 2007 and continuing into early 2008. The rates on approximately 28%, or $2.1 billion, of the loan portfolio at year-end were tied to changes in Libor benchmarks, with another 25%, or $1.9 billion, tied to prime. Declines in Libor-based indices lagged as overall market rates eased in the latter part of 2007, but have resumed more normal patterns in early 2008. The yield (TE) on the largely fixed-rate investment portfolio improved 22 basis points between 2006 and 2007.
The overall cost of funds for 2007 increased 48 basis points from 2006, mainly in response to the shift in the funding mix toward higher-cost sources coupled with continued pressure from competitive market rates. Average deposits in 2007 declined 1% compared to 2006. Average noninterest-bearing deposits funded approximately 28% of average earning assets in 2007, and the percentage of funding from all noninterest-bearing sources was 33% for the year. These percentages, while down from 32% and 36%, respectively, in 2006, are comparable to pre-storm levels. Higher-cost interest-bearing funds, which include time deposits and borrowings, funded 34% of average earning assets in 2007, compared to 29% in 2006, and up somewhat from pre-storm levels. This reflected a number of factors, including the relative attractiveness of rates on the underlying deposit products in response to market rates, increased use of the Company’s treasury-management deposit products by commercial customers with excess liquidity, and the issuance of $150 million in long-term subordinated Bank debt in late March 2007.
Overall, Whitney continues to be moderately asset sensitive over the near term. As the overall economic outlook has weakened, management has anticipated downward pressure on market interest rates and is continuing to aggressively manage its deposit and loan rates to mitigate the impact of the rate environment on its net interest income.
Net interest income (TE) increased $84.4 million, or 21%, in 2006 compared to 2005, driven by 15% growth in average earning assets between these periods and a 26-basis point widening of the net interest margin. The most important factors behind the increase in net interest income in 2006 were earning asset growth, supported in part by the funds retained from the post-storm deposit build-up, higher short-term market interest rates, the favorable impact on the funding mix of post-storm liquidity in the deposit base, and active management of the pricing structure for both loans and deposits.
A portion of the increase in average earning assets in 2006 reflected the significant influx of deposit funds that followed the late-summer hurricanes in 2005 which were mainly deployed in short-term investments. Liquidity-management investments increased to 8% of average earning assets in 2006 as compared to 1% in 2005, while loans comprised 73% of earning assets in 2006, down from 76% in 2005. The overall yield on earning assets increased 81 basis points to 6.66% in 2006, despite the higher percentage of lower-yielding short-term investments in the earning asset mix compared to 2005. The main factor behind the overall yield improvement was the rise in benchmark rates for the large variable-rate segment of Whitney’s loan portfolio. Loan yields (TE) for 2006 were up 108 basis points compared to 2005. The yield (TE) on the largely fixed-rate investment portfolio improved 29 basis points between 2005 and 2006.
The growth in earning assets in 2006 was funded primarily by a 17% increase in average deposits compared to 2005. The funds retained during 2006 from the post-storm deposit build-up contributed to a favorable shift in the overall funding mix compared to 2005 and supported Whitney’s efforts to control the upward market pressure on funding rates through deposit-pricing management. The percentage of earning assets funded by noninterest-bearing deposits was 32% in 2006, up from 30% in 2005, and the percentage of funding from all noninterest-bearing sources increased to 36% in 2006 from 33% in the prior year. Higher-cost sources of funds declined to 28% of average earning assets in 2006 from 31% in 2005. The overall cost of funds for 2006 was up 55 basis points from 2005. The rate on lower-cost interest-bearing deposits increased 61 basis points in 2006 compared to 2005, while the rate on more market-sensitive higher-cost sources of funds was up 137 basis points between these years.
PROVISION FOR CREDIT LOSSES
Whitney provided $17.0 million for credit losses in 2007 compared to $3.7 million in 2006. Whitney’s nonperforming loans and loans criticized through its credit-risk rating process increased during 2007, mainly reflecting weaknesses identified in residential-related credits. Loan charge-offs, net of recoveries, were $8.4 million, or .11% of average loans, in 2007, compared to $19.4 million, or .29% of average loans, in 2006.
For a more detailed discussion of changes in the allowance for loan losses, the reserve for unfunded credit commitments, trends in nonperforming assets and general credit quality, see the earlier section on “Loans, Credit Risk Management and Allowance and Reserve for Credit Losses.” The future level of the allowance and reserve and the provisions for credit losses will reflect management’s ongoing evaluation of credit risk, based on established internal policies and practices.
NONINTEREST INCOME
Table shows the components of noninterest income for each year in the three-year period ended December 31, 2007, along with the percent changes between years for each component. The 2007 total includes the $31.3 million gain recognized on the final settlement of insurance claims that had arisen primarily from the 2005 hurricanes. Excluding this gain and income associated with foreclosed assets and surplus property, noninterest income grew 9%, or $7.6 million, in 2007 and 6%, or $4.6 million, in 2006.
Income from service charges on deposit accounts increased 9%, or $2.6 million, in 2007, following an 8% decline between 2006 and 2005. Service charges include fees for specific transactions or services, such as processing return items or wire transfers, periodic account maintenance fees for both business and personal customers, and other revenue associated with deposit accounts, such as commissions on check sales.
Charges earned on specific transactions and services in 2007 were up 12%, or $2.1 million, compared to 2006. This followed a decrease of $.3 million in 2006 compared to 2005. The main component of this income category is fees earned on items returned for insufficient funds and for overdrafts. The higher deposit account balances maintained after the 2005 storms by customers in the areas most impacted had reduced charging opportunities in the latter part of 2005 and through much of the first half of 2006. The increase in income in 2007 reflected a return to more normal levels of fees charged as well as some improved pricing. Broad trends in how customers execute transactions have been reducing charging opportunities in recent years.
Account maintenance fees for business customers were up 9%, or $.5 million, in 2007, after decreasing 21%, or $1.5 million, in 2006. The fees charged on a large number of Whitney’s business accounts are based on an analysis of account activity, and these customers are allowed to offset accumulated charges with an earnings credit based on balances maintained in the account. The short-term market rates used to calculate the earnings credit rates declined slightly on average between 2006 and 2007, with a more rapid decrease toward the end of 2007 and into early 2008, and this supported a 10%, or $.4 million, increase in analysis account fees in 2007. Earnings credit rates rose with the underlying market rates throughout 2005 and the first half of contributing to a 26%, or $1.4 million, decrease in analysis account fees in 2006 compared to 2005. Analysis fee income in the early part of 2006 was also negatively impacted by higher levels of liquidity in the deposit base. Trends in processing business transactions have led to reduced volumes of chargeable account activity in recent years.
Personal account service charges were stable between 2006 and 2007, after decreasing $.8 million from 2005 to 2006. High deposit base liquidity was a factor behind the $.8 million decrease in personal account service charges between and 2006, as was the impact of the loss of some storm-dislocated customers. Aggressive competition has held down the pricing for fees charged to service these deposit accounts.
Bank card fees increased 10%, or $1.5 million, in 2007 and 25%, or $3.0 million, in 2006. This income category includes fees from activity on Bank-issued debit and credit cards as well as from merchant processing services. Transaction volume on Bank-issued cards was up approximately 4% in 2007 and 24% in 2006. There had been a surge in transaction volume in the latter part of 2005, particularly from debit card activity, indicating in part a change in payment behavior within the customer base dislocated by that year’s late summer storms. The continuation of this behavioral change and the introduction of a rewards program for credit card customers helped increase debit card transaction volume by 26% in 2006 and credit card volume by 18% compared to 2005. These growth rates moderated in 2007, when debit card volume was up 2% and credit card volume increased 11%.
Ongoing customer development efforts and improved market conditions for much of the year helped increase trust service fees by 15%, or $1.7 million, in 2007. This followed a 19% increase in 2006 compared to 2005 that was mainly driven by new business, including the addition of the trust business acquired with First National Bancshares, Inc., and generally favorable market conditions. Whitney has positioned relationship officers to attract and service trust and wealth management customers across its market area.
Fee income generated by Whitney’s secondary mortgage market operations decreased 6% in 2007 after growing 5% in 2006. Completed sales of home loans totaled approximately $290 million in 2007, $320 million in 2006 and $300 million in 2005. Relatively broad weakness in the overall housing market is expected to persist well into 2008, although Whitney has positioned additional resources in market areas with the best potential for loan production.
Investment services income increased 17%, or $.8 million, in 2007, following a 37%, or $1.3 million, increase in 2006 compared to 2005. Investment services include stock brokerage and annuity sales as well as fixed-income securities transactions for correspondent banks and other commercial and personal customers. The investment services operations of acquired banks contributed to the income improvement in 2006. Whitney is nearing completion of its migration to a new investment services platform through which it can offer expanded investment options, products and services to current and prospective customers.
ATM fees in 2005 had been reduced by a temporary fee-waiver policy instituted shortly after the late summer storms and by the temporary unavailability of certain equipment. Fees generated by insurance operations were the main factor behind the increase in the total for other fees and charges for 2006. Rising premiums and changes in the type of coverage available from different insurance carriers contributed to this improvement.
The settlement of a pension liability from an acquired entity produced a gain of $.5 million in 2007 that was included with other operating income. During 2005, PULSE EFT Association was sold to Discover Financial Services. As a member of the PULSE electronic payment network, Whitney received distributions totaling approximately $1.1 million that were reported with other operating income for 2005.
The net gain on sales and other revenue from foreclosed assets includes income from grandfathered assets that varies from year to year as opportunities for sales arise. The net gain or loss recognized in each period from dispositions of surplus banking property is also shown in Table 14. Management evaluates its banking facilities on an ongoing basis to identify possible under-utilization and to determine the need for functional improvements, relocations or possible sales.
NONINTEREST EXPENSE
Table shows the components of noninterest expense for each year in the three-year period ended December 31, 2007, along with the percent changes between years for each component. Noninterest expense increased 3%, or $10.6 million, in 2007, following an increase of 18%, or $52.1 million, from 2005 to 2006. Incremental operating costs associated with acquired operations, including the amortization of acquired intangibles, totaled approximately $8.5 million in 2007 and $10.4 million in 2006.
Initiatives undertaken to reduce Whitney’s exposure to natural disasters and make its disaster recovery plans and operating arrangements more resilient following the late-summer storms of 2005 added a new layer of recurring expense beginning in 2006 that mainly impacted the occupancy, data processing and equipment and telecommunication expense categories. As a result of the catastrophic 2005 storm season, the Company also saw the cost of its casualty insurance increase substantially. Nonrecurring or irregular expense items associated with the 2005 storms were incurred in each of the years shown in Table 15. These totaled approximately $2 million in 2007, $11 million in 2006 and $5 million in 2005. Certain of these expense items are detailed in the following discussion of changes in individual expense categories.
Employee compensation increased 10%, or $14.7 million, in 2007, and was up 10%, or $12.7 million, in 2006. Employee compensation includes base pay and contract labor costs, compensation earned under sales-based and other employee incentive programs, and compensation expense under management incentive plans.
Base pay, the cost of contract labor and compensation earned under sales-based incentive programs increased 10%, or $12.0 million, in 2007, with approximately $3.1 million of the total increase related to the staff of acquired operations. This followed an increase of 8%, or $9.8 million, from 2005 to 2006, when acquired operations contributed approximately $4.2 million to the total change. Compensation under incentive-programs was up $1.7 million in 2007, reflecting both the growth in certain fee-based income categories discussed earlier and an improvement in estimated performance levels used to determine annual incentives for basic banking services. Excluding the impact of acquisitions in each year, Whitney’s full-time equivalent staff grew on average by 1% in 2007 compared to 2006, as staff additions to fill openings caused by storm-related attrition were largely offset by reductions identified as part of recent cost control programs. There was a 3% reduction in the average staff level in 2006 compared to 2005, again excluding the impact of acquisitions. This reduction reflected the impact of
temporary storm-related attrition and some branch closures, but the benefit to expense in 2006 from this staff reduction was offset by additional contract labor, some of which continued into 2007. Compensation expense in both 2007 and 2006 was negatively impacted by salary scale adjustments needed to address post-storm changes in the cost of living in impacted areas and increased competition for limited labor resources.
Compensation expense associated with management incentive programs increased by $2.7 million in 2007, with $1.8 million related to share-based compensation and the remainder to the cash bonus incentive program. Management incentive program expense increased $2.9 million in 2006 compared to 2005, almost all related to share-based compensation. Share-based incentives currently include restricted stock and stock units, both performance-based and tenure-based, and stock options. Restricted stock and stock unit expense increased $1.4 million in 2007 and $2.6 million in 2006. Participation in restricted stock and stock unit awards expanded in recent years, and the awards for 2006 had been increased mainly in recognition of the special employee efforts required in the aftermath of the 2005 hurricanes. The 2007 awards returned to a level more consistent with pre-storm awards. Stock option compensation increased $.4 million in 2007 after adding $.3 million to expense in 2006. SFAS No. 123(R), Share-Based Payment, required companies to expense the fair value of option awards beginning in 2006. Overall, options awards have been deemphasized in recent years. See Notes 2 and 16 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K for more information on share-based compensation.
Employee benefits expense decreased 4%, or $1.3 million, in 2007, following an increase of 6%, or $2.0 million, in 2006. The major components of employee benefits expense, in addition to payroll taxes, are the cost of providing health benefits for active and retired employees and the cost of providing pension benefits through both the defined-benefit plans and a 401(k) employee savings plan.
The performance of the pension trust fund and trends in market yields on fixed-income securities in one period can cause the actuarially-determined periodic expense for the defined-benefit pension plan to move in the opposite direction in future periods, holding other variables constant. A $.4 million decrease in pension expense in 2007 followed a moderate increase during 2006 in the market yields referenced to determine the appropriate rate for discounting projected pension benefits, and investment performance in 2006 was above the long-term expected rate of return. Pension expense increased $.7 million in 2006 after a moderate decline during 2005 in fixed-income market yields and the discount rate. Investment performance in 2005 was below the long-term expected rate of return. The effect of these factors on 2006 pension expense was somewhat offset by the favorable impact of a $20 million employer contribution to the pension trust toward the end of 2005. Pension expense is expected to show a small increase in 2008, reflecting in part higher referenced market yields at year-end 2007 and an investment performance for 2007 below long-term expectations.
In early 2007, the Company amended its postretirement health and life insurance benefit plans to eliminate the benefits for most employees and freeze benefit levels for remaining participants. The impact of this amendment reduced employee benefits expense for 2007 by $2.2 million compared to 2006. No significant plan expense is expected for 2008 and subsequent years. Trends in fixed-income market yields also impact the actuarial valuation results for postretirement health benefits as do trends in actual benefit outlays. Unfavorable benefit experience and lower market yields for the 2005 valuation had contributed to a $.7 million expense increase in 2006.
Net occupancy expense increased 13%, or $3.7 million, in 2007, following a 31%, or $7.0 million, increase in 2006 compared to 2005. Both 2007 and 2006 included $1.3 million of incremental costs associated with acquired operations. The post-storm annual increase in casualty insurance totaled approximately $2.9 million, with $2.0 million reflected in 2006 and the remaining $.9 million in 2007. Recurring costs associated with improving Whitney’s disaster-risk posture added approximately $.9 million to 2006 occupancy expense and a similar amount to 2007. Other factors that drove the increases for both 2007 and 2006 included de novo branch expansion, the completion of capital projects on storm-damaged facilities and normal lease escalations. Increased energy costs in 2006 continued in 2007, with sustained higher fuel costs. Work on a number of maintenance and repair projects was also included in 2006, some of which had been deferred from 2005. Although storm-related facility closures and asset retirements reduced certain recurring occupancy costs after the storms in 2005, these savings were for the most part offset by a corresponding loss of office rental revenue.
Equipment and data processing expense increased 9%, or $1.8 million, in 2007, with $.3 million of incremental costs for acquired operations. In 2006, equipment and data processing expense increased 22%, or $3.7 million, of which $.5 million was for acquired operations. Approximately $1 million of the increase in 2007 and over $2 million of the increase in 2006 compared to 2005 was associated with the initiatives to improve operational resiliency in the event of a natural disaster, including the accelerated installation of a new mainframe computer and related software. De novo branch expansion and projects to enhance operational capacity and implement new customer applications were the main contributors to the remaining increases in both 2007 and 2006.
The total expense for professional services, both legal and other services, declined $1.0 million in 2007, following an increase of $5.6 million in 2006. The expense for nonlegal professional services was down $1.1 million in 2007, after increasing $5.0 million in 2006 compared to 2005. Included in 2006 was $2.0 million for work on initiatives to improve the Company’s disaster-risk profile. In 2006, Whitney also engaged consultants in the planning of upgrades to major customer interface tools and core application systems and the development and implementation of product enhancements, as well as in the executive succession planning process. Certain projects continued into 2007 and some new projects were added. The Company also performed an extensive review and update of its strategic plan in 2007 that is in the process of being implemented. Legal expense increased $.1 million in 2007 compared to 2006. This category covers legal services for both loan collection efforts and general corporate matters. Although 2007 included $.7 million for services associated with finalizing the insurance settlement mentioned above, Whitney also successfully recovered some relatively significant costs on loan collection and other matters during this year. Loan collection efforts in 2006, including work with storm-impacted customers, and storm-related disruptions to law firms and the legal system in late 2005 combined to account for most of a $.6 million increase in legal expense in 2006. The increase in criticized loan totals in the latter part of 2007 indicates sustained demand for loan collection legal services in 2008.
Amortization of intangibles is mainly associated with the value of deposit relationships acquired in bank and branch acquisitions. Amortization expense of $7.1 million is scheduled for 2008. Note 3 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K reviews recently completed acquisitions and Note 10 presents additional information on intangible assets subject to amortization.
The expense for security and other outsourced services increased 7%, or $1.0 million, in 2007. This followed a 41%, or $4.3 million, increase in 2006 compared to 2005. Acquired operations added $.5 million to 2007 expense and $.3 million to 2006. The outsourcing of the Bank’s lockbox function added approximately $.7 million to 2007 expense. Approximately $1.9 million of the increase in 2006 related to a new arrangement to outsource the Bank’s ATM operations that was phased in during 2005. During 2006, the Bank also incurred additional expense for the transportation of daily work, mainly reflecting changes in processing sites in the post-storm operating environment as well as the use of more costly delivery methods for a number of months following the storms. The cost of certain services in storm-impacted areas also increased with local wage scales.
Management directed additional resources to advertising and promotional activities in 2006 to support major campaigns to introduce new and improved products. Whitney focused on more targeted marketing efforts in both 2007 and 2005, with no major campaigns executed in either year. Current plans for advertising and promotional activities in 2008 indicate a level of expense more in line with 2007 and 2005.
Bank card processing services expense will vary mainly with changes in transaction volume on Bank-issued credit cards. Transaction volumes and bank card fee income are discussed in the earlier section on “Noninterest Income.”
In November 2006, the FDIC adopted final regulations that set the deposit insurance assessment rates that took effect in 2007. The new rate structure imposed a minimum annual assessment of from five to seven cents for every $100 of domestic deposits on institutions that are assigned the lowest risk category under the FDIC’s risk-based assessment system. Under the previous rate structure, this group of institutions, which includes the Bank, had been charged no assessment for a number of years. The actual assessment for 2007 of approximately $4.4 million was offset by a one-time assessment credit, and no expense was recognized. Based on recent deposit levels and the
Bank’s current risk classification, the annual minimum assessment in 2008 would range from approximately $3.9 million to $5.4 million, although current rates are at the lower end of the range. The $1.6 million one-time credit remaining at December 31, 2007 can offset up to 90% of the 2008 assessment expense and should be fully-used in 2008.
Miscellaneous operating losses included various charges directly related to the 2005 storms totaling $1.0 million in 2007, $6.0 million in 2006 and $4.4 million in 2005. In 2007, the Company recorded a charge of $1.0 million to establish a liability with respect to its obligation as a member of Visa USA, Inc. to share in certain litigation losses that have been or may be incurred by Visa, as discussed in Note 20 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K.
The expense categories included in other operating expense decreased 19%, or $4.7 million, on a combined basis in 2007, following an increase of 29%, or $5.7 million, in 2006 compared to 2005. 2006 included $2.2 million for the cost of disaster contingency housing, which was substantially eliminated in 2007, and certain other storm-related items that were nonrecurring in 2007. Also contributing to the increase in 2006 was the initial expensing of the annual stock option award for directors. The totals for both 2006 and 2005 included a $.5 million contribution to a disaster assistance fund for Whitney’s employees.
INCOME TAXES
The Company provided for income tax expense at an effective rate of 33.0% in 2007, 32.3% in 2006 and 29.6% in 2005. Whitney’s effective tax rate has been lower than the 35% statutory federal tax rate primarily because of tax-exempt interest income from the financing of state and local governments and the availability of tax credits generated by investments in affordable housing projects. Federal disaster-relief legislation passed in December 2005 provided for a tax credit to businesses in the storm-affected areas based on certain salaries paid to qualifying employees. The following reconciles reported income tax expense to that computed at the statutory federal tax rate for each year in the three-year period ended December 31, 2007.
Louisiana-sourced income of commercial banks is not subject to state income taxes. Rather, banks in Louisiana pay a tax based on the value of their capital stock in lieu of income and franchise taxes, and this tax is allocated to parishes in which the banks maintain branches. Whitney’s corporate value tax is included in noninterest expense. This expense will fluctuate in part based on the growth in the Bank’s equity and earnings and in part based on market valuation trends for the banking industry.
FOURTH QUARTER RESULTS
Whitney earned $30.2 million for the quarter ended December 31, 2007, compared with net income of $33.9 million for the fourth quarter of 2006. Earnings were $.45 per diluted share in 2007’s fourth quarter, compared to $.51 for the year-earlier period.
Selected fourth quarter highlights follow:
·
Whitney’s net interest income (TE) decreased less than 1%, or $.7 million, from the fourth quarter of 2006. Average earning assets increased 8% between these periods, with little change in the mix of assets. The net interest margin (TE) was 4.75% for the fourth quarter of 2007, down 39 basis points from the year-earlier period. The overall yield on earning assets decreased 21 basis points, mainly reflecting a decline between these periods in benchmark rates for the large variable-rate segment of Whitney’s loan portfolio and the impact of a higher level of nonaccruing loans in the most recent period. The cost of funds increased 18 basis points between the fourth quarters of 2006 and 2007, mainly in response to the customer-driven shift in the funding mix toward higher-cost sources. Net interest income (TE) for the fourth quarter of 2007 was also down less than 1%, or $.5 million, from the third quarter of 2007. Average earning assets increased 1% between these periods, while the net interest margin decreased 7 basis points. There was some favorable mix of earning assets between these periods, but the funding mix was little changed.
·
Whitney provided $10.0 million for credit losses in the fourth quarter of 2007, compared to $1.0 million provision in the fourth quarter of 2006. Loan charge-offs, net of recoveries, totaled $3.9 million in 2007’s fourth quarter, or .21% of average loans on an annualized basis. The allowance for loans losses increased to 1.16% of total loans at December 31, 2007. The total of loans criticized through the Company’s credit risk-rating process increased $47 million during the fourth quarter of 2007, mainly related to loans for residential development and investment and other residential purposes.
·
Noninterest income increased 15%, or $3.1 million, from the fourth quarter of 2006, with gains noted in almost all recurring revenue sources. Deposit service charge income was up 12%, or $.9 million, driven mainly by improved pricing. Bank card fees increased 14%, or $.5 million, compared to the fourth quarter of 2006 on higher transaction volumes. Trust service fees grew 8% and revenue from secondary mortgage market operations was up 14%. Fees from investment services in the fourth quarter of 2007 also compared favorably to the year-earlier period.
·
Noninterest expense in the fourth quarter of 2007 decreased 2%, or $1.4 million, from 2006’s fourth quarter. The incremental expense associated with acquired operations totaled approximately $1.9 million in the fourth quarter of 2007, including amortization of acquired intangibles. Whitney’s personnel expense increased 8%, or $3.6 million, in total, including $.9 million for the staff of acquired operations. $1.5 million of the increase in personnel expense was associated with management incentive programs, mainly related to share-based incentives, and an additional $1.0 million came from employee incentive plans. Each of these partly reflected the impact of updates to annual performance factor estimates in each quarterly period. Excluding the impact of acquisitions, the average full-time equivalent staff level declined approximately 2% between these periods, with staff reductions identified under cost control programs. The total of all other noninterest expense unrelated to personnel decreased a net $5.0 million, or 12%, compared to the fourth quarter of 2006. Expenses in the prior year’s quarter included $2.1 million of nonrecurring or periodic expense either directly associated with the 2005 storms or associated with the Company’s efforts to reduce its disaster-risk profile. In the fourth quarter of 2007, Whitney recorded a pre-tax charge of $1.0 million to establish a liability with respect to its obligation as a member of Visa USA, Inc. to share in certain of Visa’s litigation losses.
The Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K provides selected comparative financial information for each of the four quarters in 2007 and 2006.
Item 7A:
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is included in the section entitled “Asset/Liability Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that appears in Item 7 of this annual report on Form 10-K and is incorporated here by reference.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Whitney Holding Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management used the framework of criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission to conduct an evaluation of the effectiveness of internal control over financial reporting. Based on that evaluation, management concluded that internal control over financial reporting for the Company as of December 31, 2007 was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Shareholders and Board of Directors
of Whitney Holding Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Whitney Holding Corporation and its subsidiaries (the “Company”) at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New Orleans, Louisiana
February 28, 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
NATURE OF BUSINESS
Whitney Holding Corporation is a Louisiana bank holding company headquartered in New Orleans, Louisiana. Its principal subsidiary is Whitney National Bank (the Bank), which represents virtually all its operations and net income.
The Bank, which has been in continuous operation since 1883, engages in community banking in its market area stretching across the five-state Gulf Coast region, including the Houston, Texas metropolitan area, southern Louisiana, the coastal region of Mississippi, central and south Alabama, the panhandle of Florida, and the Tampa Bay metropolitan area of Florida. The Bank, together with its wholly owned subsidiary, Whitney Securities L.L.C., offers commercial and retail banking products and services, including trust products and investment services, to the customers in the communities it serves. Southern Coastal Insurance Agency, Inc., another wholly owned Bank subsidiary, offers personal and business insurance products to customers primarily in northwest Florida.
NOTE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
Whitney Holding Corporation and its subsidiaries (the Company or Whitney) follow accounting and reporting policies that conform with accounting principles generally accepted in the United States of America and those generally practiced within the banking industry. The following is a summary of the more significant accounting policies.
Basis of Presentation
The consolidated financial statements include the accounts of Whitney Holding Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Whitney reports the balances and results of operations from business combinations accounted for as purchases from the respective dates of acquisition (see Note 3).
Use of Estimates
In preparing the consolidated financial statements, the Company is required to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Investment Securities
Securities are classified as trading, held to maturity or available for sale. Management determines the classification of securities when they are purchased and reevaluates this classification periodically as conditions change that could require reclassification.
Trading account securities are bought and held principally for resale in the near term. They are carried at fair value with realized and unrealized gains or losses reflected in noninterest income. Trading account securities are immaterial in each period presented and have been included in other assets on the consolidated balance sheets.
Securities that the Company both positively intends and has the ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. Intent and ability to hold are not considered satisfied when a security is available to be sold in response to changes in interest rates, prepayment rates, liquidity needs or other reasons as part of an overall asset/liability management strategy.
Securities not meeting the criteria to be classified as either trading securities or securities held to maturity are classified as available for sale and are carried at fair value. Unrealized holding losses, other than those determined to be other than temporary, and unrealized holding gains are excluded from net income and are recognized, net of tax, in other comprehensive income and in accumulated other comprehensive income, a separate component of shareholders’ equity.
Premiums and discounts on securities, both those held to maturity and those available for sale, are amortized and accreted to income as an adjustment to the securities’ yields using the interest method. Realized gains and losses on securities, including declines in value judged to be other than temporary, are reported net as a component of noninterest income. The cost of securities sold is specifically identified for use in calculating realized gains and losses.
Loans Held for Sale
Loans originated for sale are carried at the lower of either cost or market value. At times, management may decide to sell loans that were not originated for that purpose. These loans are reclassified as held for sale when that decision is made and are also carried at the lower of cost or market.
Loans
Loans are carried at the principal amounts outstanding net of unearned income. Interest on loans and accretion of unearned income, including deferred loan fees, are computed in a manner that approximates a level rate of return on recorded principal.
The Company stops accruing interest on a loan when the borrower’s ability to meet contractual payments is in doubt. For commercial and real estate loans, a loan is placed on nonaccrual status generally when it is ninety days past due as to principal or interest, and the loan is not otherwise both well secured and in the process of collection. When a loan is moved to nonaccrual status, any accrued but uncollected interest is reversed against interest income. Interest payments on nonaccrual loans are used to reduce the reported loan principal under the cost recovery method if the collectibility of the remaining principal is not reasonably assured; otherwise, such payments are recognized as interest income when received. A loan on nonaccrual status may be reinstated to accrual status when full payment of contractual principal and interest is expected and this expectation is supported by current sustained performance.
A loan is considered impaired when it is probable that all amounts will not be collected as they become due according to the contractual terms of the loan agreement. Generally, impaired loans are accounted for on a nonaccrual basis. The extent of impairment is measured based upon a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, the fair value of the underlying collateral if the loan is collateral dependent, or, when available, the loan’s observable market price. The amount of impairment is included in the allowance for loan losses.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that, in the opinion of management, is adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The adequacy of the allowance is evaluated on an ongoing basis. Management considers various sources of information including analyses of specific loans reviewed for impairment, statistics from the internal credit risk rating process, reports on the payment performance of portfolio segments not subject to individual risk ratings, historical loss experience, portfolio concentration statistics and reports on general and local economic conditions and the economic fundamentals of specific industries that are well-represented in the customer base. Management also forms a judgment about the level of accuracy inherent in the evaluation process. Changes in management’s evaluation over time are reflected in the provision for loan losses.
As actual loan losses are incurred, they are charged against the allowance. Subsequent recoveries are added back to the allowance when collected.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets and over the shorter of the lease terms or the estimated lives of leasehold improvements. Useful lives range principally from fifteen to thirty years for buildings and improvements and from three to ten years for furnishings and equipment, including data processing equipment and software. Additions to bank premises and equipment and major replacements or improvements are capitalized.
Foreclosed Assets and Surplus Property
Collateral acquired through foreclosure or in settlement of loans and surplus property are both reported with other assets in the consolidated balance sheets. With the exception of grandfathered property interests, which are assigned a nominal book value, these assets are recorded at estimated fair value, less estimated selling costs, if this value is lower than the carrying value of the related loan or property asset. Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses. Losses arising from the transfer of bank premises and equipment to surplus property are charged to current earnings. Subsequent valuation adjustments for either foreclosed assets or surplus property are also included in current earnings, as are the revenues and expenses associated with managing these assets before they are sold.
Goodwill and Other Intangible Assets
Whitney has recognized intangible assets in connection with its purchase business combinations. Identifiable intangible assets acquired by the Company have mainly represented the value of the deposit relationships purchased in these transactions. Goodwill represents the purchase price premium over the fair value of the net assets of an acquired business, including identifiable intangible assets.
Goodwill must be assessed for impairment annually unless interim events or circumstances make it more likely than not that an impairment loss has occurred. Impairment is defined as the amount by which the implied fair value of the goodwill contained in any reporting unit within a company is less than the goodwill’s carrying value. The Company has assigned all goodwill to one reporting unit that represents Whitney’s overall banking operations. This reporting unit is the same as the operating segment identified below, and its operations constitute substantially all of the Company’s consolidated operations. Impairment losses would be charged to operating expense.
Identifiable intangible assets with finite lives are amortized over the periods benefited and are evaluated for impairment similar to other long-lived assets. If the useful life of an identifiable intangible asset is indefinite, the recorded asset is not amortized but tested for impairment by comparison to its estimated fair value.
Share-Based Compensation
Whitney is following Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, to account for share-based compensation awards granted after December 31, 2005 and awards modified, repurchased, or cancelled after that date. Under SFAS No. 123R, the grant-date fair value of equity instruments awarded to employees establishes the cost of the services received in exchange, and the cost associated with awards that are expected to vest is recognized over the required service period.
For outstanding awards for which the required service period extended beyond December 31, 2005, SFAS No. 123R required Whitney to recognize compensation after that date based on the grant-date fair value of those awards as calculated for pro forma disclosure under the original SFAS No. 123. As of December 31, 2005, all stock options awarded by the Company were fully vested and exercisable and there were no continuing service requirements. The service requirements for certain performance-based restricted stock awards did extend beyond December 31, 2005. During 2005, Whitney recognized compensation expense with respect to restricted stock awards under Accounting Principles Board Opinion (APB) No. 25 and related interpretations. The expense recognized under APB No. 25 was also based on fair value, but the timing of when fair value was determined and the method of allocating expense over time differed in certain respects from what was required under SFAS No. 123. Under APB No. 25, the Company recognized no expense with respect to stock option awards in 2005.
Note 16 shows pro forma net income and earnings per share for 2005 assuming Whitney had applied SFAS No. 123 to measure and to recognize share-based compensation.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method. Under this method the expected tax consequences of temporary differences that arise between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either deferred tax liabilities to be settled in the future or deferred tax assets that will be realized as a reduction of future taxes payable. Currently enacted tax rates and laws are used to calculate the expected tax consequences. Valuation allowances are established against deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the assets will not be realized.
Earnings per Share
Basic earnings per share is computed by dividing income applicable to common shares (net income in all periods presented) by the weighted-average number of common shares outstanding for the applicable period. Shares outstanding are adjusted for restricted shares issued to employees under the long-term incentive compensation plan and for certain shares that will be issued under the directors’ compensation plan. Diluted earnings per share is computed using the weighted-average number of shares outstanding increased by the number of shares in which employees would vest under performance-based restricted stock and stock unit awards based on expected performance factors and by the number of additional shares that would have been issued if potentially dilutive stock options were exercised, each as determined using the treasury stock method.
Statements of Cash Flows
The Company considers only cash on hand, cash items in process of collection and balances due from financial institutions as cash and cash equivalents for purposes of the consolidated statements of cash flows.
Operating Segment Disclosures
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for reporting information about a company’s operating segments using a “management approach.” Reportable segments are identified in this statement as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. Consistent with its stated strategy that is focused on providing a consistent package of community banking products and services throughout a coherent market area, Whitney has identified its overall banking operations as its only reportable segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented.
Other
Assets held by the Bank in a fiduciary capacity are not assets of the Bank and are not included in the consolidated balance sheets. Generally, certain minor sources of income are recorded on a cash basis, which does not differ materially from the accrual basis.
Accounting Standard Developments
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007. This interpretation clarifies that the benefit of a position taken or expected to be taken in a tax return should be recognized in a company’s financial statements when it is more likely than not that the position will be sustained based on its technical merits. FIN No. 48 also prescribes how to measure the tax benefit recognized and provides guidance on when a tax benefit should no longer be recognized as well as various other accounting, presentation and disclosure matters. See Note 23 for information on the impact of adopting FIN No. 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to increase consistency and comparability in fair value measurements and provide for expanded disclosures about the development of such measurements and their effect on earnings. Although the statement does not require any new fair value measurements, its definition of fair value and the framework it establishes for measuring fair value in generally accepted accounting principles will result in some changes from current practice. The guidance in this statement is generally effective for Whitney’s 2008 fiscal year. The effective date has been deferred to 2009 for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value on at least an annual basis. The initial application of this standard is not expected to have a material impact on Whitney’s financial condition or results of operations.
The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, in February 2007. This statement permits entities to choose to measure many financial instruments and certain other items at fair value, thereby reducing the earnings volatility caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for Whitney’s 2008 fiscal year. The Company has no current plans to elect the fair value option for any specific financial instruments or other items.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This revised standard expands the types of transactions or other events that will qualify as business combinations and requires that all business combinations will result in all assets and liabilities of the acquired business being recorded at their fair values, with limited exceptions. The standard also requires, among other provisions, that certain contingent assets and liabilities will be recognized at their fair values on the acquisition date. An acquirer will also recognize contingent consideration at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until the contingency is settled. Under SFAS No. 141R, acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired. These and the other provisions of SFAS No. 141R are first effective for Whitney’s business combinations with acquisition dates in 2009.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, was also issued in December 2007. This standard, which is effective for 2009, governs the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control in subsidiaries. Whitney currently has no such partially owned consolidated subsidiaries.
NOTE
MERGERS AND ACQUISITIONS
On March 2, 2007, Whitney completed its acquisition of Signature Financial Holdings, Inc. (Signature), headquartered in St. Petersburg, Florida, the parent of Signature Bank. Signature Bank operated seven banking centers in the Tampa Bay metropolitan area and had approximately $270 million in total assets, including $220 million of loans, and $210 million in deposits at acquisition. The transaction was valued at approximately $61 million, with $13 million paid to Signature’s shareholders in cash and the remainder in Whitney common stock totaling 1.49 million shares. Applying purchase accounting to this transaction, the Company recorded goodwill of $39 million and a $4 million intangible asset for the estimated value of deposit relationships with a weighted-average life of 2.4 years. No other material adjustments were required to record Signature’s assets and liabilities at fair value.
In April 2006, Whitney acquired First National Bancshares, Inc. of Bradenton, Florida (Bradenton), the parent of 1st National Bank & Trust, which also operated in the Tampa Bay area and had approximately $380 million in total assets, including a loan portfolio valued at $286 million, and $319 million in deposits at the acquisition date. Bradenton’s shareholders received 2.16 million shares of Whitney common stock and cash totaling $41 million, for a total transaction value of approximately $116 million. Intangible assets acquired in this transaction included $88 million of goodwill and $7 million assigned to the value of deposit relationships with a weighted-average life of 2.3 years.
The acquired banking operations have been merged into the Bank. Whitney’s financial statements include the results from acquired operations since the acquisition dates.
NOTE
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
The balance of federal funds sold and short-term investments included the following.
Federal funds were sold on an overnight basis, with the exception of $40 million with a term of less than one month. The U.S. government agency discount notes and the Company’s investments in U.S. government agency securities under resale agreements at December 31, 2007 mature in less than one month.
NOTE
INVESTMENT SECURITIES
Summary information about securities available for sale and securities held to maturity follows.
The following summarizes securities with unrealized losses at December 31, 2007 and 2006 by the period over which the security’s fair value had been continuously less than its amortized cost as of each year end.
Management evaluates whether unrealized losses on securities represent impairment that is other than temporary. If such impairment is identified, the carrying amount of the security is reduced with a charge to operations. In making this evaluation, management first considers the reasons for the indicated impairment. These could include changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. Management then considers the likelihood of a recovery in fair value sufficient to eliminate the indicated impairment and the length of time over which an anticipated recovery would occur, which could extend to the security’s maturity. Finally, management determines whether there is both the ability and intent to hold the impaired security until an anticipated recovery, in which case the impairment would be considered temporary. In making this assessment, management considers whether a security continues to be a suitable holding from the perspective of the Company’s overall portfolio and asset/liability management strategies.
Substantially all the unrealized losses at December 31, 2007 resulted from increases in market interest rates over the yields available at the time the underlying securities were purchased. Management identified no impairment related to credit quality. In all cases, the indicated impairment would be recovered by the security’s maturity or repricing date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. All impaired securities were originally purchased for continuing investment purposes, and management believes that they remain suitable for this purpose in light of current market conditions and Company strategies. At December 31, 2007, management had both the intent and ability to hold these securities until the market-based impairment is recovered. No losses for other-than-temporary impairment were recognized in any of the three years ended December 31, 2007.
The following table shows the amortized cost and estimated fair value of securities available for sale and held to maturity grouped by contractual maturity as of December 31, 2007. Debt securities with scheduled repayments, such as mortgage-backed securities, and equity securities are presented in separate totals. The expected maturity of a security, in particular certain U.S. agency securities and obligations of states and political subdivisions, may differ from its contractual maturity because of the exercise of call options.
Amortized
Fair
(in thousands)
Cost
Value
Securities Available for Sale
Within one year
$ 233,300
$ 232,805
One to five years
111,923
113,925
Five to ten years
3,253
3,339
After ten years
-
-
Debt securities with single maturities
348,476
350,069
Mortgage-backed securities
1,320,466
1,318,181
Equity and other debt securities
30,545
30,545
Total
$1,699,487
$1,698,795
Securities Held to Maturity
Within one year
$ 71,190
$ 71,567
One to five years
79,153
79,727
Five to ten years
77,495
78,152
After ten years
58,604
58,998
Total
$286,442
$288,444
Proceeds from sales of securities available for sale were $39 million in 2007, $46 million in 2006 and $281 million in 2005. Substantially all of the proceeds in 2007 and 2006 came from the sale of portions of the portfolios acquired with Signature and Bradenton. Whitney realized an insignificant gross loss on the sales in 2007 and no gains or losses on the 2006 sales. In 2005, Whitney realized gross gains of $2.2 million and gross losses of $2.1 million on securities sales.
Securities with carrying values of $1.63 billion at December 31, 2007 and $1.30 billion at December 31, 2006 were sold under repurchase agreements, pledged to secure public deposits or pledged for other purposes. In these totals were $123 million in 2007 and $129 million in 2006 for securities pledged at the Federal Reserve discount window in connection with the Company’s overall contingency funding plans.
NOTE
LOANS
The composition of the Company’s loan portfolio follows.
The Bank makes loans in the normal course of business to directors and executive officers of the Company and the Bank and to their associates. Loans to such related parties carry substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risks of collectibility when originated. An analysis of the changes in loans to related parties during 2007 follows.
Outstanding unfunded commitments and letters of credit to related parties totaled $94 million and $102 million at December 31, 2007 and 2006, respectively.
NOTE
ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS
A summary analysis of changes in the allowance for loan losses follows.
A summary analysis of changes in the reserve for losses on unfunded credit commitments follows. The reserve is reported with accrued expenses and other liabilities in the consolidated balance sheets.
NOTE
IMPAIRED LOANS, NONPERFORMING LOANS, FORECLOSED ASSETS AND SURPLUS PROPERTY
Information on loans evaluated for possible impairment loss follows.
The following is a summary of nonperforming loans and foreclosed assets and surplus property.
Interest income is recognized on certain nonaccrual loans as payments are received. Interest payments on other nonaccrual loans are accounted for under the cost recovery method, but this interest may later be recognized in income when loan collections exceed expectations or when workout efforts result in fully rehabilitated credits. The following compares estimated contractual interest income on nonaccrual loans and restructured loans with the cash-basis and cost-recovery interest actually recognized on these loans.
The Bank and a subsidiary own various property interests that were acquired in routine banking transactions generally before 1933. There was no ready market for these assets when they were initially acquired, and, as was general banking practice at the time, they were written down to a nominal value. The assets include direct and indirect ownership interests in scattered undeveloped acreage, various mineral interests, and a few commercial and residential sites primarily in southeast Louisiana.
The revenues and direct expenses related to these grandfathered property interests that are included in the statements of income follow.
NOTE
BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment by asset classification follows.
Provisions for depreciation and amortization included in noninterest expense were as follows.
At December 31, 2007, the Bank was obligated under a number of noncancelable operating leases, substantially all related to premises. Certain of these leases have escalation clauses and renewal options. Total rental expense was $9.8 million in 2007, $7.5 million in 2006 and $5.1 million in 2005.
As of December 31, 2007, the future minimum rentals under noncancelable operating leases having an initial lease term in excess of one year were as follows.
(in thousands)
$ 10,082
9,004
7,235
6,561
5,363
Later years
46,348
Total
$84,593
NOTE
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist mainly of identifiable intangibles, such as the value of deposit relationships, and goodwill acquired in business combinations accounted for as purchases. Note 3 presents information on goodwill and other intangible assets acquired in 2007. There were no dispositions of intangible assets during 2007.
Goodwill is tested for impairment at least annually. No indication of goodwill impairment was identified in the annual assessments as of September 30, 2007 and 2006. The balance of goodwill that will not generate future tax deductions was $322 million at December 31, 2007.
Identifiable intangible assets with finite lives are amortized over the periods benefited and are evaluated for impairment similar to other long-lived assets. The Company’s only significant identifiable intangible assets reflect the value of deposit relationships, all of which have finite lives. The weighted-average remaining life of identifiable intangible assets was approximately two years at December 31, 2007.
The carrying value of intangible assets subject to amortization was as follows.
Amortization of intangible assets included in noninterest expense was as follows.
The following shows estimated amortization expense for the five succeeding years, calculated based on current amortization schedules.
(in thousands)
$7,102
4,533
2,175
1,505
and thereafter
1,788
NOTE
DEPOSITS
The composition of deposits was as follows.
Deposits include funds of public entities, such as states and municipalities, and certain other deposits that are subject to collateral requirements. Public funds and other collateralized deposits totaled $457 million and $499 million at December 31, 2007 and 2006, respectively, including time deposits of $251 million at the end of 2007 and $263 million at the end of 2006.
Time deposits of $100,000 or more include balances in treasury-management deposit products for commercial and certain other larger deposit customers. Balances maintained in such products totaled $705 million and $486 million at December 31, 2007 and 2006, respectively, and most of these deposits mature on a daily basis. Scheduled maturities of all time deposits at December 31, 2007 were as follows.
(in thousands)
$2,463,396
80,835
37,276
and thereafter
Total
$2,582,458
NOTE
SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following.
The Bank borrows funds on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury-management services offered to its deposit customers. Repurchase agreements generally mature daily. The Bank has the ability to exercise legal authority over the underlying securities. Mortgage-backed securities issued or guaranteed by U.S. government agencies and other agency securities with a fair value of $787 million were sold under repurchase agreements at December 31, 2007.
Additional information about securities sold under repurchase agreements follows.
Federal funds purchased represent unsecured borrowings from other banks, generally on an overnight basis. Additional information about federal funds purchased follows.
From time to time, the Bank uses advances from the Federal Home Loan Bank (FHLB) as an additional source of short-term funds. The Bank made no use of short-term FHLB advances during 2007 and 2006. The advances assumed with Signature in 2007 and with Bradenton in 2006 were repaid shortly after these acquisitions. During 2005, the Bank borrowed $92 million on average under short-term FHLB advances with an effective interest rate of 3.12%, and the maximum month-end balance was $150 million. The FHLB makes advances on a secured basis.
Under the Treasury Investment Program, temporary excess U.S. Treasury receipts are loaned to participating financial institutions at 25 basis points under the federal funds rate. Repayment of these borrowed funds can be demanded at any time. The Bank limited its participation to a maximum of $40 million and has pledged securities with a comparable value as collateral for borrowings under this program.
NOTE
LONG-TERM DEBT
Long-term debt consisted of the following.
In March 2007, the Bank issued $150 million in subordinated notes with an interest rate of 5.875% and a maturity date of April 1, 2017. These notes qualify as capital for the calculation of the regulatory ratio of total capital to risk-weighted assets, subject to certain limitations as they approach maturity.
In connection with a bank acquisition, the Company assumed obligations under subordinated debentures payable to unconsolidated trusts which issued trust preferred securities. The carrying value of this mix of fixed-rate and variable-rate debentures was $13.4 million at December 31, 2007 and $16.8 million at December 31, 2006 and is included with other long-term debt above. The weighted-average yield was approximately 5.61% at year-end 2007. The debentures have maturities from 2031 through 2033, but they may be called with prior regulatory approval beginning at various dates from 2008 through 2011. Subject to certain adjustments, these debentures currently qualify as capital for the calculation of regulatory capital ratios.
NOTE
OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The more significant components of other assets and accrued expenses and other liabilities at December 31, 2007 and 2006 were as follows.
NOTE
EMPLOYEE BENEFIT PLANS
Retirement Plans
Whitney has a noncontributory qualified defined benefit pension plan covering substantially all of its employees, subject to minimum age and service-related requirements. The benefits are based on an employee’s total years of service and his or her highest consecutive five-year level of compensation during the final ten years of employment. Contributions are made in amounts sufficient to meet funding requirements set forth in federal employee benefit and tax laws plus such additional amounts as the Company may determine to be appropriate. Based on currently available information, the Company anticipates making a contribution of approximately $8 million during 2008.
Whitney also has an unfunded nonqualified defined benefit pension plan that provides retirement benefits to designated executive officers. These benefits are calculated using the qualified plan’s formula, but without applying the restrictions imposed on qualified plans by certain provisions of the Internal Revenue Code. Benefits that become payable under the nonqualified plan would be reduced by amounts paid from the qualified plan.
The following table details the changes in the actuarial present value of the qualified and nonqualified pension benefit obligations and in the plans’ assets for the years ended December 31, 2007 and 2006. The table also shows the funded status of each plan at each year end and the amounts recognized in the Company’s consolidated balance sheets. Whitney uses a December 31 measurement date for all of its defined benefit retirement plans and other postretirement benefit plans.
The weighted-average assumptions used to determine the benefit obligation for both the qualified and nonqualified plans at December 31, 2007 and 2006 follow.
The accumulated benefit obligation was $137 million and $128 million, respectively, for the qualified plan at December 31, 2007 and 2006, and $10.2 million and $8.5 million, respectively, for the nonqualified plan. The calculation of the accumulated benefit obligation ignores the assumption about future compensation levels.
Benefit payments under the qualified and nonqualified plans are expected to total $6.5 million in 2008, $7.3 million in 2009, $8.0 million in 2010, $8.6 million in 2011, $9.5 million in 2012, and $59.9 million for the next five years combined. These estimates were developed based on the same assumptions used in measuring benefit obligations as of December 31, 2007.
The components of net periodic pension expense were as follows for the qualified and nonqualified plans.
The Company used the following weighted-average assumptions in determining the net pension expense for both the qualified and nonqualified plans for each of the three years in the period ended December 31, 2007.
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R), was effective as of the end of 2006. This statement requires that an employer recognize the funded status of a benefit plan as an asset or liability in its statement of financial position. To recognize the funded status of the plans upon initial adoption as of December 31, 2006, the Company eliminated the remaining prepaid pension asset for the qualified plan of $8.1 million and increased the pension liability by $12.6 million. The corresponding charge, representing the remaining unrecognized net actuarial loss of $22.4 million and an unrecognized net prior service credit of $.2 million at adoption, was reported, net of tax, as a $13.5 million adjustment of accumulated other comprehensive loss at year-end 2006. Beginning in 2007, the gains or losses and prior service costs or credits with respect to a retirement benefit plan that arise in a period but are not immediately recognized as components of net periodic benefit expense are recognized, net of tax, as a component of other comprehensive income. The amounts included in accumulated other comprehensive income are adjusted as they are recognized as components of net periodic benefit expense in subsequent periods.
The following table shows changes in the amounts recognized in accumulated other comprehensive income or loss during 2007 for both the qualified and nonqualified plans.
The amounts of the net actuarial loss and prior service cost (credit) included in accumulated other comprehensive loss at the end of 2007 that are expected to be recognized as components of net pension expense (benefit) in 2008 for both plans total $1.0 million and $(.1) million, respectively.
The following table shows the percentage allocation of plan assets by investment category at December 31, 2007 and 2006, as well as the long-range average target allocation currently set by the investment manager and the target allocation ranges specified in the plan’s investment policy.
Whitney determines its assumption regarding the expected long-term return on plan assets with reference to the plan’s investment policy and practices, including the tolerance for market and credit risk, and historical returns for benchmark indices specified in the policy. The policy communicates risk tolerance in terms of diversification criteria and constraints on investment quality. The plan may not hold debt securities of any single issuer, except the U.S. Treasury and U.S. government agencies, in excess of 10% of plan assets. In addition, all purchases for the debt portfolio are limited to investment grade securities of less than 10 years’ maturity. The policy also calls for diversification of equity holdings across business segments and states a preference for holdings in companies that demonstrate consistent growth in earnings and dividends. No company’s equity securities shall comprise more than 5% of the plan’s total market value. Limited use of derivatives is authorized by the policy, but the investment manager has not employed these instruments.
Plan assets included 39,175 shares of Whitney common stock with a value of $1.0 million (.8% of plan assets) at December 31, 2007, and 49,175 shares with a value of $1.6 million (1.2% of plan assets) at December 31, 2006.
Whitney sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code that covers substantially all full-time employees. The Company annually matches the savings of each participant up to 4% of his or her compensation. Tax law imposes limits on total annual participant savings. Participants are fully vested in their savings and in the matching Company contributions at all times. The expense of the Company’s matching contributions was approximately $3.7 million in 2007, $3.4 million in 2006 and $3.2 million in 2005.
Health and Welfare Plans
Whitney has offered health care and life insurance benefit plans for retirees and their eligible dependents. Participant contributions are required under the health plan. All health care benefits are covered under contracts with health maintenance or preferred provider organizations or insurance contracts. The Company funds its obligations under these plans as contractual payments come due to health care organizations and insurance companies.
During the first quarter of 2007, Whitney amended these plans to eliminate postretirement health benefits for all participants other than retirees already receiving benefits and those active participants who would be eligible to receive benefits by December 31, 2007 and to eliminate dental benefits for all participants. The amendment also froze the Company’s health care benefit subsidy at current levels and eliminated the life insurance benefit for employees who retire after December 31, 2007.
The following table presents changes in the actuarial present value of the benefit obligation, the funded status of the plan, and the related amounts recognized and not recognized in the Company’s consolidated balance sheets.
Annual benefit payments, net of Medicare subsidies, are expected to range from $1.0 million to $1.4 million over the next ten years. These estimates were developed based on the same assumptions used in measuring benefit obligations as of December 31, 2007.
The discount rates used to determine the present value of the postretirement benefit obligation and the net periodic expense were the same as those shown above for the defined benefit pension plan. The Company also assumed the following trends in health care costs for the actuarial calculation of the benefit obligation at December 31, 2007 and 2006.
The components of net periodic postretirement benefit expense were as follows.
A 1% increase or decrease in the assumed health care cost trend rates would impact the calculation of the benefit obligation and net periodic expense as follows.
To recognize the funded status of the plan upon initial adoption of SFAS No. 158 in 2006, the Company recorded an additional benefit liability of $13.0 million that represented the remaining unrecognized net actuarial loss of $14.0 million and an unrecognized net prior service credit of $1.0 million at adoption. The corresponding charge was reported, net of tax, as an $8.5 million adjustment of accumulated other comprehensive loss at December 31, 2006.
The following shows changes in the amounts recognized in accumulated other comprehensive income or loss during 2007.
The amounts of the net actuarial loss and prior service credit included in accumulated other comprehensive loss at the end of 2007 that are expected to be recognized as components of net postretirement benefit expense (benefit) in 2008 are $2.1 million and $(2.2) million, respectively.
NOTE
SHARE-BASED COMPENSATION
Whitney maintains incentive compensation plans that incorporate share-based compensation. The plans for both employees and directors have been approved by the Company’s shareholders. The most recent long-term incentive plan for key employees was approved in 2007 (the 2007 plan).
The Compensation and Human Resources Committee of the Board of Directors administers the employee plans, designates who will participate and authorizes the awarding of grants. Under the 2007 plan, participants may be awarded stock options, restricted stock and stock units, including those subject to the attainment of performance goals, and stock appreciation rights, as well as other stock-based awards that the Committee deems consistent with the plan’s purposes. These are substantially the same as the awards that were available under prior plans. To date, the Committee has awarded both stock options as well as performance-based and tenure-based restricted stock and restricted stock units under the 2007 plan or prior plans.
The plan authorizes awards with respect to a maximum of 3,200,000 Whitney common shares. Shares subject to awards that have been settled in cash are not counted against the maximum authorization. At December 31, 2007, the Committee could make future awards with respect to 2,560,875 shares. This remaining authorization reflects a reduction for the maximum number of shares that could be issued with respect to performance-based awards under this plan until the performance measurement periods have been completed and the final performance adjustment is known. The stock issued for employee or director awards may come from unissued shares or shares held in treasury.
The directors’ plan provides for the annual award of stock grants and stock options to each nonemployee director. Under this plan as originally implemented, Whitney was authorized to issue an aggregate number of common shares not exceeding 3% of the Company’s outstanding shares, but in no event more than 1,687,500 shares. The Board of Directors has subsequently amended the plan to reduce the authorized shares to no more than 937,500. At December 31, 2007, 380,141 shares remain available for future award and issuance under the directors’ plan.
Employees forfeit the restricted stock units granted in 2007 and 2006 if they terminate employment within three years of the award date, although they can retain a prorated number of units in the case of retirement, death, disability and, in limited circumstances, involuntary termination. During the three-year period, they cannot transfer or otherwise dispose of the units awarded. The performance-based restricted stock units that ultimately vest will be determined with reference to Whitney’s financial performance over a three-year period in relation to that of a designated peer group. Prior to 2006, the Company had awarded performance-based restricted stock, but with substantially the same terms as the performance-based restricted units. All employee restricted stock and stock units would vest and the restrictions on their shares would lapse upon a change in control of the Company. The directors’ stock grants are fully vested upon award.
The following table recaps changes during 2007 in the number of shares that are expected to ultimately be issued with respect to employees’ performance-based and tenure-based restricted stock and stock units, taking into consideration expected performance factors but not expected forfeitures.
(a)Performance-based total includes 858,738 shares that could be issued with respect to awards whose performance measurement periods were not
completed by December 31, 2007. The maximum shares that potentially could be issued with respect to these awards total 1,010,280. Under certain
levels of performance, no shares would be issued.
The Company recognized compensation expense with respect to employee restricted stock and stock units of $13.3 million in 2007, $12.0 million for 2006 and $9.4 million in 2005. The income tax benefits associated with this compensation were approximately $4.7 million, $4.2 million and $3.3 million, respectively, in 2007, 2006 and 2005. Unrecognized compensation related to restricted stock and stock units expected to vest totaled $19.5 million at December 31, 2007. This compensation will be recognized over an expected weighted-average period of 1.9 years. The total fair value of the restricted stock that vested during 2007 was $10.4 million, based on the closing market price of Whitney’s common stock on the vesting date. The fair value of vested restricted stock totaled $10.3 million in 2006 and $8.0 million in 2005.
Directors’ stock grants totaled 8,100 shares in 2007, 8,775 shares in 2006 and 10,125 shares in 2005. The aggregate grant date fair value of these awards was $244,000 in 2007, $310,000 in 2006 and $330,000 in 2005.
The following table summarizes combined stock option activity under the employee and director plans.
Employees can first exercise their stock options from the 2007 and 2006 awards three years from the grant date, provided they are still employed. A prorated number of options can vest and become immediately exercisable upon an employee’s retirement, death or disability within this three-year period, and all options would vest upon a change in control of the Company. All employee options expire after ten years, although an earlier expiration applies in the case of retirement, death or disability. The exercise price for employee options is set at an amount not lower than the opening market price for Whitney’s stock on the grant date. Before 2006, employee stock options were awarded without the three-year service requirement, but otherwise had substantially the same terms as the options awarded in 2007 and 2006. Directors’ stock options are immediately exercisable and expire no later than ten years from the grant date. The exercise price for directors’ options is set at the closing market price for the Company’s stock on the grant date.
The following table presents certain additional information about stock options as of December 31, 2007. The intrinsic value of an option is the excess of the closing market price of Whitney’s common stock over its exercise price.
(dollars in thousands,
Weighted-
except per share data)
Average
Weighted-
Aggregate
Years to
Average
Intrinsic
Range of Exercise Prices
Number
Expiration
Exercise Price
Value
Options Exercisable
$15.31-$18.86
447,298
2.5
$17.72
$20.52-$24.44
807,074
4.1
22.60
$28.86-$29.83
593,406
6.5
28.95
$30.10-$35.37
552,500
7.8
31.94
$15.31-$35.37
2,400,278
5.1
$25.41
$6,636
Options Outstanding
$15.31-$35.41
2,812,978
5.7
$26.44
$6,636
The following table provides information on total cash proceeds received on option exercises, the intrinsic value of options exercised by employees and directors based on the Company’s closing stock price as of the exercise dates, and related tax benefits realized by Whitney. The tax benefit in each year was credited to capital surplus. The impact of the tax benefit was reported as a cash flow from financing activities in the consolidated statement of cash flows for 2007 and 2006 and as a cash flow from operations in 2005.
Whitney is following SFAS No. 123R for all awards granted after December 31, 2005 and awards modified, repurchased, or cancelled after that date. This revised accounting standard established the fair value-based method as the exclusive method of accounting for share-based compensation, with only limited exceptions. For outstanding awards for which the required service period extended beyond December 31, 2005, SFAS No. 123R required Whitney to recognize compensation after that date based on the grant-date fair value of those awards as calculated for pro forma disclosure under the original SFAS No. 123. As of December 31, 2005, all stock options awarded by the Company were fully vested and exercisable and there were no continuing service requirements. The service requirements for certain performance-based restricted stock awards did extend beyond December 31, 2005. During 2005, Whitney recognized compensation expense with respect to restricted stock awards under Accounting Principles Board Opinion (APB) No. 25 and related interpretations. The expense recognized under APB No. 25 was also based on fair value, but the timing of when fair value was determined and the method of allocating expense over time differed in certain respects from what was required under SFAS No. 123.
The following shows pro forma net income and earnings per share for 2005 assuming Whitney had applied SFAS No. 123 to measure and to recognize share-based compensation expense for that year.
The fair values of the stock options were estimated as of the grant dates using the Black-Scholes option-pricing model. The significant assumptions made in applying the option-pricing model are shown in following table. Both the volatility assumption and the weighted-average life assumption were based primarily on historical experience.
NOTE
REGULATORY MATTERS
Regulatory Capital Requirements
Measures of regulatory capital are an important tool used by regulators to monitor the financial health of insured financial institutions. The primary quantitative measures used by regulators to gauge capital adequacy are the ratio of Tier 1 regulatory capital to average total assets, also known as the leverage ratio, and the ratios of Tier 1 and total regulatory capital to risk-weighted assets. The regulators define the components and computation of each of these ratios. The minimum capital ratios for both the Company and the Bank are generally 4% leverage, 4% Tier 1 capital and 8% total capital. Regulators may, however, set higher capital requirements for an individual institution when particular circumstances warrant.
To evaluate capital adequacy, regulators compare an institution’s regulatory capital ratios with their agency guidelines, as well as with the guidelines established as part of the uniform regulatory framework for prompt corrective supervisory action toward insured institutions. In reaching an overall conclusion on capital adequacy or assigning an appropriate classification under the uniform framework, regulators must also consider other subjective and quantitative assessments of risk associated with the institution. Regulators will take certain mandatory as well as possible additional discretionary actions against institutions they judge to be inadequately capitalized. These actions could materially impact the institution’s financial position and results of operations.
Under the regulatory framework for prompt corrective action, the capital levels of banks are categorized into one of five classifications ranging from well-capitalized to critically under-capitalized. For an institution to qualify as well-capitalized, its leverage, Tier 1 and total capital ratios must be at least 5%, 6% and 10%, respectively. If an institution fails to remain well-capitalized, it will be subject to a series of operating restrictions that increase as the capital condition worsens. An institution’s capital level is also an important factor in determining the deposit insurance premium it pays under the FDIC’s risk-based assessment system. As of December 31, 2007 and 2006, the Bank was categorized as well-capitalized.
The actual capital amounts and ratios for the Company and the Bank are presented in the following tables, together with the corresponding capital amounts determined using regulatory guidelines.
Other Regulatory Matters
Dividends received from the Bank represent the primary source of funds available to the Company for the declaration and payment of dividends to Whitney’s shareholders. There are various regulatory and statutory provisions that limit the amount of dividends that the Bank can distribute to the Company. During 2008, the Bank will have available an amount equal to approximately $113 million plus its current net income to declare as dividends to the Company without prior regulatory approval. At December 31, 2007, the Company had approximately $126 million in cash and demand notes from the Bank available to provide liquidity for future dividend payments to its shareholders and other corporate purposes.
Under current Federal Reserve regulations, the Bank is limited in the amounts it may lend to the Company to a maximum of 10% of its capital and surplus, as defined in the regulations. Any such loans must be collateralized from 100% to 130% of the loan amount, depending upon the nature of the underlying collateral. The Bank made no loans to the Company during 2007 and 2006.
Banks are required to maintain currency and coin or a noninterest-bearing balance with the Federal Reserve Bank to meet reserve requirements based on a percentage of deposits. During 2007 and 2006, the Bank covered substantially all of its reserve maintenance requirement with balances of coin and currency.
NOTE
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
To meet the financing needs of its customers, the Bank issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the consolidated balance sheets. These financial instruments include commitments to extend credit under loan facilities and guarantees under standby and other letters of credit. Such instruments expose the Bank to varying degrees of credit and interest rate risk in much the same way as funded loans.
Revolving loan commitments are issued primarily to support commercial activities. The availability of funds under revolving loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. A number of such commitments are used only partially or, in some cases, not at all before they expire. Nonrevolving loan commitments are issued mainly to provide financing for the acquisition and development or construction of real property, both commercial and residential, although many are not expected to lead to permanent financing by the Bank. Loan commitments generally have fixed expiration dates and may require payment of a fee. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates, and many lines remain partly or wholly unused.
Substantially all of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services. A substantial majority of standby letters of credit outstanding at year-end 2007 have a term of one year or less.
The Bank’s exposure to credit losses from these financial instruments is represented by their contractual amounts. The Bank follows its standard credit policies in approving loan facilities and financial guarantees and requires collateral support if warranted. The required collateral could include cash instruments, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial property. See Note 7 for a summary analysis of changes in the reserve for losses on unfunded credit commitments.
A summary of off-balance sheet financial instruments follows.
NOTE
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of estimated fair value information about certain on- and off-balance-sheet financial instruments where it is practicable to estimate those values. If quoted market prices are not available, which is true for many of Whitney’s financial instruments, the Company estimates fair value using present value or other valuation techniques. The assumptions used in applying these techniques, such as those concerning appropriate discount rates and estimates of future cash flows, require considerable judgment and significantly affect the resulting fair value estimates. In addition, no value estimate is assigned to future business opportunities from long-term customer relationships underlying certain financial instruments. Accordingly, the derived fair value estimates may not indicate the amount the Company could realize in a current settlement of the financial instruments. Reasonable comparability of fair value estimates between financial institutions may not be possible due to the wide range of permitted valuation techniques and numerous assumptions involved. The aggregate fair value amounts presented do not, and are not intended to, represent an aggregate measure of the underlying fair value of the Company.
The following significant methods and assumptions were used by the Company to estimate the fair value of financial instruments:
Cash, federal funds sold and short-term investments- The carrying amount was used as a reasonable estimate of the fair value of cash and due from financial institutions, federal funds sold and short-term investments.
Investment in securities- Fair values of securities were based on quoted market prices obtained from independent pricing services.
Loans- Loans with no significant change in credit risk and with rates that are repriced in coordination with movements in market rates were valued at carrying amounts. The fair values of other loans were estimated by discounting scheduled cash flows to maturity using current rates at which loans with similar terms would be made to borrowers of similar credit quality. Appropriate adjustments were made to reflect probable credit losses.
Deposits - SFAS No. 107 requires that deposits without a stated maturity, such as noninterest-bearing demand deposits, NOW account deposits, money market deposits and savings deposits, be assigned fair values equal to the amounts payable upon demand (carrying amounts). Deposits with a stated maturity were valued by discounting contractual cash flows using a discount rate approximating current market rates for deposits of similar remaining maturity.
Short-term borrowings- Short-term borrowings are valued fairly at their carrying amounts.
Long-term debt- The fair value of long-term debt was estimated by discounting contractual payments at current market interest rates.
Off-balance sheet financial instruments- Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit. The fair values of such instruments were estimated using fees currently charged for similar arrangements in the market, adjusted for changes in terms and credit risk as appropriate. The estimated fair values of these instruments were not material.
The estimated fair values of the Company’s financial instruments follow.
NOTE
CONTINGENCIES
Legal Proceedings
The Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. After reviewing pending and threatened actions with legal counsel, management believes that the ultimate resolution of these actions will not have a material effect on the Company’s financial condition, results of operations or cash flows.
Indemnification Obligation
In October 2007, Visa Inc. completed restructuring transactions that modified the obligation of members of Visa USA, including Whitney, to indemnify Visa against pending and possible settlements of certain litigation matters. Whitney recorded a $1.0 million liability for the estimated value of its obligations under the indemnification agreement. Visa Inc. plans to use a portion of the proceeds from an initial public offering of its shares to establish an escrow account that will fund any settlement of these matters. The amount of offering proceeds escrowed for litigation settlements will reduce the number of shares of Visa stock to which Whitney will ultimately be entitled as a result of the restructuring.
Insurance Matters Related to Natural Disaster
During the third quarter of 2007, Whitney reached a final settlement on insurance claims primarily arising from the hurricanes that struck portions of its market area in late summer of 2005. With this settlement, the Company recognized a gain of $31.3 million. This gain mainly related to insured costs to replace or restore banking premises and equipment that are capitalized and that exceed the carrying value of the damaged properties.
NOTE
OTHER NONINTEREST INCOME
The components of other noninterest income were as follows.
Other operating income in 2007 includes a $31.3 million gain related to an insurance settlement as discussed in Note 20.
NOTE
OTHER NONINTEREST EXPENSE
The components of other noninterest expense were as follows.
NOTE
INCOME TAXES
The components of income tax expense (benefit) follow.
Deferred income tax expense included in shareholders’ equity for 2006 does not include the tax effect associated with the additional liabilities for pension and other postretirement benefits that were recorded as of December 31, 2006 on the adoption of SFAS No. 158. The charge for these additional liabilities was shown, net of the tax effect of $11.8 million, as an adjustment to ending accumulated other comprehensive loss in the consolidated statements of changes in shareholders’ equity for 2006. See Note 15 for additional information on the adoption of SFAS No. 158.
The effective rate of tax included in net income differed from the statutory federal income tax rate because of the following factors.
Federal disaster-relief legislation provided for a tax credit to businesses in storm-affected areas based on certain salaries paid to qualifying employees. Application of this provision reduced Whitney’s income tax expense by $.4 million in 2007, $.7 million in 2006 and $1.9 million in 2005.
Temporary differences arise between the tax bases of assets or liabilities and their reported amounts in the financial statements. The expected tax effects when these differences are resolved are recorded currently as deferred tax assets or liabilities. The components of the net deferred income tax asset, which is included in other assets on the consolidated balance sheets, follow.
As discussed in Note 2, the Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. At adoption, Whitney reduced its liability for unrecognized tax benefits from uncertain tax positions by $.7 million with a corresponding increase to beginning retained earnings for 2007. The liability for unrecognized tax benefits was approximately $.3 million at both the adoption of FIN 48 and December 31, 2007, and changes in the liability during the year were insignificant. The Company does not expect the liability for unrecognized tax benefits to change significantly during 2008. Whitney recognizes interest and penalties, if any, related to income tax matters in income tax expense, and the amounts recognized during 2007 were insignificant.
The Company and its subsidiaries file a consolidated federal income tax return and various separate company state returns. With few exceptions, the returns for years before 2004 are not open for examination by federal or state taxing authorities.
NOTE
STOCK REPURCHASE PROGRAM
In November 2007, the Board of Directors authorized the Company to repurchase up to 4 million shares of its common stock. As of December 31, 2007, Whitney had repurchased 1,895,091 shares at an average cost of $26.13 per share under this program. The program extends through December 2008.
NOTE
EARNINGS PER SHARE
The components used to calculate basic and diluted earnings per share were as follows.
NOTE
PARENT COMPANY FINANCIAL STATEMENTS
The following financial statements are for the parent company only. Cash and cash equivalents include noninterest-bearing deposits in the Bank and the demand note receivable from the Bank.
The total for cash used to invest in subsidiaries includes net cash paid to acquire Signature Financial Holdings, Inc. in 2007, First National Bancshares, Inc. in 2006 and Destin Bancshares, Inc. in 2005. The bank subsidiaries acquired with these holding companies were merged into Whitney National Bank.
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, the CEO and CFO have concluded that the disclosure controls and procedures as of the end of the period covered by this annual report were effective.
Management’s Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm. “Management’s Report on Internal Control over Financial Reporting,” which appears in Item 8
Item 9B: OTHER INFORMATION
None.
PART III
Item 10:
Item 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Whitney has adopted a Code of Ethics and Conduct for Senior Financial Officers and Executive Officers that applies to its chief executive officer, chief financial officer, controller or principal accounting officer, as well as such other persons, including officers of its subsidiaries, identified by resolution of the Board of Directors from time to time as performing similar functions for the Company and any other persons the Board of Directors designates as executive officers. A copy of the code is available on the Company’s website at www.whitneybank.com. Whitney will also post on its website at the same address any amendments to the code and any waivers from the code required to be disclosed by the rules of the SEC or the Nasdaq Global Select Market.
In further response to this Item 10, registrant incorporates by reference the section entitled “Executive Officers of the Company” appearing in Item 1 of this Form 10-K and the following sections of its Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC:
·
The subsections entitled “Board of Directors,” “Nominating and Corporate Governance Committee,” and “Audit Committee” of the section entitled “Board of Directors and Its Committees.”
·
The section entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”
·
The section entitled “Transactions with Related Persons.”
Item 11:
Item 11: EXECUTIVE COMPENSATION
In response to this item, registrant incorporates by reference the following sections of its Proxy Statement for the 2008 Annual Meeting of Shareholders to be to be filed with the SEC:
·
The section entitled “Executive Compensation.”
·
The subsections entitled “Board Committees” and “Compensation and Human Resources Committee” of the section entitled “Board of Directors and Its Committees.”
·
The section entitled “Compensation and Human Resources Committee Interlocks and Insider Participation.”
·
The section entitled “Compensation Discussion and Analysis.”
·
The section entitled “Compensation and Human Resources Committee Report.”
Item 12:
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
In partial response to this item, registrant incorporates by reference the sections entitled “Voting Securities and Principal Holders” and “Beneficial Ownership of Directors and Management” of its Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.
The following table summarizes certain information regarding the registrant’s equity compensation plans as of December 31, 2007. The underlying compensation plans, which are more fully described in Note 16 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K, have been previously approved by a vote of the shareholders.
Equity Compensation Plan Information
(a)
(b)
(c)
Plan category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans
approved by shareholders
2,904,765 (1)
$26.44 (2)
2,941,016 (3)
Equity compensation plans
not approved by shareholders
---
---
---
Total
2,904,765
$26.44
2,941,016
(1)
The total includes an aggregate of 2,434,978 shares that can be issued on the exercise of options held by employees. 185,450 shares are subject to options granted under the 2007 Long-Term Compensation Plan (2007 LTCP), 1,152,656 shares are subject to options granted under the 2004 Long-Term Incentive Plan (2004 LTIP), and 1,096,872 shares are subject to options granted under the 1997 Long-Term Incentive Plan (1997 LTIP). The total also includes an aggregate of 378,000 shares that can be issued on the exercise of options held by nonemployee directors of the Company. These options were granted under the Directors’ Compensation Plan, as amended and restated.
Also included in the total are 91,787 common stock equivalent units held in deferred compensation accounts maintained for certain of the Company’s directors, which must eventually be distributed as common shares of the Company. As allowed under the Directors’ Compensation Plan, certain nonemployee directors have deferred receipt of annual stock awards and fees, and the value of these deferrals has been credited to a bookkeeping account maintained for each director. The value of an account is indexed to the performance of one or more investment options specified in the plans. One of the investment options is equivalent units of the Company’s common stock. This option is mandatory for deferred stock awards and was extended by the Directors’ Compensation Plan to deferred compensation account balances maintained under a prior deferred compensation plan. The number of common stock equivalent units allocated to a director’s account for each deferral is based on the fair market value of the Company’s common stock on the deferral date. The common stock equivalent units are deemed to earn any dividends declared on the Company’s common stock, and additional units are allocated on the dividend payment date based on the stock’s fair market value.
(2)
Represents the weighted-average exercise price of options granted under the LTCP, the 2004 LTIP, the 1997 LTIP, and the Directors’ Compensation Plan. It does not include the per share price of common stock equivalent units held in deferred compensation accounts for the benefit of nonemployee directors. These units are allocated to accounts based on the fair market value of the Company’s common stock on the date of each account transaction.
(3)
Under the 2007 LTCP, the Company is authorized to make awards with respect to a maximum of 3,200,000 of its common shares. The 2007 LTCP provides for the award of options, stock appreciation rights, restricted stock and restricted stock units that represent common shares, as well as other stock-based awards that the Compensation and Human Resources Committee of the Company’s Board of Directors deems consistent with the plan’s purposes. Of the total shares authorized, the Company can make awards with respect to a maximum of 2,400,000 shares in a form of full-value awards, i.e., awards other than in the form of stock options or stock appreciations rights and which are settled in stock. A maximum of 1,000,000 shares may be issued upon exercise of incentive stock options awarded under the 2007 LTCP. At December 31, 2007, the Company could make future awards under the 2007 LTCP with respect to 2,560,875 shares of its common stock, of which 1,946,325 can be under full-value awards. No incentive stock options had been awarded under the 2007 LTCP as of December 31, 2007. This total has been reduced by the maximum number of shares that could be issued with respect to performance-based awards under the 2007 LTCP for which the performance measurement period was not completed by December 31, 2007.
Under the Directors’ Compensation Plan as originally implemented, the Company is authorized to make awards of stock options or common stock and allocations of common stock equivalent units with respect to the lesser of either 1,687,500 common shares or 3% of its issued and outstanding common shares, as determined from time to time. The Board of Directors subsequently amended the plan to reduce the authorized shares to no more than 937,500. At December 31, 2007, the Company could make future awards or allocations of common stock equivalent units under the plan with respect to 380,141 shares of its common stock.
Item 13:
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In response to this item, registrant incorporates by reference the following sections of its Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC:
· The section entitled “Transactions with Related Persons.”
·
The first paragraph of the subsection entitled “Board of Directors” in the section entitled “Board of Directors and Its Committees.”
·
The first paragraph of the subsection entitled “Nominating and Corporate Governance Committee” in the section entitled “Board of Directors and Its Committees.”
·
The first paragraph of the subsection entitled “Audit Committee” in the section entitled “Board of Directors and Its Committees.”
·
The first paragraph of the subsection entitled “Role of the Compensation and Human Resources Committee” in the section entitled “Compensation Discussion and Analysis.”
Item 14:
Item 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
In response to this item, registrant incorporates by reference the section entitled “Auditors” of its Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the SEC.
PART IV
Item 15:
Item 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
The following consolidated financial statements and supplementary data of the Company and its subsidiaries are included in Part II Item 8 of this Form 10-K:
Page Number
Summary of Quarterly Financial Information
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets --
December 31, 2007 and 2006
Consolidated Statements of Income --
Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Shareholders’ Equity --
Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows --
Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(a)(2)
All schedules have been omitted because they are either not applicable or the required information has been included in the consolidated financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits:
To obtain a copy of any listed exhibit send your request to the address below. The copy will be furnished upon payment of a fee.
Mrs. Shirley Fremin, Manager
Shareholder Services
Whitney Holding Corporation
P. O. Box 61260
New Orleans, LA 70161-1260
(504) 586-3627 or toll free (800) 347-7272, ext. 3627
E-mail: investor.relations@whitneybank.com
Exhibit 3.1 - Copy of the Company’s Composite Charter (filed as Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2000 (Commission file number 0-1026) and incorporated by reference).
Exhibit 3.2 - Copy of the Company’s Bylaws (filed as Exhibit 3.01 to the Company’s current report on Form 8-K filed on October 2, 2006 (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.1 *- Form of Amended and Restated Executive Agreement between Whitney Holding Corporation, Whitney National Bank and certain executive officers.
Exhibit 10.2 *- Form of Amended and Restated Officer Agreement between Whitney Holding Corporation, Whitney National Bank and an executive officer.
Exhibit 10.3*- Whitney Holding Corporation 1997 Long-Term Incentive Plan (filed as Exhibit A to the Company’s Proxy Statement dated March 18, 1997 (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.4*- Whitney Holding Corporation 2004 Long-Term Incentive Plan (filed as Exhibit B to the Company’s Proxy Statement for the Annual Meeting of Shareholders dated March 19, 2004 (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.5*- Whitney Holding Corporation 2007 Long-Term Compensation Plan (filed as Exhibit A of the Definitive Additional Materials to the Company’s Definitive Proxy Statement on Schedule 14A dated March 29, 2007 (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.6*- Amendment to the Whitney Holding Corporation 2007 Long-Term Compensation Plan effective as of December 1, 2007.
Exhibit 10.7*- Form of notice and acceptance of award of performance-based restricted stock to certain of the Company’s non-director executive officers under the Company’s 2004 Long-Term Incentive Plan (filed on June 17, 2005 as Exhibit 99.1 to the Company’s current report on Form 8-K (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.8*- Form of notice and acceptance of award of performance-based restricted stock to certain of the Company’s director executive officers under the Company’s 2004 Long-Term Incentive Plan (filed on June 17, 2005 as Exhibit 99.2 to the Company’s current report on Form 8-K (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.9*- Form of performance-based restricted stock unit agreement for executive officers under the Company’s 2004 Long-Term Incentive Plan (filed on July 6, 2006 as Exhibit 99.1 to the Company’s current report on Form 8-K (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.10*- Form of performance-based restricted stock unit agreement for executive officers under the Company’s 2007 Long-Term Compensation Plan.
Exhibit 10.11*- Form of stock option agreement between Whitney Holding Corporation and certain of its officers (filed as Exhibit 10.9b to the Company’s annual report of Form 10-K for the year ended December 31, 2001 (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.12*- Form of notice and acceptance of stock option grant to certain of the Company’s officers under the Company’s 2004 Long-Term Incentive Plan (filed on June 17, 2005 as Exhibit 99.3 to the Company’s current report of Form 8-K (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.13*- Form of notice and acceptance of stock option grant under the Company’s 2004 Long-Term Incentive Plan (filed on July 6, 2006 as Exhibit 99.2 to the Company’s current report of Form 8-K (Commission file number 0-1026) and incorporated by reference).
Exhibit 10.14 *- Form of notice and acceptance of stock option grant under the Company’s 2007
Long-Term Compensation Plan.
Exhibit 10.15 *- Whitney Holding Corporation Directors’ Compensation Plan (filed as Exhibit A
to the Company’s Proxy Statement dated March 24, 1994 (Commission file
number 0-1026) and incorporated by reference).
Exhibit 10.16 *- Amendment No. 1 to the Whitney Holding Corporation Directors’ Compensation
Plan (filed as Exhibit A to the Company’s Proxy Statement dated March 15, 1996 (Commission file
number 0-1026) and incorporated by reference).
Exhibit 10.17 *- Whitney Holding Corporation 2001 Directors’ Compensation Plan as amended and
restated effective as of January 1, 2008.
Exhibit 10.18 *- Whitney Holding Corporation Retirement Restoration Plan as amended and restated
effective January 1, 2008.
Exhibit 10.19 *- Whitney Holding Corporation Executive Incentive Compensation Plan as amended
and restated effective as of January 1, 2008.
Exhibit 10.20 *- Whitney Holding Corporation Deferred Compensation Plan as amended and
restated effective as of January 1, 2008.
Exhibit 10.21 *- Summary of performance measurements to be used under the Company’s Executive
Compensation Plan to determine bonus awards to the Company’s executive officers for fiscal year
and the maximum bonus opportunities that can be earned by executive officers for fiscal year
(filed on December 21, 2006 under Item 5.02 of the Company’s current report on Form 8-K/A
(Commission file number 0-1026) and incorporated by reference).
Exhibit 12 - Statement regarding computation of earnings to fixed charges
Exhibit 21 - Subsidiaries
Whitney Holding Corporation owns 100% of Whitney National Bank, a national banking
association organized under the laws of the United States of America. All other subsidiaries
considered in the aggregate would not constitute a significant subsidiary.
Exhibit 23 - Consent of PricewaterhouseCoopers LLP dated February 29, 2008.
Exhibit 31.1 - Certification of the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of the Company’s Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certification by the Company’s Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
*
Management contract or compensatory plan or arrangement.
**
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of certain
holders of long-term debt are not filed. The Company will furnish copies thereof to the SEC upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WHITNEY HOLDING CORPORATION
(Registrant)
By: /s/ William L. Marks
William L. Marks
Chairman of the Board and
Chief Executive Officer
February 29,
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.