NOTE
1
BASIS
OF PRESENTATION
The
consolidated financial statements include the accounts of Whitney Holding
Corporation and its subsidiaries (the Company or Whitney). All significant
intercompany balances and transactions have been eliminated.
In
preparing the consolidated financial statements, the Company is required to
make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. The consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of
the
financial condition, results of operations, changes in shareholders’ equity and
cash flows for the interim periods presented. These adjustments are of a normal
recurring nature and include appropriate estimated provisions.
Pursuant
to rules and regulations of the Securities and Exchange Commission (SEC),
certain financial information and disclosures have been condensed or omitted
in
preparing the consolidated financial statements presented in this quarterly
report on Form 10-Q. These financial statements should be read in conjunction
with the Company’s 2005 annual report on Form 10-K. Financial information
reported in these financial statements is not necessarily indicative of the
financial condition, results of operations or cash flows of any other interim
or
annual periods.
NOTE
2
UPDATE
ON IMPACT OF NATURAL DISASTERS
Two
strong hurricanes struck portions of Whitney’s service area during the third
quarter of 2005. The following sections summarize the more significant
continuing financial repercussions of these natural disasters for the Company
and for its major subsidiary, Whitney National Bank (the Bank).
Credit
Quality and Allowance for Loan Losses
Relationship
officers have closely monitored the performance of storm-impacted loan
customers. Information provided by these officers and statistics on the
performance of consumer credits were factored into management’s determination of
the allowance for loan losses at June 30, 2006. Although the identification
and
initial evaluation of storm-impacted credits has been completed, management’s
assessment of the storms’ impact is still subject to important uncertainties,
both those specific to some individual customers, such as the resolution of
insurance claims, and those applicable to the economic prospects of the
storm-impact area as a whole. With the resolution of these uncertainties and
the
ongoing collection of information on individual customers and statistics on
the
consumer segment of the loan portfolio, the loss estimate will be revised as
needed.
Disaster
Response Costs, Casualty Losses, Business Interruption and Related
Insurance
The
Bank
incurred a variety of costs to operate in disaster response mode, and a number
of facilities and their contents were damaged by the storms, including sixteen
that require replacement, relocation or major renovation. Whitney maintains
insurance for casualty losses as well as for reasonable and necessary disaster
response costs and certain revenue lost through business interruption. All
significant disaster response costs had been incurred by the end of the second
quarter of 2006 and included where appropriate in an insurance claim receivable
based on management’s understanding of the underlying coverage. The bulk of
costs to replace or renovate facilities will be incurred in future periods,
and
these will be included in the insurance claims as appropriate. Management
projects that casualty claims arising from the 2005 storms will be within policy
limits, and that gains will be recognized with respect to these claims in future
periods; however, this is contingent upon reaching agreement with insurance
carriers. An insurance claim receivable of $17.9 million was included in other
assets at June 30, 2006. Whitney has expensed $8.4 million of storm-related
disaster response costs and operating and casualty losses, of which $4.0 million
was charged to operations during 2006, including $1.5 million in the second
quarter.
NOTE
3
MERGERS
AND ACQUISITIONS
On
April
13, 2006, Whitney acquired First National Bancshares, Inc. of Bradenton, Florida
(First National) and its subsidiary, 1
st
National
Bank & Trust (1
st
National), which operates in the Tampa Bay area. 1
st
National
had approximately $380 million in total assets, including a loan portfolio
valued at $286 million, and $319 million in deposits at the acquisition date.
The Company will merge 1
st
National
into Whitney National Bank in July 2006 upon completion of systems-integration
work. First National shareholders received 2.2 million shares of Whitney common
stock and cash totaling $41 million, for a total transaction value of
approximately $116 million. Applying purchase accounting to this transaction,
the Company recorded goodwill of $88 million and a $7 million intangible asset
for the estimated value of deposit relationships with a weighted-average life
of
2.3 years. No other material adjustments were required to record First
National’s assets and liabilities at fair value.
In
April
2005, Whitney acquired Destin Bancshares, Inc. (Destin). Destin’s major
subsidiary was Destin Bank, which operated ten banking centers in the Destin,
Fort Walton Beach and Pensacola areas of the Florida panhandle, with
approximately $540 million in total assets, including a loan portfolio of $390
million, and $440 million in deposits on the acquisition date. Destin Bank
was
merged into Whitney National Bank at the acquisition date. This transaction
was
valued at $115 million, with $58 million paid to Destin shareholders in cash
and
the remainder in Whitney stock totaling approximately 1.9 million shares (1.3
million shares before adjustment for the three-for-two stock split in May 2005).
Intangible assets acquired in this transaction included $88 million of goodwill
and $9 million assigned to the value of deposit relationships with an estimated
weighted-average life of 3.0 years.
Whitney’s
financial statements include the results from acquired operations since the
acquisition dates.
NOTE
4
FEDERAL
FUNDS SOLD AND SHORT-TERM INVESTMENTS
The
balance of federal funds sold and short-term investments included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Federal
funds sold
|
|
$
|
34,025
|
|
$
|
304,500
|
|
|
U.
S. Treasury bills
|
|
|
638,685
|
|
|
-
|
|
|
U.
S. government agency discount notes
|
|
|
99,514
|
|
|
499,013
|
|
|
Other
short-term interest-bearing investments
|
|
|
5,086
|
|
|
2,245
|
|
|
Total
|
|
$
|
777,310
|
|
$
|
805,758
|
|
Federal
funds were sold on an overnight basis. The U. S. Treasury bills and government
agency discount notes have maturities of less than three months.
NOTE
5
LOANS
The
composition of the Company’s loan portfolio was as follows:
|
|
|
|
|
|
|
|
June
30
|
December 31
|
|
(in
thousands)
|
|
2006
|
2005
|
|
Commercial,
financial and agricultural
|
|
$
|
2,640,588
|
|
|
39
|
%
|
$
|
2,685,894
|
|
|
41
|
%
|
|
Real
estate - commercial, construction and other
|
|
|
3,025,366
|
|
|
44
|
|
|
2,743,486
|
|
|
42
|
|
|
Real
estate - residential mortgage
|
|
|
851,569
|
|
|
12
|
|
|
774,124
|
|
|
12
|
|
|
Individuals
|
|
|
343,223
|
|
|
5
|
|
|
357,093
|
|
|
5
|
|
|
Total
|
|
$
|
6,860,746
|
|
|
100
|
%
|
$
|
6,560,597
|
|
|
100
|
%
|
NOTE
6
ALLOWANCE
FOR LOAN LOSSES, IMPAIRED LOANS AND NONPERFORMING LOANS
A
summary
analysis of changes in the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
Six Months Ended
|
|
|
|
June
30
|
June 30
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Balance
at beginning of year
|
|
$
|
89,209
|
|
$
|
53,920
|
|
$
|
90,028
|
|
$
|
54,345
|
|
|
Allowance
of acquired bank
|
|
|
2,908
|
|
|
3,648
|
|
|
2,908
|
|
|
3,648
|
|
|
Provision
for loan losses
|
|
|
1,000
|
|
|
1,500
|
|
|
3,000
|
|
|
3,000
|
|
|
Loans
charged off
|
|
|
(13,514
|
)
|
|
(2,313
|
)
|
|
(17,143
|
)
|
|
(5,989
|
)
|
|
Recoveries
|
|
|
1,112
|
|
|
1,892
|
|
|
1,922
|
|
|
3,643
|
|
|
Net
charge-offs
|
|
|
(12,402
|
)
|
|
(421
|
)
|
|
15,221
|
|
|
(2,346
|
)
|
|
Balance
at end of year
|
|
$
|
80,715
|
|
$
|
58,647
|
|
$
|
80,715
|
|
$
|
58,647
|
|
Information
on loans evaluated for possible impairment loss follows:
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Impaired
loans
|
|
|
|
|
|
|
|
|
Requiring a loss allowance
|
|
$
|
41,665
|
|
$
|
54,994
|
|
|
Not requiring a loss allowance
|
|
|
10,043
|
|
|
4,789
|
|
|
Total recorded investment in impaired loans
|
|
$
|
51,708
|
|
$
|
59,783
|
|
|
Impairment
loss allowance required
|
|
$
|
10,845
|
|
$
|
17,334
|
|
The
following is a summary of nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Loans
accounted for on a nonaccrual basis
|
|
$
|
56,188
|
|
$
|
65,565
|
|
|
Restructured
loans
|
|
|
-
|
|
|
30
|
|
|
Total nonperforming loans
|
|
$
|
56,188
|
|
$
|
65,595
|
|
NOTE
7
DEPOSITS
The
composition of deposits was as follows:
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
3,087,502
|
|
$
|
3,301,227
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
NOW account deposits
|
|
|
1,037,343
|
|
|
1,116,000
|
|
|
Money market deposits
|
|
|
1,188,350
|
|
|
1,103,510
|
|
|
Savings deposits
|
|
|
1,171,817
|
|
|
1,120,078
|
|
|
Other time deposits
|
|
|
771,140
|
|
|
717,938
|
|
|
Time deposits $100,000 and over
|
|
|
1,367,509
|
|
|
1,246,083
|
|
|
Total interest-bearing deposits
|
|
|
5,536,159
|
|
|
5,303,609
|
|
|
Total deposits
|
|
$
|
8,623,661
|
|
$
|
8,604,836
|
|
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 $568 million at June 30, 2006 and $504
million at December 31, 2005. Most of these deposits mature on a daily
basis.
NOTE
8
OTHER
ASSETS AND OTHER LIABILITIES
The
more
significant components of other assets and other liabilities at June 30, 2006
and December 31, 2005 were as follows:
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Net
deferred income tax asset
|
|
$
|
60,526
|
|
$
|
53,065
|
|
|
Insurance
claim receivable
|
|
|
17,882
|
|
|
21,895
|
|
|
Low-income
housing tax credit fund investments
|
|
|
16,817
|
|
|
17,986
|
|
|
Prepaid
pension asset
|
|
|
11,688
|
|
|
15,271
|
|
|
Cash
surrender value of life insurance
|
|
|
9,646
|
|
|
9,575
|
|
|
Prepaid
expenses
|
|
|
7,189
|
|
|
4,713
|
|
|
Miscellaneous
investments, receivables and other assets
|
|
|
23,401
|
|
|
32,039
|
|
|
Total other assets
|
|
$
|
147,149
|
|
$
|
154,544
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Accrued
taxes and expenses
|
|
$
|
78,927
|
|
$
|
57,538
|
|
|
Dividend
payable
|
|
|
14,380
|
|
|
12,159
|
|
|
Liability
for postretirement benefits other than pensions
|
|
|
13,050
|
|
|
11,877
|
|
|
Miscellaneous
payables, deferred income and other liabilities
|
|
|
18,797
|
|
|
17,665
|
|
|
Total other liabilities
|
|
$
|
125,154
|
|
$
|
99,239
|
|
See
Note
2 for information on the natural disasters that affected Whitney during 2005,
including a discussion of related insurance matters. As part of its response
to
the disasters, the federal government allowed corporations to defer federal
income tax payments otherwise due in 2005 and 2006 until the third quarter
of
2006.
NOTE
9
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. Based on currently available information, the Company does not
anticipate making a contribution to the plan during 2006. The components of
net
pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months
Ended
|
|
|
|
|
June
30
|
|
June
30
|
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Service
cost for benefits during the period
|
|
$1,874
|
|
$1,706
|
|
$3,799
|
|
$3,515
|
|
|
Interest
cost on benefit obligation
|
|
1,948
|
|
1,814
|
|
3,879
|
|
3,580
|
|
|
Expected
return on plan assets
|
|
(2,459
|
)
|
(2,097
|
)
|
(4,922
|
)
|
(4,157
|
)
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses
|
|
452
|
|
244
|
|
861
|
|
431
|
|
|
Unrecognized prior service cost
|
|
|
(27
|
)
|
|
(27
|
)
|
|
(54
|
)
|
|
(54
|
)
|
|
Net
periodic benefit expense
|
|
|
$1,788
|
|
|
$1,640
|
|
|
$3,563
|
|
|
$3,315
|
|
Whitney
also has an unfunded nonqualified defined benefit pension plan that provides
retirement benefits to designated executive officers. The net pension expense
for nonqualified plan benefits was approximately $.3 million for the second
quarters of both 2006 and 2005. Year-to-date expense through June 30 was
approximately $.6 million in 2006 and $.5 million in 2005.
Health
and Welfare Plans
Whitney
maintains health care and life insurance benefit plans for retirees and their
eligible dependents. Participant contributions are required under the health
plan. The Company funds its obligations under these plans as contractual
payments come due to health care organizations and insurance
companies.
Whitney
recognized a net periodic expense for postretirement benefits of approximately
$.8 million in the second quarter of 2006 and $.6 million in the second quarter
of 2005. Year-to-date expense through June 30 was $1.6 million in 2006 and
$1.2
million in 2005. None of the individual components of the net periodic expense
was individually significant for any period.
NOTE
10
STOCK-BASED
COMPENSATION
Whitney
maintains incentive compensation plans that incorporate stock-based
compensation. The plans for both employees and directors have been approved
by
the Company’s shareholders. Descriptions of these plans, including the terms of
awards and the number of Whitney shares authorized for issuance, were included
in the Company’s annual report on Form 10-K for the year ended December 31,
2005. At June 30, 2006, future awards with respect to 804,599 shares of Whitney
common stock could be made under the employee plan and 1,198,676 shares under
the directors’ plan. The shares available under the employee plan have been
reduced by the maximum number of shares that could be issued with respect to
performance-based awards. The stock issued for awards may come from unissued
shares or shares held in treasury.
During
June 2006, annual stock-based compensation awards were made under each of these
plans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands, except per share data)
|
|
|
Number
Awarded
|
|
|
Grant
Date
Fair
Value
of
Option, Stock or
Stock
Unit
|
|
|
Total
Stock-based
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
incentive plan for employees:
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based restricted stock units
|
|
|
(a)
|
|
|
$35.01
|
|
|
$20,284
|
(b)
|
|
Stock options
|
|
|
238,800
|
|
|
7.23
|
|
|
1,727
|
|
|
Directors'
compensation plan:
|
|
|
|
|
|
|
|
|
|
|
|
Stock grant
|
|
|
8,775
|
|
|
35.37
|
|
|
310
|
|
|
Stock options
|
|
|
58,500
|
|
|
8.10
|
|
|
474
|
|
(a)
Number
of shares that potentially could be issued ranges from 684,980 to none. As
of
June 30, 2006, 579,365 shares are expected to ultimately be
issued.
(b)
Based
on market price of Whitney common stock on the grant date and number of shares
that are ultimately expected to be issued, taking into consideration expected
performance factors and forfeitures.
Employees
forfeit their stock units 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 this period, they cannot transfer or otherwise dispose
of
the units awarded. The 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. The directors’ stock
grant is fully vested upon award. Prior to 2006, the Company had awarded
performance-based restricted stock, but with substantially the same terms as
the
restricted units.
The
Company has recognized compensation expense with respect to restricted stock
and
stock units of $6.2 million in 2006, including $2.0 million in the second
quarter. During 2005, Whitney recognized compensation expense with respect
to
restricted stock awards totaling $2.7 million for the second quarter and $5.2
million year-to-date through June 30, 2005. Unrecognized compensation related
to
restricted stock and stock units totaled $31.9 million at June 30, 2006.
This
compensation will be recognized over an expected weighted-average period of
2.5
years. At June 30, 2006, 1,334,181 shares with a weighted-average grant-date
fair value of $32.44 per share were expected to ultimately become vested and
issued under performance-based stock and stock unit awards. At December 31,
2005, the total was 875,685 shares with a per share value of $27.81. During
the
first six months of 2006, updated performance expectations added 172,819 shares
with a weighted-average fair value of $30.70 per share to the total of shares
expected to become vested. In the same period, employees vested in 282,901
shares with a value per share of $22.44 and a total value of $6.3 million and
forfeited their rights to 10,787 shares with a weighted-average per share value
of $28.25.
Employees
can first exercise their stock options from the 2006 award 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. 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 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 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 summarizes stock option activity for 2006.
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Weighted-
|
Average
|
|
|
|
|
Average
|
Years
to
|
|
|
Number
|
|
Exercise Price
|
Expiration
|
|
Outstanding
at December 31, 2005
|
2,908,044
|
|
$24.38
|
6.6
|
|
Options granted
|
297,300
|
|
35.40
|
|
|
Options exercised
|
(227,277
|
)
|
21.66
|
|
|
Options forfeited
|
(6,000
|
)
|
30.34
|
|
|
Outstanding
at June 30, 2006
|
2,972,067
|
|
$25.68
|
6.7
|
|
Exercisable
at June 30, 2006
|
2,733,267
|
|
$24.83
|
6.4
|
The
options held by employees and directors at
June 30, 2006, both those outstanding and those exercisable, had an intrinsic
value of $28.8 million based on the closing market price for Whitney’s stock on
that date. The intrinsic value of options exercised during 2006 totaled $3.0
million as of the exercise dates. The Company received exercise proceeds
totaling $4.8 million and realized a tax benefit of $.8 million year-to-date
through June 30, 2006. During the first six months of 2005, options to acquire
348,261 shares were exercised with a total intrinsic value of $3.7 million.
These exercises yielded $6.4 million of cash proceeds and a realized tax benefit
of $1.1 million year-to-date through June 30, 2005. The tax benefit in each
period 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 2006 and as a cash flow from operations in 2005.
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123 (revised 2004) (SFAS No. 123R),
Share-Based Payment
. SFAS No. 123R replaced SFAS No. 123,
Accounting for Stock-Based Compensation
, as amended by SFAS No. 148.
Whitney must apply SFAS No. 123R to all awards granted after December 31, 2005
and to awards modified, repurchased, or cancelled after that date. The revised
standard established the fair value-based method as the exclusive method of
accounting for stock-based compensation, with only limited exceptions. Under
SFAS No. 123R, the grant-date fair value of equity instruments, including stock
options, awarded to employees determines 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 extends beyond
December 31, 2005, SFAS No. 123R requires 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 do 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, as amended.
The
following shows the effect on net income and earnings per share if Whitney
had
applied the provisions of SFAS No. 123 to measure and to recognize stock-based
compensation expense in 2005 for all awards, both options and restricted
stock.
|
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
|
(dollars
in thousands, except per share data)
|
June
30, 2005
|
|
June
30, 2005
|
|
|
Net
income
|
|
$
|
29,321
|
|
$
|
58,077
|
|
|
Stock-based
compensation expense included
|
|
|
|
|
|
|
|
|
in reported net income, net of related tax effects
|
|
|
1,726
|
|
|
3,369
|
|
|
Stock-based
compensation expense determined
|
|
|
|
|
|
|
|
|
under SFAS No. 123, net of related tax effects
|
|
|
(4,298
|
)
|
|
(5,625
|
)
|
|
Pro
forma net income
|
|
$
|
26,749
|
|
$
|
55,821
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic - as reported
|
|
$
|
.47
|
|
$
|
.95
|
|
|
Basic - pro forma
|
|
|
.43
|
|
|
.91
|
|
|
Diluted - as reported
|
|
|
.46
|
|
|
.93
|
|
|
Diluted - pro forma
|
|
|
.42
|
|
|
.89
|
|
|
Weighted-average fair value of options awarded
|
|
$
|
6.09
|
|
$
|
6.09
|
|
The
fair
values of the stock options were estimated as of the grant dates using the
Black-Scholes option-pricing model. The Company made the following significant
assumptions in applying the option-pricing model: (a) a weighted-average
expected annualized volatility for Whitney’s common stock of 22.85% for 2006 and
22.97% for 2005; (b) a weighted-average option life of 5.4 years for 2006 and
5.6 years for 2005; (c) an expected annual dividend yield of 3.25% for 2006
and
3.14% for 2005; and (d) a weighted-average risk-free interest rate of 5.14%
for
2006 and 3.87% for 2005. Both the volatility assumption and the weighted-average
option life assumption were based primarily on historical experience.
NOTE
11
CONTINGENCIES
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 Whitney’s financial condition,
results of operations or cash flows.
See
Note
2 for information on the impact of natural disasters that struck Whitney’s
market area in 2005, including comments about contingencies surrounding the
resolution of insurance claims.
NOTE
12
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. Many
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 June 30, 2006 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.
A
summary
of off-balance-sheet financial instruments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
|
(in
thousands)
|
|
|
2006
|
|
|
2005
|
|
|
Commitments
to extend credit - revolving
|
|
$
|
1,947,967
|
|
$
|
1,834,415
|
|
|
Commitments
to extend credit - nonrevolving
|
|
|
541,794
|
|
|
593,667
|
|
|
Credit
card and personal credit lines
|
|
|
545,468
|
|
|
507,733
|
|
|
Standby
and other letters of credit
|
|
|
398,254
|
|
|
365,582
|
|
NOTE
13
EARNINGS
PER SHARE
The
components used to calculate basic and diluted earnings per share were as
follows:
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
June
30
|
|
June
30
|
|
|
(dollars
in thousands, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,413
|
|
$
|
29,321
|
|
$
|
75,562
|
|
$
|
58,077
|
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Numerator for diluted earnings per share
|
|
$
|
39,413
|
|
$
|
29,321
|
|
$
|
75,562
|
|
$
|
58,077
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
64,890,893
|
|
|
62,004,132
|
|
|
63,868,697
|
|
|
61,289,967
|
|
|
Effect of potentially dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and contingently issuable shares
|
|
|
1,306,215
|
|
|
1,072,023
|
|
|
1,211,334
|
|
|
1,050,299
|
|
|
Denominator
for diluted earnings per share
|
|
|
66,197,108
|
|
|
63,076,155
|
|
|
65,080,031
|
|
|
62,340,266
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.61
|
|
$
|
.47
|
|
$
|
1.18
|
|
$
|
.95
|
|
|
Diluted
|
|
|
.60
|
|
|
.46
|
|
|
1.16
|
|
|
.93
|
|
|
Antidilutive
stock options
|
|
|
7,873
|
|
|
-
|
|
|
3,958
|
|
|
-
|
|
NOTE
14
ACCOUNTING
PRONOUNCEMENTS
In
June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48,
Accounting
for Uncertainty in Income Taxes
.
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
in accordance with SFAS No.109,
Accounting
for Income Taxes
,
when it
is more likely than not that the position will be sustained based on its
technical merits. The interpretation also prescribes how to measure the tax
benefit recognized and provides guidance on when a tax benefit should be
derecognized as well as various other accounting, presentation and disclosure
matters. This interpretation is effective for Whitney’s 2007 fiscal year.
Application of this interpretation is not expected to have a material impact
on
Whitney’s financial condition or results of operations.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based
Payment
.
This
statement replaced SFAS No. 123,
Accounting
for Stock-Based Compensation
.
Whitney
adopted the provisions of SFAS No. 123R beginning January 1, 2006. Information
about the more significant provisions of this standard is presented in Note
10.
|
WHITNEY
HOLDING CORPORATION AND SUBSIDIARIES
|
|
|
|
(Unaudited)
|
|
|
|
|
Second Quarter
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
Six
Months ended June 30
|
|
(dollars
in thousands, except per share data)
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
QUARTER-END
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
10,427,716
|
|
$
|
10,301,742
|
|
$
|
8,920,289
|
|
$
|
10,427,716
|
|
$
|
8,920,289
|
|
|
Earning
assets
|
|
|
9,489,364
|
|
|
9,518,326
|
|
|
8,145,344
|
|
|
9,489,364
|
|
|
8,145,344
|
|
|
Loans
|
|
|
6,860,746
|
|
|
6,488,639
|
|
|
6,284,625
|
|
|
6,860,746
|
|
|
6,284,625
|
|
|
Investment
securities
|
|
|
1,822,119
|
|
|
1,725,357
|
|
|
1,761,875
|
|
|
1,822,119
|
|
|
1,761,875
|
|
|
Deposits
|
|
|
8,623,661
|
|
|
8,683,776
|
|
|
7,169,236
|
|
|
8,623,661
|
|
|
7,169,236
|
|
|
Shareholders'
equity
|
|
|
1,072,764
|
|
|
980,755
|
|
|
955,583
|
|
|
1,072,764
|
|
|
955,583
|
|
|
AVERAGE
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
10,552,631
|
|
$
|
10,162,685
|
|
$
|
8,833,445
|
|
$
|
10,358,735
|
|
$
|
8,531,090
|
|
|
Earning
assets
|
|
|
9,665,927
|
|
|
9,249,232
|
|
|
8,104,745
|
|
|
9,458,733
|
|
|
7,852,525
|
|
|
Loans
|
|
|
6,792,224
|
|
|
6,510,471
|
|
|
6,102,380
|
|
|
6,652,129
|
|
|
5,848,276
|
|
|
Investment
securities
|
|
|
1,787,210
|
|
|
1,701,467
|
|
|
1,947,260
|
|
|
1,744,575
|
|
|
1,963,438
|
|
|
Deposits
|
|
|
8,790,845
|
|
|
8,542,554
|
|
|
7,086,179
|
|
|
8,667,387
|
|
|
6,840,951
|
|
|
Shareholders'
equity
|
|
|
1,061,216
|
|
|
975,456
|
|
|
933,976
|
|
|
1,018,573
|
|
|
910,647
|
|
|
INCOME
STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
156,199
|
|
$
|
141,992
|
|
$
|
114,003
|
|
$
|
298,191
|
|
$
|
216,192
|
|
|
Interest
expense
|
|
|
34,950
|
|
|
28,755
|
|
|
19,434
|
|
|
63,705
|
|
|
33,204
|
|
|
Net
interest income
|
|
|
121,249
|
|
|
113,237
|
|
|
94,569
|
|
|
234,486
|
|
|
182,988
|
|
|
Net
interest income (TE)
|
|
|
122,804
|
|
|
114,744
|
|
|
96,023
|
|
|
237,548
|
|
|
185,956
|
|
|
Provision
for loan losses
|
|
|
1,000
|
|
|
2,000
|
|
|
1,500
|
|
|
3,000
|
|
|
3,000
|
|
|
Noninterest
income
|
|
|
21,243
|
|
|
21,176
|
|
|
22,211
|
|
|
42,419
|
|
|
43,602
|
|
|
Net securities gains in noninterest income
|
|
|
-
|
|
|
-
|
|
|
68
|
|
|
-
|
|
|
68
|
|
|
Noninterest
expense
|
|
|
82,693
|
|
|
79,100
|
|
|
72,382
|
|
|
161,793
|
|
|
138,643
|
|
|
Net
income
|
|
|
39,413
|
|
|
36,149
|
|
|
29,321
|
|
|
75,562
|
|
|
58,077
|
|
|
KEY
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
1.50
|
%
|
|
1.44
|
%
|
|
1.33
|
%
|
|
1.47
|
%
|
|
1.37
|
%
|
|
Return
on average shareholders' equity
|
|
|
14.90
|
|
|
15.03
|
|
|
12.59
|
|
|
14.96
|
|
|
12.86
|
|
|
Net
interest margin (TE)
|
|
|
5.09
|
|
|
5.02
|
|
|
4.75
|
|
|
5.06
|
|
|
4.77
|
|
|
Average
loans to average deposits
|
|
|
77.26
|
|
|
76.21
|
|
|
86.12
|
|
|
76.75
|
|
|
85.49
|
|
|
Efficiency
ratio
|
|
|
57.41
|
|
|
58.20
|
|
|
61.25
|
|
|
57.79
|
|
|
60.41
|
|
|
Allowance
for loan losses to loans
|
|
|
1.18
|
|
|
1.37
|
|
|
.93
|
|
|
1.18
|
|
|
.93
|
|
|
Nonperforming
assets to loans plus foreclosed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets and surplus property
|
|
|
.83
|
|
|
1.02
|
|
|
.31
|
|
|
.83
|
|
|
.31
|
|
|
Annualized
net charge-offs to average loans
|
|
|
.73
|
|
|
.17
|
|
|
.03
|
|
|
.46
|
|
|
.08
|
|
|
Average
shareholders' equity to average assets
|
|
|
10.06
|
|
|
9.60
|
|
|
10.57
|
|
|
9.83
|
|
|
10.67
|
|
|
Shareholders'
equity to total assets
|
|
|
10.29
|
|
|
9.52
|
|
|
10.71
|
|
|
10.29
|
|
|
10.71
|
|
|
Leverage
ratio
|
|
|
7.82
|
|
|
7.99
|
|
|
8.63
|
|
|
7.82
|
|
|
8.63
|
|
|
COMMON
SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.61
|
|
$
|
.58
|
|
$
|
.47
|
|
$
|
1.18
|
|
$
|
.95
|
|
|
Diluted
|
|
|
.60
|
|
|
.57
|
|
|
.46
|
|
|
1.16
|
|
|
.93
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
.27
|
|
$
|
.27
|
|
$
|
.25
|
|
$
|
.54
|
|
$
|
.48
|
|
|
Dividend payout ratio
|
|
|
45.04
|
%
|
|
47.41
|
%
|
|
53.89
|
%
|
|
46.17
|
%
|
|
51.68
|
%
|
|
Book
Value Per Share
|
|
$
|
16.31
|
|
$
|
15.45
|
|
$
|
15.11
|
|
$
|
16.31
|
|
$
|
15.11
|
|
|
Trading
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High sales price
|
|
$
|
37.26
|
|
$
|
36.17
|
|
$
|
33.00
|
|
$
|
37.26
|
|
$
|
33.00
|
|
|
Low sales price
|
|
|
33.80
|
|
|
27.27
|
|
|
28.65
|
|
|
27.27
|
|
|
28.44
|
|
|
End-of-period closing price
|
|
|
35.37
|
|
|
35.46
|
|
|
32.63
|
|
|
35.37
|
|
|
32.63
|
|
|
Trading volume
|
|
|
13,719,163
|
|
|
14,411,128
|
|
|
6,531,000
|
|
|
28,130,291
|
|
|
15,943,595
|
|
|
Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
64,890,893
|
|
|
62,835,144
|
|
|
62,004,132
|
|
|
63,868,697
|
|
|
61,289,967
|
|
|
Diluted
|
|
|
66,197,108
|
|
|
63,960,543
|
|
|
63,076,155
|
|
|
65,080,031
|
|
|
62,340,266
|
|
|
Tax-equivalent
(TE) amounts are calculated using a marginal federal income tax
rate of
35%.
|
|
The
efficiency ratio is noninterest expense to total net interest
(TE) and
noninterest income, excluding securities
transactions.
|
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) from December 31, 2005 to June 30, 2006 and on their results
of operations during the second quarters of 2006 and 2005 and during the
six-month periods through June 30 in each year. 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 quarterly report on Form 10-Q,
particularly the consolidated financial statements and related notes appearing
in Item 1. This discussion and analysis should be read in conjunction with
the
Company’s 2005 annual report on Form 10-K.
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 the financial repercussions of natural disasters,
including the impact on the allowance for loan losses and related provision,
deposit balances, liquidity and on certain categories of noninterest expense;
(b) expectations expressed about insurance recoveries of storm-related casualty
losses and repair and rebuilding costs; (c) comments on conditions impacting
certain sectors of the loan portfolio; (d) information about changes in the
duration of the investment portfolio with changes in market rates; (e)
statements of the results of net interest income simulations run by the Company
to measure interest rate sensitivity; (f) discussion of the performance of
Whitney’s net interest income assuming certain conditions; and (g) comments on
expected trends or changes in expense levels for retirement
benefits.
Whitney’s
ability to accurately project results or predict the effects of future plans
or
strategies is inherently limited. Although Whitney believes that the
expectations reflected in 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:
|
·
|
changes
in economic and business conditions, including those caused by past
or
future natural disasters or by acts of war or terrorism, that directly
or
indirectly affect the financial health of Whitney’s customer
base;
|
|
·
|
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;
|
|
·
|
changes
in laws and regulations that significantly affect the activities
of the
banking industry and the industry’s 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;
|
|
·
|
the
failure to capitalize on growth opportunities and to realize cost
savings
in connection with business acquisitions;
|
|
·
|
management’s
inability to develop and execute plans for Whitney to effectively
respond
to unexpected changes.
|
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.
OVERVIEW
UPDATE
ON IMPACT OF NATURAL DISASTERS
Two
strong hurricanes struck portions of Whitney’s service area during the third
quarter of 2005. The following sections summarize the more significant
continuing financial repercussions of these natural disasters for the Company
and the Bank.
Credit
Quality and Allowance for Loan Losses
Relationship
officers have closely monitored the performance of storm-impacted loan
customers. Information provided by these officers and statistics on the
performance of consumer credits were factored into management’s determination of
the allowance for loan losses at June 30, 2006. Although the identification
and
initial evaluation of storm-impacted credits has been completed, management’s
assessment of the storms’ impact is still subject to important uncertainties,
both those specific to some individual customers, such as the resolution of
insurance claims, and those applicable to the economic prospects of the
storm-impact area as a whole. With the resolution of these uncertainties and
the
ongoing collection of information on individual customers and statistics on
the
consumer segment of the loan portfolio, the loss estimates will be revised
as
needed.
Disaster
Response Costs, Casualty Losses, Business Interruption and Related
Insurance
The
Bank
incurred a variety of costs to operate in disaster response mode, and a number
of facilities and their contents were damaged by the storms, including sixteen
that require replacement, relocation or major renovation. Whitney maintains
insurance for casualty losses as well as for reasonable and necessary disaster
response costs and certain revenue lost through business interruption. All
significant disaster response costs had been incurred by the end of the second
quarter of 2006 and included where appropriate in an insurance claim receivable
based on management’s understanding of the underlying coverage. The bulk of
costs to replace or renovate facilities will be incurred in future periods,
and
these will be included in the insurance claims as appropriate. Management
projects that casualty claims arising from the 2005 storms will be within policy
limits, and that gains will be recognized with respect to these claims in future
periods; however, this is contingent upon reaching agreement with insurance
carriers.
Deposit
Growth and Liquidity Management
The
Bank
experienced a rapid accumulation of deposits in the months following the storms.
A number of factors that contributed to this accumulation, such as the
settlement of insurance clams, coupled with resource constraints and other
obstacles to rebuilding, and deferrals granted on income tax installments,
were
still present during the second quarter of 2006. Recent deposit activity by
customers in the storm-impacted areas has provided evidence of some reduction
of
the post-storm accumulation, and management is monitoring the ongoing stability
of these deposits as part of the Company’s overall asset/liability management
process. Whitney has invested a significant portion of the funds from this
post-storm deposit influx into short-term liquidity-management securities.
Significant additional disaster-relief funds should begin to be distributed
in
the storm-impacted markets later in 2006, although the rules governing these
distributions have not been finalized.
HIGHLIGHTS
OF FINANCIAL RESULTS
Whitney
earned $39.4 million in the quarter ended June 30, 2006, a 34% increase compared
to net income of $29.3 million reported for the second quarter of 2005. Per
share earnings were $.61 per basic share and $.60 per diluted share in 2006’s
second quarter, each representing a 30% increase from per share earnings of
$.47
and $.46, respectively, in the year-earlier period. Year-to-date earnings of
$75.6 million in 2006 were 30% higher than the earnings for the comparable
period in 2005. Year-to-date per share earnings were $1.18 per basic share
and
$1.16 per diluted share in 2006, representing increases of 24% and 25%,
respectively, from the comparable per share results in 2005.
On
April
13, 2006, Whitney acquired First National Bancshares, Inc. of Bradenton, Florida
(First National) and its subsidiary, 1
st
National
Bank & Trust (1
st
National), which operates in the Tampa Bay area. 1
st
National
had approximately $380 million in total assets, including a loan portfolio
valued at $286 million, and $319 million in deposits at the acquisition date.
First National shareholders received 2.2 million shares of Whitney common stock
and cash totaling $41 million, for a total transaction value of approximately
$116 million. The Company will merge 1
st
National
into the Bank in July 2006. Whitney’s financial information for 2006 includes
the results from these acquired operations since the acquisition
date.
Selected
second quarter highlights follow:
|
·
|
Whitney’s
net interest income (TE) for the second quarter of 2006 increased
$26.8
million, or 28%, compared to the second quarter of 2005, driven by
both
the 19% increase in average earning assets and a wider net interest
margin. The net interest margin (TE) was 5.09% for the second quarter
of
2006, up 34 basis points from the year earlier period.
|
|
·
|
Average
total loans for the quarter, including loans held for sale, were
up 11%
compared to the second quarter of 2005, with approximately 4% associated
with the 1
st
National acquisition. Average investment securities decreased 8%
from the
second quarter of 2005 to 2006’s second quarter in support of loan growth.
As noted earlier, Whitney invested a significant portion of the funds
from
the post-storm build up of deposits in liquidity- management securities,
and average short-term investments for the second quarter of 2006
increased by $1.03 billion compared to the second quarter of 2005.
Total
average earning assets for the quarter were up a net 19%, or $1.56
billion, compared to the second quarter of
2005.
|
|
|
Whitney
provided $1.0 million for loan losses in the second quarter of
2006,
compared to a $1.5 million provision in the second quarter of
2005. Net
charge-offs totaled $12.4 million in 2006’s second quarter, compared to
$.4 million in the second quarter of 2005. The current quarter’s total
included the $12.3 million charge-off of one storm-impacted commercial
relationship, against which a substantial allowance had been
established
in prior periods.
|
|
|
Noninterest
income decreased 4% from the second quarter of 2005, when Whitney
recognized $1.0 million in gains on sales of surplus banking
property and
received a $.2 million distribution related to its membership
in an
electronic payment network which was sold. While the results
for the
second quarter of 2006 showed improvement in a number of income
categories, reflecting both internal growth and contributions
from
acquired operations, revenue from service charges on deposit
accounts was
down 19%, or $1.6 million, compared to the year-earlier period.
The
build-up of liquidity in the deposit base after the 2005 storms
continued
to reduce charging opportunities in the second quarter of 2006,
although
the impact has abated from that felt in earlier periods. Deposit
fee
potential has also declined as the earnings credit allowed against
service
charges on certain business deposit accounts has increased with
the rise
in short-term market rates.
|
|
|
Noninterest
expense increased 14%, or $10.3 million, from 2005’s second quarter.
Incremental operating costs associated with 1
st
National
totaled approximately $1.7 million in the second quarter of 2006,
and the
amortization of intangibles acquired in this transaction added
$.4 million
to expense for the current year’s period. Personnel expense increased 5%,
or $2.3 million, in total, including approximately $1.1 million
for the
1
st
National staff. Compensation expense under management
incentive programs decreased by $.6 million in the second quarter
of 2006
compared to the year-earlier period, mainly related to the timing
of
stock-based compensation awards in each period. Whitney expensed
$1.5
million of disaster-related costs and casualty and operating
losses in the
second quarter of 2006 and incurred both recurring and nonrecurring
expenses related to its efforts to make its operations more resilient
in
the face of future natural disasters and less exposed to the
impact of any
such disasters. Second quarter expense in 2006 was also impacted
by the
sharp increase in the cost of property and casualty insurance
coverage
that is affecting businesses and individuals across the Gulf
Coast
region.
|
FINANCIAL
CONDITION
LOANS,
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR LOAN LOSSES
Loan
Portfolio Developments
Total
loans increased $300 million, or 5%, from year-end 2005 to the end of 2006’s
second quarter, and were up 9%, or $576 million, from the end of 2005’s second
quarter. Whitney acquired a $286 million loan portfolio with 1
st
National
in April 2006. Table 1 shows loan balances by type of loan at June 30, 2006
and
at the end of the four prior quarters. The following discussion provides a
brief
overview of the composition of the different portfolio segments and the
customers served in each as well as recent changes.
|
TABLE
1. LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
(dollars
in thousands)
|
|
|
June
30
|
|
|
March
31
|
|
|
December
31
|
|
|
September
30
|
|
|
June
30
|
|
|
Commercial,
financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agricultural
|
|
|
$2,640,588
|
|
|
$2,595,056
|
|
|
$2,685,894
|
|
|
$2,614,414
|
|
|
$2,506,878
|
|
|
Real
estate - commercial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
construction and other
|
|
|
3,025,366
|
|
|
2,780,340
|
|
|
2,743,486
|
|
|
2,684,353
|
|
|
2,637,708
|
|
|
Real
estate -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential mortgage
|
|
|
851,569
|
|
|
771,547
|
|
|
774,124
|
|
|
790,823
|
|
|
779,178
|
|
|
Individuals
|
|
|
343,223
|
|
|
341,696
|
|
|
357,093
|
|
|
373,033
|
|
|
360,861
|
|
|
Total loans
|
|
|
$6,860,746
|
|
|
$6,488,639
|
|
|
$6,560,597
|
|
|
$6,462,623
|
|
|
$6,284,625
|
|
The
portfolio of commercial loans, other than those secured by real property,
decreased 2%, or $45 million, between year-end 2005 and June 30, 2006. Advances
on existing credits and a steady pace of newly originated loans in certain
parts
of Whitney’s market area was offset by paydowns and payoffs, partly reflecting
strong cash flows to customers in certain industry segments such as oil and
gas
and construction contractors as well as the application of storm-related
insurance proceeds. This portfolio sector grew 5%, or $134 million, from the
end
of 2005’s second quarter, with only a small contribution from the 1
st
National
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. 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. There have been no major trends or changes in the concentration
mix of this portfolio category from year-end 2005.
Loans
outstanding to oil and gas industry customers represented approximately 8%
of
total loans at June 30, 2006, down slightly from the percentage at year-end
2005. The major portion of Whitney’s customer base in this industry provides
transportation and other services and products to support exploration and
production activities. With expectations of sustained higher commodity prices,
Whitney has increased its attention to lending opportunities in the exploration
and production sector in recent years.
Outstanding
balances under participations in larger shared-credit loan commitments totaled
$336 million at the end of 2006’s second quarter, including approximately $58
million related to the oil and gas industry. Substantially all such 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 10%, or $282 million, from December 31, 2005, and has increased 15%, or
$388 million, since the end of the second quarter of 2005. The 1
st
National
acquisition added approximately $182 million to this category in 2006, mainly
related to commercial mortgages.
Whitney
continues to develop new business in this highly competitive sector throughout
its market area in addition to financing new projects for its established
customer base.
The
more
recent activity in this portfolio sector has been driven by condominium and
apartment projects and single-family residential development, particularly
in
the eastern Gulf Coast region, and by the development of retail, office and
industrial properties by customers throughout Whitney’s market area. The future
pace of new real estate project financing will reflect the level of confidence
by Whitney and its customers in the sustainability of favorable economic
conditions. The rate of portfolio growth in a given period will also be affected
by the refinancing of seasoned income properties in the secondary market and
payments on residential development loans as inventory is sold.
The
residential mortgage loan portfolio increased 10%, or $77 million, from the
end
of 2005 to June 30, 2006, and was up a similar percentage and amount from a
year
earlier. Growth in this category has mostly come from acquisitions. Whitney
continues to sell most conventional residential mortgage loan production in
the
secondary market.
Loans
to
individuals include various consumer installment and credit line products.
Some
storm-related factors are evident in the decrease in this portfolio category
since September 30, 2005, including the application of insurance proceeds and
some reduction in credit demand associated with the ongoing disruption of normal
routines for individuals from the most affected areas.
Credit
Risk Management and Allowance for Loan Losses
General
Discussion of Credit Risk Management and Determination of
Allowance
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. 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 process.
Management’s
evaluation of credit risk in the loan portfolio is ultimately 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 loan 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 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. The
allowance for criticized loans includes any specific allowances determined
for
loans that are deemed impaired under the definition in Statement of Financial
Accounting Standards No. 114. The allowance for the remainder of criticized
loans is calculated by applying loss factors to loan balances aggregated by
severity of the internal risk rating.
Management’s
Assessment of Storms’ Impact on Credit Quality
Loan
officers have completed individual assessments of the immediate and near-term
impact of the storms on all significant commercial and commercial real estate
customers in the affected areas and have initiated risk rating changes as
needed, with confirmation of the conclusions by the credit review function.
The
results from this large-scale review were extrapolated to the limited portion
of
the storm-impacted portfolio not reviewed and confirmed, which totaled
approximately $195 million and mainly consisted of relatively low-balance
credits.
The
detailed review process applied to commercial and commercial real estate loans
was not logistically feasible for the residential mortgage and consumer credit
components of the storm-impacted portfolio, which was estimated to total $237
million as of June 30, 2006. Management has applied incremental loss factors
to
this portfolio based on early loss experience statistics and assumptions
regarding storm-related credit deterioration on different portions of the
impacted portfolio segmented by risk characteristics such as credit scores
and
the type of collateral, if any.
With
additional information, management’s estimate of the storms’ impact on loan
losses will be refined, and any related revisions in the allowance calculation
will be reflected in the provision for loan losses as they occur.
Credit
Quality Statistics and Components of Allowance for Loan
Losses
Table
2
provides information on nonperforming loans and other nonperforming assets
at
June 30, 2006 and at the end of the previous four quarters. Nonperforming loans
are included in the criticized loan total discussed below and encompass
substantially all loans separately evaluated for impairment. The $12.3 million
charge-off of one storm-impacted commercial relationship is reflected in the
reduction in nonperforming loans from March 31, 2006. This relationship had
been
identified as impaired shortly after the storms in 2005, and a substantial
impairment allowance had been established. This charge-off was the main factor
behind an $8.9 million decrease in the allowance for impaired loans between
March 31, 2006 and June 30, 2006. Overall there have been no significant trends
related to industries or markets underlying the changes in nonperforming
assets.
|
TABLE
2. NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
(dollars
in thousands)
|
|
|
June
30
|
|
|
March
31
|
|
|
December
31
|
|
|
September
30
|
|
|
June
30
|
|
|
Loans
accounted for on a nonaccrual basis
|
|
|
$56,188
|
|
|
$65,494
|
|
|
$65,565
|
|
|
$43,763
|
|
|
$18,521
|
|
|
Restructured
loans
|
|
|
-
|
|
|
28
|
|
|
30
|
|
|
30
|
|
|
32
|
|
|
Total nonperforming loans
|
|
|
56,188
|
|
|
65,522
|
|
|
65,595
|
|
|
$43,793
|
|
|
18,553
|
|
|
Foreclosed
assets and surplus property
|
|
|
695
|
|
|
652
|
|
|
1,708
|
|
|
794
|
|
|
1,014
|
|
|
Total nonperforming assets
|
|
|
$56,883
|
|
|
$66,174
|
|
|
$67,303
|
|
|
$44,587
|
|
|
$19,567
|
|
|
Loans
90 days past due still accruing
|
|
|
$
7,354
|
|
|
$ 3,956
|
|
|
$13,728
|
|
|
$
5,358
|
|
|
$
3,185
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plus foreclosed assets and surplus property
|
|
|
.83
|
%
|
|
1.02
|
%
|
|
1.03
|
%
|
|
.69
|
%
|
|
.31
|
%
|
|
Allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonperforming loans
|
|
|
144
|
|
|
136
|
|
|
137
|
|
|
208
|
|
|
317
|
|
|
Loans
90 days past due still accruing to loans
|
|
|
.11
|
|
|
.06
|
|
|
.21
|
|
|
.08
|
|
|
.05
|
|
During
the second quarter of 2006, there was a $23 million decrease in the total of
loans criticized through the internal credit risk classification process.
Criticized loans at June 30, 2006 included $9 million of loans whose full
repayment is in doubt. With the $12.3 million storm-related charge-off discussed
above, the total for this rating classification decreased $10 million from
March
31, 2006. Loans identified as having well-defined weaknesses that would likely
result in some loss if not corrected increased a net $3 million during the
current quarter, to a total of $146 million at June 30, 2006. Loans warranting
special attention totaled $83 million at June 30, 2006, down $16 million from
March 31, 2006. The allowance determined for criticized loans at June 30, 2006,
other than those separately evaluated for impairment, was essentially unchanged
from that determined at the end of 2006’s first quarter.
Management’s
update to its storm-impact assessment as of June 30, 2006 reduced the allowance
by approximately $2.8 million compared to March 31, 2006, mainly related to
consumer loans.
The
overall allowance determined as of June 30, 2006 was $8.5 million less than
the
allowance at March 31, 2006. The allowance on the portfolio acquired with
1
st
National
totaled $2.9 million.
Table
3
compares second quarter and year-to-date activity in the allowance for loan
losses for 2006 with the comparable periods of 2005.
|
TABLE
3. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN
LOSSES
|
|
|
|
Three
Months Ended
June 30
|
Six Months Ended
June 30
|
|
(dollars
in thousands)
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Balance
at the beginning of period
|
|
|
$89,209
|
|
|
$53,920
|
|
|
$90,028
|
|
|
$54,345
|
|
|
Allowance
of acquired bank
|
|
|
2,908
|
|
|
3,648
|
|
|
2,908
|
|
|
3,648
|
|
|
Provision
for loan losses charged to operations
|
|
|
1,000
|
|
|
< |