Annual Report
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2006
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Commission
file number 0-1026
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WHITNEY
HOLDING CORPORATION
(Exact
name of registrant as specified in its charter)
|
Louisiana
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72-6017893
|
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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228
St. Charles Avenue
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(504)
586-7272
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New
Orleans, Louisiana 70130
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(Registrant’s
telephone number
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(Address
of principal executive offices)
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title
of Each Class
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Name of Exchange on Which Registered
|
|
Common
Stock, no par value
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Nasdaq
Global Select Market
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in
Rule 405 of the Securities Act. Yes
X
No _
Indicate
by check mark if the registrant is not required to file reports
pursuant to
Section 13 or Section 15(d) of the Act. Yes_ No
X
Indicate
by check mark whether the registrant (1) has filed all reports
required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the
preceding 12 months (or for such shorter period that the registrant
was required
to file such reports), and (2) has been subject to such filing
requirements for
the past 90 days. Yes
X
No
_
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and will not be contained,
to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.
__
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer or a non-accelerated filer. See definition of
“accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
X
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Accelerated
filer _
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Non-accelerated
filer _
|
Indicate
by check mark if the registrant is a shell company (as defined
in Rule 12b-2 of
the Exchange Act). Yes_ No
X
As
of
December 31, 2006, the aggregate market value of the registrant’s common stock
(all shares are voting shares) held by nonaffiliates was approximately
$2.23
billion (based on the closing price of the stock on June 30, 2006).
At
February 28, 2007, 65,971,833 shares of the registrant’s no par value common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
specifically identified parts of the registrant’s Proxy Statement for the 2007
Annual Meeting of Shareholders to be filed with the Securities
and Exchange
Commission are incorporated by reference into Part III of this
Form
10-K.
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WHITNEY
HOLDING CORPORATION
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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
2006, Whitney acquired First National Bancshares, Inc. of Bradenton,
Florida
(First National) and its subsidiary, 1st National Bank & Trust (1st
National), which operated in the Tampa Bay area. On October 5,
2006, Whitney
announced a definitive agreement to acquire Signature Financial
Holdings, Inc.
(Signature), headquartered in St. Petersburg, Florida. Signature
is the parent
of Signature Bank, which operates seven banking centers in the
Tampa
metropolitan area. Subject to approval by Signature’s shareholders and certain
other closing conditions, this acquisition is expected to be completed
in the
first quarter of 2007. Since early 1994
,
Whitney
has acquired 19 separate banking operations involving over $3.4
billion of
assets, with the more recent focus on banks in faster-growing markets
such as
those in certain parts of Florida and the Houston, Texas area.
The Company will
continue to seek opportunities to leverage its operations through
acquisitions
that expand existing market share or provide 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, cash 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.,
which was
acquired in 2005 with the Company's purchase of Destin Bancshares,
Inc., offers personal and business lines of insurance to customers 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, but 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 also 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 are 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). Ongoing supervision is provided through regular
examinations 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 1 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 Federal Deposit Insurance Corporation
(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.
FDICIA
and Prompt Corrective Action
The
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA)
established a "prompt corrective action" program in which every
bank 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.
In 2005, the Bank
elected for the first time to establish a financial subsidiary
to be able to
continue to operate the insurance agency acquired with Destin
Bancshares,
Inc.
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 policy. In addition, any loans by a bank
holding company
to a subsidiary bank are subordinate in right of payment to deposits
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
Federal
Reserve Board 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, including Whitney, 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 is expected to encompass substantially all insured institutions,
including the Bank. A one-time assessment credit is available
to offset up to
100% of the 2007 assessment. Any remaining credit can be used
to offset up to
90% of subsequent annual assessments through 2010. For institutions
assigned to
higher risk categories, the premiums that took effect in 2007
range 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 2006 ranged from 1.32 cents to 1.24 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 “knowing your customer” 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 recent laws provide law enforcement
authorities
with 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
are
required to consider compliance in connection with the regulatory
review of
applications. The regulatory authorities have been active in imposing
“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 nonbank 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 may not exceed 10%
of the Bank’s
capital stock and surplus, and 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. A
depository institution may not pay any dividend if payment 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.
|
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 2006, the Company and the Bank had a total of 2,559 employees,
or 2,484
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.
EXECUTIVE
OFFICERS OF THE COMPANY
|
Name
and
Age
|
Position
Held and Recent Business
Experience
|
|
William
L. Marks, 63
|
Chief
Executive Officer and Chairman of the Board of the
Company
|
|
and
Whitney National Bank since 1990
|
|
|
R.
King Milling, 66
|
President
of the Company and Whitney National Bank since 1984;
|
|
Director
of the Company and Whitney National Bank since 1978
|
|
|
Robert
C. Baird, Jr., 56
|
Executive
Vice President of the Company and Whitney National Bank
|
|
since
1995, Division Executive of Louisiana Banking
|
|
|
Thomas
L. Callicutt, Jr., 59
|
Executive
Vice President and Chief Financial Officer of the Company
|
|
and
Whitney National Bank since 1999 and Treasurer of the
Company
|
|
|
since
2001
|
|
|
Rodney
D. Chard, 64
|
Executive
Vice President of the Company and Whitney National
|
|
Bank
since 1996, Division Executive of Operations and
Technology
|
|
|
Joseph
S. Exnicios, 51
|
Executive
Vice President of the Company and Whitney National Bank
since
|
|
2004,
Senior Vice President of Whitney National Bank from 1994 to
2004,
|
|
|
Division
Executive of New Orleans Commercial Banking
|
|
|
John
C. Hope III, 57
|
Executive
Vice President of the Company since 1994 and of Whitney
|
|
National
Bank since 1998, Division Executive of Gulf Coast
Banking
|
|
|
Kevin
P. Reed, 46
|
Executive
Vice President of the Company and Whitney National Bank
since
|
|
2004,
Senior Vice President of Whitney National Bank from 1998 to
2004,
|
|
|
Division
Executive of Trust & Wealth Management
|
|
|
Lewis
P. Rogers, 54
|
Executive
Vice President of the Company and Whitney National Bank
since
|
|
2004,
Senior Vice President of Whitney National Bank from 1998 to
2004,
|
|
|
Division
Executive of Credit Administration
|
|
|
John
M. Turner, Jr., 45
|
Executive
Vice President of the Company and Whitney National Bank
since
|
|
February
2005, Senior Vice President of Whitney National Bank from 1994
to
2005,
Regional Executive - Eastern Region
|
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 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.
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 and should be considered carefully in evaluating the
Company’s overall risk profile.
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. One of the
most
important factors is changes in market 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.
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 an area that is susceptible to hurricanes
and tropical storms. 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, 2006.
Hurricane
Katrina hit the greater New Orleans area and the Mississippi coast in August
2005, with lesser impacts on coastal Alabama and the western panhandle of
Florida. Hurricane Rita made landfall the following month at the border of
Texas
and Louisiana, with a major impact on southwest Louisiana, including the
Lake
Charles area. These two storms caused widespread property damage, required
the
relocation of an unprecedented number of residents and business operations,
and
severely disrupted normal economic activity in the impacted areas. The impact
on
the Company, both operationally and with respect to credit risk and liquidity,
and the uncertainties that remain in the wake of these storms are covered
in
detail in
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
located
in Item 7.
None.
The
Company does not directly own 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 Whitney National
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 maintains
approximately 151 banking facilities in five states. 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
to
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 hold a variety of property interests acquired through the
years
in settlement of loans. Note 9 to the consolidated financial statements included
in Item 8 provides further information regarding such property interests
and is
incorporated here by reference.
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.
None.
9
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 symbol WTNY.
The Summary of Quarterly Financial Information appearing in Item 8 of this
Form
10-K shows the high and low sales prices of the Company’s stock for each
calendar quarter of 2006 and 2005, 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
28,
2007, was as follows:
Title of Class
Shareholders
of Record
Common
Stock, no par value
5,384
Dividends
declared by the Company are listed in the Summary of Quarterly Financial
Information appearing in Item 8 of this 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.
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,
2006.
|
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
2006
|
-
|
-
|
-
|
-
|
|
November
2006
|
8,589
(2)
|
$32.53
|
-
|
-
|
|
December
2006
|
-
|
-
|
-
|
-
|
| (1) |
No
repurchase plans were in effect during the fourth quarter of
2006.
|
| (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, 2001 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.
11
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 2006,
2005 and
2004. 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) expectations expressed about insurance recoveries of
storm-related casualty losses and repair and rebuilding costs; (b)
expectations
about Whitney’s operational resiliency in the event of natural disasters and
projections of costs associated with disasters; (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 (i) 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 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:
| · |
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 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 effectively expand into new
markets;
|
| · |
the
cost and other effects of material contingencies, including
litigation
contingencies and insurance recoveries;
|
| · |
Whitney’s
ability to effectively manage interest rate risk and other
market risk,
credit risk and operational risk;
|
| · |
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;
|
13
| · | the failure to attract and retain key personnel; |
| · |
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.
|
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
UPDATE
ON IMPACT OF NATURAL DISASTERS
Two
strong hurricanes struck portions of Whitney’s service area in the late-summer
of 2005. The following sections summarize some 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 December 31, 2006. The significant
overall
uncertainties that complicated management’s early assessments of storm-related
credit losses have largely been addressed in the year since the storms,
and the
storms’ impact on credit quality is primarily being reflected in the normal
process for determining the loan loss allowance and reserves for
losses on
unfunded credit commitments. Some important uncertainties remain,
however,
including those specific to some individual customers, such as the
resolution of
insurance claims, and those applicable to the economic prospects
of the
storm-impacted area as a whole. Management will continue to monitor
the
resolution of these uncertainties when determining future loss allowances
and
reserves.
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 required 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 have been incurred 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.
HIGHLIGHTS
OF FINANCIAL RESULTS
Whitney
earned $145 million for the year ended December 31, 2006, compared
with annual
net income of $102 million in 2005. Per share earnings were $2.24
per basic
share and $2.20 per diluted share in 2006, compared to $1.65 and
$1.63,
respectively, for 2005. The Bank saw a rapid build-up of deposits
following the
later-summer hurricanes of 2005 that impacted parts of Whitney’s market area,
and the funds retained from these deposits during 2006 were a major
factor
behind the significant growth in average earning assets and net interest
income
compared to 2005. Annual average deposits in 2006 were up 17%, or
$1.3 billion,
from 2005. The results for 2006 also included approximately $16 million
in
expenses associated with the storms. This total included both the
cost to
implement initiatives that reduced the exposure of the Company’s operations to
future disasters and improved operational resilience as well as certain
increased operating costs and additional expenditures directly related
to the
2005 storms. The components of these expenses are covered in more
detail in the
“Noninterest Expense” section of the discussion of “Results of Operations”
below. Approximately $5 million of storm-related expenses were recognized
in
2005. Management’s initial assessment of the storms’ impact on credit quality
was the main factor in the $38 million annual provision for credit
losses in
2005.
In
April
2006, Whitney acquired First National Bancshares, Inc. of Bradenton,
Florida
(First National) and its subsidiary, 1st National Bank & Trust (1st
National), which operated in the Tampa Bay area. 1st 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 merged 1st National into the Bank in July 2006.
Whitney’s
financial information for 2006 includes the results from these acquired
operations since the acquisition date.
The
key
components of 2006’s earnings performance follow:
| · |
Net
interest income, on a taxable-equivalent (TE) basis, increased
21%, or
$84.4 million, in 2006. Average earning assets were 15% higher
in 2006,
and the net interest margin (TE) widened by 26 basis points.
The most
important factors behind the increase in net interest income
in 2006 were
earning asset growth, supported in part by 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.
|
| · |
Whitney
provided $3.7 million for credit losses in 2006, compared
to a $37.6
million provision in 2005 that incorporated management’s early estimate of
the impact of the 2005 storms. Net charge-offs totaled $19.4
million in
2006, including one $12.3 million storm-impacted credit,
compared to $5.0
million in 2005. During 2006, there was a $53 million decrease
in the
total of loans criticized through the internal credit risk
classification
process.
|
| · |
Noninterest
income increased 3%, or $2.6 million, between 2005 and 2006.
Improvements
were noted in a number of income categories, reflecting both
internal
growth and contributions from acquired operations. Deposit
service charge
income was down 8% compared to 2005. The residual additional
liquidity in
the deposit base from the post-storm build-up continued to
reduce
comparative charging opportunities in 2006, and fee potential
from
business customers declined as the earnings credit allowed
against account
charges rose between the years with short-term market
rates.
|
| · |
Noninterest
expense increased 18%, or $52.1 million, from 2006. As noted
above, 2006
included approximately $16 million in expenses associated
directly and
indirectly with the late-summer hurricanes of 2005, compared
to $5 million
in 2005. Incremental operating costs associated with acquired
operations,
including amortization of intangibles, totaled approximately
$10.4 million
in 2006. Whitney’s personnel expense increased 9%, or $14.7 million, in
total, including approximately $4.7 million related to acquired
staff.
Compensation expense under management incentive programs
increased by $2.9
million in of 2006, almost all related to share-based compensation
earned
under Whitney’s long-term incentive
plan.
|
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. In applying these principles
to
determine the amounts and other disclosures that are presented in
the financial
statements and discussed in this section, the Company is required
to make
estimates and assumptions.
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 increased 7%, or $490 million, during 2006. Whitney acquired
a $286
million loan portfolio with 1st National in April 2006. Table 1 shows
loan
balances by type of loan at December 31, 2006 and at the end of the
previous
four years. The following discussion provides an overview of the
composition of
the different portfolio segments and the customers served in each
as well as
recent changes.
|
TABLE
1. LOANS OUTSTANDING BY TYPE
|
|||||
|
December
31,
|
|||||
|
(in
thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
Commercial,
financial and agricultural
|
$2,725,531
|
$2,685,894
|
$2,399,794
|
$2,213,207
|
$1,917,859
|
|
Real
estate - commercial, construction and other
|
3,094,004
|
2,743,486
|
2,209,975
|
1,726,212
|
1,584,099
|
|
Real
estate - residential mortgage
|
893,091
|
774,124
|
685,732
|
619,869
|
638,703
|
|
Individuals
|
337,790
|
357,093
|
330,775
|
323,322
|
314,751
|
|
Total loans
|
$7,050,416
|
$6,560,597
|
$5,626,276
|
$4,882,610
|
$4,455,412
|
The
portfolio of commercial loans, other than those secured by real property,
increased 1%, or $40 million, between year-end 2005 and 2006. Advances
on
existing credits and a steady pace of newly originated loans in certain
parts of
Whitney’s market area during 2006 were largely 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. The 1st National acquisition had
little impact
on this portfolio segment. 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 segment from year-end 2005.
Loans
outstanding to oil and gas industry customers represented approximately
9% of
total loans at December 31, 2006, consistent with 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. 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. Outstanding loans to exploration and production companies
totaled
a little more than one third of the industry portfolio at the end
of 2006, up
slightly from year-end 2005. The Bank has a petroleum engineer on
staff who
participates in 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
$383 million at the end of 2006, including approximately $91 million
related to
the oil and gas industry. The total outstanding is up $32 million
from year-end
2005. 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 13%, or $351 million, during 2006. The 1st National acquisition
added
approximately $230 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. For several years, there has been
little new financing activity for hotel and other hospitality industry
projects,
which has largely been concentrated in the New Orleans metropolitan
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
economic
conditions favorable to successful project completion. 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 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.
The
residential mortgage loan portfolio increased 15%, or $119 million,
from the end
of 2005 to year-end 2006. This growth came mostly from acquisitions,
with
support from the continued promotion of targeted home loan products
held in the
portfolio. 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 the end of 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.
Table
2
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.
|
TABLE
2. LOAN MATURITIES BY TYPE
|
||||
|
December
31, 2006
|
||||
|
One
year
|
One
through
|
More
than
|
||
|
(in
thousands)
|
or
less
|
five
years
|
five
years
|
Total
|
|
Commercial,
financial and agricultural
|
$1,767,402
|
$
927,951
|
$
30,178
|
$2,725,531
|
|
Real
estate - commercial, construction and other
|
1,174,200
|
1,605,988
|
313,816
|
3,094,004
|
|
Real
estate - residential mortgage
|
135,980
|
495,883
|
261,228
|
893,091
|
|
Individuals
|
166,360
|
156,299
|
15,131
|
337,790
|
|
Total
|
$3,243,942
|
$3,186,121
|
$620,353
|
$7,050,416
|
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 is
composed
of the Bank’s senior lenders, senior officers in Credit Administration, the
President and the Chairman and 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 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 as defined by Statement of Financial Accounting Standards
(SFAS) No.
114. 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 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.
Management’s Assessment of Storms’ Impact on Credit Quality and Related
Uncertainties
The
significant overall uncertainties that complicated management’s early
assessments of storm-related credit losses have largely been addressed
by the
end of 2006, and the storms’ impact on credit quality is primarily being
reflected in the normal process for managing credit risk and determining
the
loan loss allowance and reserve for losses on unfunded credit
commitments.
Loan
officers completed individual assessments of the impact of the storms
on all
significant commercial and commercial real estate loan customers
in the affected
areas and initiated risk rating changes as needed, with confirmation
of the
conclusions by the credit review function. Whitney’s commercial relationships
include many larger corporate borrowers with significant resources
who serve
multiple market areas, have the ability to shift physical operations
and are
backed by strong guarantors. The loan officers’ reviews generally confirmed
management’s expectation that most of these customers would show limited
immediate or near-term adverse effects from the storms, although
one larger
commercial credit with a manufacturer that was promptly identified
as
nonperforming has subsequently been charged off, as noted below.
Another larger
credit in heavy industry whose risk rating was initially downgraded
in the
storm-impact review process has been subsequently removed from the
criticized
classifications.
Tourism
is an important facet of the New Orleans economy, and the city’s success in
fully revitalizing this industry and hosting conventions is important
to hotel
operators and others in the hospitality industry over the long term.
The Bank is
closely tracking the operations of hospitality industry customers,
and this
process has generally confirmed the underlying financial and managerial
strength
within this customer base. The rating on one hotel that encountered
delays in
reopening and was initially identified as warranting special attention
was
further downgraded during 2006, and several other smaller tourism-dependent
credits have been criticized.
The
detailed review process that was applied to commercial and commercial
real
estate loans following the storms was not logistically feasible for
the
residential mortgage and consumer credit components of the storm-impacted
portfolio, and payment deferral programs impaired the usefulness
of statistics
traditionally used to monitor credit quality in these portfolios.
Initially,
management segmented these portfolios using pre-storm risk characteristics,
and
then assumed different levels of storm-related credit deterioration
for the
various segments and applied incremental loss factors. Over time,
these factors
have been adjusted to reflect the accumulated statistics on actual
loss
experience.
Credit
Quality Statistics and Components of Credit Loss Allowance and
Reserve
Table
3
provides information on nonperforming loans and other nonperforming
assets for
each of the five years in the period ended December 31, 2006. 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 during 2006
is
reflected in the reduction in nonperforming loans from year-end 2005.
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
a major factor behind a $7.6 million decrease in the allowance for
impaired
loans during 2006. Overall, there have been no significant trends
related to
industries or markets underlying the changes in nonperforming assets.
A
comparison of contractual interest income on nonperforming loans
with the
cash-basis and cost-recovery interest actually recognized on these
loans for
2006, 2005 and 2004 is presented in Note 9 to the consolidated financial
statements located in Item 8. Whitney’s policy for placing loans on nonaccrual
status is presented in Note 2 to the consolidated financial
statements.
|
TABLE
3. NONPERFORMING ASSETS
|
|||||||||||||||
|
December
31
|
|||||||||||||||
|
(dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||
|
Loans
accounted for on a nonaccrual basis
|
$
|
55,992
|
$
|
65,565
|
$
|
23,597
|
$
|
26,776
|
$
|
37,959
|
|||||
|
Restructured
loans
|
-
|
30
|
49
|
114
|
336
|
||||||||||
|
Total
nonperforming loans
|
55,992
|
65,595
|
23,646
|
26,890
|
38,295
|
||||||||||
|
Foreclosed
assets and surplus banking property
|
800
|
1,708
|
2,454
|
3,490
|
3,854
|
||||||||||
|
Total
nonperforming assets
|
$
|
56,792
|
$
|
67,303
|
$
|
26,100
|
$
|
30,380
|
$
|
42,149
|
|||||
|
Loans
90 days past due still accruing
|
$
|
7,574
|
$
|
13,728
|
$
|
3,533
|
$
|
3,385
|
$
|
5,817
|
|||||
|
Ratios:
|
|||||||||||||||
|
Nonperforming assets to loans plus foreclosed
|
|||||||||||||||
|
assets and surplus property
|
.81
|
%
|
1.03
|
%
|
.46
|
%
|
.62
|
%
|
.95
|
%
|
|||||
|
Allowance for loan losses to
|
|
||||||||||||||
|
nonperforming loans
|
136
|
137
|
230
|
221
|
173
|
||||||||||
|
Loans 90 days past due still accruing to loans
|
.11
|
.21
|
.06
|
.07
|
.13
|
||||||||||
During
2006, there was a $53 million decrease in the total of loans criticized
through
the internal credit risk classification process. Criticized loans
at December
31, 2006 included $8 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 approximately $13 million from the
end of 2005.
Loans identified as having well-defined weaknesses that would likely
result in
some loss if not corrected increased $18 million during 2006, to
a total of $157
million at year end. The main contributor to this increase was the
addition of
storm-impacted credits, most of which had been identified as warranting
special
attention by the end of 2005. Several of these storm-related downgrades
were for
customers directly impacted by the lingering slowdown in tourism.
Rating
movement on storm-impacted credits, both the downgrades just mentioned
and
upgrades of other credits out of criticized categories, was also
the main factor
behind a $59 million decrease in the total of loans warranting special
attention
since the end of 2005. The total for this rating category at year-end
2006 was
$61 million. The allowance determined for criticized loans at December
31, 2006,
other than those separately evaluated for impairment, was up $.5
million from
year-end 2005.
The
overall allowance determined as of December 31, 2006 was $14.1 million
less than
the allowance at year-end 2005. The main factors behind this decrease
were the
net reduction of $7.1 million in the allowance component associated
with
criticized loans and adjustments during 2006 to the special storm-related
component of the allowance that reflected sustained, better than
anticipated
performance by consumer credits and other loans from storm-affected
areas that
are not subjected to individual credit reviews. The allowance for
loans with
average or better credit quality ratings and loans not subject to
individual
rating increased $1.0 million from the end of 2005 to December 31,
2006, mainly
driven by loan growth. Management’s relative assessment of economic and other
qualitative risk factors between these dates added $2.9 million to
the
allowance.
Table
4
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. The increase during 2006
in the loss
reserve on unfunded credit commitments mainly related to letters
of credit and
unused loan facilities with storm-affected commercial customers.
|
TABLE
4. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
AND
|
||||||||||||||||
|
RESERVE FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS
|
||||||||||||||||
|
(dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
ALLOWANCE
FOR LOAN LOSSES
|
||||||||||||||||
|
Balance
at beginning of year
|
$
|
90,028
|
$
|
54,345
|
$
|
59,475
|
$
|
66,115
|
$
|
71,633
|
||||||
|
Allowance
of acquired banks
|
2,908
|
3,648
|
2,461
|
-
|
-
|
|||||||||||
|
Allowance
on loans transferred to held for sale
|
-
|
-
|
-
|
-
|
(895
|
)
|
||||||||||
|
Provision
for credit losses
|
2,400
|
37,000
|
2,000
|
(3,500
|
)
|
7,500
|
||||||||||
|
Loans
charged off:
|
||||||||||||||||
|
Commercial, financial and agricultural
|
(15,841
|
)
|
(7,047
|
)
|
(9,680
|
)
|
(7,286
|
)
|
(6,894
|
)
|
||||||
|
Real estate - commercial, construction and other
|
(6,535
|
)
|
(438
|
)
|
(932
|
)
|
(963
|
)
|
(5,148
|
)
|
||||||
|
Real estate - residential mortgage
|
(555
|
)
|
(295
|
)
|
(619
|
)
|
(1,176
|
)
|
(1,816
|
)
|
||||||
|
Individuals
|
(2,297
|
)
|
(2,876
|
)
|
(2,799
|
)
|
(3,509
|
)
|
(3,353
|
)
|
||||||
|
Total charge-offs
|
(25,228
|
)
|
(10,656
|
)
|
(14,030
|
)
|
(12,934
|
)
|
(17,211
|
)
|
||||||
|
Recoveries
on loans previously charged off:
|
||||||||||||||||
|
Commercial, financial and agricultural
|
3,409
|
2,707
|
2,488
|
2,273
|
2,472
|
|||||||||||
|
Real estate - commercial, construction and other
|
234
|
932
|
223
|
3,666
|
463
|
|||||||||||
|
Real estate - residential mortgage
|
270
|
571
|
246
|
1,873
|
509
|
|||||||||||
|
Individuals
|
1,906
|
1,481
|
1,482
|
1,982
|
1,644
|
|||||||||||
|
Total recoveries
|
5,819
|
5,691
|
4,439
|
9,794
|
5,088
|
|||||||||||
|
Net
loans charged off
|
(19,409
|
)
|
(4,965
|
)
|
(9,591
|
)
|
(3,140
|
)
|
(12,123
|
)
|
||||||
|
Balance
at end of year
|
$
|
75,927
|
$
|
90,028
|
$
|
54,345
|
$
|
59,475
|
$
|
66,115
|
||||||
|
Ratios
|
||||||||||||||||
|
Net charge-offs to average loans
|
.29
|
%
|
.08
|
%
|
.19
|
%
|
.07
|
%
|
.28
|
%
|
||||||
|
Gross charge-offs to average loans
|
.37
|
.17
|
.27
|
.28
|
.39
|
|||||||||||
|
Recoveries to gross charge-offs
|
23.07
|
53.41
|
31.64
|
75.72
|
29.56
|
|||||||||||
|
Allowance for loan losses to loans at end of year
|
1.08
|
1.37
|
.97
|
1.22
|
1.48
|
|||||||||||
|
RESERVE
FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS
|
||||||||||||||||
|
Reserve
at beginning of year
|
$
|
580
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Provision
for credit losses
|
1,320
|
580
|
-
|
-
|
-
|
|||||||||||
|
Reserve
at end of year
|
$
|
1,900
|
$
|
580
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
TABLE
5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
|
|||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||||||||||||
| % | % | % | % | % | |||||||||||||||||||||||||||
|
(dollars
in millions)
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
Balance
|
Loans
|
|||||||||||||||||||||
|
Commerical,
financial
and agricultural
|
$
|
31.4
|
38
|
%
|
$
|
40.6
|
41
|
%
|
$
|
24.3
|
43
|
%
|
$
|
29.2
|
45
|
%
|
$
|
32.0
|
43
|
%
|
|||||||||||
|
Real
estate - commercial,
construction and other
|
31.8
|
44
|
29.8
|
42
|
21.2
|
39
|
19.2
|
35
|
18.8
|
36
|
|||||||||||||||||||||
|
Real
estate-
residential mortgage
|
4.0
|
13
|
7.3
|
12
|
4.2
|
12
|
5.0
|
13
|
5.5
|
14
|
|||||||||||||||||||||
|
Individuals
|
3.8
|
5
|
7.3
|
5
|
2.7
|
6
|
2.6
|
7
|
4.7
|
7
|
|||||||||||||||||||||
|
Unallocated
|
4.9
|
-
|
5.0
|
-
|
1.9
|
-
|
3.5
|
-
|
5.1
|
-
|
|||||||||||||||||||||
|
Total
|
$
|
75.9
|
100
|
%
|
$
|
90.0
|
100
|
%
|
$
|
54.3
|
100
|
%
|
$
|
59.5
|
100
|
%
|
$
|
66.1
|
100
|
%
|
|||||||||||
22
INVESTMENT
SECURITIES
The
investment securities portfolio balance of $1.89 billion at December
31, 2006
was up $245 million, or 15%, compared to December 31, 2005. This
increase mainly
reflected the highly liquid structure of Whitney’s balance sheet at the end of
2005, when funds from the post-storm deposit build-up were invested
mainly in
short-term liquidity-management securities or used to support the
inflated
balances of cash and cash items that resulted from temporary storm-forced
changes to the Bank’s normal processing and collection of cash items. Average
investment securities were basically stable between 2005 and 2006.
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, 2006, including the weighted-average yield on such securities,
is shown in
Table 6. The carrying value of securities with explicit call options
totaled
$216 million at year-end 2006. 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 37 months at December 31, 2006, compared to 47
months at
year-end 2005.
The
weighted-average taxable-equivalent portfolio yield was approximately
4.74% at
December 31, 2006, compared to 4.42% at December 31, 2005. 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
$270 million
of adjustable-rate issues with a weighted-average yield of 4.40%.
The initial
reset dates on these securities are predominantly within four years
of year-end
2006.
The
mix
of investments in the portfolio did not change significantly during
2006. The
duration of the overall investment portfolio was 2.4 years at December
31, 2006,
and would extend to 3.3 years assuming an immediate 300 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, 2005, the portfolio’s estimated
duration was 3.0 years.
Securities
available for sale made up the bulk of the total investment portfolio
at
December 31, 2006. Gross unrealized losses on securities available
for sale
totaled $28.7 million at December 31, 2006 and were mainly related
to
mortgage-backed securities and certain longer-maturity U. S. government
agency
securities. The gross losses represented 1.8% of the total amortized
cost of the
underlying securities. Note 6 to the consolidated financial statements
located
in Item 8 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, 2006 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. In addition, management has the intent
and ability to
hold these securities until the market-based impairment is recovered;
therefore,
no value impairment was evaluated as 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,
2006 that exceeded 10% of its shareholders’ equity.
DEPOSITS
AND BORROWINGS
Deposits
at December 31, 2006 were 2%, or $172 million, below the level
at year-end 2005.
This followed an increase of 30%, or $1.99 billion, from year-end
2004 to the
end of 2005, which mainly reflected the rapid accumulation of deposits
in the
months following the 2005 storms. Much of this surge in deposits
was sustained
through the first half of 2006, with anticipated reductions becoming
evident
mainly over the second half of the year as the recovery process
progressed,
inflows from insurance proceeds diminished and initial disaster-assistance
programs were completed. The deposits associated with 1st National’s acquired
operations totaled approximately $200 million at December 31, 2006.
On average,
total deposits increased 17%, or approximately $1.25 billion, in
2006 compared
to 2005. Table 7 shows the composition of deposits at December
31, 2006 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. Noninterest-bearing demand deposits had increased 56%,
or $1.19
billion, by the end of 2005 compared to year-end 2004. During 2006,
this deposit
category decreased 11%, or $353 million, but still represented
35% of total
deposits at December 31, 2006 compared to 32% two years earlier.
Lower-cost
interest-bearing deposits, which exclude time deposits, had grown
16%, or $457
million, in 2005, before contracting 3%, or $89 million, in 2006.
Total
lower-cost deposits comprised 73% of total deposits at year-end
2006, compared
to 77% at the end of 2005, with this moderate shift in the deposit
mix partly
reflecting the reallocation of some storm-related funds to higher-cost
deposit
products. Higher-cost time deposits at December 31,
2006
were
up 14%, or $270 million, compared to year-end 2005. This followed
a 21%, or $345
million, increase in 2005, that partly reflected the deposits acquired
in that
year with Destin Bank. Time deposits of $100,000 and over 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
$486 million of funds in treasury-management deposit products at
December 31,
2006, down $18 million from December 31, 2005. Public fund time
deposits totaled
$263 million at year-end 2006, which was $91 million higher than
the end of
2005.
|
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
|
$1,042,072
|
$231,248
|
$1,273,320
|
|
Over
three months through six months
|
238,948
|
181,386
|
420,334
|
|
Over
six months through twelve months
|
143,316
|
187,906
|
331,222
|
|
Over
twelve months
|
60,140
|
149,625
|
209,765
|
|
Total
|
$1,484,476
|
$750,165
|
$2,234,641
|
Short-term
and other borrowings at December 31, 2006 were up 19%, or $84 million,
from
year-end 2005. 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 56%, or $158 million, from year-end
2005 to
the end of 2006, and were up a comparable percentage on average
in 2006, partly
reflecting generally strong liquidity in certain segments of the
commercial
deposit base. Because of the underlying customer relationship,
these borrowings
serve as a relatively stable source of funds. Additional information
on
borrowings, including yields and maximum amounts borrowed, is presented
in Note
13 to the consolidated financial statements located in Item 8.
SHAREHOLDERS’
EQUITY AND CAPITAL ADEQUACY
Shareholders’
equity totaled $1.13 billion at December 31, 2006, which represented
an increase
of $152 million from the end of 2005. Whitney issued 2.2 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. Whitney recognized $20 million in additional
equity during
2006 from activity in share-based compensation plans for employees
and
directors, including option exercises. Total shareholders’ equity grew $56
million in 2005, to $961 million at December 31, 2005. The 1.9
million shares
issued in the Destin acquisition in May 2005 were valued at $57
million. Whitney
repurchased 1.56 million of its common shares during 2005 at a
cost of $47
million. The Company retained $41 million of earnings, net of dividends
declared, but this was partly offset by an $18 million other comprehensive
loss
representing an unrealized net holding loss on securities available
for sale
during 2005. Activity in share-based compensation plans during
2005 generated
$21 million in additional equity for the year. The Company declared
dividends
during 2006 that represented a payout totaling 49% of earnings
for the year. The
dividend payout ratio was 60% in 2005 and 57% in 2004.
The
ratios in Table 9 indicate that the Company remained strongly capitalized
at
December 31, 2006. The increase in risk-weighted assets during
2006 mainly
reflected the impact of the First National acquisition and a shift
in the asset
mix away from the lower-risk short-term investments to which the
Company had
initially directed much of the post-storm build-up in deposit funding.
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.
|
TABLE
9. RISK-BASED CAPITAL AND CAPITAL RATIOS
|
||||||||||||||||
|
(dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Tier
1 regulatory capital
|
$
|
853,774
|
$
|
765,881
|
$
|
767,717
|
$
|
739,236
|
$
|
672,408
|
||||||
|
Tier
2 regulatory capital
|
77,827
|
90,608
|
54,345
|
59,475
|
66,115
|
|||||||||||
|
Total regulatory capital
|
$
|
931,601
|
$
|
856,489
|
$
|
822,062
|
$
|
798,711
|
$
|
738,523
|
||||||
|
Risk-weighted
assets
|
$
|
8,340,926
|
$
|
7,746,046
|
$
|
6,527,821
|
$
|
5,777,094
|
$
|
5,301,764
|
||||||
|
Ratios
|
||||||||||||||||
|
Leverage ratio (Tier 1 capital to average assets)
|
8.76
|
%
|
8.21
|
%
|
9.56
|
%
|
10.13
|
%
|
9.76
|
%
|
||||||
|
Tier 1 capital to risk-weighted assets
|
10.24
|
9.89
|
11.76
|
12.80
|
12.68
|
|||||||||||
|
Total capital to risk-weighted assets
|
11.17
|
11.06
|
12.59
|
13.83
|
13.93
|
|||||||||||
|
Shareholders’ equity to total assets
|
10.93
|
9.51
|
11.00
|
10.84
|
11.28
|
|||||||||||
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 earlier “Overview” section and the section above
on “Deposits and Borrowings” discuss changes in these liability-funding sources
in 2006. Whitney National Bank is a member of the Federal Home
Loan Bank system.
This membership provides 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.
As
noted
earlier, the Bank experienced a rapid accumulation of deposits
in the months
following the storms in 2005. Whitney initially invested a significant
portion
of the accumulated funds in short-term liquidity-management securities
and has
since reduced these investments to satisfy an anticipated reduction
in these
deposits during 2006 as the recovery process continues. Although
significant
additional government funds to support the rebuilding process are
becoming
available in the storm-impacted markets, only limited distributions
had been
made by the end of 2006. The extent to which these funds will impact
Whitney’s
deposit base and its liquidity position is uncertain, as is the
timing of any
such impact.
Cash
generated from operations is another important source of funds
to meet liquidity
needs. The consolidated statements of cash flows located in Item
8 present
operating cash flows and summarize all significant sources and
uses of funds for
each year in the three-year period ended December 31, 2006.
At
December 31, 2006, Whitney Holding Corporation had approximately
$87 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 2007, the Bank will have available
an amount
equal to approximately $78 million plus its current net income
to declare as
dividends to the Company without prior regulatory approval.
Whitney
has announced an agreement to acquire Signature Financial Holdings,
Inc. for
cash and/or stock in a transaction expected to close in the first
quarter of
2007. The cash component of the purchase price will be no more
that 49% of
approximately $62 million in total consideration to be received
by Signature
shareholders.
Contractual
Obligations
The
following table summarizes payments due from the Company and the
Bank under
specified long-term and certain other contractual obligations as
of December 31,
2006. 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, 2006 by the periods in which they
expire.
Commitments under credit card and personal credit lines generally
have no stated
maturity.
|
TABLE
11. CREDIT-RELATED COMMITMENTS
|
|||||
| ( in thousands) |
Commitments
expiring by period from December 31, 2006
|
||||
|
Less
than
|
1
-
3
|
3
-
5
|
More
than
|
||
|
Total
|
1
year
|
years
|
years
|
5
years
|
|
|
Loan
commitments - revolving
|
$2,261,861
|
$1,577,765
|
$362,366
|
$290,013
|
$31,
717
|
|
Loan
commitments - nonrevolving
|
471,264
|
269,915
|
201,349
|
-
|
-
|
|
Credit
card and personal credit lines
|
528,276
|
528,276
|
-
|
-
|
-
|
|
Standby
and other letters of credit
|
385,478
|
354,204
|
31,274
|
-
|
-
|
|
Total
|
$3,646,879
|
$2,730,160
|
$594,989
|
$290,013
|
$31,
717
|
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 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 2006 indicated that
Whitney was
moderately asset sensitive over the near term, similar to its position
at
year-end 2005. Based on these simulations, annual net interest
income (TE) would
be expected to increase $21.1 million, or 4.4%, and decrease $22.1
million, or
4.6%, 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 2005 produced results that
ranged from a
positive impact on net interest income (TE) of $28.9 million, or
6.2%, to a
negative impact of $31.9 million, or 6.8%.
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 6 and 19 to the consolidated
financial statements located in Item 8 contain information regarding
fair
values.
The
Bank
has used interest rate swaps on a limited basis to bring the market
risk
associated with the longer-duration fixed-rate loans desired by
some customers
in line with Whitney’s asset/liability management objectives. No interest rate
swap agreements were in effect at December 31, 2006, and swap activity
has had
minimal impact on financial condition and results of operations.
Other
than this swap activity, the Company has made no investments in
financial
instruments or participated 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 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) increased $84.4 million, or 21%, in 2006
compared to
2005. Average earning assets were 15%, or $1.25 billion, higher
in 2006 and the
net interest margin (TE) improved 26 basis points to 5.11% from
2005. The net
interest margin is net interest income (TE) as a percent of average
earning
assets. 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.
Tables 12 and 13 provide details on the components of the Company’s net interest
income (TE) and net interest margin (TE).
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. These
funds were mainly deployed in short-term investments that were
on average $634
million higher in 2006 compared to 2005. Average loans, which in
Table 12
include loans held for sale, increased 10%, or $628 million, in
2006 compared to
2005, with approximately 4% associated with the 1st
National
acquisition in April 2006. 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.
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 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. Short-term rates began to increase in mid-2004
prompting an
increase in bank prime rates totaling 125 basis points by the end
of 2004,
another 200 basis points by year-end 2005, and a further increase
of 100 basis
points through 2006’s year end. Balances of loans with adjustable rates tied to
short-term market rate indices or prime totaled nearly 60% of the
dollar value
of the portfolio at the end of both 2006 and 2005. The yield (TE)
on the largely
fixed-rate investment portfolio is less responsive to changes in
market rates
and improved 29 basis points between 2005 and 2006.
The
growth in earning assets in 2006 was funded primarily by an increase
in average
deposits of 17%, or $1.25 billion, 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, which include time deposits
and
short-term and other borrowings, declined to 28% of average earning
assets in
2006 from 31% in 2005, while funding from lower-cost interest-bearing
deposits
was stable at 36% of earning assets in each period.
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. Rates paid on higher-cost sources of funds are more sensitive
to market
rate changes, reflecting in part the cost of attracting public
funds and excess
liquidity from certain corporate and private banking customers
as noted earlier
in the section on “Deposits and Borrowings.” The rate on higher-cost funding
sources in 2006 was up 137 basis points compared to 2005.
Changes
in the mix of funding sources have a significant impact on the
direction of the
overall cost of funds. Whitney’s ability to maintain a favorable mix and cost of
funding sources over the longer term will depend on, among other
factors, its
continued success in retaining and growing the deposit base in
a highly
competitive environment and in managing its deposit-pricing structure
as rates
rise on alternative financial products.