FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
The
purpose of this discussion and analysis is to focus on
significant changes in the financial condition of Whitney Holding Corporation
and its subsidiaries (the Company or Whitney) from December 31, 2006 to
March
31, 2007 and on their results of operations during the first quarters of
2007
and 2006. Nearly all of the Company’s operations are contained in its banking
subsidiary, Whitney National Bank (the Bank). This discussion and analysis
is
intended to highlight and supplement information presented elsewhere in
this
quarterly report on Form 10-Q, particularly the consolidated financial
statements and related notes appearing in Item 1. This discussion and analysis
should be read in conjunction with the Company’s annual report on Form 10-K for
the year ended December 31, 2006.
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; (c)
comments on conditions impacting certain sectors of the loan portfolio;
(d)
information about changes in the duration of the investment portfolio with
changes in market rates; (e) statements of the results of net interest
income
simulations run by the Company to measure interest rate sensitivity; (f)
discussion of the performance of Whitney’s net interest income assuming certain
conditions; and (g) comments on expected trends or changes in expense levels
for
retirement benefits and advertising and promotion.
Whitney’s
ability to accurately project results or predict the
effects of plans or strategies is inherently limited. Although Whitney
believes
that the expectations reflected in its forward-looking statements are based
on
reasonable assumptions, actual results and performance could differ materially
from those set forth in the forward-looking statements.
Factors
that could cause actual results to differ from those
expressed in the Company’s forward-looking statements include, but are not
limited to:
|
●
|
|
changes
in economic and business conditions, including those
caused by past or future natural disasters or by acts of war
or terrorism,
that directly or indirectly affect the financial health of Whitney’s
customer base;
|
|
●
|
|
changes
in interest rates that affect the pricing of Whitney’s
financial products, the demand for its financial services and
the
valuation of its financial assets and liabilities;
|
|
●
|
|
changes
in laws and regulations that significantly affect the
activities of the banking industry and the industry’s competitive position
relative to other financial service providers;
|
|
●
|
|
technological
changes affecting the nature or delivery of
financial products or services and the cost of providing
them;
|
|
●
|
|
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 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;
|
|
●
|
|
the
failure to attract or retain key personnel;
|
|
●
|
|
the
failure to capitalize on growth opportunities and to
realize cost savings in connection with business acquisitions;
|
|
●
|
|
management’s
inability to develop and execute plans for Whitney
to effectively respond to unexpected
changes.
|
You
are cautioned not to place undue reliance on these
forward-looking statements. Whitney does not intend, and undertakes no
obligation, to update or revise any forward-looking statements, whether
as a
result of differences in actual results, changes in assumptions or changes
in
other factors affecting such statements, except as required by law.
OVERVIEW
Whitney
earned $37.0 million in the quarter ended March 31, 2007,
compared to net income of $36.1 million for the first quarter of 2006.
Per share
earnings were $.56 per basic share and $.55 per diluted share in 2007’s first
quarter, compared to $.58 and $.57, respectively, for the year-earlier
period.
Mergers
and Acquisitions
On
March 2, 2007, Whitney completed its acquisition of Signature
Financial Holdings, Inc. (Signature), the parent of Signature Bank. Signature’s
banking subsidiary operated seven banking centers in the Tampa Bay area
with
approximately $270 million in total assets, including $220 million of loans,
and
$210 million in deposits at acquisition. The transaction was valued at
approximately $61 million, with $13 million paid to Signature’s shareholders in
cash and the remainder in Whitney common stock totaling 1.49 million shares.
In
April 2006, the Company acquired First National Bancshares, Inc. of Bradenton,
Florida (Bradenton) and its banking subsidiary which had approximately
$380
million in total assets, including a loan portfolio valued at $286 million,
and
deposits totaling $319 million at the acquisition date. Bradenton’s shareholders
received 2.16 million shares of Whitney common stock and cash totaling
$41
million, for a total transaction value of approximately $116 million. Whitney’s
financial information includes the results from these acquired operations
since
the acquisition dates.
Net
Interest Income
Whitney’s
net interest income (TE) for the first quarter of 2007
increased $1.7 million, or 1%, compared to the first quarter of 2006. Average
earning assets were stable between these periods. The net interest margin
(TE)
was 5.08% for the first quarter of 2007, up 6 basis points from the year-earlier
period. First quarter net interest income (TE) in 2007 was down $2.1 million,
or
2%, from the fourth quarter of 2006, with close to $2.0 million of this
decrease
related to the fewer number of days in the current period. Average earning
assets increased 1% between these periods, mainly reflecting the Signature
acquisition, while the net interest margin declined by 6 basis points,
largely
as a result of a shift in the funding mix.
Loans
and Earning Assets
Average
total loans for the first quarter of 2007, including loans
held for sale, were up 9%, or $592 million, compared to the first quarter
of
2006, with approximately 6%, or $387 million, associated with the operations
acquired with Signature and Bradenton. Of the organic loan growth between
these
periods, approximately half was from commercial relationships. Loans comprised
77% of average earning assets in the first quarter of 2007 compared to
71% in
the year-earlier period. Whitney had initially placed a significant portion
of
the funds from the deposit build-up following the 2005 hurricanes in short-term
investments, which totaled $1.0 billion on average in the first quarter
of 2006,
or $700 million higher than in the first quarter of 2007.
Deposits
and Funding
Average
deposits in the first quarter of 2007 were down 4%, or $321
million, compared to the first quarter of 2006. The addition of $261 million
in
average deposits associated with the banking operations acquired in the
interim
was more than offset by an anticipated reduction in the post-storm deposit
accumulation, which had peaked around the end of the first quarter of 2006.
Noninterest-bearing deposits funded approximately 29% of average earning
assets
in the first quarter of 2007, and the percentage of funding from all
noninterest-bearing sources was 34% for the period. These percentages,
while
down from their highpoints in the first quarter of 2006, are comparable
to or
slightly above pre-storm levels. The current level of funding from higher-cost
sources, which includes time deposits and borrowings, is up somewhat from
pre-storm levels, reflecting in part the increased relative attractiveness
of
available rates in response to higher market rates and increased use of
Whitney’s treasury-management deposit products by commercial customers with
excess liquidity.
In
late March 2007, the Bank issued $150 million in subordinated
notes to augment its regulatory capital and enhance its capacity for future
growth.
Provision
for Credit Losses and Credit
Quality
Whitney
made a $2.0 million negative provision for credit losses in
the first quarter of 2007, compared to a $2.0 million provision in the
first
quarter of 2006. There was a small net recovery of loan charge-offs in
2007’s
first quarter, compared to net charge-offs of $2.8 million in the first
quarter
of 2006.
Noninterest
Income
Noninterest
income increased 14%, or $2.9 million, from the first
quarter of 2006. Deposit service charge income was up 9% compared to the
first
quarter of 2006 when the Bank’s ability to generate deposit service charges was
limited by the post-storm deposit build-up and some disruption to normal
customer activity. Improvements were noted in a number of other income
categories, including trust services and investment services, reflecting
both
internal growth and contributions from acquired operations. Whitney recognized
net gains on sales and other revenue from foreclosed assets totaling $3.0
million in the first quarter of 2007, an increase of $1.7 million from
the total
recognized in the first quarter of 2006.
Noninterest
Expense
Noninterest
expense increased 9%, or $7.3 million, from 2006’s first
quarter. Incremental operating costs associated with the Signature and
Bradenton
operations totaled approximately $2.4 million in the first quarter of 2007,
and
the amortization of intangibles acquired in these transactions added another
$.8
million to expense for the current year’s first quarter. The cost of assistance
integrating Signature into Whitney’s system in the first quarter of 2007 totaled
approximately $.9 million.
Initiatives
implemented to reduce Whitney’s exposure to disasters and
to make its disaster recovery plans and operating arrangement more resilient
added approximately $1.3 million of recurring expense to the first quarter
of
2007. As a result of the catastrophic 2005 storm season, the Company also
saw
the cost of its casualty insurance coverage in the current quarter increase
by
$.9 million compared to the first quarter of 2006.
Whitney
expensed disaster-response costs, insurance claim management
fees and casualty and operating losses directly related to the 2005 storms
totaling $.6 million in the first quarter of 2007 and $2.5 million in the
first
quarter of 2006.
Insurance
Matters Related to Natural
Disasters
Two
strong hurricanes struck portions of Whitney’s service area in
late-summer 2005. The Bank incurred a variety of costs to operate in disaster
response mode, and a number of facilities and their contents were damaged
by the
storms, including sixteen that require replacement, relocation or major
renovation. Whitney maintains insurance for casualty losses as well as
for
reasonable and necessary disaster response costs and certain revenue lost
through business interruption. All significant disaster response costs
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.
FINANCIAL
CONDITION
LOANS,
CREDIT RISK MANAGEMENT, AND ALLOWANCE AND RESERVE FOR
CREDIT LOSSES
Loan
Portfolio Developments
Total
loans increased $203 million, or 3%, from year-end 2006 to the
end of 2007’s first quarter, and were up 12%, or $765 million, from the end of
first quarter of 2006. Whitney acquired a $220 million loan portfolio with
Signature in March 2007 and a $286 million portfolio with Bradenton in
April
2006.
Table
1 shows loan balances by type of loan at March 31, 2007 and at
the end of the four prior quarters. The following discussion provides a
brief
overview of the composition of the different portfolio segments and the
customers served in each as well as recent changes.
|
TABLE
1. LOANS
|
|
|
|
|
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
March
31
|
|
December
31
|
September
30
|
June
30
|
March
31
|
|
Commercial,
financial and
agricultural
|
|
$
|
2,790,633
|
|
|
$
|
2,725,531
|
|
$
|
2,591,733
|
|
$
|
2,640,588
|
|
$
|
2,595,056
|
|
|
Real
estate - commercial,
construction
and other
|
|
|
3,199,254
|
|
|
|
3,094,004
|
|
|
3,053,927
|
|
|
3,025,366
|
|
|
2,780,340
|
|
|
Real
estate-
residential
mortgage
|
|
|
918,323
|
|
|
|
893,091
|
|
|
874,945
|
|
|
851,569
|
|
|
771,547
|
|
|
Individuals
|
|
|
345,371
|
|
|
|
337,790
|
|
|
332,035
|
|
|
343,223
|
|
|
341,696
|
|
|
Total
loans
|
|
$
|
7,253,581
|
|
|
$
|
7,050,416
|
|
$
|
6,852,640
|
|
$
|
6,860,746
|
|
$
|
6,488,639
|
|
The
portfolio of commercial loans, other than those secured by real
property, increased 2%, or $65 million, between year-end 2006 and March
31,
2007. This portfolio sector increased 8%, or $196 million, compared to
the end
of 2006’s first quarter, with little of this growth associated with the
Signature and Bradenton acquisitions. 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.
Successful business development efforts by lending officers in market areas
outside of New Orleans, in particular Texas and Alabama, have also increased
the
geographic diversification of customers represented in the commercial portfolio.
Also included in the commercial loan category are loans to individuals,
generally secured by collateral other than real estate, that are used to
fund
investments in new or expanded business opportunities.
Loans
outstanding to oil and gas industry customers represented
approximately 10% of total loans at March 31, 2007, up from approximately
9% at
year-end 2006. The majority of Whitney’s customer base in this industry provides
transportation and other services and products to support exploration and
production activities. With expectations of sustained higher commodity
prices,
Whitney has increased its attention to lending opportunities in the exploration
and production sector in recent years, and loans outstanding to this sector
comprised approximately 40% of the industry portfolio at March 31, 2007.
Outstanding
balances under participations in larger shared-credit
loan commitments totaled $386 million at the end of 2007’s first quarter,
comparable to the total outstanding at year-end 2006. The total at March
31,
2007 included approximately $96 million related to the oil and gas industry.
Substantially all such shared credits are with customers operating in Whitney’s
market area.
The
commercial real estate portfolio includes loans for construction
and real estate development, both commercial and residential, loans secured
by
multi-family residential properties and other income-producing properties,
and
loans secured by properties used in commercial or industrial operations.
This
portfolio sector grew 3%, or $105 million, from December 31, 2006, and
has
increased 15%, or $419 million, since the end of the first quarter of 2006.
Substantially all of these increases can be attributed to the operations
of
Signature and Bradenton. 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. Although Whitney continues to develop new business in
this highly competitive sector throughout its market area, the pace of
new
financing has been restrained somewhat by recent weaknesses in certain
parts of
the Florida market area, and new production has largely been offset by
the
anticipated refinancing of seasoned income properties in the secondary
market
and payments on residential development loans as inventory is sold. 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
residential mortgage loan portfolio increased $25 million, from
the end of 2006 to March 31, 2007, and was up 19%, or $147 million, from
a year
earlier. Growth in this category has mostly come from acquisitions, with
support
from the promotion of tailored home mortgage loan products generally targeted
to
the private client and higher net worth customer base. The Bank continues
to
sell most conventional residential mortgage loan production in the secondary
market. Whitney has no meaningful exposure to “sub-prime” home mortgage
loans.
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. 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.
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. The allowance for criticized loans includes any specific allowances
determined for loans that are deemed impaired under the definition in Statement
of Financial Accounting Standards No. 114. The allowance for the remainder
of
criticized loans is calculated by applying loss factors to loan balances
aggregated by severity of the internal risk rating.
The
monitoring of credit risk also extends to unfunded credit
commitments, such as unused commercial credit lines and letters of credit,
and
management establishes reserves as needed for its estimate of probable
losses on
such commitments.
Credit
Quality Statistics and Components of Credit
Loss Allowance and Reserve
Table
2 provides information on nonperforming loans and other
nonperforming assets at March 31, 2007 and at the end of the previous four
quarters. Nonperforming loans are included in the criticized loan total
discussed below and encompass substantially all loans separately evaluated
for
impairment. The allowance for impaired loans decreased $.5 million between
December 31, 2006 and March 31, 2007, reflecting charge-off activity and
other
changes during the first quarter of 2007. Overall there have been no significant
trends related to industries or markets underlying the changes in nonperforming
assets.
|
TABLE
2. NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
March
|
|
December
|
September
|
June
|
March
|
|
(dollars
in thousands)
|
|
31
|
|
31
|
30
|
30
|
31
|
|
Loans
accounted for on a nonaccrual basis
|
|
$
|
53,250
|
|
|
$
|
55,992
|
|
$
|
54,277
|
|
$
|
56,188
|
|
$
|
65,494
|
|
|
Restructured
loans
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28
|
|
|
Total
nonperforming loans
|
|
$
|
53,250
|
|
|
$
|
55,992
|
|
$
|
54,277
|
|
|
56,188
|
|
|
65,522
|
|
|
Foreclosed
assets and surplus property
|
|
|
1,737
|
|
|
|
800
|
|
|
301
|
|
|
695
|
|
|
652
|
|
|
Total
nonperforming assets
|
|
$
|
54,987
|
|
|
$
|
56,792
|
|
$
|
54,578
|
|
$
|
56,883
|
|
$
|
66,174
|
|
|
Loans
90 days past due still accruing
|
|
$
|
7,299
|
|
|
$
|
7,574
|
|
$
|
8,963
|
|
$
|
7,354
|
|
$
|
3,956
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets to loans plus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosed
assets and surplus
property
|
|
|
.76
|
%
|
|
|
.81
|
%
|
|
.80
|
%
|
|
.83
|
%
|
|
1.02
|
%
|
|
Allowance
for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonperforming
loans
|
|
|
144
|
|
|
|
136
|
|
|
138
|
|
|
144
|
|
|
136
|
|
|
Loans
90 days past due still accruing to loans
|
|
|
.10
|
|
|
|
.11
|
|
|
.13
|
|
|
.11
|
|
|
.06
|
|
During
the first quarter of 2007, there was a $16 million increase in
the total of loans criticized through the internal credit risk classification
process. The portfolio acquired with Signature added $17 million to the
criticized total, substantially all in the least severe classification
of loans
warranting special attention. The total for this classification was $81
million
at March 31, 2007, up $20 million from year-end 2006. Loans identified
as having
well-defined weaknesses that would likely result in some loss if not corrected
decreased a net of $2 million during the current quarter, to a total of
$155
million at March 31, 2007. Criticized loans at the end of 2007’s first quarter
also included $6 million of loans whose full repayment is in doubt, down
from $8
million at year-end 2006. The allowance determined for criticized loans
at March
31, 2007, other than those separately evaluated for impairment, was $.4
million
higher than that determined at year-end 2006.
Table
3 compares activity in the allowance for loan losses and in the
reserve for losses on unfunded credit commitments for the first quarters
of 2007
and 2006.
|
TABLE
3. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN
LOSSES AND
|
|
|
RESERVE FOR LOSSES ON UNFUNDED CREDIT
COMMITMENTS
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(dollars
in thousands)
|
|
2007
|
2006
|
|
ALLOWANCE
FOR LOAN LOSSES
|
|
|
|
|
|
|
Allowance
at beginning of period
|
|
$
|
75,927
|
|
$
|
90,028
|
|
|
Allowance
of acquired bank
|
|
|
2,791
|
|
|
-
|
|
|
Provision
for credit losses
|
|
|
(2,000
|
)
|
|
2,000
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
(1,941
|
)
|
|
(1,409
|
)
|
|
Real
estate - commercial, construction and
other
|
|
|
-
|
|
|
(1,325
|
)
|
|
Real
estate - residential mortgage
|
|
|
(69
|
)
|
|
(278
|
)
|
|
Individuals
|
|
|
(678
|
)
|
|
(617
|
)
|
|
Total
charge-offs
|
|
|
(2,688
|
)
|
|
(3,629
|
)
|
|
Recoveries
on loans previously charged off:
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
2,474
|
|
|
347
|
|
|
Real
estate - commercial, construction and
other
|
|
|
72
|
|
|
82
|
|
|
Real
estate - residential mortgage
|
|
|
41
|
|
|
104
|
|
|
Individuals
|
|
|
295
|
|
|
277
|
|
|
Total
recoveries
|
|
|
2,882
|
|
|
810
|
|
|
Net
loans (charged off) recovered
|
|
|
194
|
|
|
(2,819
|
)
|
|
Allowance
at end of period
|
|
$
|
76,912
|
|
$
|
89,209
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Annualized
net charge-offs (recoveries) to average
loans
|
|
|
(.01
|
)%
|
|
.17
|
%
|
|
Annualized
gross charge-offs to average loans
|
|
|
.15
|
|
|
.22
|
|
|
Recoveries
to gross charge-offs
|
|
|
107.22
|
|
|
22.32
|
|
|
Allowance
for loan losses to loans at period
end
|
|
|
1.06
|
|
|
1.37
|
|
|
RESERVE
FOR LOSSES ON UNFUNDED CREDIT
COMMITMENTS
|
|
|
|
|
|
|
|
|
Reserve
at beginning of period
|
|
$
|
1,900
|
|
$
|
580
|
|
|
Provision
for credit losses
|
|
|
-
|
|
|
(40
|
)
|
|
Reserve
at end of period
|
|
$
|
1,900
|
|
$
|
540
|
|
The
overall allowance for loan losses determined as of March 31, 2007
was $1.0 million higher than the allowance at December 31, 2006. The allowance
on the Signature portfolio at acquisition totaled $2.8 million. There were
no
other significant changes in the components of the allowance since year-end
2006, other than as previously discussed.
INVESTMENT
SECURITIES
The
investment securities portfolio balance decreased by $37 million,
or 2%, from year-end 2006 to March 31, 2007. Average investment securities
have
increased 7%, or $127 million, from the first quarter of 2006 to 2007’s first
quarter. The composition of the average portfolio of investment securities
and
effective yields are shown in Table 7.
The
mix of investments in the portfolio did not change significantly
during the first quarter of 2007. The duration of the overall investment
portfolio was 2.2 years at March 31, 2007, 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, 2006, the portfolio’s estimated duration was 2.4 years.
Securities
available for sale made up the bulk of the total
investment portfolio at March 31, 2007. Gross unrealized losses on securities
available for sale totaled $22.2 million at March 31, 2007 and were mainly
related to mortgage-backed securities. The gross losses represented 1.8%
of the
total amortized cost of the underlying securities. Substantially all the
unrealized losses at March 31, 2007 resulted from increases in market interest
rates over the yields available at the time the underlying securities were
purchased. Management identified no value impairment related to credit
quality
in the portfolio. 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.
DEPOSITS
AND BORROWINGS
Deposits
at March 31, 2007, excluding the impact of the Signature
acquisition, were 1%, or $115 million, below the level at year-end 2006.
Compared to March 31, 2006, deposits at the end of the current quarter,
excluding deposits associated with Signature and the Bradenton operations
acquired in April 2006, were down 6%, or $560 million. The surge in deposits
after the late-summer hurricanes of 2005 peaked around the end of the first
quarter of 2006, with anticipated reductions becoming evident mainly over
the
second half of that year as the recovery process progressed, inflows from
insurance proceeds diminished and initial disaster-assistance programs
were
completed. Some further reduction in the post-storm deposit accumulation
was
noted in the first quarter of 2007.
Table
4 shows the composition of deposits at March 31, 2007 and at
the end of the previous four quarters. The composition of average deposits
and
the effective rates on interest-bearing deposits for the first quarter
of 2007
and the fourth and first quarters of 2006 are presented in Table 7.
|
TABLE
4. DEPOSIT COMPOSITION
|
|
|
|
|
2007
|
2006
|
|
(dollars
in thousands)
|
|
March
31
|
December
31
|
September
30
|
June
30
|
March
31
|
|
Noninterest-bearing
demand
deposits
|
|
$
|
2,757,885
|
|
|
32
|
%
|
$
|
2,947,997
|
|
|
35
|
%
|
$
|
2,864,705
|
|
|
35
|
%
|
$
|
3,087,502
|
|
|
36
|
%
|
$
|
3,189,552
|
|
|
37
|
%
|
|
Interest-bearing
deposits:
NOW
account deposits
|
|
|
1,052,278
|
|
|
13
|
|
|
1,099,408
|
|
|
13
|
|
|
996,429
|
|
|
12
|
|
|
1,037,343
|
|
|
12
|
|
|
1,090,894
|
|
|
12
|
|
|
Money
market deposits
|
|
|
1,221,330
|
|
|
14
|
|
|
1,185,610
|
|
|
14
|
|
|
1,172,037
|
|
|
14
|
|
|
1,188,350
|
|
|
14
|
|
|
1,095,554
|
|
|
13
|
|
|
Savings
deposits
|
|
|
956,332
|
|
|
11
|
|
|
965,652
|
|
|
11
|
|
|
1,050,219
|
|
|
13
|
|
|
1,171,817
|
|
|
13
|
|
|
1,214,840
|
|
|
14
|
|
|
Other
time deposits
|
|
|
806,044
|
|
|
10
|
|
|
750,165
|
|
|
9
|
|
|
757,424
|
|
|
9
|
|
|
771,140
|
|
|
9
|
|
|
716,833
|
|
|
8
|
|
|
Time
deposits
$100,000
and over
|
|
|
1,730,366
|
|
|
20
|
|
|
1,484,476
|
|
|
18
|
|
|
1,358,886
|
|
|
17
|
|
|
1,367,509
|
|
|
16
|
|
|
1,376,103
|
|
|
16
|
|
|
Total
interest-bearing
|
|
|
5,766,350
|
|
|
68
|
|
|
5,485,311
|
|
|
65
|
|
|
5,334,995
|
|
|
65
|
|
|
5,536,159
|
|
|
64
|
|
|
5,494,224
|
|
|
63
|
|
|
Total
|
|
$
|
8,524,235
|
|
|
100
|
%
|
$
|
8,433,308
|
|
|
100
|
%
|
$
|
8,199,700
|
|
|
100
|
%
|
$
|
8,623,661
|
|
|
100
|
%
|
$
|
8,683,776
|
|
|
100
|
%
|
The
post-storm influx
of deposits was initially concentrated in noninterest-bearing and certain
other
lower-cost deposit products, particularly personal savings accounts. The
anticipated reductions to these storm-related deposits as well as some
migration
to higher-yielding products contributed to a 13%, or $869 million, decrease
in
lower-cost deposits from March 31, 2006 to the end of 2007’s first quarter,
excluding the deposits associated with acquired banks. Lower-cost deposits
at
March 31, 2007 decreased 5%, or $327 million, from year-end 2006, also
excluding
the impact of the Signature acquisition. This decrease partly reflects
seasonal
factors affecting year-end deposit totals. Noninterest-bearing demand deposits
comprised 32% of total deposits at March 31, 2007, comparable to pre-storm
levels, but down from 37% a year earlier.
Higher-cost
time
deposits at March 31, 2007 were up 9%, or $212 million, compared to year-end
2006, and 15%, or $309 million, compared to March 31, 2006, each excluding
deposits associated with the intervening acquisitions. 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 $694 million of funds in
treasury-management deposit products at March 31, 2007, up $208 million
from the
total held at December 31, 2006 and up $83 million from a year earlier.
Public
fund time deposits totaled approximately $236 million at the end of the
first
quarter of 2007, which was down $17 million from year-end 2006, but up
$50
million from March 31, 2006.
Short-term
borrowings
at March 31, 2007 were up 15%, or $74 million, from year-end 2006, substantially
all related to borrowings through the sale of securities under repurchase
agreements to customers using Whitney’s treasury-management sweep product.
In
late March 2007,
the Bank issued $150 million in 10-year subordinated notes to augment the
Bank’s
regulatory capital and enhance its capacity for future growth.
SHAREHOLDERS’
EQUITY
AND CAPITAL ADEQUACY
Shareholders’
equity
totaled $1.20 billion at March 31, 2007, which
was an increase of $85 million from the end of 2006. The 1.49 million shares
issued in the acquisition of Signature in March 2007 were valued at $48
million.
For the first quarter of 2007, the Company retained $17 million of earnings,
net
of declared dividends, and recognized $5 million in additional equity from
activity in share-based compensation plans for employees and directors,
including option exercises. Other comprehensive income for the first quarter
of
2007 totaled $14 million, including a $5 million unrealized holding gain
on
securities available for sale and $9 million primarily related to prior
service
credit and actuarial gains resulting from an amendment to Whitney’s
postretirement benefit plans as discussed in Note 8 to the consolidated
financial statements in Item 1 of this report.
The
Company declared a dividend during the first quarter of 2007 that
represented a payout totaling 53% of earnings for the period. The dividend
payout ratio was 49% for the full year in 2006.
The
ratios in Table 5 indicate that the Company remained strongly
capitalized at March 31, 2007. Tier 2 and total regulatory capital at March
31,
2007 include $150 million in subordinated notes payable issued by the Bank
in
the first quarter of 2007. The increase in risk-weighted assets from the
end of
2006 mainly reflected the impact of the Signature acquisition. The goodwill
and
other intangible assets recognized in business acquisitions are excluded
from
risk-weighted assets. These intangible assets, however, are also deducted
in
determining regulatory capital and thereby serve to offset the addition
to
capital for the value of shares issued as consideration for the
acquisition.
|
TABLE
5. RISK-BASED CAPITAL AND CAPITAL
RATIOS
|
|
|
|
|
|
|
|
|
March
31
|
December
31
|
|
(dollars
in thousands)
|
|
2007
|
2006
|
|
Tier
1 regulatory capital
|
|
$
|
883,111
|
|
$
|
853,774
|
|
|
Tier
2 regulatory capital
|
|
|
228,550
|
|
|
77,827
|
|
|
Total
regulatory capital
|
|
$
|
1,111,661
|
|
$
|
931,601
|
|
|
Risk-weighted
assets
|
|
$
|
8,607,331
|
|
$
|
8,340,926
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
Leverage
(Tier 1 capital to average assets)
|
|
|
9.02
|
%
|
|
8.76
|
%
|
|
Tier
1 capital to risk-weighted assets
|
|
|
10.26
|
|
|
10.24
|
|
|
Total
capital to risk-weighted assets
|
|
|
12.92
|
|
|
11.17
|
|
|
Shareholders’
equity
to total assets
|
|
|
11.31
|
|
|
10.93
|
|
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.
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.
On
the liability side, liquidity management focuses on growing the
base of core deposits at competitive rates, including the use of
treasury-management products for commercial customers, while at the same
time
ensuring access to economical wholesale funding sources. The section above
on
“Deposits and Borrowings” discusses changes in these liability-funding sources
in the first quarter of 2007.
Cash
generated from
operations is another important source of funds to meet liquidity needs.
The
consolidated statements of cash flows located in Item 1 of this report
present
operating cash flows and summarize all significant sources and uses of
funds for
the first three months of 2007 and 2006.
At
March 31, 2007, Whitney Holding Corporation had approximately $64
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.
Contractual
Obligations
Payments
due from the Company and the Bank under specified long-term
and certain other binding contractual obligations, other than obligations
under
deposit contracts and short-term borrowings, were scheduled in Whitney’s annual
report on Form 10-K for the year ended December 31, 2006. The most significant
obligations included operating leases for banking facilities and various
multi-year contracts for outsourced services and software licenses.
In
late March 2007, the Bank issued $150 million in subordinated
notes payable that mature in ten years and require debt service payments
of
approximately $9 million per year. During the first quarter of 2007, the
Bank
also assumed obligations under Signature’s facility leases totaling
approximately $3 million to be paid over terms ranging from three to fourteen
years, with approximately half due within five years. Management expects
that
most of the funds needed to repair or replace banking premises and equipment
damaged or destroyed by the storms that struck in the summer of 2005 will
be
provided by insurance.
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. The most significant
off-balance-sheet obligations are the Bank’s commitments under traditional
credit-related financial instruments. Table 6 schedules these commitments
as of
March 31, 2007 by the periods in which they expire. Commitments under credit
card and personal credit lines generally have no stated maturity.
|
TABLE
6. CREDIT-RELATED
COMMITMENTS
|
|
(in
thousands)
|
Commitments
expiring by period from March 31,
2007
|
|
|
|
Less
than
|
1
- 3
|
3
- 5
|
More
than
|
|
|
Total
|
1
year
|
years
|
years
|
5
years
|
|
Loan
commitments - revolving
|
$2,410,132
|
$1,719,223
|
$289,722
|
$357,500
|
$43,687
|
|
Loan
commitments - nonrevolving
|
483,239
|
263,287
|
219,952
|
-
|
-
|
|
Credit
card and personal credit lines
|
540,268
|
540,268
|
-
|
-
|
-
|
|
Standby
and other letters of credit
|
397,878
|
350,117
|
39,125
|
8,636
|
-
|
|
Total
|
$3,831,517
|
$2,872,895
|
$548,799
|
$366,136
|
$43,687
|
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 measures
its interest rate sensitivity over the near term primarily by running net
interest income simulations. The net interest income simulations run at
March
31, 2007 indicated that Whitney was moderately asset sensitive over the
near
term, similar to its position at year-end 2006. Based on these simulations,
annual net interest income (TE) would be expected to increase $24.9 million,
or
5.1%, and decrease $26.3 million, or 5.4%, if interest rates instantaneously
increased or decreased, respectively, from current rates by 100 basis points.
These changes are measured against the results of a base simulation run
that
uses growth forecasts as of the measurement date and that assumes a stable
rate
environment and structure. The comparable simulation run at year-end 2006
produced results that ranged from a positive impact on net interest income
(TE)
of $21.1 million, or 4.4%, to a negative impact of $22.1 million, or 4.6%.
The
actual impact that changes in interest rates have on net interest
income will depend on many factors. These factors include Whitney’s ability to
achieve expected growth in earning assets and maintain a desired mix of
earning
assets and interest-bearing liabilities, the actual timing when assets
and
liabilities reprice, the magnitude of interest rate changes and corresponding
movement in interest rate spreads, and the level of success of asset/liability
management strategies that are implemented.
RESULTS
OF OPERATIONS
NET
INTEREST INCOME (TE)
Whitney’s
net interest income (TE) for the first quarter of 2007
increased $1.7 million, or 1%, compared to the first quarter of 2006. Average
earning assets were stable between these periods. The net interest margin
(TE)
improved 6 basis points to 5.08% from the year-earlier period. The net
interest
margin (TE) is net interest income (TE) as a percent of average earning
assets.
Net interest income (TE) for the first quarter of 2007 was down $2.1 million,
or
2%, from the fourth quarter of 2006, with close to $2.0 million of this
decrease
related to the fewer number of days in the current period. Average earning
assets increased 1% between these periods, mainly reflecting the Signature
acquisition, while the net interest margin declined by 6 basis points,
largely
as a result of the shift in the funding mix. Tables 7 and 8 provide details
on
the components of the Company’s net interest income (TE) and net interest margin
(TE).
The
overall yield on earning assets increased 72 basis points from
the first quarter of 2006. The main factors behind this yield improvement
were
the rise in benchmark rates for the large variable-rate segment of Whitney’s
loan portfolio and a favorable shift in mix of earning assets, although
yields
also improved on the largely fixed-rate investment portfolio and the Company’s
short-term investments. Average total loans, which in Table 7 include loans
held
for sale, were up 9% or $592 million, compared to the first quarter of
2006,
with approximately 6%, or $387 million, associated with the operations
acquired
with Signature and Bradenton. Loans comprised 77% of average earning assets
for
the first quarter of 2007, compared to 71% in the year-earlier period.
Short-term investments represented 3% of average earning assets in the
first
quarter of 2007, down from 11% in the first quarter of 2006. Whitney had
initially placed a significant portion of the funds from the deposit build-up
following the 2005 hurricanes in short-term investments, which totaled
$1.0
billion on average in the first quarter of 2006, or $700 million higher
than in
the first quarter of 2007.
The
overall cost of funds for the current year’s first quarter
increased 66 basis points from the first quarter of 2006. This increase
was
driven by higher competitive market rates as well as a shift in the funding
mix
to higher-cost sources. Average deposits in the first quarter of 2007 were
down
4%, or $321 million, compared to the first quarter of 2006. The addition
of $261
million in average deposits associated with acquired operations was more
than
offset by an anticipated reduction in the post-storm deposit accumulation,
which
had peaked around the end of the first quarter of 2006. Noninterest-bearing
deposits funded approximately 29% of average earning assets in the first
quarter
of 2007, and the percentage of funding from all noninterest-bearing sources
was
34% for the period. These percentages, while down from their highpoints
of 35%
and 36%, respectively, in the first quarter of 2006, are comparable to
or
slightly above pre-storm levels. Higher-cost interest-bearing funds, which
include time deposits and borrowings, funded 32% of average earning assets
in
2007’s first quarter, compared to 27% in the year-earlier period. The current
level of funding from higher-cost sources is up somewhat from pre-storm
levels.
Factors behind this shift included the increased relative attractiveness
of
rates on these funding sources in response to higher market rates, increased
use
of the Company’s treasury-management deposit products by commercial customers
with excess liquidity, and the mix of deposits of acquired
banks.