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, 2008

 

Commission file number 0-1026

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

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  þ   No  o

 

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  o   No  þ

 

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  þ   No  o

 

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.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  þ

 

As of December 31, 2008, the aggregate market value of the registrant’s common stock (all shares are voting shares) held by nonaffiliates was approximately $1.18 billion (based on the closing price of the stock on June 30, 2008).

 

At February 27, 2009, 67,381,880 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 2009 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.

 

 

WHITNEY HOLDING CORPORATION

 

TABLE OF CONTENTS

 

 

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 and with various other smaller banking organizations. The Bank also has numerous local and national nonbank competitors, including savings and loan associations, credit unions, mortgage companies, personal and commercial finance companies, investment brokerage and financial advisory firms, and mutual fund companies. Entities that deliver financial services and access to financial products and transactions exclusively through the Internet are another source of competition. Technological advances have allowed the Bank and other financial institutions to provide electronic and Internet-based services that enhance the value of traditional financial products. Continued consolidation within the financial services industry will most likely change the nature and intensity of competition that Whitney faces, but can also create opportunities for Whitney to demonstrate and exploit competitive advantages.

 

The participants in the financial services industry are subject to varying degrees of regulation and governmental supervision. The following section summarizes certain important aspects of the supervision and regulation of banks and bank holding companies. Some of Whitney’s competitors that are neither banks nor bank holding companies may be subject to less regulation than the Company and the Bank, and this may give them a competitive advantage. The system of laws and regulations affecting the financial services industry has changed over the last few months with the implementation of laws such as the Emergency Economic Stabilization Act (EESA) and the American Recovery and Reinvestment Act (ARRA) and will continue to change as the government attempts to respond to the financial crises affecting the banking system and financial markets. These changes, as well as future changes, in the laws and regulations governing the financial industry could and likely will influence the competitive positions of the participants in this industry. We cannot predict whether the 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 designed primarily to protect depositors and the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC), and not the Company or its shareholders or creditors. 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) as its chartering authority and secondarily by the FDIC as its deposit insurer. Ongoing supervision is provided through regular examinations by the OCC and FRB and other means that allow the regulators to gauge management’s ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. As a result, the scope of routine examinations of the Company and the Bank is rather extensive. To facilitate supervision, the Company and the Bank are required to file periodic reports with the regulatory agencies, and much of this information is made available to the public by the agencies.

 

Capital

 

The FRB and the OCC require that the Company and the Bank meet certain minimum ratios of capital to assets in order to conduct their activities. Two measures of regulatory capital are used in calculating these ratios — Tier 1 Capital and Total Capital. Tier 1 Capital generally includes common equity, retained earnings, a limited amount of qualifying preferred stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other intangible assets, such as core deposit intangibles, and certain other

assets. Total Capital generally consists of Tier 1 Capital plus the allowance for loan losses, preferred stock that did not qualify as Tier 1 Capital, certain types of subordinated debt and a limited amount of other items.

 

The Tier 1 Capital ratio and the Total Capital ratio are calculated against an asset total weighted for risk. Certain assets, such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, often have a 100% risk weighting. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations. The leverage ratio also provides a measure of the adequacy of Tier 1 Capital, but assets are not risk-weighted for this calculation. Assets deducted from regulatory capital, such as goodwill and other intangible assets, are also excluded from the asset base used to calculate capital ratios. The minimum capital ratios for both the Company and the Bank are generally 8% for Total Capital, 4% for Tier 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 to its shareholders or any management fee to its holding company, if the depository institution would be undercapitalized as a result. Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations, and must submit a capital restoration plan that is guaranteed by the institution’s parent holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.

 

The capital ratios for both the Company and the Bank exceed the required minimums, and the capital ratios for the Bank make it eligible for classification as “well-capitalized” under current regulatory criteria.

 

In 2004, the Basel Committee on Banking Supervision published a new set of risk-based capital standards (Basel II) in order to update the original international capital standards that had been put in place in 1988 (Basel I). Basel II adopts a three-pillar framework comprised of minimum capital requirements, supervisory assessment of capital adequacy and market discipline. Basel II provides several options for determining capital requirements for credit and operational risk. In December 2007, the agencies adopted a final rule implementing Basel II’s advanced approach. The final rule became effective on April 1, 2008. Compliance with the final rule is mandatory only for “core banks” — U.S. banking organizations with over $250 billion in banking assets or on-balance-sheet foreign exposures of at least $10 billion. Other U.S. banking organizations that meet applicable qualification requirements may elect, but are not required, to comply with the final rule. The final rule also allows a banking organization’s primary federal regulator to determine that application of the rule would not be appropriate in light of the organization’s asset size, level of complexity, risk profile or scope of operations. In July 2008, in order to address the potential competitive inequalities resulting from the now bifurcated risk-based capital system in the United States, the agencies agreed to issue a proposed rule that would provide noncore banks with the option to adopt an approach consistent with Basel II’s standardized approach. This proposed new rule would replace the agencies’ earlier proposed amendments to existing Basel I risk-based capital rules (referred to as the “Basel I-A” approach). Comments to this proposed rule were due in October 2008, and there has been no further action on the rule to date. At this time, U.S. banking organizations not subject to the final rule are required to continue to use the existing Basel I risk-based capital rules. The Company is not required, and has not elected, to comply with the final rule.

 

FDICIA and Prompt Corrective Action

 

The Federal Deposit Insurance Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for insured depository institutions (well-capitalized, adequately capitalized, undercapitalized,

significantly undercapitalized and critically undercapitalized) and requires the federal banking agencies, including the FDIC, to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within these categories. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.

 

Failure to meet the capital guidelines also could subject a depository institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee the bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. The Bank currently meets the criteria for “well-capitalized.”

 

Within the “prompt corrective action” regulations, the federal banking agencies also have established procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital. Specifically, a federal banking agency may, after notice and an opportunity for a hearing, reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is deemed to be operating in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The FDIC may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.

 

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

 

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 financial 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 certain financial activities not previously permitted for banks. The Bank has established two financial subsidiaries for insurance agency activities.

 

Support of Subsidiary Banks by Holding Companies

 

Under current FRB policy, Whitney is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank in circumstances where it might not do so absent such a policy. In

addition, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to depositors and certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority of payment.

 

Limitations on Acquisitions of Banks and Bank Holding Companies

 

As a general proposition, other companies seeking to acquire control of a bank such as the Bank or a bank holding company such as Whitney would require the approval of the FRB under the BHCA. In addition, individuals or groups of individuals seeking to acquire control of a bank or 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 or 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 or bank holding company.

 

Deposit Insurance

 

The Bank is a member of the FDIC, and its deposits are insured by the DIF of 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 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 premium rate adopted in 2006 is still applicable and its structure imposes a minimum assessment of from five to seven cents for every $100 of domestic deposits on institutions that are assigned to the lowest risk category. This category currently encompasses substantially all insured institutions, including the Bank. For institutions assigned to higher risk categories, the premiums that took effect in 2007 ranged from ten cents to forty-three cents per $100 of deposits. The FDIC is authorized to raise the assessment rates as necessary to maintain the DIF’s required reserve ratio of 1.25% and has done so effective January 1, 2009.

 

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 2008 ranged from 1.14 cents to 1.10 cents per $100 of assessable deposits. These assessments will continue until the debt matures in 2017 through 2019.

 

Effective November 21, 2008 and until December 31, 2009, the FDIC expanded deposit insurance limits for certain accounts under the FDIC’s Temporary Liquidity Guarantee Program (TLG Program). Provided an institution has not opted out of the Program, the FDIC will fully guarantee funds deposited in noninterest-bearing transaction accounts, including (i) interest on Lawyer Trust Accounts or IOLTA accounts, and (ii) negotiable order of withdrawal or NOW accounts with rates no higher than .50 percent if the institution has committed to maintain the interest rate at or below that rate. In conjunction with the increased deposit insurance coverage, insurance assessments also increase. The Bank has not opted out of the Program.

 

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 include:

 

Anti-Money Laundering.   Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and

the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications. The regulatory authorities have imposed “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

 

OFAC.   The Office of Foreign Assets Control (OFAC) is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will continue to send, bank regulatory agencies lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Company or the Bank find a name on any transaction, account or wire transfer that is on an OFAC list, the Company or the Bank must freeze such account, file a suspicious activity report and notify the appropriate authorities.

 

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. The Bank is also prohibited from purchasing low quality assets from the Company or other nonbank affiliates of the Company. Outstanding loans from the Bank to the Company or other nonbank affiliates of the Company may not exceed 10% of the Bank’s capital stock and surplus, and the total of such transactions between the Bank and all of its nonsubsidiary affiliates may not exceed 20% of the Bank’s capital stock and surplus. These loans must be fully or over-collateralized.

 

Loans to Insiders.   The Bank also is subject to quantitative restrictions on extensions of credit to executive officers, directors, principal shareholders and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, (ii) must not involve more than the normal risk of repayment or present other unfavorable terms and (iii) may require approval by the Bank’s board of directors. Loans to executive officers are subject to certain additional restrictions.

 

Dividends.   Whitney’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is the dividends that it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Company as well as to the Company’s payment of dividends to its shareholders. The Bank would need prior regulatory approval to pay the Company a dividend that exceeded the Bank’s current net income and retained net income from the two previous years. The Bank may not pay any dividend that would cause it to become undercapitalized or if it already is undercapitalized. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that generally bank holding companies and insured banks should only pay dividends out of current operating earnings.

 

Whitney’s ability to pay dividends is also limited by its participation in the U.S. Department of Treasury’s (Treasury) Capital Purchase Program (CPP) established under the Troubled Asset Relief Program (TARP). Prior to December 19, 2011, unless Whitney has redeemed the Series A preferred stock issued to the Treasury in the CPP or the Treasury has transferred the Series A preferred stock to a third party, Whitney cannot increase its quarterly dividend above $.31 per share of common stock. Furthermore, if Whitney is not current in the payment of quarterly dividends on the Series A preferred stock, it cannot pay dividends on its common stock.

 

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 the OCC. 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 of 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.

 

Privacy and Data Security.   The GLB Act imposed new requirements on financial institutions with respect to consumer privacy. The GLB Act generally prohibits disclosure of consumer information to nonaffiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to consumers annually. Financial institutions, however, will be required to comply with state law if it is more protective of consumer privacy than the GLB Act. The GLB Act also directed federal regulators, including the FDIC, to prescribe standards for the security of consumer information. The Bank is subject to such standards, as well as standards for notifying consumers in the event of a security breach. Under federal law, the Company must disclose its privacy policy to consumers, permit consumers to “opt out” of having nonpublic customer information disclosed to third parties, and allow customers to opt out of receiving marketing solicitations based on information about the customer received from another subsidiary. States may adopt more extensive privacy protections. The Company is similarly required to have an information security program to safeguard the confidentiality and security of customer information and to ensure proper disposal. Customers must be notified when unauthorized disclosure involves sensitive customer information that may be misused.

 

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:

 

 

As a result of the turmoil in the residential real estate and mortgage lending markets, there are several legislative and regulatory initiatives currently under discussion at both the federal and state levels that could, if adopted, alter the terms of existing mortgage loans, impose restrictions on future mortgage loan originations, diminish lenders’ rights against delinquent borrowers or otherwise change the ways in which lenders make and administer residential mortgage loans. If made final, any or all of these proposals could have a negative effect on the financial performance of Whitney’s mortgage lending operations, by, among other things, reducing the volume of mortgage loans that the Bank can originate and sell into the secondary market and impairing the Bank’s ability to proceed against certain delinquent borrowers with timely and effective collection efforts.

 

The deposit operations of the Bank are also subject to laws and regulations that:

 

 

Commercial Real Estate Lending.   Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. Regulators have issued guidance with respect to the risks posed by commercial real estate lending concentrations. Commercial real estate loans generally include land development, construction loans and loans secured by multifamily property and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:

 

 

Capital Purchase Program.   Under Title I of the EESA of 2008, the Treasury has established the TARP, which includes the CPP. Under the CPP, Treasury will, upon application by a bank holding company and approval by the FRB and the primary federal regulator of the subsidiary bank, purchase senior preferred stock of the company. This senior preferred stock bears quarterly dividends at an annual rate of five percent for the first five years and nine percent thereafter. So long as this senior preferred stock is outstanding, certain restrictions are placed on the participant’s ability to pay other dividends or repurchase stock. In addition, CPP participants are subject to certain executive compensation limitations. Further, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. As a participant in the CPP, the Company may be subject to any such retroactive terms and conditions. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed or the extent to which the Company’s business may be affected.

 

American Recovery and Reinvestment Act (ARRA).   On February 17, 2009, President Obama signed into law the ARRA, more commonly known as the economic stimulus or economic recovery package. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including Whitney, that are in addition to those previously announced by the Treasury, until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.

 

Proposed Legislation and Regulatory Action.   New statutes and regulations are regularly adopted that contain a wide-range of proposals for altering the structure, regulation, and competitive relationships of financial institutions. Included among current proposals is the re-structuring of the regulatory framework within which Whitney operates. Further, newly enacted legislation, such as the EESA and the ARRA, direct Treasury and the federal banking regulators to adopt and implement rules for a wide-range of programs and initiatives that will significantly impact the financial services industry. Whitney cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which its business may be affected.

 

EMPLOYEES

 

At the end of 2008, the Company and the Bank had a total of 2,736 employees, or 2,665 employees on a full-time equivalent basis. Whitney affords its employees a variety of competitive benefit programs including retirement plans and group health, life and other insurance programs. The Company also supports training and educational programs designed to ensure that employees have the types and levels of skills needed to perform at their best in their current positions and to help them prepare for positions of increased responsibility.

AVAILABLE INFORMATION

 

The Company’s filings with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on Whitney’s website as soon as reasonably practicable after the Company files the reports with the SEC. Copies can be obtained free of charge by visiting the Investor Relations section of the Company’s website at www.whitneybank.com . These reports are also available on the SEC’s website at www.sec.gov . The Company’s website is not incorporated into this annual report on Form 10-K and it should not be considered part of this report.

 

 

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:

 

 

Although Whitney generally is not significantly more susceptible to adverse effects from these or other common risk factors than other industry participants, there are certain aspects of Whitney’s business model that may expose it to somewhat higher levels of risk. In addition to the other information contained in or incorporated by reference into this annual report on Form 10-K, these risk factors should be considered carefully in evaluating Whitney’s overall risk profile. Additional risks not presently known, or that Whitney currently deems immaterial, may also adversely affect Whitney’s business, financial condition or results of operations.

 

Unusually severe disruptions in the residential real estate market nationwide and in Whitney’s market area may cause continued higher provisions for credit losses and increase the uncertainty inherent in management’s estimate of credit losses as reflected in its financial condition and results of operations.

 

The residential real estate market has been under severe stress in the Florida and coastal Alabama markets served by Whitney and throughout many other areas of the country. The underlying imbalance of supply and demand will likely take some time to resolve and has caused declines in the value of many residential-related properties, including occupied residences, investment properties, homebuilders’ inventories, developed lots and land for future development. These conditions increase the possibility of default on loans made by Whitney that are secured by residential-related properties as well as the probability that the realizable collateral value will not be sufficient to satisfy the debt, resulting in a loss. Whitney’s loans secured by residential-related real estate in Florida and coastal Alabama comprised approximately 8% of the loan portfolio at December 31, 2008.

 

In addition, the problems in the residential real estate market have direct and indirect negative impacts on the broader economy that may increase the credit risk inherent in Whitney’s loans to customers in these and other parts of Whitney’s market area unrelated to residential real estate.

 

The recession in the broader economy, both nationally and internationally, could have an adverse affect on Whitney’s financial condition, results of operations and cash flows.

 

Recessionary conditions in the broader economy could adversely affect the financial capacity of businesses and individuals in Whitney’s market area. For example, there are some published reports that predict 2009 will be the most difficult year for the commercial real estate market since the early 1990’s, although the level of difficulty could vary widely among different market areas. These conditions could, among other consequences, increase the credit risk inherent in the current loan portfolio, restrain new loan demand from creditworthy borrowers, prompt Whitney to tighten its underwriting criteria, and reduce the liquidity in Whitney’s customer base and the level of deposits that they maintain. These economic conditions could also delay the correction of the imbalance of supply and demand in certain residential real estate markets as discussed above.

The impact on Whitney’s financial results could include continued high levels of problem credits, provisions for credit losses and expenses associated with loan collection efforts, the need for Whitney to replace core deposits with higher-cost sources of funds, and an inability to produce loan growth or overall growth in earning assets. Noninterest income from sources that are dependent on financial transactions and market valuations could also be reduced.

 

Whitney has credit exposure in the oil and gas industry.

 

At December 31, 2008, Whitney had approximately $1.06 billion in loans to borrowers in the oil and gas industry, representing approximately 12% of its total loans outstanding as of that date. The majority of Whitney’s customer base in this industry provides transportation and other services and products to support exploration and production activities. If there is a significant downturn in the oil and gas industry generally, the cash flows of Whitney’s customers’ in this industry would be adversely impacted. This in turn could impair their ability to service their debt to Whitney with adverse consequences to the Company’s earnings.

 

The composition of Whitney’s loan portfolio could increase the volatility of its credit quality metrics and provisions for credit losses.

 

Whitney’s loan portfolio contains individual relationships, primarily with commercial customers, with outstanding balances that are relatively large in relation to its asset size. Changes in the credit quality of one or a few of these relationships could lead to increased volatility in the Company’s reported totals of loans with above-normal credit risk and in its provisions for credit losses over time.

 

Current levels of market volatility are unprecedented, and may result in disruptions in our ability to access sources of funds, which may negatively affect our capital resources and liquidity.

 

The Company depends on access to a variety of sources of funding to provide the Company with sufficient capital resources and liquidity to meet its commitments and business needs, and to accommodate the transaction and cash management needs of its customers. Sources of funding available to the Company, and upon which the Company relies or may rely as regular components of its liquidity and funding management strategy, include interbank borrowings, FHLB advances, borrowings from the Federal Reserve Discount Window and brokered deposits. The Company has also historically enjoyed a solid reputation in the capital markets and historically has been able to raise funds in the form of either short or long-term borrowings or equity issuances.

 

The capital and credit markets have been experiencing extreme volatility and periods of severe disruption that in recent months have reached unprecedented levels. Among other factors, these conditions reflect extreme uncertainty on the part of market participants in response to the rapid evolution of the credit crisis among major entities in the financial services industry. In some cases, the markets have pressured stock prices and limited credit availability for certain issuers seemingly without regard to those issuers’ underlying business fundamentals. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Company will not experience an adverse effect, which may be material, on its ability to access the capital markets and sources of liquidity.

 

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.

 

On October 3, 2008, President Bush signed into law the EESA. The legislation was the result of a proposal by the Treasury in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. Pursuant to the EESA, the Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Treasury announced the Capital Purchase Program, a program under the EESA pursuant to which it would purchase senior preferred stock and warrants to purchase common stock from participating financial institutions. On November 21, 2008, the FDIC adopted a Final Rule with respect to its Temporary Liquidity Guarantee Program pursuant to which the FDIC will

guarantee certain “newly-issued unsecured debt” of banks and certain holding companies and also guarantee, on an unlimited basis, noninterest-bearing bank transaction accounts. On February 17, 2009, President Obama signed into law the ARRA. The purposes of the legislation are to preserve and create jobs, to assist those most impacted by the recession, to provide investments to increase economic efficiency in health services, to invest in transportation, environmental protection and other infrastructure, and to stabilize local and state governments.

 

Each of these programs was implemented to help stabilize our economy and financial system. There can be no assurance, however, as to the actual impact that the EESA and its implementing regulations, the Capital Purchase Program, the FDIC programs, or any other governmental program will have on the financial markets. The failure of the EESA, the ARRA or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect the Company’s business, financial condition, and results of operations, access to credit or the trading price of the Company’s common stock.

 

The failure of other financial institutions could adversely affect Whitney.

 

Whitney’s ability to engage in routine funding transactions could be adversely affected by the actions and potential failures of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or concerns about, one or more financial institutions or the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions.

 

Concern by customers over deposit insurance may cause a decrease in deposits and changes in the mix of funding sources available to Whitney.

 

With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured and some may seek deposit products or other bank savings and investment products that are collateralized. Decreases in deposits and changes in the mix of funding sources may adversely affect the Company’s funding costs and net income.

 

Whitney’s profitability depends in substantial part on net interest income and on its ability to manage interest rate risk.

 

Whitney’s net interest income represented more than 75% of total revenues in each of the last five years. Net interest income is the difference between the interest earned on loans, investment securities and other earning assets, and interest owed on deposits and borrowings. Numerous and often interrelated factors influence Whitney’s ability to maintain and grow net interest income, and a number of these factors are addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations located in Item 7 of this annual report on Form 10-K. One of the most important factors is changes in market interest rates and in the relationship between these rates for different financial instruments and products and at different maturities. Such changes are generally outside the control of management and cannot be predicted with certainty. Although management applies significant resources to anticipating these changes and to developing and executing strategies for operating in an environment of change, they cannot eliminate the possibility that interest rate risk will negatively affect the Company’s net interest income and lead to earnings volatility.

 

For several years, Whitney has been positioned to be moderately asset sensitive over the near term, which would point to an expected improvement in net interest income in a rising rate environment and a reduction in net interest income as rates declined, holding other factors constant. Recent economic conditions have led to lower market rates during 2008. The Federal Reserve reduced interest rates on three occasions in 2007 by a total of 100 basis points, to 4.25%, and by another 400 basis points, to a range of 0% to 0.25%, during 2008. A significant portion of Whitney’s loans bear interest at variable rates, and the corresponding market

benchmark rates have declined sharply over this same period. These and possible further future rate reductions could have a negative impact on Whitney’s net interest income and net income.

 

Whitney is heavily regulated by federal agencies and changes in laws and regulations may affect its financial outlook.

 

Whitney is heavily regulated at the federal level. This regulation is designed primarily to protect depositors, federal deposit insurance funds and the banking system as a whole, not shareholders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation and implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways, including limiting the types of financial services and products offered and/or increasing the ability of nonbanks to offer competing financial services and products. Also, if the Company does not comply with laws, regulations or policies, it could receive regulatory sanctions, including monetary penalties that may have a material impact on its financial condition and results of operations, and suffer damage to its reputation.

 

In response to the recent crises affecting the banking system and financial markets, Congress is likely to consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as the Company’s current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand the Company’s permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on the Company’s business, financial condition, or results of operations.

 

As a result of Whitney’s participation in the Capital Purchase Program (CPP) , Whitney may face additional regulation and cannot predict the cost or effects of compliance at this time.

 

In connection with Whitney’s participation in the CPP, the Company and the Bank may face additional regulations and/or reporting requirements, including, but not limited to, the following:

 

 

The senior preferred stock issued to the Treasury impacts net income available to Whitney’s common shareholders and its earnings per share.

 

On December 19, 2008, the Company issued senior preferred stock (Series A preferred stock) to the Treasury in an aggregate amount of $300 million, along with a warrant for 2,631,579 shares of common stock. As long as shares of the Company’s Series A preferred stock issued under the CPP are outstanding, no dividends may be paid on the Company’s common stock unless all dividends on the Series A preferred stock

have been paid in full. Additionally, for so long as the Treasury owns shares of the Series A preferred stock, the Company is not permitted to pay cash dividends in excess of $.31 per share per quarter on its common stock for three years without the Treasury’s consent. The dividends declared on shares of the Company’s Series A preferred stock will reduce the net income available to common shareholders and the Company’s earnings per common share. Additionally, warrants to purchase the Company’s common stock issued to the Treasury, in conjunction with the issuance of the Series A Preferred Stock, may be dilutive to the Company’s earnings per share. The shares of the Company’s Series A preferred stock will also receive preferential treatment in the event of liquidation, dissolution or winding up.

 

Holders of the Series A preferred stock have rights that are senior to those of Whitney’s common shareholders.

 

The Series A preferred stock that the Company has issued to the Treasury is senior to its shares of common stock and holders of the Series A preferred stock have certain rights and preferences that are senior to holders of the Company’s common stock. The restrictions on the Company’s ability to declare and pay dividends to common shareholders are discussed immediately above. In addition, the Company and its subsidiaries may not purchase, redeem or otherwise acquire for consideration any shares of the Company’s common stock unless the Company has paid in full all accrued dividends on the Series A preferred stock for all prior dividend periods, other than in certain circumstances. Furthermore, the Series A preferred stock is entitled to a liquidation preference over shares of the Company’s common stock in the event of liquidation, dissolution or winding up.

 

Holders of the Series A preferred stock may, under certain circumstances, have the right to elect two directors to Whitney’s board of directors.

 

In the event that the Company fails to pay dividends on the Series A preferred stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting the Company’s board of directors will be increased by two. Holders of the Series A preferred stock, together with the holders of any outstanding parity stock with like voting rights will be entitled to elect the two additional members of the board of directors at the next annual meeting (or at a special meeting called for this purpose) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.

 

Holders of the Series A preferred stock have limited voting rights.

 

Except in connection with the election of directors to the Company’s board of directors as discussed immediately above and as otherwise required by law, holders of the Series A preferred stock have limited voting rights. In addition to any other vote or consent of shareholders required by law or Whitney’s amended and restated charter, the vote or consent of holders owning at least 66 2 / 3 % of the shares of Series A preferred stock outstanding is required for (1) any authorization or issuance of shares ranking senior to the Series A preferred stock; (2) any amendment to the rights of the Series A preferred stock that adversely affects the rights, preferences, privileges or voting power of the Series A preferred stock; or (3) consummation of any merger, share exchange or similar transaction unless the shares of Series A preferred stock remain outstanding or are converted into or exchanged for preference securities of the surviving entity other than the Company and have such rights, preferences, privileges and voting power as are not materially less favorable than those of the holders the Series A preferred stock.

 

Whitney may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.

 

In order to maintain the Company’s or its Bank’s capital at desired or regulatory-required levels or to replace existing capital such as the Series A preferred stock, the Company may be required to issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. The Company may sell these shares at prices below the current market price of

shares, and the sale of these shares may significantly dilute shareholder ownership. The Company could also issue additional shares in connection with acquisitions of other financial institutions.

 

Whitney’s market area is susceptible to hurricanes and tropical storms, which may increase the Company’s exposure to credit risk, operational risk and liquidity risk.

 

Most of Whitney’s market area lies within the coastal region of the five states bordering the Gulf of Mexico. This is a region that is susceptible to hurricanes and tropical storms. The two strong hurricanes that struck in 2005 had a major impact on the greater New Orleans area, southwest Louisiana and the Mississippi coast, with lesser impacts on coastal Alabama and the western panhandle of Florida. Within its broader market area, the greater New Orleans area is Whitney’s primary base of operations and is home to branches and relationship officers that service approximately 40% of the Bank’s total loans and 50% of total deposits at December 31, 2008. The 2005 storms caused widespread property damage, required temporary or permanent relocations of a large number of residents and business operations, and severely disrupted normal economic activity in the impacted areas. Although the Bank was able to operate successfully in the aftermath of these storms, management carefully studied its risk posture and has taken a number of steps to reduce the Bank’s exposure to future natural disasters and make its disaster recovery plans and operating arrangements more resilient. Details of the storms’ impact on Whitney, both operationally and with respect to credit risk and liquidity, has been chronicled in Item 7 of the Company’s annual reports on Forms 10-K for 2007, 2006 and 2005 as well as in Item 2 of Part I of quarterly reports on Form 10-Q filed since the storms struck.

 

Whitney cannot predict the extent to which future storms may impact its exposure to credit risk, operational risk or liquidity risk.

 

 

 

 

A special meeting of the shareholders of Whitney Holding Corporation was held on December 17, 2008.

 

The proposal to amend the Company’s charter to authorize the issuance of up to 20 million shares of preferred stock was approved as follows:

 

 

The proposal to amend the Company’s charter to increase the number of authorized shares of common stock from 100 million to 200 million was approved as follows:

 

 

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, 2003 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.

 

Comparison of 5-Year Cumulative Total Return

 

 

 

Tax-equivalent (TE) amounts are calculated using a marginal federal income tax rate of 35%.

 

The efficiency ratio is noninterest expense to total net interest (TE) and noninterest income (excluding securities transactions).

 

The tangible equity to tangible assets ratio is total shareholders’ equity less intangible assets into total assets less intangible assets.

 

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 2008, 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 annual report on Form 10-K, particularly the consolidated financial statements and related notes appearing in Item 8.

 

FORWARD-LOOKING STATEMENTS

 

This discussion contains “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide projections of results of operations or of financial condition or state other forward-looking information, such as expectations about future conditions and descriptions of plans and strategies for the future. Forward-looking statements often contain words such as “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “plan,” “predict,” “project” or other words of similar meaning.

 

The forward-looking statements made in this discussion include, but may not be limited to, (a) comments on conditions impacting certain sectors of the loan portfolio and opportunities for loan growth; (b) information about changes in the duration of the investment portfolio with changes in market rates; (c) statements of the results of net interest income simulations run by the Company to measure interest rate sensitivity; (d) discussion of the performance of Whitney’s net interest income assuming certain conditions; (e) expectations about Whitney’s operational resiliency in the event of natural disasters; (f) comments on expected trends or changes in expense levels for retirement benefits, loan collection costs and deposit insurance; and (g) comments on economic conditions and proposed legislation and regulatory action.

 

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:

 

 

 

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’s net income available to common shareholders totaled $58.0 million for the year ended December 31, 2008, or $.89 per diluted share, compared with earnings of $151 million for 2007, or $2.23 per diluted share. During 2007, Whitney reached a final settlement on insurance claims primarily arising from the hurricanes that struck portions of its market area in the late summer of 2005. With this settlement, the Company recognized a gain in 2007 of $31.3 million ($19.9 million after-tax, or $.29 per diluted share).

 

U.S. Treasury Department Capital Purchase Program

 

On December 19, 2008, Whitney issued 300,000 shares of senior preferred stock to the U.S. Department of Treasury (Treasury) under the Capital Purchase Program (CPP) that was established as part of the Emergency Economic Stabilization Act of 2008 (EESA). Treasury also received a ten-year warrant to purchase 2,631,579 shares of common stock at an exercise price of $17.10 per share. The aggregate proceeds were $300 million, and the total capital raised qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios. The terms of the senior preferred stock and warrant are more fully described in Note 17 to the consolidated financial statements located in Item 8, including certain restrictions on the Company’s ability to pay common dividends or repurchase stock. Further, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed or the extent to which the Company’s business may be affected.

 

Mergers and Acquisitions

 

On November 7, 2008, Whitney completed its acquisition of Parish National Corporation (Parish), the parent of Parish National Bank. Parish National Bank operated 16 banking centers, primarily on the north shore of Lake Pontchartrain and other parts of the metropolitan New Orleans area, and had $771 million in total assets, including a loan portfolio of $606 million, and $636 million in deposits at the acquisition date.

The transaction was valued at approximately $158 million, with approximately $97 million paid to Parish’s shareholders in cash and the remainder in Whitney stock totaling approximately 3.33 million shares.

 

Loans and Earning Assets

 

Organic loan growth, which excludes the Parish acquisition, was 12%, or $891 million, during 2008. The Parish acquisition accounted for approximately $605 million of the total $1.50 billion increase in loans from year-end 2007 to December 31, 2008. Loan demand and customer development activity in Whitney’s Texas and Louisiana markets were the major contributors to organic loan growth over this period, with additional support coming from the Alabama/Mississippi market. The Florida-based portfolio was essentially unchanged year over year, with market conditions continuing to restrain loan demand in that state. Loans, including loans held for sale, comprised 80% of average earning assets in 2008 compared to 76% in 2007. Economic conditions will likely restrain loan demand and the rate of overall portfolio growth in 2009.

 

Deposits and Funding

 

There was little overall organic deposit growth during 2008. Deposits associated with Parish accounted for approximately $635 million of the Company’s total deposit growth of $678 million, or 8%, from December 31, 2007. Several important factors have influenced the more recent trends in deposits. Customers have become risk-averse in response to the increasingly uncertain economic conditions. The federal government has taken steps to support bank liquidity by temporarily expanding deposit insurance coverage, including unlimited coverage on certain accounts. Market rates have fallen to minimal levels for savings or investment options perceived to be safe.

 

Noninterest-bearing demand deposits grew 12%, or $329 million, from year-end 2007, before considering the $164 million added with Parish, and comprised 35% of total deposits at December 31, 2008. This organic growth was concentrated mainly in commercial accounts. Higher-cost time deposits at December 31, 2008 were down approximately 8%, or $213 million, compared to year-end 2007, again before considering Parish’s $161 million of time deposits. With limited net organic deposit growth during 2008, the Company funded a portion of its organic loan growth with short-term borrowings. The balance of short-term borrowings at December 31, 2008 was up 40%, or $367 million, from year-end 2007.

 

Net Interest Income

 

Whitney’s net interest income (TE) for 2008 decreased 2%, or $10.2 million, from 2007. Average earning assets increased 5% in 2008, driven by the 10% growth in average loans compared to 2007. The net interest margin (TE) of 4.55% in 2008 was down 34 basis points from 2007, mainly reflecting the steep reduction in benchmark rates for the large variable-rate segment of Whitney’s loan portfolio. The rates on approximately 28% of the loan portfolio at December 31, 2008 were tied to changes in LIBOR benchmarks, with another 28% tied to prime. Declining market rates also led to a sharp reduction in rates paid on interest-bearing deposits and short-term borrowings. The benefit to Whitney’s cost of funds was offset partially by the increased use of short-term borrowings in the funding mix to support earning asset growth.

 

Provision for Credit Losses and Credit Quality

 

Whitney provided $134 million for credit losses in 2008 compared to $17.0 million in 2007. Net loan charge-offs were $71.3 million, or .88% of average loans, in 2008, compared to $8.4 million, or .11% of average loans, in 2007. The allowance for loan losses increased $73.2 million during 2008 and represented 1.77% of total loans at December 31, 2008, up from 1.16% at the end of 2007.

 

Continuing weaknesses in residential-related real estate markets, primarily in the Tampa, Florida area, accounted for approximately half of both the provision and the $82 million in gross charge-offs during 2008. Loans for commercial real estate (CRE) development or investment with identified weaknesses accounted for approximately $13 million of the provision and $6 million of gross charge-offs, again concentrated in the Tampa area. Problem commercial and industrial (C&I) credits added approximately $20 million to the provision for 2008 and were responsible for approximately $28 million of gross charge-offs, with no

significant regional or industry concentration. Management also added approximately $10 million to the allowance and provision in 2008 based on its relative assessment of economic and other qualitative risk factors since the end of 2007.

 

The total of loans criticized through the Company’s credit risk-rating process was $770 million at December 31, 2008, which represented 8% of total loans and a net increase of $465 million from December 31, 2007. The increase in criticized loans during 2008 was largely concentrated in residential-related real estate loans which comprised approximately 41% of the criticized loan total at year-end 2008, with over half from Whitney’s Florida markets.

 

Noninterest Income

 

Noninterest income in 2008 increased 11%, or $10.1 million, over 2007, excluding the insurance settlement gain in 2007, a $2.3 million gain recognized in 2008 from the mandatory redemption of Visa shares, and income associated with foreclosed assets and surplus property in each period. Deposit service charge income grew by 11% compared to 2007, aided mainly by reduced earnings credit allowed on certain commercial deposit accounts. Most other recurring revenue sources showed improvement or were stable compared to 2007 even under difficult financial and housing market conditions. The results for 2008 also benefited from the earnings on a bank-owned life insurance program implemented during the year.

 

Noninterest Expense

 

Noninterest expense increased 1%, or $2.0 million, in 2008. Incremental operating costs associated with acquired operations, including amortization of intangibles, totaled approximately $7.9 million for 2008. Whitney’s personnel expense decreased 6%, or $12.3 million, before considering the cost of acquired staff. Compensation associated with management incentive programs was down $13.3 million in 2008, largely as a result of tightened performance criteria coupled with the difficult operating environment. The total of all other noninterest expense unrelated to personnel increased a net $6.4 million, or 4%, compared to 2007, again before considering acquired operations.

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

 

Whitney prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. A discussion of certain accounting principles and methods of applying those principles that are particularly important to this process is included in Note 2 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. The Company is required to make estimates, judgments and assumptions in applying these principles to determine the amounts and other disclosures that are presented in the financial statements and discussed in this section.

 

Allowance for Credit Losses

 

Whitney believes that the determination of its estimate of the allowance for credit 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 section below entitled “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 national and local 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.

 

Goodwill Impairment Test

 

Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. The impairment test compares the estimated fair value of a reporting unit with its net book value. Whitney has assigned all goodwill to one reporting unit that represents

the overall banking operations. The fair value of the reporting unit is based on valuation techniques that market participants would use in an acquisition of the whole unit, such as estimated discounted cash flows, the quoted market price of Whitney’s stock including an estimated control premium, and observable average price-to-earnings and price-to-book multiples of our competitors. If the unit’s fair value is less than its carrying value, an estimate of the implied fair value of the goodwill is compared to the goodwill’s carrying value. Given the current volatility in market prices due in part to significant uncertainty about the financial services industry as a whole and limited activity of healthy bank acquisitions, management placed greater reliance on the discounted cash flow analysis for the annual test. This analysis requires significant assumptions about the economic environment, expected net interest margins, growth rates and the rate at which cash flows are discounted.

 

No impairment was indicated when the annual test was performed on September 30, 2008. During the 2008 fourth quarter, circumstances such as a decrease in Whitney’s market price to a level below book value, further asset quality deterioration and declining general economic conditions that reduced estimates of growth and the net interest margin, led management to perform a subsequent impairment test as of December 31, 2008. No indication of goodwill impairment was indicated by this interim test as the analysis resulted in a fair value estimate approximately 10% higher than book value. Either a 15 basis point reduction in the long-term expected net interest margin or a 1% lower perpetual growth rate would reduce the estimated fair value by 10%. Given the current economic environment and potential for volatility in the fair value estimate, management will reassess goodwill impairment quarterly.

 

Accounting for Retirement Benefits

 

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 below in the section entitled “Noninterest Expense.”

 

FINANCIAL CONDITION

 

LOANS, CREDIT RISK MANAGEMENT AND ALLOWANCE AND RESERVE FOR CREDIT LOSSES

 

Loan Portfolio Developments

 

Organic loan growth was 12%, or $891 million, during 2008. The Parish acquisition accounted for approximately $605 million of the total $1.50 billion increase in loans from year-end 2007 to December 31, 2008. Loan demand and customer development activity in Whitney’s Texas and Louisiana markets were the major contributors to organic loan growth over this period, with additional support coming from the Alabama/Mississippi market. Loans serviced from Whitney’s operations in Houston, Texas grew by 36% year over year, those serviced in Louisiana markets outside New Orleans were up 6%, loans from the metropolitan New Orleans area grew 14%, and the Alabama/Mississippi portfolio gained 9%. The Florida-based portfolio was essentially unchanged year over year, with market conditions continuing to restrain loan demand from the state. Economic conditions will likely restrain loan demand and the rate of overall portfolio growth in 2009.

 

Table 1 shows loan balances by type of loan at December 31, 2008 and at the end of the previous four years. Table 2 distributes the loan portfolio as of December 31, 2008 by the geographic region from which the

loans are serviced. The following discussion provides an overview of the composition of the different portfolio sectors and the customers served in each, as well as recent changes.

 

 

The portfolio of commercial and industrial (C&I) loans increased 22%, or $614 million, between year-end 2007 and 2008, with only a limited contribution from the Parish acquisition. This growth was concentrated in Whitney’s Houston, Texas market and its Louisiana markets, including strong growth from customers in the oil and gas (O&G) industry. The recent disruptions in the credit markets have restricted access by some of Whitney’s commercial customers to traditional borrowing sources and led them to increase their use of existing credit facilities with the Bank. Overall, the C&I portfolio has remained diversified, with customers in a range of industries, including O&G exploration and production, wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, financial services and professional services. The growth in market areas outside of metropolitan New Orleans in recent years has increased the geographic diversification of customers represented in the C&I portfolio.

 

Loans outstanding to oil and gas (O&G) industry customers represented approximately 12% of total loans at December 31, 2008, up from approximately 10% at year-end 2007. The majority of Whitney’s customer base in this industry provides transportation and other services and products to support exploration and production activities. The Bank seeks service and supply customers who are quality operators that can manage through volatile commodity price cycles. Loans outstanding to the exploration and production (E&P) sector comprised close to one-third of the O&G industry portfolio at December 31, 2008. Within the E&P sector, approximately 60% of the portfolio is related to natural gas production and 40% to oil production based on measures of collateral support. Management 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 slowdown in global economic activity has led to a sharp reduction in commodity prices in recent months and management has made what it believes to be appropriate adjustments to Whitney’s credit underwriting guidelines and the management of existing relationships. 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 $772 million at the end of 2008, compared to $444 million outstanding at year-end 2007. The total at December 31, 2008 included approximately $326 million related to the O&G industry. Substantially all of the shared credits are with customers operating in Whitney’s market area.

 

The CRE portfolio includes loans for construction and land development and investment, both commercial and residential, loans secured by multi-family residential properties and other income-producing properties, and loans secured by properties used by the owner in C&I operations. Table 2 presents information on the

components and geographic distribution of the CRE portfolio. Management also sets exposure guidelines for the overall portfolio of CRE loans as well as for loans to developers or owner-users that are secured by various subcategories of property. As with lending to the O&G industry, management regularly monitors real estate industry fundamentals and portfolio credit quality.

 

 

Project financing is an important component of the activity in the CRE portfolio sector, and sector growth is impacted by the availability of new projects as well as the anticipated refinancing of seasoned income properties in the secondary market and payments on residential development loans as inventory is sold. The CRE portfolio sector grew $680 million during 2008, of which approximately $454 million was from the Parish acquisition. The organic growth of 6%, or $226 million, was mainly in the Houston, Texas market, with smaller contributions from the Louisiana and Alabama/Mississippi markets, and involved a variety of retail, commercial and industrial facilities, as well as some multi-family and single-family residential development. The lack of growth in the Florida-based CRE portfolio reflected a limited supply of new projects coupled with gradual paydowns on existing project loans. The growing economic uncertainty during the current recession will slow the availability of new creditworthy CRE projects throughout Whitney’s market area and limit the potential for any growth in this portfolio sector in 2009.

 

The residential mortgage loan portfolio increased 16%, or $145 million, during 2008, of which approximately $86 million was from Parish. The 6% organic growth in this portfolio sector was mainly from Whitney’s Louisiana and Texas markets. The Bank continues to sell most conventional residential mortgage loan production in the secondary market. Whitney’s lending strategy has not included sub-prime home mortgage loans.

 

Loans to individuals include various consumer installment and credit line products. There was organic growth of approximately 6% in this portfolio sector during 2008 on top of the $38 million added with Parish.

 

Table 3 reflects contractual loan maturities, unadjusted for scheduled principal reductions, prepayments or repricing opportunities. Approximately 60% of the value of loans with a maturity greater than one year carries a fixed rate of interest.

 

Credit Risk Management and Allowance and Reserve for Credit Losses

 

General Discussion of Credit Risk Management and Determination of Credit Loss Allowance and Reserve

 

Whitney manages credit risk mainly through adherence to underwriting and loan administration standards established by the Bank’s Credit Policy Committee and through the efforts of the credit administration function to ensure consistent application and monitoring of standards throughout the Company. Written credit policies define underwriting criteria, concentration guidelines, and lending approval processes that cover individual authority and the appropriate involvement of regional loan committees and a senior loan committee. The senior loan committee includes the Bank’s senior lenders, senior officers in Credit Administration, the Chief Risk Officer, the President and the Chief Executive Officer.

 

C&I credits and CRE loans, are underwritten principally based upon cash flow coverage, but additional support is regularly obtained through collateralization and guarantees. C&I 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.

 

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 monthly watch committee process is initiated. The watch committee, composed of senior lending and credit administration management as well as the Chief Executive Officer and Chief Risk Officer, 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. This methodology is described in Note 2 to the consolidated financial statements located in Item 8 of the annual report on Form 10-K.

 

The recorded allowance encompasses three key elements: (1) allowances established for losses on criticized loans; (2) allowances based on historical loss experience for loans with acceptable credit quality and groups of homogeneous loans not individually rated; and (3) allowances based on general economic conditions and other qualitative risk factors internal and external to the Company.

The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit, and management establishes reserves as needed for its estimate of probable losses on such commitments.

 

Credit Quality Statistics and Components of Credit Loss Allowance and Reserve

 

The total of loans criticized through the Company’s credit risk-rating process was $770 million at December 31, 2008, which represented 8% of total loans and a net increase of $465 million from December 31, 2007. Criticized loans from the Parish acquisition accounted for approximately $55 million of the increase. Table 4 shows the composition of criticized loans at December 31, 2008, distributed by the geographic region from which the loans are serviced.

 

 

The increase in criticized loans during 2008 was largely concentrated in loans for residential development. Loans for residential development, investment and other residential purposes comprised approximately 41% of the criticized loan total at year-end 2008, over half of which were from Whitney’s Florida markets. CRE loans on nonresidential investment or income-producing properties accounted for approximately 30% of the criticized total, with the majority again concentrated in the Florida market. Criticized CRE loans secured by properties used in the borrower’s business operations represented 13% of the criticized total at December 31, 2008, and loans to C&I relationships comprised 15%, with no significant concentrations related to industries or markets. Although management has not identified any systemic portfolio credit issues apart from the real estate problems primarily concentrated in Florida and coastal Alabama, as the recessionary conditions in the overall economy continue, it is monitoring closely the impact on the performance of the tourism and energy industries, given their importance to the economies in Whitney’s market area.

 

Included in the total of criticized loans at December 31, 2008 is $301 million of nonperforming loans, which is up a net $181 million from year-end 2007. Approximately two-thirds of the nonperforming total at December 31, 2008 was for residential-related loans that are heavily concentrated in Whitney’s Florida markets. The Florida markets accounted for 72% of total nonperforming loans at the end of 2008, followed by 18% from Louisiana and 8% from Alabama. Table 5 provides information on nonperforming loans and other nonperforming assets at the end of each of the five years in the period ended December 31, 2008. Nonperforming loans encompass substantially all loans that are evaluated separately for impairment.

 

A comparison of contractual interest income on nonperforming loans with the cash-basis and cost-recovery interest actually recognized on these loans for 2008, 2007 and 2006 is presented in Note 8 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. Whitney’s policy for placing loans on nonaccrual status is presented in Note 2 to the consolidated financial statements.

 

Table 6 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 7, together with the percentage of total loans in each category.

 

The overall allowance for loan losses increased $63 million during 2008, net of the allowance added with Parish. The component of the allowance for criticized loans increased a net $47 million after charge-offs of approximately $61 million during the year. The allowance for loans with average or better credit quality ratings and loans not subject to individual rating increased $6 million for the year, mainly from the impact of recent charge-off experience on historical loss factors. Management also added approximately $10 million to the allowance based on its relative assessment of economic and other qualitative risk factors since the end of 2007.

 

Continuing weaknesses in the residential-related real estate markets, primarily in the Tampa, Florida area, accounted for approximately half of both the $134 million provision and the $82 million in gross charge-offs during 2008, mainly related to loans for residential development. Loans for CRE development or investment with identified weaknesses accounted for approximately $13 million of the provision and $6 million of gross charge-offs, again concentrated in the Tampa, Florida area. Problem C&I credits added approximately $20 million to the provision for 2008 and were responsible for approximately $28 million of gross charge-offs, with no significant regional or industry concentration.

 

It is uncertain when sufficient demand will return to depressed residential real estate markets to establish a solid floor on prices and stimulate renewed development. This, when coupled with the uncertainties arising from the current national recession and weak global economic conditions, makes it difficult for management to predict when the level of criticized loans will stabilize or retreat. In this environment, the periodic estimate of inherent losses in the loan portfolio may be volatile.