Whitney Holding 10-K 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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
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 registrants 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 registrants 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 registrants no par value common stock were outstanding.
Certain specifically identified parts of the registrants 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
Whitney Holding Corporation (the Company or Whitney) is a Louisiana corporation that is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA). The Company began operations in 1962 as the parent of Whitney National Bank (the Bank). The Bank is a national banking association headquartered in New Orleans, Louisiana, that has been in continuous operation in the greater New Orleans area since 1883. The Company has at times operated as a multi-bank holding company when it established or acquired new entities in connection with business acquisitions. To achieve the synergies and efficiencies of operating as a single-bank holding company, the Company has merged all banking operations into the Bank and intends to continue merging the operations of any future acquisitions at the earliest possible date.
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. While todays economic environment currently does not provide traditional acquisition opportunities, the Companys longer-term strategy is to continue to seek opportunities to leverage its current operations through acquisitions that expand existing market share or provide it access to new markets with attractive deposit bases and economic fundamentals.
The Company, through the Bank, engages in community banking activities and serves a market area that covers the five-state Gulf Coast region stretching from Houston, Texas, across southern Louisiana and the coastal region of Mississippi, to central and south Alabama, the western panhandle of Florida, and to the Tampa Bay metropolitan area of Florida. The Bank also maintains a foreign branch on Grand Cayman in the British West Indies.
The Bank provides a broad range of community banking services to commercial, small business and retail customers, offering a variety of transaction and savings deposit products, treasury management services, secured and unsecured loan products, including revolving credit facilities, and letters of credit and similar financial guarantees. The Bank also provides trust and investment management services to retirement plans, and offers investment brokerage services and annuity products. Southern Coastal Insurance Agency, Inc., a subsidiary of the Bank, currently offers personal and business lines of insurance to customers mainly in northwest Florida and the New Orleans metropolitan area.
The Company also owns Whitney Community Development Corporation (WCDC). WCDC was formed to provide financial support to corporations or projects that promote community welfare in areas with mainly low or moderate incomes. WCDCs primary activity has been to provide financing for the development of affordable housing.
All material funds of the Company are invested in the Bank. The Bank has a large number of customer relationships that have been developed over a period of many years. In 2008, the Bank celebrated its 125th anniversary of continuous operations in the greater New Orleans area. The loss of any single customer or a few customers would not have a material adverse effect on the Bank or the Company. The Bank has customers in a number of foreign countries; however, the revenue derived from these foreign customers is not a material portion of its overall revenues.
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 Whitneys 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.
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 managements 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.
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 institutions 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 IIs 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 organizations primary federal regulator to determine that application of the rule would not be appropriate in light of the organizations 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 IIs 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.
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 banks compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the banks 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 parents 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.
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.
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 companys 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.
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.
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 DIFs 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 FDICs 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 institutions 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 Banks 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 Banks 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 Banks board of directors. Loans to executive officers are subject to certain additional restrictions.
Dividends. Whitneys 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 Banks payment of dividends to the Company as well as to the Companys payment of dividends to its shareholders. The Bank would need prior regulatory approval to pay the Company a dividend that exceeded the Banks 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.
Whitneys ability to pay dividends is also limited by its participation in the U.S. Department of Treasurys (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 banks 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 institutions record of fulfilling its obligations under the CRA. The regulatory agencys assessment of the institutions record is made available to the public. The Bank received an outstanding rating following its most recent CRA examination.
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include provisions that:
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 Whitneys 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 Banks 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 participants 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 Companys 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 Treasurys consultation with the recipients 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.
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.
The Companys 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 Whitneys 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 Companys website at www.whitneybank.com. These reports are also available on the SECs website at www.sec.gov. The Companys website is not incorporated into this annual report on Form 10-K and it should not be considered part of this report.
EXECUTIVE OFFICERS OF THE COMPANY
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 Whitneys 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 Whitneys overall risk profile. Additional risks not presently known, or that Whitney currently deems immaterial, may also adversely affect Whitneys business, financial condition or results of operations.
Unusually severe disruptions in the residential real estate market nationwide and in Whitneys market area may cause continued higher provisions for credit losses and increase the uncertainty inherent in managements 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. Whitneys 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 Whitneys loans to customers in these and other parts of Whitneys market area unrelated to residential real estate.
The recession in the broader economy, both nationally and internationally, could have an adverse affect on Whitneys 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 Whitneys 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 1990s, 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 Whitneys 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 Whitneys 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.
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 Whitneys 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 Whitneys 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 Companys earnings.
The composition of Whitneys loan portfolio could increase the volatility of its credit quality metrics and provisions for credit losses.
Whitneys 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 Companys 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 Companys business, financial condition, and results of operations, access to credit or the trading price of the Companys common stock.
Whitneys 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 Companys funding costs and net income.
Whitneys profitability depends in substantial part on net interest income and on its ability to manage interest rate risk.
Whitneys 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 Whitneys ability to maintain and grow net interest income, and a number of these factors are addressed in Managements 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 Companys 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 Whitneys 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 Whitneys 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 Companys current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand the Companys 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 Companys business, financial condition, or results of operations.
As a result of Whitneys 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 Whitneys 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 Whitneys 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 Companys Series A preferred stock issued under the CPP are outstanding, no dividends may be paid on the Companys 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 Treasurys consent. The dividends declared on shares of the Companys Series A preferred stock will reduce the net income available to common shareholders and the Companys earnings per common share. Additionally, warrants to purchase the Companys common stock issued to the Treasury, in conjunction with the issuance of the Series A Preferred Stock, may be dilutive to the Companys earnings per share. The shares of the Companys 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 Whitneys 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 Companys common stock. The restrictions on the Companys 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 Companys 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 Companys 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 Whitneys 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 Companys 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.
Except in connection with the election of directors to the Companys 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 Whitneys amended and restated charter, the vote or consent of holders owning at least 662/3% 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 Companys or its Banks 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.
Whitneys market area is susceptible to hurricanes and tropical storms, which may increase the Companys exposure to credit risk, operational risk and liquidity risk.
Most of Whitneys 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 Whitneys primary base of operations and is home to branches and relationship officers that service approximately 40% of the Banks 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 Banks 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 Companys 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.
The Company does not directly own any real estate, but it does own real estate indirectly through its subsidiaries. The Companys executive offices are located in downtown New Orleans in the main office facility owned by the Bank. The Bank also owns an operations center in the greater New Orleans area. The Bank makes portions of its main office facility and certain other facilities available for lease to third parties, although such incidental leasing activity is not material to Whitneys overall operations. The Bank maintained approximately 170 banking facilities in five states at December 31, 2008. The Bank owns approximately 70% of these facilities, and the remaining banking facilities are subject to leases, each of which management considers to be reasonable and appropriate for its location. Management ensures that all properties, whether owned or leased, are maintained in suitable condition. Management also evaluates its banking facilities on an ongoing basis to identify possible under-utilization and to determine the need for functional improvements, relocations or possible sales.
The Bank and a subsidiary of the Bank hold a variety of property interests acquired through the years in settlement of loans. Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K provides further information regarding such property interests and is incorporated here by reference.
There are no material pending legal proceedings to which the Company or its subsidiaries is a party or to which any of their property is subject, other than ordinary routine litigation incidental to the Companys business.
A special meeting of the shareholders of Whitney Holding Corporation was held on December 17, 2008.
The proposal to amend the Companys charter to authorize the issuance of up to 20 million shares of preferred stock was approved as follows:
The proposal to amend the Companys charter to increase the number of authorized shares of common stock from 100 million to 200 million was approved as follows:
The Companys stock trades on The Nasdaq Global Select Market under the ticker symbol WTNY. The Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K shows the high and low sales prices of the Companys stock for each calendar quarter of 2008 and 2007, as reported on The Nasdaq Global Select Market, and is incorporated here by reference.
The approximate number of shareholders of record of the Company, as of February 27, 2009, was as follows:
Dividends declared by the Company are listed in the Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K, which is incorporated here by reference. For a description of certain restrictions on the payment of dividends see the section entitled Supervision and Regulation that appears in Item 1 of this annual report on Form 10-K, the section entitled Shareholders Equity and Capital Adequacy located in Item 7, and Note 17 to the consolidated financial statements located in Item 8.
The following table provides information with respect to purchases made by or on behalf of the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of the Companys common stock during the three months ended December 31, 2008.
There have been no recent sales of unregistered securities.
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 Companys 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
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
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 Companys 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.
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 Whitneys net interest income assuming certain conditions; (e) expectations about Whitneys 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.
Whitneys 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 Companys 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.
Whitneys 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).
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 Companys 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 Companys business may be affected.
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 Parishs shareholders in cash and the remainder in Whitney stock totaling approximately 3.33 million shares.
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 Whitneys 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.
There was little overall organic deposit growth during 2008. Deposits associated with Parish accounted for approximately $635 million of the Companys 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 Parishs $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.
Whitneys 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 Whitneys 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 Whitneys cost of funds was offset partially by the increased use of short-term borrowings in the funding mix to support earning asset growth.
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 Companys 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 Whitneys Florida markets.
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 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. Whitneys 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.
Whitney prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. A discussion of certain accounting principles and methods of applying those principles that are particularly important to this process is included in Note 2 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. The Company is required to make estimates, judgments and assumptions in applying these principles to determine the amounts and other disclosures that are presented in the financial statements and discussed in this section.
Whitney believes that the determination of its estimate of the allowance for credit losses involves a higher degree of judgment and complexity than its application of other significant accounting policies. Factors considered in this determination and managements 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 Whitneys credit customers or other factors can materially impact the allowance estimate, potentially subjecting the Company to significant earnings volatility.
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 Whitneys stock including an estimated control premium, and observable average price-to-earnings and price-to-book multiples of our competitors. If the units fair value is less than its carrying value, an estimate of the implied fair value of the goodwill is compared to the goodwills 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 Whitneys 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.
Management makes a variety of assumptions in applying principles that govern the accounting for benefits under the Companys 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.
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 Whitneys 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 Whitneys 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 Whitneys 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 Whitneys 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 Whitneys 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 Whitneys 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 Whitneys 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 Whitneys 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.
TABLE 2. GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO AT DECEMBER 31, 2008
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 Whitneys 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 Whitneys Louisiana and Texas markets. The Bank continues to sell most conventional residential mortgage loan production in the secondary market. Whitneys 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.
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 Banks 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 Banks 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 customers 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.
Managements 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 Companys 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 Companys 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.
TABLE 4. CRITICIZED LOANS AT DECEMBER 31, 2008
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 Whitneys 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 borrowers 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 Whitneys 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 Whitneys 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. Whitneys 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.
The investment securities portfolio balance of $1.94 billion at December 31, 2008 was down $46 million, or 2%, compared to December 31, 2007. Securities with carrying values of $1.69 billion at December 31, 2008 were sold under repurchase agreements, pledged to secure public deposits or pledged for other purposes. Average investment securities increased $74 million, or 4%, between 2007 and 2008. The composition of the average portfolio in investment securities and effective yields are shown in Table 14.
Information about the contractual maturity structure of investment securities at December 31, 2008, including the weighed-average yield on such securities, is shown in Table 8. The carrying value of securities with explicit call options totaled $157 million at year-end 2008. These call options and the scheduled principal reductions and projected prepayments on mortgage-backed securities are not reflected in Table 8. Including expected principal reductions on mortgage-backed securities, the weighted-average maturity of the overall securities portfolio was approximately 31 months at December 31, 2008, compared to 32 months at year-end 2007.
The weighted-average taxable-equivalent portfolio yield was approximately 4.84% at December 31, 2008, compared to 4.88% at December 31, 2007. A substantial majority of the securities in the investment portfolio bear fixed interest rates. The investment in mortgage-backed securities with final contractual maturities beyond ten years shown in Table 8 included approximately $176 million of adjustable-rate issues with a weighted-average yield of 4.44%. The initial reset dates on these securities are predominantly within three years of year-end 2008.
During 2008, the mix of investments in the portfolio shifted further toward mortgage-backed securities issued or guaranteed by U.S. government agencies. The duration of the overall investment portfolio was 1.6 years at December 31, 2008, and would extend to 3.6 years assuming an immediate 300 basis point increase in market rates according to the Companys asset/liability management model. Duration provides a measure of the sensitivity of the portfolios fair value to changes in interest rates. At December 31, 2007, the portfolios estimated duration was 2.1 years.
Securities available for sale made up the bulk of the total investment portfolio at December 31, 2008. Available-for-sale securities are carried at fair value, and the balance reported at December 31, 2008 reflected gross unrealized gains of $31.9 million and gross unrealized losses of $1.2 million. The unrealized losses were related mainly to mortgage-backed securities and represented less than 1% of the total amortized cost of the underlying securities. Note 5 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K provides information on the process followed by management to evaluate whether unrealized losses on securities, both those available for sale and those held to maturity, represent impairment that is other than temporary and that should be recognized with a charge to operations. Substantially all the unrealized losses at December 31, 2008 resulted from changes in market interest rates from the yields available on the underlying securities when they were purchased and other factors unrelated to credit quality. There were no securities in the investment portfolio tied to sub-prime home mortgage loans. In addition, management has the intent and ability to hold these securities until the market-based impairment is recovered; therefore, no value impairment was evaluated as other than temporary.
The Company does not normally maintain a trading portfolio, other than holding trading account securities for short periods while buying and selling securities for customers. Such securities, if any, are included in other assets in the consolidated balance sheets.
Apart from securities issued or guaranteed by the U.S. government or its agencies, at December 31, 2008, Whitney held no investment in the securities of a single issuer that exceeded 10% of its shareholders equity.
DEPOSITS AND BORROWINGS
There was little overall organic deposit growth during 2008. Deposits associated with Parish accounted for approximately $635 million of the Companys 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.
Table 9 shows the composition of deposits at December 31, 2008 and at the end of the two previous years. Table 14 presents the composition of average deposits and borrowings and the effective rates on interest-bearing funding sources for each of these years.
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. Demand deposits and savings deposits at the end of 2006 reflected the lingering impact of the substantial influx of deposit funds in the aftermath of 2005s catastrophic hurricane season. As anticipated, these deposits continued to be worked down during 2007, with some migration to higher-yielding products.
Higher-cost time deposits at December 31, 2008 were down approximately 8%, or $213 million, compared to year-end 2007, again before considering Parishs $161 million of time deposits. Customers held $397 million of funds in treasury-management time deposit products at December 31, 2008, down $308 million from the total held at December 31, 2007. These products are used mainly by commercial customers with excess liquidity pending redeployment for corporate or investment purposes, and, while they provide a recurring source of funds, the amounts available over time can be volatile. Strong liquidity among Whitneys commercial customers, particularly those in the O&G industry and in heavy construction, had been reflected in the 2007 balance. Competitively bid public funds time deposits, which require collateralization, totaled $260 million at year-end 2008, which was $55 million higher than the end of 2007. Treasury-management deposits and public funds deposits serve partly as an alternative to Whitneys short-term borrowings.
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. The main source of short-term borrowings continued to be the sale of
securities under repurchase agreements to customers using Whitneys treasury management sweep product. Total borrowings from customers under repurchase agreements totaled $780 million at December 31, 2008 and $772 million at December 31, 2007. At the end of 2008, the Bank had purchased $480 million of federal funds compared to $98 million at the end of 2007. During 2008, the Bank also borrowed an average of $286 million under short-term Federal Home Loan Bank (FHLB) advances. Such borrowings had been minimal in prior years. Additional information on short-term borrowings, including yields and maximum amounts borrowed, is presented in Note 12 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K.
In late March 2007, the Bank issued $150 million in ten-year subordinated notes as described in Note 13 to the consolidated financial statements located in Item 8. Whitney has no other significant long-term borrowings.
SHAREHOLDERS EQUITY AND CAPITAL ADEQUACY
Shareholders equity totaled $1.53 billion at December 31, 2008, which represented an increase of $297 million from the end of 2007. On December 19, 2008, Whitney issued to the Treasury cumulative perpetual preferred stock and a warrant to purchase shares of the Companys common stock for aggregate proceeds of $300 million. The terms of the preferred stock and warrant and certain other aspects of this transaction are described in Note 17 to the consolidated financial statements located in Item 8. The 3.33 million shares issued in the acquisition of Parish in November 2008 were valued at $61 million. During 2008, Whitney repurchased 2.04 million of its common shares at a cost of $50 million. This completed the program announced in November 2007 under which the Company repurchased a total of 3.93 million shares. Whitney recognized $9 million in additional equity during 2008 from activity in share-based compensation plans for employees and directors, but this was largely offset by a $7 million other comprehensive loss.
The total common stock dividends declared during 2008 exceeded earnings available to common shareholders by $16 million and represented a payout ratio of 127%. Paying dividends in excess of earnings cannot be sustained over the long term. The quarterly dividend rate was reduced in the fourth quarter of 2008 from $.31 to $.20 in order to protect the Companys capital position. The dividend rate will be reassessed quarterly in light of credit quality trends and expected earnings. The dividend payout ratio was 52% in 2007 and 49% in 2006.
Whitneys ability to pay dividends is also limited by its participation in the Treasurys CPP. Prior to December 19, 2011, unless Whitney has redeemed the preferred stock issued to the Treasury in the CPP or the Treasury has transferred the 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 preferred stock, it cannot pay dividends on its common stock.
The ratios in Table 11 indicate that Whitney remained well capitalized at December 31, 2008. The capital raised through Treasurys investment in the preferred stock and common stock warrants qualifies as Tier 1 capital. Tier 2 regulatory capital at December 31, 2008 and 2007 includes $150 million in subordinated debt issued by the Bank in the first quarter of 2007. The increase in risk-weighted assets from the end of 2007 mainly reflected the impact of the Parish acquisition and organic loan growth. 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.
Both the Company and the Bank satisfied the capital criteria to be categorized as well-capitalized at December 31, 2008. The Bank has been categorized as well-capitalized in the most recent notice received from its primary regulatory agency.
In February 2009, amendments were made to the EESA that changed some of the terms and conditions associated with the CPP, including that TARP recipients may be allowed to redeem the preferred stock without regard to whether the company has replaced such funds from any other source. The Company will monitor the development of regulations regarding these amendments and any other changes in the TARP program that may alter its previous conclusions regarding the benefits of participating in TARP.
LIQUIDITY MANAGEMENT AND CONTRACTUAL OBLIGATIONS
The objective of liquidity management is to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while at the same time meeting the operating, capital and strategic cash flow needs of the Company and the Bank. Whitney develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process, making full use of quantitative modeling tools available to project cash flows under a variety of possible scenarios, including credit-stressed conditions.
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 Companys ability to generate cash flows from scheduled payments, contractual maturities, and prepayments, through use as collateral for borrowings, and through possible sale or securitization. Table 3 above presents the contractual maturity structure of the loan portfolio and Table 8 presents contractual investment maturities. At December 31, 2008, securities available for sale with a carrying value of $1.48 billion, out of a total portfolio of $1.73 billion, were sold under repurchase agreements, pledged to secure public deposits or pledged for other purposes.
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 entitled Deposits and Borrowings discusses changes in these liability-funding sources in 2008.
In October 2008, the FDIC temporarily increased deposit insurance coverage limits for all deposit accounts from $100,000 to $250,000 per depositor through December 31, 2009 and offered to provide unlimited deposit insurance coverage for noninterest-bearing transaction accounts and certain other specified deposits over the same period. Whitney elected to participate in the unlimited coverage program. These steps were taken as part of the federal governments response to the recent severe disruption in the credit markets
and were designed to support deposit retention and enhance the liquidity of the nations insured depository institutions and thereby assist in stabilizing the overall economy; however, there is no assurance these steps will be successful.
Wholesale funding currently used by the Bank includes FHLB advances and federal funds purchased from upstream correspondents. The unused borrowing capacity from the FHLB at December 31, 2008 totaled approximately $1.8 billion and is secured by a blanket lien on loans secured by real estate. The Bank may also borrow from the Federal Reserve Discount Window and had a borrowing capacity at December 31, 2008 of approximately $117 million, based on collateral pledged. In addition, both the Company and the Bank have access to external funding sources in the financial markets, and the Bank has developed the ability to gather deposits at a nationwide level, although it has not used this ability to date.
The Company elected to participate in the Treasurys TLG Program that provides an FDIC guarantee for all senior unsecured debt with stated maturities in excess of 30 days which is issued between October 14, 2008 and June 30, 2009. The guarantees will expire no later than June 30, 2012. Whitney is eligible to issue up to approximately $200 million of guaranteed debt under the program, but none had been issued as of December 31, 2008.
Cash generated from operations is another important source of funds to meet liquidity needs. The consolidated statements of cash flows located in Item 8 of this annual report on Form 10-K present operating cash flows and summarize all significant sources and uses of funds for each year in the three-year period ended December 31, 2008.
Dividends received from the Bank represent the primary source of funds available to the Company for the declaration and payment of dividends to Whitneys shareholders, both common and preferred. There are various regulatory and statutory provisions that limit the amount of dividends that the Bank can distribute to the Company. During 2009, the Bank will have available an amount equal to approximately $11.4 million plus its current net income to declare as dividends to the Company without prior regulatory approval. At December 31, 2008, the Company had approximately $45.3 million in cash and demand notes from the Bank available to provide liquidity for future dividend payments to its common and preferred shareholders and for other corporate purposes.
Table 12 summarizes payments due from the Company and the Bank under specified long-term and certain other contractual obligations as of December 31, 2008. Obligations under deposit contracts and short-term borrowings are not included. The maturities of time deposits are scheduled in Table 10 above in the section entitled Deposits and Borrowings. Purchase obligations represent legal and binding contracts to purchase services or goods that cannot be settled or terminated without paying substantially all of the contractual amounts. Not included are a number of contracts entered into to support ongoing operations that either do not specify fixed or minimum amounts of goods or services or are cancelable on short notice without cause and without significant penalty. The consolidated statements of cash flows provide a picture of Whitneys ability to fund these and other more significant cash operating expenses, such as interest expense and compensation and benefits, out of current operating cash flows.
As a normal part of its business, the Company enters into arrangements that create financial obligations that are not recognized, wholly or in part, in the consolidated financial statements. Certain of these arrangements, such as noncancelable operating leases, are reflected in Table 12 above. The most significant off-balance sheet obligations are the Banks commitments under traditional credit-related financial instruments. Table 13 schedules these commitments as of December 31, 2008 by the periods in which they expire. Commitments under credit card and personal credit lines generally have no stated maturity.
Revolving loan commitments are issued primarily to support commercial activities. The availability of funds under revolving loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. A number of such commitments are used only partially or, in some cases, not at all before they expire. Credit card and personal credit lines are generally subject to cancellation if the borrowers 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, including the prospect of
temporarily increased levels of draws on back-up commercial facilities during this period of disruption in the credit markets, are incorporated into the Companys liquidity and asset/liability management models.
Substantially all of the letters of credit are standby agreements that obligate the Bank to fulfill a customers 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. Historically, the Bank has had minimal calls to perform under standby agreements. Certain public financing arrangements supported by letters of credit from the Bank are structured as variable-rate demand notes that are periodically remarketed to reset the interest rate. The recent disruption in credit markets has led to unsuccessful remarketing efforts for some of these public financings. To assist its customers, the Bank has purchased the underlying instruments until credit market conditions improve sufficiently to restart remarketing efforts or the instruments are refinanced under new arrangements. Such purchases totaled approximately $33 million as of December 31, 2008, and outstanding letters of credit supporting variable-rate demand notes totaled approximately $98 million.
The objective of the Companys asset/liability management is to implement strategies for the funding and deployment of its financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk.
Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company has developed a model to measure its interest rate sensitivity over the near term primarily by running net interest income simulations. Management also monitors longer-term interest rate risk by modeling the sensitivity of its economic value of equity. The model can be used to test the Companys sensitivity in various economic environments. The model incorporates managements assumptions and expectations regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates. Assumptions can also be entered into the model to evaluate the impact of possible strategic responses to changes in the competitive environment. Management, through the Companys Investment and Asset and Liability Committee, monitors simulation results against rate sensitivity guidelines specified in Whitneys asset/liability management policy.
The net interest income simulations run at the end of 2008 indicated that Whitney was moderately asset sensitive over the near term, which is similar to its position at year-end 2007. Based on these simulations, annual net interest income (TE) would be expected to increase $26.3 million, or 5.9%, if interest rates instantaneously increased from current rates by 100 basis points. The simulation assuming a 100 basis point decrease from current rates was suspended at year-end 2008 in light of the current rate environment. 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 2007 produced results that ranged from a positive impact on net interest income (TE) of $24.3 million, or 5.2%, to a negative impact of $26.5 million, or 5.6%.
The actual impact that changes in interest rates have on net interest income will depend on many factors. These factors include Whitneys ability to achieve expected growth in earning assets and to maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing when assets and liabilities reprice, the magnitude of interest rate changes and corresponding movement in interest rate spreads, and the level of success of asset/liability management strategies that are implemented.
Changes in interest rates affect the fair values of financial instruments. The earlier section entitled Investment Securities and Notes 5 and 19 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K contain information regarding fair values.
The Company has made minimal use of investments in financial instruments or participations in agreements with values that are linked to or derived from changes in the value of some underlying asset or index. These are commonly referred to as derivatives and include such instruments as interest rate swaps,
futures, forward contracts, option contracts, and other financial arrangements with similar characteristics. Management continues to evaluate whether to make additional use of derivatives as part of its ongoing asset/liability and liquidity management processes.
RESULTS OF OPERATIONS
Whitneys net interest income (TE) decreased $10.2 million, or 2%, in 2008 compared to 2007. Average earning assets were 5%, or $486 million, higher in 2008, while the net interest margin (TE) contracted 34 basis points to 4.55%. The net interest margin is net interest income (TE) as a percent of average earning assets. Tables 14 and 15 provide details on the components of the Companys net interest income (TE) and net interest margin (TE).
The overall yield on earning assets decreased 118 basis points to 5.74% in 2008, mainly reflecting the steep reduction in benchmark rates for the large variable-rate segment of Whitneys loan portfolio. The higher level of nonaccruing loans in 2008 lowered the effective yield by approximately 10 basis points. Loan yields (TE) for 2008 declined 157 basis points compared to 2007. The rates on approximately 28%, or $2.6 billion, of the loan portfolio at year-end 2008 were tied to changes in LIBOR benchmarks, with another 28% tied to prime. At December 31, 2008, approximately 31% of these variable-rate loan agreements contained floor rates that would prevent further rate reductions. The recent disruption in credit markets has been reflected in wider than normal spreads for LIBOR rates, which benefited Whitneys net interest income and margin. Management estimates that the wider than normal LIBOR spreads added 30 basis points to the fourth quarters net interest margin and 10 basis points to 2008s annual margin. This benefit is being reduced as the LIBOR spreads return to levels closer to normal historical relationships in the early part of 2009. There was a favorable shift in the earning asset mix between these periods, with loans comprising 80% of average earning assets for 2008 compared to 76% in 2007. In Table 14, loans include loans held for sale. The yield (TE) on the largely fixed-rate investment portfolio was stable between 2007 and 2008.
The cost of funds decreased 84 basis points from 2007 to 1.19% in 2008. Noninterest-bearing demand deposits funded a favorable 28% of average earning assets in both 2008 and 2007, although the benefit to the net interest margin was somewhat muted by the lower rate environment in the current period. Rates on interest-bearing deposits and short-term borrowings during 2008 were down sharply from 2007, consistent with general market rate movements that were driven by the slowing economy and the trend toward liquidity and safety by investors and savers. The reduction in funding costs from declining rates was partially offset by the impact of a shift between these years toward higher-cost sources, which includes time deposits and borrowings. This shift mainly reflected the increased use of short-term borrowings to support earning asset growth.
Overall, Whitney continues to be moderately asset sensitive over the near term. In the current economic climate and low rate environment, Whitney continues to aggressively manage its loan and deposit rates to maintain a favorable net interest margin, although the ability to further reduce certain deposit and borrowing costs is becoming limited.
Net interest income (TE) decreased $6.6 million, or 1%, in 2007 compared to 2006. Average earning assets were up 3%, or $287 million, in 2007, while the net interest margin (TE) contracted 22 basis points to 4.89%. The overall yield on earning assets increased 26 basis points to 6.92% in 2007, mainly reflecting an increasing percentage of loans in the asset mix. Loan yields (TE) for 2007 were up 14 basis points compared to 2006. The benchmark rates underlying the variable-rate segment of Whitneys loan portfolio were relatively stable on average compared to 2006, with declines noted only toward the end of 2007. The yield (TE) on the investment portfolio improved 22 basis points between 2006 and 2007.
The overall cost of funds for 2007 increased 48 basis points from 2006, mainly in response to the shift in the funding mix toward higher-cost sources coupled with pressure from competitive market rates. Average noninterest-bearing deposits funded approximately 28% of average earning assets in 2007, but this was down from 32% in 2006 when the impact of the excess liquidity in the deposit base following the 2005 hurricanes was still clearly evident. Higher-cost interest-bearing sources funded 34% of average earning assets in 2007, compared to 29% in 2006, with the increase reflecting the relative attractiveness of rates on the underlying deposit products in response to market rates, increased use of the Companys treasury-management deposit products by commercial customers with excess liquidity, and the issuance of $150 million in long-term subordinated Bank debt in late March 2007.
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 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 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. 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 provision for 2008 also included approximately $6 million associated with changes in the mix of noncriticized loans and historical loss factors.
For a more detailed discussion of changes in the allowance for loan losses, the reserve for unfunded credit commitments, nonperforming assets and general credit quality, see the earlier section entitled Loans, Credit Risk Management and Allowance and Reserve for Credit Losses. The future level of the allowance and reserve and the provisions for credit losses will reflect managements ongoing evaluation of credit risk, based on established internal policies and practices.
Table 16 shows the components of noninterest income for each year in the three-year period ended December 31, 2008, along with the percent changes between years for each component. In 2008, Whitney recognized a $2.3 million gain from the mandatory redemption of a portion of its Visa shares in connection with Visas restructuring and initial public offering. The 2007 noninterest income total included a $31.3 million gain recognized on the settlement of insurance claims arising from hurricanes that struck portions of Whitneys market area in 2005. Excluding these unusual gains and income associated with foreclosed assets and surplus property, noninterest income grew 11%, or $10.1 million, in 2008 and 9%, or $7.6 million, in 2007.
Income from service charges on deposit accounts increased 11%, or $3.4 million, in 2008, following a 9%, or $2.6 million, increase between 2007 and 2006. Service charges include periodic account maintenance fees for both commercial and personal customers, charges for specific transactions or services, such as processing return items or wire transfers, and other revenue associated with deposit accounts, such as commissions on check sales.
Account maintenance fees for commercial customers were up 67%, or $4.0 million, in 2008, mainly driven by a reduction in the earnings credit allowance in response to the sharp drop in benchmark interest rates. Commercial account fees increased 9%, or $.5 million, in 2007. The fees charged on a large number of Whitneys commercial accounts are based on an analysis of account activity, and these customers are allowed to offset accumulated charges with an earnings credit based on balances maintained in the account. Trends in processing business transactions have led to reduced volumes of chargeable account activity in recent years.
Personal account service charges have been relatively stable, with aggressive competition holding down the pricing for fees charged to service these deposit accounts.
Charges earned on specific transactions and services in 2008 were down 3%, or $.6 million, compared to 2007. Broad trends in how customers execute transactions have been reducing charging opportunities in recent years. Charges had increased 12%, or $2.1 million, in 2007 compared to 2006. The main component of this income category is fees earned on items returned for insufficient funds and for overdrafts. The higher deposit account balances maintained after the 2005 storms by customers in the areas most impacted had reduced
charging opportunities through much of the first half of 2006. The increase in income in 2007 reflected a return to more normal levels of fees charged as well as some improved pricing.
Bank card fees increased 7%, or $1.1 million, in 2008 and 10%, or $1.5 million, in 2007. This income category includes fees from activity on Bank-issued debit and credit cards as well as from merchant processing services. Transaction volume on Bank-issued cards was up approximately 5% in 2008 and 4% in 2007. The introduction of a rewards program for credit card customers has contributed to an increasing proportion of higher fee credit transactions in the overall transaction volume.
Trust service fees in 2008 were essentially unchanged from 2007 under difficult financial market conditions. In 2007, customer development efforts and improved market conditions for much of that year had helped grow trust service fees by 15%, or $1.7 million, compared to 2006. Whitney has positioned relationship officers to attract and service trust and wealth management customers across its market area.
Fee income generated by Whitneys secondary mortgage market operations was stable between 2008 and 2007 after decreasing 6% in 2007. Relatively broad weakness in the overall housing market was apparent in the latter part of 2007 and has continued throughout 2008 and into 2009. Whitney has positioned resources in those parts of its market area with the best potential for loan production and the current low market rate environment should stimulate refinancing activity, but the difficult housing market and overall economic conditions may restrain any fee income growth from mortgage operations in 2009.
Investment services income increased 3%, or $.2 million, in 2008, following a 17%, or $.8 million, increase in 2007 compared to 2006. Investment services include stock brokerage and annuity sales as well as fixed-income securities transactions for correspondent banks and other commercial and personal customers. The 2008 results were impacted by the difficult financial market conditions.
Whitney implemented a bank-owned life insurance program in May 2008 and earned $3.9 million during 2008 on the $150 million used to purchase policies under this program.
The Visa share redemption gain and the insurance settlement gain mentioned above are included in the totals for other operating income for 2008 and 2007, respectively.
The net gain on sales and other revenue from foreclosed assets includes income from grandfathered assets carried at a nominal value. Such income totaled $3.8 million in 2008, $4.3 million in 2007 and $1.9 million in 2006, with the fluctuations mainly reflecting opportunities for asset sales.
Table 17 shows the components of noninterest expense for each year in the three-year period ended December 31, 2008, along with the percent changes between years for each component. Noninterest expense increased 1%, or $2.0 million, in 2008, following an increase of 3%, or $10.6 million, from 2006 to 2007. Incremental operating costs associated with acquired operations, including the amortization of acquired intangibles, totaled approximately $7.9 million in 2008 and $8.5 million in 2007.
Employee compensation decreased 6%, or $9.2 million, in 2008, after being up 10%, or $14.7 million, in 2007. Employee compensation includes base pay and contract labor costs, compensation earned under sales-based and other employee incentive programs, and compensation expense under management incentive plans.
Compensation other than that earned under management incentive plans increased 3%, or $4.0 million, in 2008, with approximately $2.1 million of the total increase related to the staff of acquired operations. This followed an increase of 10%, or $12.0 million, from 2006 to 2007, when acquired operations contributed approximately $3.1 million to the total change. The compensation added for normal salary adjustments in 2008 was partly offset by the favorable impact of a 2% reduction in the average full-time equivalent staff level compared to 2007, excluding the acquired staff. Sales-based incentive-program compensation increased only slightly in 2008, consistent with the level of growth in fee-based income categories discussed earlier, after rising $1.7 million in 2007. Compensation expense in both 2007 and 2006 had been adversely affected by salary scale adjustments needed to address changes in the cost of living and increased competition for limited labor resources in areas impacted by the catastrophic hurricanes in 2005.
Compensation expense associated with management incentive programs decreased by $13.3 million in 2008, largely as a result of tightened performance criteria coupled with the current difficult operating environment. No bonus was earned under the cash bonus incentive program for 2008 and the related compensation expense was down $7.2 million. Share-based compensation under management incentive programs decreased $6.1 million from 2007. Management incentive program expense increased $2.7 million in 2007 compared to 2006, with $1.8 million related to share-based compensation and the remainder to the cash bonus incentive program. Share-based incentives currently include restricted stock units, both performance-
based and tenure-based, and stock options. See Notes 2 and 16 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K for more information on share-based compensation.
Employee benefits expense decreased 3%, or $.9 million, in 2008, and was down 4%, or $1.3 million, in 2007. The major components of employee benefits expense, in addition to payroll taxes, are the cost of providing health benefits for active and retired employees and the cost of providing pension benefits through both the defined-benefit plans and a 401(k) employee savings plan. In early 2007, the Company amended its postretirement health and life insurance benefit plans to eliminate the benefits for most employees and freeze benefit levels for remaining participants. The related postretirement benefit expense decreased $2.2 million in 2007 and an additional $.4 million in 2008.
As described more fully in Note 15 to the consolidated financial statements, Whitney amended its qualified defined-benefit pension plan in late 2008 to limit future eligibility and to freeze benefit accruals for certain current participants. At the same time, the employee savings plan was amended to authorize the Company to make discretionary profit sharing contributions, beginning in 2009, on behalf of participants in the savings plan who are ineligible to participate in the qualified defined-benefit plan or subject to the freeze in benefit accruals. The discretionary profit sharing contributions are expected to add approximately $1.9 million to 2009 expense.
The performance of the pension trust fund for 2008 was substantially below the long-term expected rate of return, reflecting conditions in the equity and corporate debt markets. This level of fund performance will lead to an estimated increase of approximately $5 million in the actuarially determined periodic expense for the defined-benefit pension plan in 2009, holding other variables constant.
Net occupancy expense increased 7%, or $2.3 million, in 2008, following a 13%, or $3.7 million, increase in 2007 compared to 2006. The incremental impact of acquired operations totaled approximately $.6 million in 2008 and $1.3 million in 2007. Increased expenses related to de novo branch expansion and higher energy costs drove most of the remaining increase for 2008. A sharp increase in the cost of casualty insurance following the 2005 storms had added $.9 million of expense to 2007, but these higher costs began to moderate in 2008. Recurring costs associated with improving Whitneys disaster-risk posture also added approximately $.9 million to 2007.
Equipment and data processing expense increased 9%, or $2.1 million, in 2008, driven in large part by the cost of new customer-oriented applications associated with strategic initiatives and by branch expansion. The incremental costs for acquired operations totaled $.4 million in 2008. Equipment and data processing expense in 2007 was also up 9% over 2006. Approximately $1 million of the $1.8 million total increase came from initiatives to improve operational resiliency in the event of a natural disaster. Acquired operations contributed $.3 million to the 2007 increase.
The total expense for professional services, both legal and other services, increased $3.0 million in 2008, following a decrease of $1.0 million in 2007. Legal expense increased $1.7 million in 2008 on higher costs associated with problem loan collection efforts. This category also includes the cost of services for general corporate matters. Given the current economic environment and the elevated level of criticized loans at the end of 2008, increased demand for loan collection legal services is expected to continue throughout 2009. The expense for nonlegal professional services was up $1.3 million in 2008, after decreasing $1.1 million in 2007 compared to 2006. Consultants have been engaged over these years to assist in strategic planning and in upgrading major customer interface tools and core application systems and developing and implementing product enhancements and process improvements. Each year also included approximately $1.0 million for assistance integrating the systems of acquired operations. Included in 2006 was $2.0 million for work on initiatives to improve the Companys disaster-risk profile in response to the 2005 storms.
The $1.3 million reduction in telecommunications and postage expense in 2008 mainly reflected the elimination of some redundant communication services used during an upgrade project in 2007. This was part of the overall efforts to improve operational resiliency in the event of a natural disaster.
Amortization of intangibles is associated mainly with the value of deposit relationships acquired in bank and branch acquisitions. Amortization expense of $8.8 million is scheduled for 2009. Note 3 to the
consolidated financial statements located in Item 8 of this annual report on Form 10-K reviews recently completed acquisitions and Note 10 presents additional information on intangible assets subject to amortization.
The expense for security and other outsourced services was stable in 2008. This followed a 7%, or $1.0 million, increase in 2007 compared to 2006. Acquired operations had little impact on 2008, but added $.5 million to 2007 expense.
Management directed additional resources to advertising and promotional activities in 2006 to support major campaigns to introduce new and improved products. Whitney focused on more targeted marketing efforts in both 2008 and 2007, with no comparable major campaigns executed in either year.
Bank card processing services expense will vary mainly with changes in transaction volume on Bank-issued credit cards. Transaction volumes and bank card fee income are discussed in the earlier section entitled Noninterest Income.
Beginning in 2007, the FDIC adopted a new rate structure for deposit insurance premiums that imposed a minimum annual assessment on those institutions assigned to the lowest risk category under the FDICs risk-based assessment system. Under the previous rate structure, this group of institutions, which includes the Bank, had been charged no assessment for a number of years. The assessment imposed on the Bank for 2007 was fully offset by a one-time assessment credit. The $1.6 million credit remaining at December 31, 2007 was used to offset a portion of the Banks $4.4 million assessment for 2008. Recent bank failures and economic conditions have put pressure on deposit insurance reserve ratios and have led the FDIC to introduce a new, higher rate structure beginning in 2009. Although the specific assessments will vary based on a number of institution-specific factors, the new rate structure is expected to more than double the actual assessment from the 2008 level, assuming no change in deposit volumes. Whitney has also elected to participate in the part of the FDICs Temporary Liquidity Guarantee Program that provides for full deposit insurance coverage for specified deposit categories. The separate assessment for this expanded coverage, which began October 14, 2008 and ends December 31, 2009, will cost an estimated $1.2 million annually based on year-end 2008 deposit levels.
Miscellaneous operating losses included uninsured casualty losses and certain expenses associated with tropical storms that struck parts of the Companys market area totaling approximately $2.1 million in 2008, $1.0 million in 2007 and $6.0 million in 2006. Whitney also took a $1.9 million charge in 2008 related to the planned closure of certain branch facilities in early 2009. In 2007, the Company recorded a charge of $1.0 million to establish a liability with respect to an indemnification agreement with Visa. As discussed in Note 20 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K, this liability was reversed in 2008.
The other operating expense category increased 23%, or $4.8 million, on a combined basis in 2008, following a decrease of 19%, or $4.7 million, in 2007 compared to 2006. The cost of problem loan collections and foreclosed asset management was up approximately $3.3 million in 2008 and is expected to remain at an elevated level throughout 2009. Expenses associated with investments in projects that generate tax credits increased $1.5 million in 2008 on expanded activities. In 2006, the other operating expense category included $2.2 million for disaster contingency housing and certain other storm-related items that were substantially eliminated for 2007 and 2008.
The Company provided for income tax expense at an effective rate of 24.6% in 2008, 33.0% in 2007 and 32.3% in 2006. Because of the reduced level of pre-tax income, tax-exempt income and tax credits had a more pronounced impact on the effective rate for 2008. Interest income from the financing of state and local governments has been the main component of Whitneys tax-exempt income, although tax-exempt earnings from the bank-owned life insurance program also became a significant factor in 2008. The main source of tax credits has been investments in affordable housing projects and in projects that primarily benefit low-income communities or help the recovery and redevelopment of communities in the Gulf Opportunity Zone. Table 18 reconciles reported income tax expense to that computed at the statutory federal tax rate for each year in the three-year period ended December 31, 2008.
Louisiana-sourced income of commercial banks is not subject to state income taxes. Rather, banks in Louisiana pay a tax based on the value of their capital stock in lieu of income and franchise taxes, and this tax is allocated to parishes in which the banks maintain branches. Whitneys corporate value tax is included in noninterest expense. This expense will fluctuate in part based on the growth in the Banks equity and earnings and in part based on market valuation trends for the banking industry.
Whitneys net income available to common shareholders totaled $8.2 million in the quarter ended December 31, 2008, compared with $7.0 million for the third quarter of 2008 and $30.2 million for 2007s fourth quarter. Earnings were $.12 per diluted common share for the fourth quarter of 2008, $.11 for the current years third quarter and $.45 for the fourth quarter of 2007.
The following discussion highlights factors impacting recent trends in Whitneys operating results:
The Summary of Quarterly Financial Information appearing in Item 8 of this annual report on Form 10-K provides selected comparative financial information for each of the four quarters in 2008 and 2007.
The information required for this item is included in the section entitled Asset/Liability Management in Managements Discussion and Analysis of Financial Condition and Results of Operations that appears in Item 7 of this annual report on Form 10-K and is incorporated here by reference.
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (Unaudited)