Whitney Holding 10-K 2010
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, 2009
Commission file number 0-1026
WHITNEY HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. o
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.
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, 2009, the aggregate market value of the registrants common stock (all shares are voting shares) held by nonaffiliates was approximately $856 million (based on the closing price of the stock on June 30, 2009).
At February 26, 2010, 96,452,136 shares of the registrants no par value common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
WHITNEY HOLDING CORPORATION
TABLE OF CONTENTS
ORGANIZATION AND RECENT DEVELOPMENTS
Whitney Holding Corporation (the Company or Whitney) is a Louisiana corporation registered 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 engaged in the general banking business in the greater New Orleans area continuously 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.
NATURE OF BUSINESS AND MARKETS
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 metropolitan area of Tampa Bay, 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, investment brokerage services, secured and unsecured loan products, including revolving credit facilities, and letters of credit and similar financial guarantees. The Bank also provides trust and investment management services to retirement plans, corporations and individuals. Through its subsidiaries, the Bank also offers personal and business lines of insurance and annuity products to its customers.
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 been changing recently 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 financial crises that have affected 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 generally is not intended for the protection of the Companys shareholders. The following summarizes certain of the more important statutory and regulatory provisions. As of the date of this document, substantial changes to the regulatory framework applicable to Whitney and its subsidiaries are being considered by Congress and by U.S. bank regulatory agencies. For a discussion of such proposed changes, please see Recent Regulatory Developments below. Changes in applicable law or regulation, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of Whitney and its subsidiaries.
Recent Regulatory Developments
U.S. Treasury Capital Purchase Program. Pursuant to the U.S. Department of the Treasurys (the U.S. Treasury) Capital Purchase Program (the CPP), on December 19, 2008, Whitney issued and sold 300,000 shares of Whitneys Fixed Rate Cumulative Perpetual Preferred Stock Series A (Series A Preferred Stock) and a warrant to purchase up to 2,631,579 shares of our common stock to the U.S. Treasury as part of the CPP (the Warrant). This senior preferred stock bears quarterly dividends at an annual rate of five percent for the first five years and nine percent thereafter. The Company may redeem the preferred stock from the Treasury at any time without penalty, subject to the Treasurys consultation with the Companys primary regulatory agency. So long as the senior preferred stock is outstanding, certain restrictions are placed on Whitneys 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, Whitney 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.
Comprehensive Financial Stability Plan of 2009. On February 10, 2009, Treasury Secretary Timothy Geithner announced a new comprehensive financial stability plan (the Financial Stability Plan), which earmarked the second $350 billion of unused funds originally authorized under the Emergency Economic Stabilization Act of 2008.
The major elements of the Financial Stability Plan included: (i) a capital assistance program that has invested in convertible preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a public-private investment fund intended to leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy toxic assets from financial institutions, and (iv) assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.
Regulatory Reform. In June of 2009, the current administration proposed a wide range of regulatory reforms that, if enacted, may have significant effects on the financial services industry in the United States. Significant aspects of the current administrations proposals included, among other things, proposals (i) that any financial firm whose combination of size, leverage and interconnectedness could pose a threat to financial stability (known as Tier 1 FHCs) be subject to certain enhanced regulatory requirements, as discussed below, (ii) that federal bank regulators require loan originators or sponsors to retain part of the credit risk of securitized exposures, (iii) that there be increased regulation of broker-dealers and investment advisers, (iv) that a federal consumer financial protection agency be created that would have broad authority to regulate providers of credit, savings, payment and other consumer financial products and services, (v) that there be comprehensive regulation of OTC derivatives, (vi) that the controls on the ability of banking institutions to engage in transactions with affiliates be tightened, and (vii) that financial holding companies be required to be well-capitalized and well managed on a consolidated basis.
The U.S. Congress, state lawmaking bodies and federal and state regulatory agencies continue to consider a number of wide-ranging and comprehensive proposals for altering the structure, regulation and competitive relationships of the nations financial institutions, including rules and regulations related to the broad range of reform proposals set forth by the current administration described above. The House of Representatives passed a bill in December 2009 that covered many elements of the administration proposal discussed above. The Senate Banking Committee currently is considering counterpart legislation to bring to the Senate floor. In addition, both the U.S. Treasury Department and the Basel Committee on Banking Supervision (the Basel Committee) have issued policy statements regarding proposed significant changes to the regulatory capital framework applicable to banking organizations. For a discussion of such proposals, please see Capital below.
It cannot be predicted whether or in what form further legislation and/or regulations may be adopted or the extent to which Whitneys business may be affected thereby.
Tier 1 FHC Status. As noted above, the current administration has proposed that so-called Tier 1 FHCs be subject to certain enhanced regulatory requirements. The House bill contains a similar concept. If Whitney were deemed to be a Tier 1 FHC, it would be subject to such requirements. Among other things, Tier 1 FHCs would be subject to stricter and more conservative capital, liquidity and risk management standards, a new prompt corrective action regime (similar to that which already exists for insured depository institutions), enhanced public disclosures, and a requirement that they have in place a credible plan for the rapid resolution of the firm in the event of severe financial distress. There would also be a focus on the sufficiency of high-quality capital in stressed economic scenarios. Moreover, Tier 1 FHC subsidiaries (whether regulated or unregulated) would be subject to consolidated supervision by the Federal Reserve, although functionally regulated subsidiaries (such as banks and broker-dealers) would continue to be supervised by their primary federal regulators.
Incentive Compensation. On October 22, 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies (the Incentive Compensation Proposal) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organizations incentive compensation arrangements should (i) provide incentives
that do not encourage risk-taking beyond the organizations ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organizations board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organizations supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Proposal provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organizations safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. In addition, on January 12, 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such banks would otherwise be charged.
The scope and content of the U.S. banking regulators policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of Whitney and its subsidiaries to hire, retain and motivate their key employees.
Financial Crisis Responsibility Fees. On January 14, 2010, the current administration announced a proposal to impose a fee (the Financial Crisis Responsibility Fee) on those financial institutions that benefited from recent actions taken by the U.S. government to stabilize the financial system. If implemented as initially proposed, the Financial Crisis Responsibility Fee will be applied to firms with over $50 billion in consolidated assets, and, therefore, by its current proposed terms would not apply to Whitney. There can be no assurance that the proposal will not be revised and will not apply to Whitney in the future. The Financial Crisis Responsibility Fee would be collected by the Internal Revenue Service and would be approximately fifteen basis points, or 0.15%, of an amount calculated by subtracting a covered institutions Tier 1 capital and FDIC-assessed deposits (and/or an adjustment for insurance liabilities covered by state guarantee funds) from such institutions total assets.
The Financial Crisis Responsibility Fee, if implemented as proposed by the current administration, would go into effect on June 30, 2010 and remain in place for at least ten years. The U.S. Treasury would be asked to report after five years on the effectiveness of the Financial Crisis Responsibility Fee as well as its progress in repaying projected losses to the U.S. government as a result of the TARP. If losses to the U.S. government as a result of TARP have not been recouped after ten years, the Financial Crisis Responsibility Fee would remain in place until such losses have been recovered.
Whitney is a bank holding company, registered with and regulated by the Federal Reserve. 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 Federal Reserve 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 Federal Reserve 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 a limited amount of the allowance for loan losses, preferred stock that does 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. The asset total also includes 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 regulatory 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. At December 31, 2009, both Whitney and the Bank had the required capital levels to qualify as well-capitalized.
The OCC, the Federal Reserve, and the FDIC have authority to compel or restrict certain actions if the Banks capital should fall below adequate capital standards as a result of operating losses, or if its regulators otherwise determine that it has insufficient capital. Among other matters, the corrective actions may include, but are not limited to, requiring the Bank to enter into informal or formal enforcement orders, including memoranda of understanding, written agreements, supervisory letters, commitment letters, and consent or cease and desist orders to take corrective action and refrain from unsafe and unsound practices; removing officers and directors; assessing civil monetary penalties; and taking possession of and closing and liquidating the Bank.
As a result of the current difficult operating environment and the Companys recent operating losses, the Banks primary regulator has required the Bank to implement plans to (i) maintain regulatory capital at a level sufficient to meet specific minimum regulatory capital ratios set by the regulator; (ii) make several improvements to the Banks oversight of its lending operations; and (iii) assess the adequacy of the Banks allowance for loan and lease losses and improve related policies and procedures. The Banks specified minimum regulatory capital ratios are a leverage ratio of 8%, a Tier 1 Capital ratio of 9%, and a Total Capital ratio of 12%. As of December 31, 2009, the Banks regulatory ratios exceeded all three of these minimum ratios with an 8.90% leverage ratio, a 10.48% Tier 1 Capital ratio, and a 13.31% Total Capital ratio. In addition to meeting these capital requirements, we believe that the Bank has made significant progress in meeting its commitments, including (i) the adoption of amendments to various credit policies to provide for (a) the development of a written action plan for criticized assets of $1 million or greater and (b) the timely and accurate risk ratings of loans and timely placement of loans on nonaccrual; (ii) the establishment of training programs for lending officers to ensure completion of written action plans for criticized assets and accurate risk ratings of loans and the proper financial analysis of borrowers and guarantors; and (iii) completion of an assessment of and enhancement to the methodology for determining its allowance for loan losses.
The Companys primary regulator, the Federal Reserve, has also required us to take certain actions in addition to the foregoing, which include (i) obtaining regulatory approval prior to repurchasing its common stock or incurring, guaranteeing additional debt or increasing its cash dividends, (ii) providing a plan to strengthen risk management reporting and practices and (iii) providing a capital plan to maintain a sufficient capital position and updating the plan quarterly with capital projections and stress tests. We believe that the Company has met and will continue to meet its obligations under this commitment.
The regulatory capital framework under which the Company and the Bank operate is in a period of change with likely legislation or regulation that will revise the current standards and very likely increase capital requirements for the entire banking industry, including the Company and the Bank. The resulting capital requirements are yet to be determined. The Company and the Bank are now governed by a set of capital rules known as Basel I that the Federal Reserve and the OCC have had in place since 1988, with some subsequent amendments and revisions. Before the recent financial crisis began to have a dramatic effect on the banking industry, the U.S. regulators had participated in an effort by the Basel Committee on Banking Supervision to develop
Basel II. 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 for core banksU.S. banking organizations with over $250 billion in banking assets or on-balance-sheet foreign exposures of at least $10 billion. For other banking organizations, including the Company and the Bank, the U.S. banking agencies proposed a rule in July 2008 that would have enabled these organizations to adopt the Basel II standardized approach. The proposed rule has not been finalized. In September 2009, as a result of the financial crisis that has adversely affected global credit markets and increased credit, liquidity, interest rate and other risks, the Treasury Department issued principles for international regulatory reform, which included recommendations for higher capital standards for all banking organizations to be implemented as part of a broader reconsideration of international risk-based capital standards developed by Basel II. In December 2009, the Basel Committee requested comment on a series of proposals that would have the effect of increasing capital requirements.
FDICIA and Prompt Corrective Action
The Federal Deposit Insurance Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for insured depository institutions (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.) and requires the federal banking agencies, including the FDIC, to implement systems for prompt corrective action for insured depository institutions that do not meet minimum capital requirements within these categories. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.
Failure to meet the capital guidelines also could subject a depository institution to capital raising requirements. An undercapitalized bank must develop a capital restoration plan and its parent holding company must guarantee the 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.
Within the prompt corrective action regulations, the federal banking agencies also have established procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital. Specifically, a federal banking agency may, after notice and an opportunity for a hearing, reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is deemed to be operating in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The FDIC may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.
In addition to the prompt corrective action directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
Expansion and Activity Limitations
With prior regulatory approval, a bank holding company may acquire other banks or bank holding companies, and a national bank may participate in FDIC-assisted transactions or merge with other banks. Acquisitions of banks domiciled in states other than the national banks home state 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. A bank holding company may also engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to banking activities. The Federal Reserve normally requires a notice or application to engage in or acquire companies engaged in such activities. Under the BHCA, a bank holding company 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 Federal Reserve 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 qualifying banks to establish financial subsidiaries that may engage in certain financial activities not previously permitted for banks. The Bank currently controls two financial subsidiaries, where it conducts its insurance agency activities.
Whitney is currently subject to a consent order requiring it to take certain actions to enhance its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program. The 2001 US Patriot Act, which substantially revised the BSA laws, includes a provision that requires the Federal Reserve and the OCC, the Companys primary regulators, to consider Whitneys BSA/AML compliance, among other factors, when reviewing bank mergers, acquisitions and other applications for business combinations.
Support of Subsidiary Banks by Holding Companies
Under current Federal Reserve 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.
Limitations on Acquisitions of Banks and Bank Holding Companies
As a general proposition, other companies seeking to acquire control of a bank such as the Bank or a bank holding company such as Whitney would require the approval of the Federal Reserve 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 Federal Reserve (which the Federal Reserve 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. 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 the Bank, and long-term debt issuer ratings for large institutions that have such ratings. In February 2009, the FDIC issued new risk based assessment rates that took effect April 1, 2009. For insured depository institutions in the lowest risk category, the annual assessment rate ranges from 7 to 24 cents for every $100 of domestic deposits. For institutions assigned to higher risk categories, the new assessment rates range from 17 to 77.5 cents per $100 of domestic deposits. These ranges reflect a possible downward adjustment for unsecured debt outstanding and possible upward adjustments for secured liabilities and, in the case of institutions outside the lowest risk category, brokered deposits.
The FDICs assessment rates are intended to result in a DIF reserve ratio of at least 1.15%. As part of an effort to remedy the decline in the ratio from recent bank failures, the FDIC, on September 30, 2009, collected a one-time special assessment of five basis points of an institutions assets minus Tier 1 capital as of June 30, 2009. Later in
2009, the FDIC ruled that nearly all FDIC-insured depositor-institutions must prepay their estimated DIF assessments for the next three years on December 31, 2009. This ruling also provided for maintaining the assessment rates at their current levels through the end of 2010, with a uniform increase of 3 cents per $100 of covered deposits effective January 1, 2011. The ruling did not affect how the Bank determines and recognizes its expense for deposit insurance.
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 was approximately 1 cent per $100 of assessable deposits in 2009. These assessments will continue until the debt matures in 2017 through 2019.
Effective November 21, 2008 and until June 30, 2010, the FDIC expanded deposit insurance limits for certain accounts under the FDICs Temporary Liquidity Guarantee Program (TLG Program). Provided an institution does not opt out of the TLG Program, the FDIC fully guarantees 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. A separate assessment was imposed for this expanded coverage. The Bank did not opt out of the TLG 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:
Bank Secrecy Act 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.
On February 19, 2010, Whitney announced that the Bank consented and agreed to the issuance of an order by the OCC addressing certain compliance matters relating to BSA and anti-money laundering items. The Order requires the Bank, among other things: (i) to establish a compliance committee to monitor and coordinate compliance with the Order within 30 days and to provide a written report to the OCC; (ii) to engage a consultant to assist the Board of Directors in reviewing the Banks BSA compliance personnel within 90 days and to review previous account and transaction activity for the Bank; (iii) to develop, implement and ensure adherence to a comprehensive written program of policies and procedures that provide for BSA compliance within 150 days; and (iv) to develop and implement a written, institution-wide and on-going BSA risk assessment to accurately identify risks within 150 days. Any material failure to comply with the provisions of the Order could result in enforcement actions by the OCC. Prior to the issuance of the Order, the Company had already commenced and implemented initiatives and strategies to address the issues noted in the Order. The Bank continues to work cooperatively with its regulators and expects to fully satisfy the items contained in the Order.
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 sends 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 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, has been 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 needs prior regulatory approval to pay the Company a dividend that exceeds 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, regulatory policy statements by the OCC and the Federal Reserve provide that generally bank holding companies and insured banks should only pay dividends out of current operating earnings. Whitney must currently obtain regulatory approval before increasing the common dividend rate above the current quarterly level of $.01 per share.
In addition to these regulatory requirements and restrictions, Whitneys ability to pay dividends is also limited by its participation in the 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 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 concepts currently under discussion at both the federal and state government 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 the Banks 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:
American Recovery and Reinvestment Act (ARRA). The ARRA, which was signed into law in February 2009, includes a wide variety of programs intended to stimulate the economy and to 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. These limits are in addition to those previously announced by the Treasury and apply until the institution has repaid the Treasury.
At the end of 2009, the Company and the Bank had a total of 2,730 employees, or 2,661 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 or furnishes 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
Making or continuing an investment in securities issued by Whitney, including our common stock, involves certain risks that you should carefully consider. Whitney must recognize and attempt to manage these 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.
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 and a subsequent period of slow recovery in the broader economy could adversely affect the financial capacity of businesses and individuals in Whitneys market area. 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 real estate markets as discussed below. Legislative and regulatory actions taken in response to these conditions could impose additional restrictions and requirements on Whitney and others in the financial industry.
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 possible impairment of certain intangible or deferred tax assets, 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.
The current and further deterioration in the residential construction and commercial real estate markets may lead to increased nonperforming assets in Whitneys loan portfolio and increased provision for losses on loans, which could have a material adverse effect on our capital, financial condition and results of operations.
Since the third quarter of 2007, the residential construction and commercial real estate markets have experienced a variety of difficulties and changed economic conditions. In particular, conditions in Whitneys Florida and Alabama residential-related real estate markets have led to continued declines in credit quality since the end of 2007. Our nonperforming loans were $414 million at December 31, 2009, compared to $301 million at December 31, 2008. Nonperforming loans in our Florida and Alabama markets represented approximately 59% and 18%, respectively, of our total nonperforming loans at December 31, 2009. More recently, we have begun to see some deterioration in our commercial real estate loan portfolio across all of our markets, particularly in Texas.
Commercial real estate loans, which include residential-related construction loans, comprised $2.8 billion or 33% of Whitneys loan portfolio as of December 31, 2009. The continued deterioration in market conditions could lead to additional loss provisions with respect to our real estate loan portfolios and the valuation of real estate we have obtained through foreclosure as well as to further additions to nonperforming real estate loans. A sustained weak economy could also result in higher levels of nonperforming loans in other categories, such as commercial and industrial loans, which may result in additional losses. Management continually monitors market conditions and economic factors throughout our footprint for indications of change in other markets. If these economic conditions and market factors negatively and/or disproportionately affect some of our larger loans, then we could see a sharp increase in our total net charge-offs and also be required to significantly increase our allowance for loan losses. Any further increase in our nonperforming assets and related increases in our provision for losses on loans could negatively affect our business and could have a material adverse effect on our capital, financial condition and results of operations.
Whitney has credit exposure in the oil and gas industry.
At December 31, 2009, the Bank had approximately $894 million in loans to borrowers in the oil and gas industry, representing approximately 11% of its total loans outstanding as of that date. The majority of the Banks 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 the Bank 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.
Whitneys allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.
The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense. The allowance represents managements best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. We have recently completed an assessment of and made enhancements to our Banks allowance methodology. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge offs, based on judgments different than those of management. An increase in the allowance for loan losses results in a decrease in net income, and possibly regulatory capital, and may have a material adverse effect on our capital, financial condition and results of operations.
Impairment of goodwill associated with acquisitions would result in a charge to earnings.
Goodwill is tested for impairment at least annually and the impairment test compares the estimated fair value of a reporting unit with its net book value. Given the current economic environment and potential for volatility in the fair value estimate, management is updating the impairment test for goodwill quarterly. No indication of goodwill impairment was identified by the annual test as of September 30, 2009 or the interim test as of December 31, 2009; however, it is possible that a noncash goodwill impairment charge may be required in the future. Such a charge could result in a material reduction in earnings in the period in which goodwill is determined to be impaired,
but an impairment charge would not have an effect on tangible common equity or regulatory capital.
Additional losses may result in a valuation allowance to deferred tax assets.
If Whitney is unable to continue to generate, or is unable to demonstrate that it can continue to generate, sufficient taxable income in the near future, then the Company may not be able to fully realize the benefits of our deferred tax assets and may be required to recognize a valuation allowance, similar to an impairment of those assets, if it is more likely than not that some portion of the deferred tax assets will not be realized. Any such valuation allowance would have a negative effect on Whitneys results of operations, financial condition and capital position.
Whitneys ability to pay dividends is subject to certain regulatory considerations.
Whitney must currently obtain regulatory approval before increasing the common dividend rate above the current quarterly level of $0.1 per share. Regulatory policy statements provide that generally bank holding companies should only pay dividends out of current operating earnings and the level of dividends, if any, must be consistent with current and expected capital requirements. There are also various regulatory restrictions on the ability of the Bank to pay dividends to the Company. Dividends received from the Bank have traditionally been Whitneys principal source of cash flow. Because of recent losses, the Bank currently has no capacity to declare dividends to the Company without prior regulatory approval. For additional information regarding the regulatory restrictions applicable to the Company and Bank, see Supervision and Regulation under Item 1.
Whitneys continued participation in the Capital Purchase Program may adversely affect our ability to retain customers, attract investors, compete for new business opportunities and retain high performing employees.
Several financial institutions which participated in the CPP received approval from the Treasury to exit the program during the second half of 2009. These institutions have, or are in the process of, repurchasing the preferred stock and repurchasing or auctioning the warrant issued to the Treasury as part of the CPP. Whitney has not yet requested approval to repurchase the preferred stock and warrant from the Treasury. In order to repurchase one or both securities, in whole or in part, we must establish that we have satisfied all of the conditions to repurchase, and there can be no assurance that we will be able to repurchase these securities from the Treasury.
Our customers, employees, counterparties in our current and future business relationships, and the media may draw negative implications regarding the strength of Whitney as a financial institution based on our continued participation in the CPP following the exit of one or more of our competitors or other financial institutions. Any such negative perceptions may impair our ability to effectively compete with other financial institutions for business. In addition, because we have not yet repurchased the Treasurys CPP investment, we remain subject to the restrictions on incentive compensation contained in the ARRA. Financial institutions which have repurchased the Treasurys CPP investment are relieved of the restrictions imposed by the ARRA and its implementing regulations. Due to these restrictions, we may not be able to successfully compete with financial institutions that have repurchased the Treasurys investment to retain and attract high performing employees. If this were to occur, our business, financial condition and results of operations may be adversely affected, perhaps materially.
The failure of other financial institutions could adversely affect Whitney.
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 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.
Whitneys business is highly regulated. Our compliance with existing and proposed banking legislation and regulation, including our compliance with regulatory and supervisory actions, could adversely limit or restrict our activities and adversely affect our business, operating flexibility and financial condition.
Whitney is subject to extensive regulation, supervision and legislation that govern almost all aspects of our operations and limit the businesses in which we may engage. The Company and the Bank are subject to regular examinations, supervision and comprehensive regulation by various federal authorities with regard to compliance with such laws and regulations impacting financial institutions. For additional information, see Supervision and Regulation in Item 1. These laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. The cost of compliance with such laws and regulations can be substantial and adversely affect our ability to operate profitably. Current economic conditions, particularly in the financial and real estate markets, have resulted in bank regulatory agencies placing increased focus and scrutiny on participants in the financial services industry, including Whitney.
As a result of the difficult operating environment and the Companys operating losses, the Companys and the Banks primary regulators have required certain actions. See above Supervision and Regulation. While the Company has already commenced and implemented initiatives and strategies to address these regulatory issues and the Company believes that it has made significant progress in the adoption and implementation of plans and policies, the Company will likely devote significant time and resources of our management team, which may increase our costs, impede the efficiency of our internal business processes and adversely affect our profitability in the near term.
If the Company or the Bank are unable to implement these plans in a timely manner and otherwise meet the commitments outlined above or if we fail to adequately resolve any other matters that any of our regulators may require us to address in the future, we could become subject to more stringent supervisory actions, up to and including a cease and desist order. If our regulators were to take such supervisory action, we could, among other things, become subject to significant restrictions on our existing business or on our ability to develop any new business. We also could be required to raise additional capital in the future, restrict or reduce our dividends or dispose of certain assets and liabilities within a prescribed period of time. The terms of any such supervisory action could have a material negative effect on our business, operating flexibility and financial condition.
Reductions in the Companys or the Banks credit ratings could reduce access to funding sources in the credit and capital markets and increase funding costs.
Numerous rating agencies regularly evaluate our creditworthiness and assign credit ratings to the debt of the Company and the Bank. The agencies ratings are based on a number of factors, some of which are not within our control. In addition to factors specific to the financial strength and performance of the Company and the Bank, the rating agencies also consider conditions affecting the financial services industry generally. During 2009, several rating agencies downgraded select ratings for both the Company and the Bank, which was also the case for a number of other financial services industry entities. All of the Banks debt ratings remain investment grade. All of the Companys ratings remain investment grade, with the exception of the Standard & Poors long-term debt rating, which is one level below investment grade. The agencies have also reported either a stable or negative ratings outlook for both the Company and the Bank.
In light of the difficulties confronting the financial services industry generally, and the Company and the Bank specifically, including, among others, the weak global economic conditions, credit market disruptions, and the severe stress on residential and commercial real estate markets, there can be no assurance that the Company and the Bank will not receive further downgrades or that any of our ratings will remain investment grade. Further rating reductions by one or more rating agencies could adversely affect our access to funding sources and the cost and other terms of obtaining funding. Long-term debt ratings also factor into the calculation of deposit insurance premiums, and a reduction in the Banks ratings may increase premiums and expenses.
The Companys financial condition and outlook may be adversely affected by damage to Whitneys reputation.
Our financial condition and outlook is highly dependent upon perceptions of our business practices and reputation. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, disclosure, existing or future litigation, sharing or inadequate protection of customer information and from actions taken by government regulators and community organizations in response to that conduct. Damage to our reputation could give rise to legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to regulatory enforcement actions, fines and penalties and cause us to incur related costs and expenses.
The costs and effects of litigation, derivative suits, investigations or similar matters, or adverse facts and developments related thereto, could materially affect Whitneys business, operating results and financial condition.
Whitney may be involved from time to time in a variety of litigation, derivative suits, investigations or similar matters arising out of our business. In 2009, we received, like many other financial institutions, a demand letter from a shareholder asserting that the Companys incentive compensation between 2004 and 2008 was excessive and that the performance goals under its compensation plans were only achieved through imprudent business practices. The Board of Directors formed a special committee of independent directors to investigate this shareholder claim. The special committee conducted a thorough review of the demand allegations and concluded in its investigation that the there is no substantiation for the claims of wrongful conduct referenced in the shareholder demand and recommended that the demand be rejected. The Board adopted the special committees conclusions and recommendation.
Neither management nor the special committee can predict at this time whether the shareholder will file a derivative lawsuit notwithstanding the special committees conclusion and Boards adoption of the special committees recommendation. The Companys insurance may not cover all claims that may be asserted against us, including the claim set forth above, and indemnification rights to which we are entitled may not be honored, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. We may not be able to obtain appropriate types
or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all.
We rely on our systems and employees, and any errors or fraud could materially adversely affect our operations.
Whitney is exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors, and computer/telecommunications systems malfunctions. The Banks business is dependent on its ability to process a large number of increasingly complex transactions. We have committed to make significant investments of time and resources into changing and improving our core systems and processes. We refer to this program internally as our Project Genesis program. If the operations of, or any of the changes to, our financial, accounting, or other data processing systems, including our Project Genesis program, fail or have other significant shortcomings, we could be materially adversely affected. We are similarly dependent on our employees. We could be materially adversely affected if one of our employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we do business also could be sources of operational risk to us due to breakdowns or failures of such parties own systems or employees. Any of these occurrences could diminish our ability to operate our business and result in potential liability to customers, reputation damage and regulatory intervention, which could materially adversely affect us.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages or natural disasters. Such disruptions may give rise to losses in service to customers and loss or liability to us. In addition, there is a risk that our business continuity and data security systems prove to be inadequate. Any such failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance.
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, the Company is not permitted to pay cash dividends in excess of $.31 per share per quarter on its common stock for three years from the preferred stock issue date without the Treasurys consent, unless Treasury no longer owns the preferred stock. The dividends declared on shares of the Companys Series A preferred stock 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 may be dilutive to the Companys earnings per share.
There can be no assurance when the Series A preferred stock can be redeemed and the Warrant can be repurchased.
Subject to consultation with the Companys banking regulators, Whitney intends to repurchase the Series A preferred stock and the Warrant issued to the Treasury when we believe the credit metrics in our loan portfolio have improved for the long-term and the overall economy has rebounded. However, there can be no assurance when the Series A preferred stock and the Warrant can be repurchased, if at all. Until such time as the Series A preferred stock and the Warrant are repurchased, we will remain subject to the terms and conditions of those instruments, which, among other things, require Whitney to obtain regulatory approval to repurchase or redeem common stock or our other preferred stock or increase the dividends on the Companys common stock over $.31 per share, except in limited circumstances. Further, Whitneys continued participation in the CPP subjects us to increased regulatory and legislative oversight, including with respect to executive compensation. These new and any future oversight and legal requirements and implementing standards under the CPP may have unforeseen or unintended adverse effects on the financial services industry as a whole, and particularly on CPP participants such as Whitney.
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 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.
Holders of the Series A preferred stock have limited voting rights.
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 66 2/3% of the shares of Series A preferred stock outstanding is required for (1) any authorization or issuance of shares ranking senior to the Series A preferred stock; (2) any amendment to the rights of the Series A preferred stock that adversely affects the rights, preferences, privileges or voting power of the Series A preferred stock; or (3) consummation of any merger, share exchange or similar transaction unless the shares of Series A preferred stock remain outstanding or are converted into or exchanged for preference securities of the surviving entity other than the Company and have such rights, preferences, privileges and voting power as are not materially less favorable than those of the holders the Series A preferred stock.
Whitney may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
In order to maintain the Companys or the Banks capital at desired or regulatorily-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.
New banking laws and regulations could materially affect our operations and our cost of doing business.
Legislation is now pending in Congress that would, if enacted, substantially change the regulatory framework for the banking industry, limit certain activities, impose new operational requirements, and increase consumer compliance obligations. The OCC and the federal bank regulatory agencies already have authority to impose many of these changes. If any new laws or regulations take effect, such changes could materially affect the way we do business and increase our compliance requirements.
The short-term and long-term impact of a likely new capital framework, whether through the current proposal for non-Basel II U.S. banking institutions or through another set of capital standards, is uncertain.
For U.S. banking institutions with assets of less than $250 billion and foreign exposures of less than $10 billion, including the Company and the Bank, a proposal is currently pending that would apply to them the standardized approach of the new risk-based capital standards developed by the Basel Committee on Banking Supervision (Basel II). As a result of the deterioration in the global credit markets and increases in credit, liquidity, interest rate, and other risks, the U.S. banking regulators have discussed possible increases in capital requirements, separate from the current proposal for the standardized approach of Basel II. Furthermore, in September 2009, the Treasury issued principles for international regulatory reform, which included recommendations for higher capital standards for all banking organizations to be implemented as part of a broader reconsideration of international risk-based capital standards developed by Basel II. Any new capital framework is likely to affect the cost and availability of different types of credit. U.S. banking organizations are likely to be required to hold higher levels of capital and could incur increased compliance costs. It is unclear at this time if similar increases in capital standards will be incorporated into a revised Basel II proposal that would be adopted by international financial institutions. Any of these developments, including increased capital requirements, could have a material negative effect on our business, results of operations and financial condition.
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, 2009. 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.
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 maintains operations centers in the greater New Orleans area and in Prattville, Alabama. 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 161 banking facilities in five states at December 31, 2009. The Bank owns approximately 80% 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 subsidiaries 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.
Whitney and its affiliates are subject to litigation and claims arising in the ordinary course of business. Whitney evaluates these contingencies based on information currently available, including advice of counsel. Management is currently of the opinion that the outcome of pending and threatened litigation would not have a material effect on Whitneys consolidated financial position or results of operations.
The Companys common 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 2009 and 2008, 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 26, 2010, 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. Holders of Whitneys common stock are subject to the prior dividend rights of any holders of Whitney preferred stock then outstanding. 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, 2009.
No repurchase plans were in effect during the fourth quarter of 2009. Under the CPP, prior to the earlier of (i) December 19, 2011 or (ii) the date on which the Series A Preferred Stock is redeemed in whole or the U.S. Treasury has transferred all of the Series A Preferred Stock to unaffiliated third parties, the consent of the U.S. Treasury is required to repurchase any shares of common stock, except in connection with benefit plans in the ordinary course of business and certain other limited exceptions.
There have been no recent sales of unregistered securities.
STOCK PERFORMANCE GRAPH
The following performance graph and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent the Company specifically incorporates it by reference into such filing.
The performance graph compares the cumulative five-year shareholder return on the Companys common stock, assuming an investment of $100 on December 31, 2004 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.
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Whitney Holding Corporation and its subsidiaries (the Company or Whitney) and on their results of operations during 2009, 2008 and 2007. 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, and these statements are intended to be covered by the safe harbor provided by the same. 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, including economic conditions; (b) information about changes in the duration of the investment portfolio with changes in market rates; (c) discussion of the results of a voluntary stress test of the loan portfolio; (d) statements of the results of net interest income simulations run by the Company to measure interest rate sensitivity; (e) comments on the anticipated dividend capacity of the Company and the Bank; (f) discussion of the performance of Whitneys net interest income assuming certain conditions; (g) discussion of factors affecting trends in certain categories of noninterest income; and (h) comments on expected changes in certain categories of noninterest expense.
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.
The year ended December 31, 2009 was another difficult year for the U.S. economy and for the financial services industry. High credit costs, primarily the result of loan portfolio pressure stemming from ongoing deterioration in real estate values, as well as increasing unemployment and other factors, continued to negatively impact earnings. Property value declines, which began in late 2007, continued throughout 2008 and 2009. While Whitney did not have material exposure to many of the issues that originally plagued the industry (e.g., sub-prime loans, structured investment vehicles and collateralized debt obligations), the Companys exposure to the residential housing sector, primarily residential development activity in the Florida market, pressured its loan portfolio, resulting in increased credit costs and foreclosed asset expenses. As the economic downturn continued, consumer confidence and weak economic conditions began to impact areas of the economy outside of the housing sector. Under these conditions, Whitney reported a net loss to common shareholders of $78.4 million for the year ended December 31, 2009, or $1.08 per diluted share, compared with earnings to common shareholders of $58.0 million for 2008, or $.88 per diluted share.
Common Stock Offering
During the fourth quarter of 2009, Whitney announced and completed an underwritten public offering of the Companys common stock. The underwriters purchased 28.75 million shares at a public offering price of $8.00 per share. The net proceeds to the Company after deducting offering expenses and underwriting discounts and commissions were $218 million.
Mergers and Acquisitions
On November 7, 2008, Whitney completed its acquisition of Parish National Corporation (Parish), the parent of Parish National Bank. Parish National Bank operated 16 banking centers, primarily on the north shore of Lake Pontchartrain and other parts of the metropolitan New Orleans area, and had $771 million in total assets, including a loan portfolio of $606 million, and $636 million in deposits at the acquisition date. Whitneys financial statements include the results from these acquired operations since the acquisition date.
Loans and Earning Assets
Total loans at the end of 2009 were down $678 million, or 7%, from December 31, 2008, with reduction in all of the Banks geographic regions and most portfolio segments. Total earning assets at December 31, 2009 were down approximately 5% from the end of 2008. The decline in total loans included charge-offs of $204 million and foreclosures of approximately $59 million. As was anticipated and previously disclosed, economic conditions restrained loan demand through 2009. Whitney continues to seek and fund new credit relationships and to renew existing ones, but the level of overall demand has been insufficient to cover repayments and maturities along with charge-offs, foreclosures and other problem loan resolutions. Management believes this situation will continue for the first half of 2010 with hope for some slow growth during the second half of 2010 in an economy beginning to recover and strengthen.
Deposits and Funding
Total deposits at December 31, 2009 decreased approximately 1%, or $112 million, from December 31, 2008, but with a favorable shift in the deposit mix. Noninterest-bearing demand deposits grew 2%, or $68 million, from year-end 2008, and comprised 36% of total deposits at December 31, 2009. Lower-cost interest-bearing deposits grew 13%, or $466 million, over the same period, reflecting funds attracted to a special money market deposit product introduced in the first half of 2009. Higher-cost time deposits at December 31, 2009 were down 25%, or $645 million, compared to year-end 2008, mainly from declines in competitively bid public fund deposits and deposits held in treasury-management sweep products used by corporate customers. The sustained period of low market interest rates has tended to reduce the attractiveness of time deposits compared to alternative deposit products and investments.
The balance of short-term borrowings at December 31, 2009, was down 42%, or $542 million, from year-end 2008, reflecting mainly restrained loan demand and the overall reduced level of earning assets.
Net Interest Income
Whitneys net interest income (TE) for 2009 decreased $12.5 million, or 3%, from 2008. Average earning assets were up 7% between these periods, while the net interest margin (TE) contracted 43 basis points to 4.12%. Asset yields decreased 92 basis points in 2009 mainly from a steep reduction in benchmark rates for the large variable-rate segment of Whitneys loans portfolio. The cost of funds decreased 49 basis points from 2008 mainly from the impact of the sustained low rate environment on both deposit and short-term borrowing rates and a favorable shift in the funding mix. The lost interest on nonaccruing loans reduced the net interest margin by approximately 20 basis points in 2009 compared to approximately 10 basis points in 2008.
Provision for Credit Losses and Credit Quality
Whitney increased its provision for credit losses to $259 million in 2009 compared to $134 million in 2008. Provisions related to impaired loans accounted for approximately half of the total provision for credit losses in 2009. More than $100 million of the impaired loan provisions came from Whitneys Florida and Alabama markets and reflected in large part the continued decline in the value of underlying real estate collateral. The remainder of the provision for credit losses for 2009 was related to the increase in total criticized loans, the impact of elevated charge-off levels on historical loss factors, smaller consumer charge-offs and qualitative adjustments.
Net loan charge-offs were $195 million, or 2.22%, of average loans in 2009, compared to $71.3 million, or .88% of average loans, in 2008. Florida loans generated approximately $140 million of the $204 million of gross charge-offs for 2009. These were heavily concentrated in residential-related real estate loans. The provision for loan losses exceeded net charge-offs by $62.6 million during 2009, which increased the allowance for loan losses to 2.66% of total loans at December 31, 2009 from 1.77% at December 31, 2008.
The total of loans criticized through the Companys credit risk-rating process was $1.06 billion at December 31, 2009. This represented 13% of total loans and a net increase of $288 million from December 31, 2008, although the criticized total at year-end 2009 was down $124 million from its peak at September 30, 2009. Criticized commercial and industrial (C&I) relationships increased $122 million from year-end 2008. This increase came mainly from loans to oil and gas industry customers, although less than 1% of the O&G portfolio was considered to be nonperforming at December 31, 2009. Criticized commercial real estate loans increased $114
million during 2009, but the year-end total was down $79 million from the highpoint at the end of third quarter of 2009.
Noninterest income in 2009 increased 15%, or $15.4 million, over 2008, excluding 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. Parishs operations contributed approximately $8.0 million to the increase for 2009. Deposit service charge income grew by 11%, or $3.6 million, compared to 2008 on higher commercial account fees and the impact of Parish. The growth in commercial fees was driven in large part by reduced earnings credits in the low market rate environment. Fee income from Whitneys secondary mortgage market operations grew $4.5 million in 2009, nearly double the level in 2008. Increased refinancing activity prompted by low rates and the addition of Parishs operations both contributed. The results for 2009 also benefited from the earnings on a bank-owned life insurance program implemented midway through 2008.
Noninterest expense increased 19%, or $65.3 million, in 2009. Incremental operating costs associated with Parishs operations, including amortization of intangibles, totaled approximately $23.8 million for 2009. Loan collection costs, including legal services, and foreclosed asset expenses and provisions for valuation losses totaled approximately $28 million for 2009, up approximately $21 million from 2008. The expense for deposit insurance and other regulatory fees was up $18.9 million compared to 2008, reflecting mainly steps taken by the FDIC to maintain the integrity of the deposit insurance fund as it absorbs recent bank failures. Whitneys personnel expense increased 5%, or $9.0 million, before considering the cost of acquired staff. Employee compensation was stable as increases from normal salary adjustments and higher sales-based incentives were offset by a reduction in management incentive compensation from tightened performance criteria and the difficult operating environment. The cost of employee benefits grew approximately $9.0 million, before considering Parishs impact, driven mainly by pension benefits.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Whitney prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. A discussion of certain accounting principles and methods of applying those principles that are particularly important to this process is included in Note 2 to the consolidated financial statements located in Item 8 of this annual report on Form 10-K. The Company is required to make estimates, judgments and assumptions in applying these principles to determine the amounts and other disclosures that are presented in the financial statements and discussed in this section.
Allowance for Credit Losses
Whitney believes that the determination of its estimate of the allowance for credit losses involves a higher degree of judgment and complexity than its application of other significant accounting policies. Factors considered in this determination and 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, 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 Impairment Test
Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. The impairment test compares the estimated fair value of a reporting unit with its net book value. Whitney has assigned all goodwill to one reporting unit that represents the overall banking operations. The fair value of the reporting unit is based on valuation techniques that market participants would use in an acquisition of the whole unit, such as estimated discounted cash flows, the quoted market price of 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 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 has 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, 2009. Given the current economic environment and potential for volatility in the fair value estimate, management has been updating the impairment test for goodwill quarterly throughout 2009. No indication of goodwill impairment was identified in these interim tests. For the most recent impairment test as of December 31, 2009, the discounted cash flow analysis resulted in a fair value estimate approximately 7% higher than book value. Either a 10 basis point reduction in the expected net interest margin, a .50% lower projected growth rate or a .50% higher discount rate would reduce the estimated fair value by approximately 7%.
Accounting for Retirement Benefits
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.
LOANS, CREDIT RISK MANAGEMENT AND ALLOWANCE AND RESERVE FOR CREDIT LOSSES
Loan Portfolio Developments
Total loans at the end of 2009 were down $678 million, or 7%, from December 31, 2008, with reduction in all of the Banks geographic regions and most portfolio segments. Included in this decline were charge-offs of $204 million and foreclosures of approximately $59 million. As was anticipated and previously disclosed, economic conditions restrained loan demand throughout 2009. Whitney continues to seek and fund new credit relationships and to renew existing ones, but the level of overall demand has been insufficient to cover repayments and maturities along with charge-offs, foreclosures and other problem loan resolutions. Management believes this situation will continue for the first half of 2010 with hope for some slow growth during the second half of 2010 in an economy beginning to recover and strengthen.
Table 1 shows loan balances by type of loan at December 31, 2009 and at the end of the previous four years. Table 2 distributes the loan portfolio as of December 31, 2009 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.
TABLE 1. LOANS OUTSTANDING BY TYPE
The portfolio of C&I loans, including real estate loans secured by properties used in the borrowers business, decreased $296 million, or 7%, between year-end 2008 and 2009, mainly reflecting economic conditions noted above. The C&I portfolio is diversified over a range of industries, including oil and gas (O&G), wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, hospitality, financial services and professional services.
Loans outstanding to O&G industry customers declined approximately $167 million during 2009, but still represented approximately 11%, or $894 million, of total loans at December 31, 2009. 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 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 sector comprised approximately 32% of the O&G portfolio at December 31, 2009. Management continues to monitor the impact of weak global economic activity on commodity prices and has made what it believes to be appropriate adjustments to Whitneys credit underwriting guidelines with respect to O&G loans and the management of existing relationships.
Outstanding balances under participations in larger shared-credit loan commitments totaled $680 million at the end of 2009, compared to $772 million outstanding at year-end 2008. The total at December 31, 2009 included approximately $247 million related to the O&G industry. Substantially all of the shared credits are with customers operating in Whitneys market area.
TABLE 2. GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO AT DECEMBER 31, 2009
The commercial real estate (CRE) portfolio includes loans for construction and land development (C&D) and investment, both commercial and residential, and other real estate loans secured by income-producing properties. The CRE portfolio decreased $358 million, or 11%, during 2009. Approximately half of the decrease came from charge-offs and foreclosures. Project financing is an important component of 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. Management expects that current economic conditions and uncertainty will limit the availability of new creditworthy CRE projects throughout Whitneys market area over the near term.
Tables 3 and 4 show the composition of certain components of the CRE portfolio by property type and the region from which the loans are serviced. Management also sets exposure guidelines for the overall portfolio of CRE loans as well as for loans secured by various subcategories of property.
TABLE 3. CONSTRUCTION, LAND & LAND DEVELOPMENT LOANS AT DECEMBER 31, 2009
TABLE 4. OTHER COMMERCIAL REAL ESTATE LOANS AT DECEMBER 31, 2009
The residential mortgage loan portfolio declined $44 million during 2009, reflecting in part the impact of attractive refinancing opportunities in the low interest rate environment, as well as some charge-offs and foreclosures. The Bank continues to sell most conventional residential mortgage loan production in the secondary market.
Table 5 reflects contractual loan maturities, unadjusted for scheduled principal reductions, prepayments or repricing opportunities. Approximately 60% of the value of loans with a maturity greater than one year carries a fixed rate of interest.
TABLE 5. LOAN MATURITIES BY TYPE
Credit Risk Management and Allowance and Reserve for Credit Losses
General Discussion of Credit Risk Management and Determination of Credit Loss Allowance and Reserve
Whitney manages credit risk mainly through adherence to underwriting and loan administration standards established by the 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 primarily responsible for ongoing monitoring and the assignment of risk ratings to individual loans based on established guidelines. An independent credit review function, which reports 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 its 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 process for determining the recorded allowance involves three key elements: (1) establishing specific allowances as needed for loans evaluated for impairment; (2) developing loss factors based on historical loss experience for nonimpaired commercial loans grouped by geography, loan product type and internal risk rating and for homogeneous groups of residential and consumer loans; and (3) determining appropriate adjustments to historical loss factors based on managements assessment of current economic conditions and other qualitative risk factors both internal and external to the Company. During the third quarter of 2009, management enhanced the allowance methodology by expanding the qualitative and environmental factors that are considered and by evaluating and applying loss factors to the loan portfolio at a more granular level to better capture regional distinctions and distinctions among the loan types.
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 $1.06 billion at December 31, 2009. This represented 13% of total loans and a net increase of $288 million from December 31, 2008, although the criticized total at year-end 2009 was down $124 million, or 11%, from its peak at September 30, 2009. The range of criticized ratings covers loans with well-defined weaknesses that would likely lead to a default if not corrected as well as loans with a high probability of loss but not yet charged off due to specific pending events. Criticized ratings also identify loans that deserve close attention because of potential weaknesses as evidenced by, for example, the borrowers recent operating trends or adverse market conditions. Table 6 shows the composition of criticized loans at December 31, 2009, distributed by the geographic region from which the loans are serviced.
Criticized C&I relationships, including associated real estate loans, totaled $336 million at December 31, 2009, which was an increase of $122 million from year-end 2008. Criticized C&I loans outstanding to O&G industry customers increased approximately $100 million during 2009 and totaled approximately $122 million at December 31, 2009. This represented 14% of the O&G industry portfolio outstanding, although less than 1% of this portfolio was considered to be nonperforming at December 31, 2009. Until the outlook on commodity prices translates into increased exploration and drilling activity, management expects continued stress on the O&G industry portfolio and elevated levels of criticized relationships. There were no other significant industry concentrations within the total for criticized C&I relationships.
TABLE 6.CRITICIZED LOANS AT DECEMBER 31, 2009
Tables 7 and 8 show the composition of certain components of the criticized CRE portfolio by property type and the region from which the loans are serviced.
The total for criticized C&D loans of $377 million at December 31, 2009 was up $37 million from December 31, 2008, but recently declined $39 million from September 30, 2009. Whitneys Florida markets saw a decrease of $43 million in criticized C&D loans during 2009, reflecting charge-offs, foreclosures and other problem loan resolutions, particularly with respect to loans for residential development. Criticized C&D loans serviced from Whitneys Texas market increased $104 million during 2009 and represented 28% of total C&D loans in the Texas market at December 31, 2009. General economic and credit market conditions continue to delay the successful completion of various retail and other income-producing CRE projects and stretch the financial capacity of the developers. Whitney has worked proactively with its borrowers to develop strategies to deal with these difficult conditions and only $11 million of C&D loans from the Texas market were considered nonperforming at December 31, 2009; nevertheless, management expects the elevated level of criticized credits to continue for the near term.
TABLE 8. CRITICIZED OTHER COMMERCIAL REAL ESTATE LOANS AT DECEMBER 31, 2009
Criticized other CRE loans on income-producing properties increased $77 million during 2009, although the total at December 31, 2009 was down $40 million from September 30, 2009. Net additions to the criticized total during 2009 consisted mainly of loans secured by leased retail and warehouse facilities and apartment buildings and were concentrated mainly in the Texas and Florida markets. Nonperforming loans on income-producing CRE totaled approximately $79 million at December 31, 2009, with $48 million from the Florida markets, but only $5 million from Texas. As the weak conditions in the overall economy continue, management is closely monitoring the impact on CRE loan customers with hotel operations and others in the hospitality industry and on the performance of the CRE loan portfolio secured by retail and other income-producing properties in all markets.
Included in the total of criticized loans at December 31, 2009 was $414 million of nonperforming loans, which is up a net $113 million from year-end 2008. Residential-related real estate credits that are heavily concentrated in Whitneys Florida and coastal Alabama markets comprised approximately half of total nonperforming loans at December 31, 2009. In total, the Florida market accounted for 59% of nonperforming loans at the year-end 2009, with another 18% from Alabama, 17% from Louisiana, and 6% from Texas. The earlier discussion of criticized loans includes some additional details on nonperforming assets at December 31, 2009. Table 9 provides information on nonperforming loans and other nonperforming assets at the end of each of the five years in the period ended December 31, 2009. Nonperforming loans encompass all loans that are evaluated separately for impairment.
TABLE 9.NONPERFORMING ASSETS
Whitney will continue to evaluate all opportunities to dispose of nonperforming assets as quickly as possible, including consideration of the trade-offs between current disposal prices and the carrying costs and management challenges of longer-term resolution. Whitney may recognize losses on future asset disposition decisions and actions.
A comparison of contractual interest income on nonperforming loans with the cash-basis and cost-recovery interest actually recognized on these loans for 2009, 2008 and 2007 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 10 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 11, together with the percentage of total loans in each category.
Approximately half of the total $258 million provision for loans losses in 2009 was related to nonperforming loans evaluated for impairment losses. More than $100 million of the impaired loan provisions came from Whitneys Florida and Alabama markets and reflected in large part the continued decline in the value of underlying real estate collateral. The remainder of the provision for loan losses for 2009 was related mainly to the increase in total criticized loans, the impact of elevated charge-off levels on historical loss factors, smaller consumer charge-offs and qualitative adjustments.
Gross charge-offs in 2009 totaled $204 million, with the majority from Whitneys Florida markets. The gross charge-offs were heavily concentrated in residential C&D loans and other residential-related credits, which totaled approximately $122 million for 2009. Other C&D loans and loans on income-producing CRE accounted for approximately $42 million of charge-offs in 2009, with the majority again from Florida. In total, Whitneys Florida markets generated approximately $140 million of gross charge-offs for 2009, with $110 million from the Tampa market. The $32 million of C&I relationships charged off in 2009 came mainly from Whitneys Louisiana markets.
The provision for loan losses exceeded net charge-offs by $62.6 million during 2009, which increased the allowance for loan losses to 2.66% of total loans at December 31, 2009 from 1.77% at December 31, 2008.
It is uncertain when sufficient demand will return to depressed real estate markets to establish a solid floor on prices and stimulate renewed development. This, when coupled with the uncertainties arising from weak national and global economic conditions, makes it difficult for management to predict when the level of criticized loans will stabilize or retreat. In this current economic environment, the periodic estimate of inherent losses in Whitneys loan portfolio may be volatile.
TABLE 10. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS
TABLE 11. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Whitneys investment securities portfolio balance of $2.05 billion at December 31, 2009 was up $111 million, or 6%, compared to December 31, 2008. Securities with carrying values of $1.39 billion at December 31, 2009 were sold under repurchase agreements, pledged to secure public deposits or pledged for other purposes. Average investment securities decreased 1% between 2008 and 2009. The composition of the average portfolio in investment securities and effective yields are shown in Table 19.
Information about the contractual maturity structure of investment securities at December 31, 2009, including the weighted-average yield on such securities, is shown in Table 12. The carrying value of securities with explicit call options totaled $126 million at year-end 2009. These call options and the scheduled principal reductions and projected prepayments on mortgage-backed securities are not reflected in Table 12. Including expected principal reductions on mortgage-backed securities, the weighted-average maturity of the overall securities portfolio was approximately 42 months at December 31, 2009, compared to 31 months at year-end 2008.
Mortgage-backed securities issued or guaranteed by U.S. government agencies continued to be the main component of the portfolio, comprising 83% of the total at December 31, 2009. The duration of the overall investment portfolio was 2.6 years at December 31, 2009 and would extend to 3.8 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, 2008, the portfolios estimated duration was 1.6 years.
The weighted-average taxable-equivalent portfolio yield was approximately 4.35% at December 31, 2009, compared to 4.84% at December 31, 2008. 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 12 included approximately $105 million of adjustable-rate issues with a weighted-average yield of 4.18%. The initial reset dates on these securities are predominantly within one year from year-end 2009.
TABLE 12. DISTRIBUTION OF INVESTMENT MATURITIES
Securities available for sale made up the bulk of the total investment portfolio at December 31, 2009. Available-for-sale securities are carried at fair value, and the balance reported at December 31, 2009 reflected gross unrealized gains of $41.0 million and gross unrealized losses of $2.8 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. No value impairment was evaluated as other than temporary at December 31, 2009.
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, 2009, Whitney held no investment in the securities of a single issuer that exceeded 10% of its shareholders equity.
DEPOSITS AND BORROWINGS
Total deposits at December 31, 2009 decreased approximately 1%, or $112 million, from December 31, 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 to year-end 2008.
Table 13 shows the composition of deposits at December 31, 2009 and at the end of the two previous years. Table 19 presents the composition of average deposits and borrowings and the effective rates on interest-bearing funding sources for each of these years.
TABLE 13. DEPOSIT COMPOSITION
Noninterest-bearing demand deposits grew 2%, or $68 million, from year-end 2008, and comprised 36% of total deposits at December 31, 2009. During the first half of 2009, the Bank executed a campaign around a special money market deposit product to attract new personal and business accounts. Balances held in money market accounts at year-end 2009 were up $517 million from the end of 2008. Deposits at year-end 2009 and 2008 included some seasonal inflows that were concentrated in NOW accounts.
Time deposits at December 31, 2009 were down 25%, or $645 million, compared to year-end 2008. The sustained period of low market interest rates has tended to reduce the attractiveness of time deposits compared to alternative deposit products and investments. Customers held $151 million of funds in treasury-management time deposit products at December 31, 2009, down $246 million from the total held at December 31, 2008. 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. Competitively bid public funds time deposits totaled approximately $81 million at year-end 2009, which was down $179 million from year-end 2008. Treasury-management deposits and public funds deposits serve partly as an alternative to Whitneys other short-term borrowings.
TABLE 14. MATURITIES OF TIME DEPOSITS
The balance of short-term borrowings at December 31, 2009 was down 42%, or $542 million, from year-end 2008. The main source of short-term borrowing continued to be the sale of securities under repurchase agreements to customers using Whitneys treasury-management sweep product. Borrowings from customers under
securities repurchase agreements totaled $712 million at December 31, 2009, which was down $68 million from December 31, 2008. Similar to Whitneys treasury-management deposit products, this source of funds can be volatile. Other short-term borrowings, which have included purchased federal funds, short-term Federal Home Loan Bank (FHLB) advances and borrowing through the Federal Reserves Term Auction Facility, decreased $474 million from year-end 2008, reflecting the overall reduced level of earning assets and the funds available from the Companys recent common stock offering. 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 2007, the Bank issued $150 million of 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 $1.68 billion at December 31, 2009, which represented an increase of $156 million from the end of 2008. As noted earlier, Whitney raised $218 million in the fourth quarter of 2009 in an underwritten public offering of 28.75 million of the Companys common shares. Shareholders equity was reduced by the $62.1 million net loss for 2009 and by common dividends declared of $3.0 million and preferred dividends of $13.0 million. These reductions were offset partly by a $14.4 million increase in other comprehensive income.
Tables 15 and 16 present information on regulatory capital ratios for the Company and the Bank. The capital raised in the recent common stock offering is reflected in the Companys Tier 1 capital for 2009. Treasurys investment in preferred stock and common stock warrants is included in Tier 1 capital for the Company beginning in 2008. The Tier 2 regulatory capital for both the Company and the Bank includes $150 million beginning in 2007 in subordinated notes payable issued by the Bank. The decrease in risk-weighted assets from the end of 2008 mainly reflected a reduction in both outstanding loans and in certain credit-related commitments that are converted to assets for risk-based capital calculations.
TABLE 15. REGULATORY CAPITAL AND CAPITAL RATIOS COMPANY
The minimum capital ratios are generally 4% leverage, 4% Tier 1 capital and 8% total capital. Regulators may, however, set higher capital requirements for an individual institution when particular circumstances warrant. Bank holding companies must also have at least a 6% Tier 1 capital ratio and a 10% total capital ratio to be considered well-capitalized for various regulatory purposes. As of December 31, 2009, the Company had the requisite capital levels to qualify as well-capitalized by its regulators.
TABLE 16. REGULATORY CAPITAL AND CAPITAL RATIOS BANK
For a bank to qualify as well-capitalized under the current regulatory framework for prompt corrective supervisory action, its leverage, Tier 1 and total capital ratios must be at least 5%, 6% and 10%, respectively. As a result of the current difficult operating environment and recent operating losses, the Bank has committed to its primary regulator that it will implement a plan to maintain higher capital ratios with a leverage ratio of at least 8%, a Tier 1 regulatory capital ratio of at least 9%, and a total risk-based capital ratio of at least 12%. As of December 31, 2009, the Bank exceeded the requisite capital levels to both satisfy these target minimums and to qualify as well-capitalized by its regulators. The capital raised by the Company in its recent common stock offering strengthens its capacity to serve as a source of financial support to the Bank.
Voluntary Stress Test
Most economic indicators point toward the overall U.S. economy either remaining in a potentially prolonged recessionary period or transitioning to a gradual recovery period. As a result, during the third quarter of 2009, Whitney elected to perform a stress test of the loan portfolio using a similar methodology employed in the Supervisory Capital Assessment Program (SCAP), which was designed by banking regulators to stress a financial institutions loan portfolios under different economic scenarios.
The Company engaged outside consultants to assist with the details of the SCAP methodology and to advise the Company how to effectively build a model to estimate the Banks potential losses in its loan portfolio. As a result, Whitneys management built a sophisticated model and used it to calculate potential losses at a granular level based upon recent charge-off history and adjusted for certain qualitative factors. Whitney segregated each portfolio by geography, loan product type and risk rating and then computed a base loss percentage for each segment based upon a weighted average of charge-offs over the past two years. Whitney then adjusted the calculation for qualitative and macroeconomic factors. Finally, it applied the resulting two-year charge-off percentages to the December 31, 2008 loan portfolio by segment.
Actual net charge-offs for 2009 were 15% less than the most likely base case for the first year of the stress test period and 51% below the most adverse case. The results of the internal stress test using the original loss projections indicate that the current level of Tier 1 common capital is adequate to absorb losses under either the most likely or the most adverse case scenarios.
The Company declared a nominal quarterly dividend of $.01 per share to common shareholders throughout 2009. The Company must currently obtain regulatory approval before increasing the common dividend rate above this level. Regulatory policy statements provide that generally bank holding companies should only pay dividends out of current operating earnings and that the level of dividends, if any, must be consistent with current and expected capital requirements. Preferred dividends totaled $13.0 million for 2009.
In addition to these regulatory requirements and restrictions, Whitneys ability to pay common dividends is also limited by its participation in the Treasurys CPP. Prior to December 19, 2011, unless the Company 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 pay a quarterly common dividend above $.31 per share. 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 common dividend rate will be reassessed quarterly in light of credit quality trends, expected earnings performance and capital levels, limitations resulting from Treasurys CPP or regulatory requirements, and the Banks capacity to declare and pay dividends to the Company. Given the current operating environment, it is unlikely that Whitney will increase its common dividend in the near term.
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 5 above presents the contractual maturity structure of the loan portfolio and Table 12 presents contractual investment maturities. At December 31, 2009, securities available for sale with a carrying value of $1.22 billion, out of a total portfolio of $1.88 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 2009.
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 also 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, including a recent extension of this coverage through June 30, 2010. In June 2009, the FDIC extended the period for the expanded $250,000 coverage through December 31, 2013. These steps were taken as part of the federal governments response to severe disruption in the credit markets and were designed to support deposit retention and to enhance the liquidity of the nations insured depository institutions and thereby assist in stabilizing the overall economy.
Wholesale funding currently available to the Bank includes FHLB advances, federal funds purchased from correspondents and borrowings through the Federal Reserves Term Auction Facility. The Banks unused borrowing capacity from the FHLB at December 31, 2009 totaled approximately $1.5 billion and is secured by a blanket lien on loans secured by real estate. The Banks unused borrowing capacity from the Federal Reserve Discount Window totaled approximately $.9 billion at December 31, 2009, based on the 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 funding source to date.
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, 2009.
In the fourth quarter of 2009, Whitney raised $218 million in an underwritten public offering of 28.75 million of the Companys common shares, as was discussed earlier. At December 31, 2009, the Company had approximately $240 million in cash and demand notes from the Bank available to provide liquidity for future dividend payments to its common and preferred shareholders and other corporate purposes. Whitney reduced its quarterly common dividend to $.01 per share throughout 2009, and the Company must currently obtain regulatory approval before increasing the common dividend rate above this rate.
Dividends received from the Bank have been 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. Because of recent losses, the Bank currently has no capacity to declare dividends to the Company without prior regulatory approval.
Table 17 summarizes payments due from the Company and the Bank under specified long-term and certain other contractual obligations as of December 31, 2009. Obligations under deposit contracts and short-term borrowings are not included. The maturities of time deposits are scheduled in Table 14 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. During 2009, Whitney announced an initiative to replace the Banks core data processing application systems and invest in new customer service technology which will be implemented over a two-year period. Obligations under contracts associated with this initiative are included with purchase obligations in Table 17. 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 employee compensation and benefits, out of current operating cash flows.
TABLE 17. CONTRACTUAL OBLIGATIONS
OFF-BALANCE SHEET ARRANGEMENTS
As a normal part of its business, the Company enters into arrangements that create financial obligations that are not recognized, wholly or in part, in the consolidated financial statements. Certain of these arrangements, such as noncancelable operating leases, are reflected in Table 17 above. The most significant off-balance sheet obligations are the Banks commitments under traditional credit-related financial instruments. Table 18 schedules these commitments as of December 31, 2009 by the periods in which they expire. Commitments under credit card and personal credit lines generally have no stated maturity.
TABLE 18. CREDIT-RELATED COMMITMENTS
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 not all are 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 periods 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 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. When disruption in the credit markets led to unsuccessful remarketing efforts for some of these financings, the Bank assisted its customers by purchasing the underlying instruments until credit market conditions improved sufficiently to restart remarketing efforts or the instruments were refinanced under new arrangements. The Bank no longer held any of these instruments by the end of 2009. Outstanding letters of credit supporting variable-rate demand notes totaled approximately $119 million at December 31, 2009.
The objective of the Companys asset/liability management is to implement strategies for the funding and deployment of its financial resources 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.
Based on the simulation run at December 31, 2009, annual net interest income (TE) would be expected to decrease approximately $8.1 million, or 1.8%, if interest rates instantaneously increased from current rates by 100 basis points. The sensitivity is measured against the results of a base simulation run that uses forecasts of earning assets and funding sources as of the measurement date and that assumes a stable rate environment and structure. A comparable simulation run as of December 31, 2008 produced results that indicated a positive impact on net interest income (TE) of $10.3 million, or 2.1%, from a 100 basis point rate increase. Although Whitney has historically tended to be moderately asset sensitive over the near term, the more recent simulations indicate a somewhat liability-sensitive position in a rising market rate scenario. This shift reflects to a large extent the increased use of rate floors on variable-rate loans and the extent to which these floors exceed the indexed rate in the current low rate environment. Additional information on variable-rate loans and loans with rate floors is included in the following section on Net Interest Income (TE). The simulation assuming a 100 basis point decrease from current rates was suspended at both December 31, 2009 and December 31, 2008 in light of the historically low rate environment. The results of the December 31, 2008 simulation reflect adjustments to the underlying model in light of the unusually low rate environment and they differ from those previously disclosed.
The actual impact that changes in interest rates have on net interest income will depend on a number of factors. These factors include Whitneys ability to achieve any expected growth in earning assets and to maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of the repricing of assets and liabilities, 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 derivative financial instruments as part of its asset/liability and liquidity management processes, but management continues to evaluate whether to make additional use of these instruments. During 2009, the Bank began offering interest rate swap agreements to commercial banking customers seeking to manage their interest rate risk. For each customer swap agreement, the Bank has entered into an offsetting agreement with an unrelated financial institution.
RESULTS OF OPERATIONS
NET INTEREST INCOME (TE)
Whitneys net interest income (TE) decreased $12.5 million, or 3%, in 2009 compared to 2008. Average earning assets were 7%, or $745 million, higher in 2009, largely reflecting the Parish acquisition in late 2008, while the net interest margin (TE) contracted 43 basis points to 4.12%. The net interest margin is net interest income (TE) as a percent of average earning assets. Tables 19 and 20 provide details on the components of the Companys net interest income (TE) and net interest margin (TE). The loan totals in Table 19 include loans held for sale.
The overall yield on earning assets decreased 92 basis points to 4.82% in 2009. This decline resulted mainly from a steep reduction in benchmark rates for the large variable-rate segment of Whitneys loan portfolio compared to 2008. There was a small favorable shift in the earning asset mix between these periods. The yield (TE) on the largely fixed-rate investment portfolio declined 39 basis points between 2008 and 2009.
Loan yields (TE) for 2009 declined 103 basis points compared to 2008. The rates on approximately 28%, or $2.4 billion, of the loan portfolio at year-end 2009 vary based on LIBOR benchmarks, with another 28% tied to prime. These percentages are consistent with those at year-end 2008. The Bank has increased the use of rate floors on its loan products which has helped limit the impact of declining benchmark rates on loan yields. At the end of 2009, approximately 59% of the outstanding balance of its LIBOR/prime-based loans was subject to rate floors compared to 36% at the end of 2008.
The disruption in credit markets in the latter part of 2008 was reflected in wider than normal spreads for LIBOR rates, which benefited Whitneys net interest income and margin for the fourth quarter of 2008 and parts of the third quarter. Management estimates that the wider than normal LIBOR spreads added 30 basis points to the net interest margin for the fourth quarter of 2008 and 10 basis points to 2008s annual margin.
The higher level of nonaccruing loans in 2009 has also reduced net interest income and lowered the effective asset yield. Nonaccruing loans reduced Whitneys net interest margin by approximately 20 basis points for 2009, which was 10 basis points more than the estimated impact on the margin for 2008.
The cost of funds decreased 49 basis points from 2008 to .70% in 2009. The decline reflected mainly the impact of the sustained low rate environment on both deposit and short-term borrowing rates. The overall cost of interest-bearing deposits was down 58 basis points between 2008 and 2009, with the cost of the more rate sensitive time deposits down 98 basis points. Short-term borrowing costs decreased 132 basis points over this same period. Noninterest-bearing demand deposits funded a favorable 29% of average earning assets in 2009 and 28% in 2008, although the benefit to the net interest margin was somewhat muted by the lower rate environment in the current period. The percentage of funding from all noninterest-bearing sources increased to 34% compared to 31% in 2008.
TABLE 19. SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME(TE)(a) YIELDS AND RATES
TABLE 20. SUMMARY OF CHANGES IN NET INTEREST INCOME(TE)(a) (b)
There are several factors that will challenge Whitneys ability to increase net interest income and expand the net interest margin in the near future. Continued weak loan demand will make it difficult to grow earning assets and maintain the proportion of loans in the earning asset mix. The rates on many variable-rate loans with rate floors currently exceed the underlying indexed market rates. This will limit the benefit to Whitneys loan yields from any rise in market rates as the economy recovers. Whitney continues to manage its deposit rates and funding mix to maintain a favorable net interest margin, but the ability to further reduce funding costs has become limited after the sustained period of low market rates.
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 overall yield on earning assets decreased 118 basis points to 5.74% in 2008, again mainly from a steep reduction in benchmark rates for variable-rate loans. The higher level of nonaccruing loans in 2008 lowered the effective yield by approximately 10 basis points, but this was offset by the impact of the wider than normal LIBOR spreads discussed earlier. Loan yields (TE) for 2008 declined 157 basis points compared to 2007. 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. The yield (TE) on the fixed-rate investment portfolio was stable between 2007 and 2008.
The overall cost of funds decreased 84 basis points from 2007 to 2008. Noninterest-bearing demand deposits funded 28% of average earning assets in both 2008 and 2007, and the percentage of funding from all noninterest-bearing sources was 31% in 2008 compared to 33% in 2007. 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.
PROVISION FOR CREDIT LOSSES
Whitney increased its provision for credit losses to $259 million in 2009 compared to $134 million in 2008. Provisions related to impaired loans accounted for approximately half of the total provision for credit losses in 2009. More than $100 million of the impaired loan provisions came from Whitneys Florida and Alabama markets and reflected in large part the continued decline in the value of underlying real estate collateral. The remainder of the provision for credit losses for 2009 was related to the increase in total criticized loans, the impact of elevated charge-off levels on historical loss factors, smaller consumer charge-offs and qualitative adjustments.
Net loan charge-offs were $195 million, or 2.22%, of average loans in 2009, compared to $71.3 million, or .88% of average loans, in 2008. Florida loans generated approximately $140 million of the $204 million of gross charge-offs for 2009. The gross charge-offs were heavily concentrated in residential-related real estate loans.
The provision for loan losses exceeded net charge-offs by $62.6 million during 2009, which increased the allowance for loan losses to 2.66% of total loans at December 31, 2009 from 1.77% at December 31, 2008.
For a more detailed discussion of changes in the allowance for loan losses, the reserve for losses on 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 21 shows the components of noninterest income for each year in the three-year period ended December 31, 2009, 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 15%, or $15.4 million, in 2009 and 11%, or $10.1 million, in 2008. Parishs operations contributed approximately $8.0 million to the increase for 2009.
TABLE 21. NONINTEREST INCOME
Reduced overall economic activity and conservative behavior by Whitneys customers in response to economic uncertainty limited the opportunity for growth in certain income categories in 2009, including deposit service charges and bank card fees. The Company is monitoring recent legislative proposals that would impose limits on certain deposit and other transaction fees and potentially reduce the Banks fee income.
Income from service charges on deposit accounts increased 11%, or $3.6 million, in 2009 on higher commercial account fees and the impact of Parish. This followed an 11%, or $3.4 million, increase between 2008 and 2007 also on higher commercial account fees. 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.
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. The growth in commercial fees in each period was driven in large part by a reduction in the earnings credit allowance in the low market rate environment, although the impact was muted by higher account balances maintained in 2009.
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 2009 increased 4%, or $.7 million, compared to 2008. Charges had decreased 3%, or $.6 million, in 2008 compared to 2007. Without Parishs contribution, there would have been a decrease of over $1.0 million in 2009 reflecting in part the conservative customer behavior discussed above. Broad trends in how customers execute transactions have also been reducing charging opportunities in recent years. The main component of this income category is fees earned on items returned for insufficient funds and for overdrafts.
Fee income generated by Whitneys secondary mortgage market operations grew $4.5 million in 2009, nearly double the level in 2008. This fee income category was stable between 2008 and 2007. The low interest rate environment prompted increased refinancing activity in 2009 and results for the year also benefited from the addition of Parishs mortgage operations. Relatively broad weakness in the overall housing market was apparent in the latter part of 2007 and continued throughout 2008 and into 2009. The market improved as 2009 progressed, but it is unclear if continued improvement will generate loan production sufficient to offset an anticipated decrease in refinancing activity. Whitney has positioned resources in those parts of its market area with the best potential for loan production.
The Parish acquisition also benefited bank card fees, although most of the increase in this income category in 2009 reflected a change in the reporting of certain transactions by a new processor, with the offset in the ATM fees category. Excluding the impact of this change in 2009, bank card fees increased 4%, or $.8 million, in 2009 and 7%, or $1.1 million, in 2008. This income category includes fees from activity on Bank-issued debit and credit cards as well as from merchant processing services.
Trust service fees declined 7%, or $1.0 million, in 2009 and were essentially unchanged between 2008 and 2007 under difficult financial market conditions. Whitney has positioned relationship officers to attract and service trust and wealth management customers across its market area.
Whitney implemented a bank-owned life insurance program in May 2008. Earnings on the $150 million used to purchase policies under this program increased $3.3 million in 2009 compared to 2008.
In the latter part of 2009, the Bank began offering interest rate swap agreements to commercial banking customers seeking to manage their interest rate risk. Income related to this service added $.5 million to other operating income in 2009. 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 $1.9 million in 2009, $3.8 million in 2008 and $4.3 million in 2007, with the fluctuations mainly reflecting opportunities for asset sales.
Table 22 shows the components of noninterest expense for each year in the three-year period ended December 31, 2009, along with the percent changes between years for each component. Noninterest expense increased 19%, or $65.3 million, in 2009, following an increase of 1%, or $2.0 million, from 2007 to 2008. Incremental operating costs associated with acquired operations, including the amortization of acquired intangibles, totaled approximately $23.8 million in 2009 and $7.9 million in 2008. Loan collection costs, including legal services, and foreclosed asset expenses and provisions for valuation losses totaled approximately $28 million for 2009, up approximately $21 million from 2008. The expense for deposit insurance and other regulatory fees was up approximately $19 million compared to 2008, reflecting mainly steps taken by the FDIC to maintain the integrity of the deposit insurance fund as it absorbs recent bank failures.
TABLE 22. NONINTEREST EXPENSE
Employee compensation increased 5%, or $7.5 million, in 2009, after decreasing 6%, or $9.2 million, in 2008. 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 9%, or $12.4 million, in 2009, with approximately $7.7 million of the total increase related to the staff of acquired operations. This followed an increase of 3%, or $4.0 million, from 2007 to 2008, when acquired operations contributed approximately $2.1 million to the total change. The increase in 2009 compensation unrelated to acquisitions of $4.7 million reflected normal salary adjustments and higher sales-based incentive-program compensation related mainly to secondary mortgage operations. The average full-time equivalent staff level was down slightly between 2009 and 2008, excluding the impact of acquired staff. 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.
Compensation expense associated with management incentive programs decreased by $4.9 million in 2009 and $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 2009 or 2008. Reduced share-based compensation has reflected in part the lower estimated cost of more recent awards relative to the cost of prior awards that vested in 2009 and 2008. 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 increased 32%, or $10.4 million, in 2009, following a decrease of 3%, or $.9 million, in 2008. The major components of employee benefits expense, in addition to payroll taxes, are the cost of providing pension benefits through both the defined-benefit plans and a 401(k) employee savings plan and the cost of providing health benefits for active and retired employees.
The increase in employee benefits expense in 2009 was driven mainly by the cost of providing pension benefits. The addition of the Parish staff added approximately $1.3 million to benefits expense for 2009.
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 contributed to an increase of $3.1 million in the actuarially determined periodic expense for the defined-benefit pension plan in 2009. 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 contribution added $2.6 million to 2009 expense.
Net occupancy expense increased 8%, or $2.9 million, in 2009, following a 7%, or $2.3 million, increase in 2008 compared to 2007. The incremental impact of acquired operations totaled approximately $2.1 million in 2009 and $.6 million in 2008. Increased expenses related to de novo branch expansion and higher energy costs drove most of the remaining increase for 2008.
Equipment and data processing expense increased 3%, or $.7 million, in 2009. The incremental costs for acquired operations totaled approximately $1.2 million in 2009. Costs added in 2009 related to the initiative to replace the core data processing system, the opening of a new operations center and various new and enhanced applications, were offset by savings achieved on certain major contract renewals and the elimination of some costs associated with the Banks response to operational difficulties encountered in the aftermath the major hurricanes in 2005. Equipment and data processing expense in 2008 was up 9% over 2007, driven in large part by the cost of new customer-oriented applications associated with strategic initiatives and by branch expansion. Acquired operations contributed $.4 million to the 2008 increase.
The total expense for professional services, both legal and other services, increased $5.9 million in 2009 and $3.0 million in 2008. Legal expense increased $4.9 million to a total of $9.7 million in 2009 and was up $1.7 million in 2008. Each increase came mainly from higher costs associated with problem loan collection efforts. The legal expense category also includes the cost of services for general corporate matters. The expense for nonlegal professional services was up $1.1 million in 2009, following a $1.3 million increase in 2008 compared to 2007. The 2009 expense total included consulting costs related to the initiative to replace core data processing systems, the set-up of the new operations center and an internal stress test of Whitneys capital adequacy under various credit loss scenarios. Consultants have also been engaged over the past three years to assist in strategic planning, the upgrade of major customer interface tools, the development and implementation of product enhancements and process improvements, and regulatory compliance efforts. Both 2008 and 2007 included approximately $1.0 million for assistance integrating the systems of acquired operations.
Other costs associated with problem loan collections and foreclosed assets increased $16.1 million in 2009, including a $10.4 million additional provision to increase the valuation allowance on foreclosed property. These costs were up $3.3 million in 2008 compared to 2007. Expenses associated with problem loan collections and foreclosed assets are expected to remain elevated in the near term.
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 $5.2 million is scheduled for 2010. 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 deposit insurance and other regulatory fees in 2009 was up $18.9 million compared to 2008. Recent bank failures and economic conditions have put pressure on deposit insurance reserve ratios and led the FDIC to introduce a higher rate structure in 2009. Whitney also elected to participate in the FDICs Temporary Liquidity Guarantee Program that provides for full deposit insurance coverage for specified deposit categories. This program began October 14, 2008 and is scheduled to end June 30, 2010, with increased premiums beginning in 2010. During 2009, the FDIC also imposed an industry-wide emergency special assessment at 5 basis points of the insured institutions total assets less Tier 1 regulatory capital. Whitneys assessment totaled $5.5 million. The FDIC will increase regular assessment rates in the future as needed to maintain the integrity of the deposit insurance fund. The $2.9 million increase in deposit insurance and other regulatory fees in 2008 reflected mainly the availability of a one-time credit to offset deposit insurance assessments imposed under a rate structure that was adopted by the FDIC for 2007. The one-time credit fully offset the Banks 2007 assessment as well as $1.6 million of the Banks $4.4 million assessment for 2008.
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 and $1.0 million in 2007. Whitney also took charges of $.3 million in 2009 and $1.9 million in 2008 related to the planned closure of branch facilities. 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 Company provided for income tax expense or benefit at an effective rate of 44.5% in 2009, 24.6% in 2008 and 33.0% in 2007. Whitneys effective tax rates have varied from the 35% federal statutory rate primarily because of tax-exempt interest income and the availability of tax credits. Interest income from the financing of state and local governments and earnings from the bank-owned life insurance program are the major components of tax-exempt income. The main source of tax credits has been investments in affordable housing projects and, beginning in 2008, in projects that primarily benefit low-income communities or help the recovery and redevelopment of communities in the Gulf Opportunity Zone. Tax-exempt income and tax credits tend to increase the effective tax benefit rate from the statutory rate in loss periods and to reduce the tax expense rate in profitable periods. The impact on the effective rate becomes more pronounced as the pre-tax income or loss becomes smaller, leading to lower expense rates and higher tax benefit rates. Table 23 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, 2009.
TABLE 23. INCOME TAXES
Louisiana-sourced income of commercial banks is not subject to state income taxes. Rather, a bank in Louisiana pays a tax based on the value of its capital stock in lieu of income and franchise taxes, and this tax is allocated to parishes in which the bank maintains 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.
FOURTH QUARTER RESULTS
Whitney reported net income of $318,000 for the fourth quarter of 2009 compared to a net loss of $30.0 million for the third quarter of 2009. Including dividends on preferred stock, the loss to common shareholders was $3.75 million, or $.04 per diluted common share, for the fourth quarter of 2009 compared to a loss of $34.1 million, or $.50 per diluted share, for the third quarter of 2009. The Company earned $8.2 million, or $.12 per diluted common share, for the fourth quarter of 2008.
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 2009 and 2008.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (Unaudited)
All prices as reported on The Nasdaq Global Select Market.
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (Unaudited) (continued)
All prices as reported on The Nasdaq Global Select Market.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Whitney Holding Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.
Management used the framework of criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission to conduct an evaluation of the effectiveness of internal control over financial reporting. Based on that evaluation, management concluded that internal control over financial reporting for the Company as of December 31, 2009 was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Companys internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Shareholders and Board of Directors
of Whitney Holding Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders equity and cash flows present fairly, in all material respects, the financial position of Whitney Holding Corporation and its subsidiaries (the Company) at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
March 1, 2010
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
The accompanying notes are an integral part of these financial statements.
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Whitney Holding Corporation is a Louisiana bank holding company headquartered in New Orleans, Louisiana. Its principal subsidiary is Whitney National Bank (the Bank), which represents virtually all its operations and net income.
The Bank, which has been in continuous operation since 1883, engages in community banking in its market area stretching across the five-state Gulf Coast region, including the Houston, Texas metropolitan area, southern Louisiana, the coastal region of Mississippi, central and south Alabama, the panhandle of Florida, and the Tampa Bay metropolitan area of Florida. The Bank offers commercial and retail banking products and services, including trust products and investment services, to the customers in the communities it serves. Southern Coastal Insurance Agency, Inc., a wholly owned Bank subsidiary, offers personal and business insurance products to customers primarily in northwest Florida and the New Orleans metropolitan area.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
Whitney Holding Corporation and its subsidiaries (the Company or Whitney) follow accounting and reporting policies that conform with accounting principles generally accepted in the United States of America and those generally practiced within the banking industry. The following is a summary of the more significant accounting policies.
Basis of Presentation
The consolidated financial statements include the accounts of Whitney Holding Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Whitney reports the balances and results of operations from business combinations accounted for as purchases from the respective dates of acquisition (see Note 3).
Use of Estimates
In preparing the consolidated financial statements, the Company is required to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Securities are classified as trading, held to maturity or available for sale. Management determines the classification of securities when they are purchased and reevaluates this classification periodically as conditions change that could require reclassification.
Trading account securities are bought and held principally for resale in the near term. They are carried at fair value with realized and unrealized gains or losses reflected in noninterest income. Trading account securities are immaterial in each period presented and have been included in other assets on the consolidated balance sheets.
Securities that the Company both positively intends and has the ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. The intent and ability to hold are not considered satisfied when a security is available to be sold in response to changes in interest rates, prepayment rates, liquidity needs or other reasons as part of an overall asset/liability management strategy.
Securities not meeting the criteria to be classified as either trading securities or securities held to maturity are classified as available for sale and are carried at fair value. Unrealized holding losses, other than those determined to be other than temporary, and unrealized holding gains are excluded from net income and are recognized, net of tax, in other comprehensive income and in accumulated other comprehensive income, a separate component of shareholders equity.
Premiums and discounts on securities, both those held to maturity and those available for sale, are amortized and accreted to income as an adjustment to the securities yields using the interest method. Realized gains and losses on securities, including declines in value judged to be other than temporary, are reported net as a component of noninterest income. The cost of securities sold is specifically identified for use in calculating realized gains and losses.
Loans Held for Sale
Loans originated for sale are carried at the lower of either cost or market value. At times, management may decide to sell loans that were not originated for that purpose. These loans are reclassified as held for sale when that decision is made and are also carried at the lower of cost or market.
Loans are carried at the principal amounts outstanding net of unearned income. Interest on loans and accretion of unearned income, including deferred loan fees, are computed in a manner that approximates a level rate of return on recorded principal.
The Company stops accruing interest on a loan when the borrowers ability to meet contractual payments is in doubt. For commercial and real estate loans, a loan is placed on nonaccrual status generally when it is ninety days past due as to principal or interest, and the loan is not otherwise both well secured and in the process of collection. When a loan is moved to nonaccrual status, any accrued but uncollected interest is reversed against interest income. Interest payments on nonaccrual loans are used to reduce the reported loan principal under the cost recovery method if the collectibility of the remaining principal is not reasonably assured; otherwise, such payments are recognized as interest income when received. A loan on nonaccrual status may be reinstated to accrual status when full payment of contractual principal and interest is expected and this expectation is supported by current sustained performance.
A loan is considered impaired when it is probable that all amounts will not be collected as they become due according to the contractual terms of the loan agreement. Generally, impaired loans are accounted for on a nonaccrual basis. The extent of impairment is measured as discussed below in the section entitled Allowance for Loan Losses.
Allowance for Loan Losses
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. As actual loan losses are incurred, they are charged against the allowance. Subsequent recoveries are added back to the allowance when collected. The methodology for determining the allowance involves significant judgment, and important factors that influence this judgment are re-evaluated quarterly to respond to changing conditions.
The process for determining the recorded allowance involves three key elements: (1) establishing specific allowances as needed for loans evaluated for impairment; (2) developing loss factors based on historical loss experience for nonimpaired commercial loans grouped by geography, loan product type and internal risk rating and for homogeneous groups of residential and consumer loans; and (3) determining appropriate adjustments to historical loss factors based on managements assessment of current economic conditions and other qualitative risk factors both internal and external to the Company.
A loan is considered impaired when it is probable that all contractual amounts will not be collected as they come due. Specific allowances are determined for impaired loans based on the present value of expected future cash flows discounted at the loans contractual interest rate, the fair value of the collateral if the loan is collateral dependent, or, when available, the loans observable market price.
The historical loss factors for commercial loans are determined with reference to the results of migration analysis, which analyzes the charge-off experience over time for loans within each grouping. The historical loss factors for homogeneous loan groups are based on average historical charge-off information. Management adjusts historical loss factors based on its assessment of whether current conditions, both internal and external, would be
adequately reflected in these factors. Internally, management must consider such matters as whether trends have been identified in the quality of underwriting and loan administration as well as in the timely identification of credit quality issues. Management also monitors shifts in portfolio concentrations and other changes in portfolio characteristics that indicate levels of risk not fully captured in the loss factors. External factors include local and national economic trends, as well as changes in the economic fundamentals of specific industries which are well-represented in Whitneys customer base. Applying the adjusted loss factors to the corresponding loan groups yields an allowance that represents managements best estimate of probable losses. Management has established policies and procedures to help ensure a consistent approach to this inherently judgmental process.
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.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets and over the shorter of the lease terms or the estimated lives of leasehold improvements. Useful lives range principally from fifteen to thirty years for buildings and improvements and from three to ten years for furnishings and equipment, including data processing equipment and software. Additions to bank premises and equipment and major replacements or improvements are capitalized.
Collateral acquired through foreclosure or in settlement of loans is reported with other assets in the consolidated balance sheets. With the exception of grandfathered property interests, which are assigned a nominal book value, these assets are recorded at estimated fair value less estimated selling costs. Any initial reduction in the carrying amount of a loan to the fair value of the collateral received is charged to the allowance for loan losses. Subsequent valuation adjustments for foreclosed assets are also included in current earnings, as are the revenues and expenses associated with managing these assets before they are sold.
Goodwill and Other Intangible Assets
Whitney has recognized intangible assets in connection with its purchase business combinations. Identifiable intangible assets acquired by the Company have represented mainly the value of the deposit relationships purchased in these transactions. Goodwill represents the purchase price premium over the fair value of the net assets of an acquired business, including identifiable intangible assets.
Goodwill must be assessed for impairment annually unless interim events or circumstances make it more likely than not that an impairment loss has occurred. Impairment is defined as the amount by which the implied fair value of the goodwill contained in any reporting unit within a company is less than the goodwills carrying value. The Company has assigned all goodwill to one reporting unit that represents Whitneys overall banking operations. This reporting unit is the same as the operating segment identified below, and its operations constitute substantially all of the Companys consolidated operations. Impairment losses would be charged to operating expense.
Identifiable intangible assets with finite lives are amortized over the periods benefited and are evaluated for impairment similar to other long-lived assets. If the useful life of an identifiable intangible asset is indefinite, the recorded asset is not amortized but is tested for impairment annually by comparison to its estimated fair value.
The grant-date fair value of equity instruments awarded to employees establishes the cost of the services received in exchange, and the cost associated with awards that are expected to vest is recognized over the required service period.
The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method. Under this method, the expected tax consequences of temporary differences hat arise between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either deferred tax liabilities to be settled in the future or deferred tax assets that will be realized as a reduction of future taxes payable. Currently enacted tax rates and laws are used to calculate the expected tax consequences. Valuation allowances are established against deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the assets will not be realized.
Under accounting standards adopted by the Company on January 1, 2007, the benefit of a position taken or expected to be taken in a tax return is recognized in a companys financial statements when it is more likely than not that the position will be sustained based on its technical merits.
Earnings per Common Share
The Financial Accounting Standards Board (FASB) has concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be included in the computation of earnings per common share using the two-class method. Whitney has awarded share-based payments that are considered participating securities under this guidance. The two-class method allocates net income applicable to common shareholders to each class of common stock and participating security according to common dividends declared and participation rights in undistributed earnings. Net losses are not allocated to participating securities because the securities bear no contractual obligation to fund or otherwise share in losses. This guidance is effective for 2009 and has been applied retrospectively to earnings per share data presented for prior periods with no material impact.
Basic earnings per common share is computed by dividing income applicable to and allocated to common shareholders by the weighted-average number of common shares outstanding for the period. Shares outstanding are adjusted for unvested restricted shares issued to employees under the long-term incentive compensation plan and for certain shares that will be issued under the directors compensation plan.
Diluted earnings per common share is computed using the weighted-average number of common shares outstanding increased by dilutive potential common shares. Potential common shares consist of employee and director stock options, unvested restricted stock units awarded to employees without dividend rights, and stock warrants issued to Treasury in December 2008. Performance-based restricted stock units reflect expected performance factors. The number of potential common shares included in the diluted earnings per share calculation is determined using the treasury stock method. Potential common shares do not enter into the calculation of diluted earnings per share if the impact would be anti-dilutive, i.e., increase earnings per share or reduce a loss per share.
Statements of Cash Flows
The Company considers only cash on hand, cash items in process of collection and balances due from financial institutions as cash and cash equivalents for purposes of the consolidated statements of cash flows.
Operating Segment Disclosures
Accounting standards have been established for reporting information about a companys operating segments using a management approach. Reportable segments are identified in these standards as those revenue-producing components for which separate financial information is produced internally and which are subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. Consistent with its stated strategy that is focused on providing a consistent package of community banking products and services throughout a coherent market area, Whitney has identified its overall banking operations as its only reportable segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented.
Assets held by the Bank in a fiduciary capacity are not assets of the Bank and are not included in the consolidated balance sheets. Generally, certain minor sources of income are recorded on a cash basis, which does not differ materially from the accrual basis.
Accounting Standard Developments
In August 2009, the FASB updated its guidance on fair value measurements and disclosure. The updated guidance clarifies how to measure the fair value of a liability when a quoted price in an active market for the identical liability is not available, but does not introduce new fair value measurement principles. The new guidance did not have a material impact on the Companys fair value disclosures.
In June 2009, the FASB amended its guidance on accounting for transfers of financial assets. The amended guidance eliminates the concept of qualifying special-purpose entities and requires that these entities be evaluated for consolidation under applicable accounting guidance, and it also removes the exception that permitted sale accounting for certain mortgage securitizations when control over the transferred assets had not been surrendered. Based on this new standard, many types of transferred financial assets that would previously have been derecognized will now remain on the transferors financial statements. The guidance also requires enhanced disclosures about transfers of financial assets and the transferors continuing involvement with those assets and related risk exposure. The new guidance is effective for Whitney beginning in 2010. Adoption of this new guidance is not expected to have a significant impact on the Companys financial condition or results of operations, given Whitneys current involvement in financial asset transfer activities.
Also in June 2009, the FASB issued amended guidance on accounting for variable interest entities (VIEs). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about an enterprises involvement with variable interest entities. The new guidance is effective for Whitneys 2010 fiscal year. The adoption of this new guidance is not expected to materially impact the Companys financial condition or results of operations.
In April 2009, the FASB established a new method of recognizing and reporting other-than-temporary impairments of debt securities and expanded and increased the frequency of related disclosures. Given the current composition of Whitneys portfolio of debt securities, application of this new guidance did not materially impact the Companys financial condition or results of operations.
MERGERS AND ACQUISITIONS
In November 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. Applying purchase accounting to this transaction, the Company recorded goodwill of $104 million and a $13 million intangible asset for the estimated value of deposit relationships with a weighted-average life of approximately three years.
In March 2007, Whitney acquired Signature Financial Holdings, Inc. (Signature), headquartered in St. Petersburg, Florida, the parent of Signature Bank. Signature Bank operated seven banking centers in the Tampa Bay metropolitan area and had approximately $270 million in total assets, including $220 million of loans, and $210 million in deposits at acquisition. Signatures shareholders received 1.49 million shares of Whitney common stock and cash totaling $13 million, for a total transaction value of approximately $61 million. Intangible assets acquired in this transaction included $39 million of goodwill and $4 million assigned to the value of deposit relationships with a weighted-average life of 2.4 years.
The acquired banking operations have been merged into the Bank. Whitneys financial statements include the results from acquired operations since the acquisition dates.
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
The balance of federal funds sold and short-term investments included the following.
Federal funds at December 31, 2009 were sold on an overnight basis. Interest-bearing deposits at December 31, 2009 include $195 million with the regional Federal Reserve Bank.
Summary information about securities available for sale and securities held to maturity follows. Substantially all mortgage-backed securities are backed by residential mortgage loans.
The following summarizes securities with unrealized losses at December 31, 2009 and 2008 by the period over which the securitys fair value had been continuously less than its amortized cost as of each year end.
Management evaluates whether unrealized losses on securities represent impairment that is other than temporary. If such impairment is identified, the carrying amount of the security is reduced with a charge to operations. In making this evaluation, management first considers the reasons for the indicated impairment. These could include changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, and changes in the markets perception of the issuers financial health and the securitys credit quality. Management then considers the likelihood of a recovery in fair value sufficient to eliminate the indicated impairment and the length of time over which an anticipated recovery would occur, which could extend to the securitys maturity. Finally, management determines whether there is both the ability and the intent to hold the impaired security until an anticipated recovery, in which case the impairment would be considered temporary. In making this assessment, management considers whether the security continues to be a suitable holding from the perspective of the Companys overall portfolio and asset/liability management strategies and whether there are other circumstances that would more likely than not require the sale of the security.
There were minimal unrealized losses at December 31, 2009, all of which were unrelated to credit quality. In all cases, the indicated impairment would be recovered by the securitys maturity or repricing date or possibly earlier if the market price for the security increases with a reduction in the yield required by the market. All impaired securities were originally purchased for continuing investment purposes, and management believes that they remain suitable for this purpose in light of current market conditions and Company strategies. At December 31, 2009, management had both the intent and ability to hold these securities until the market-based impairment is recovered. No losses for other-than-temporary impairment were recognized in any of the three years ended December 31, 2009.
The following table shows the amortized cost and estimated fair value of securities available for sale and held to maturity grouped by contractual maturity as of December 31, 2009. Debt securities with scheduled repayments, such as mortgage-backed securities, and equity securities are presented in separate totals. The expected maturity of a security, in particular certain U.S. agency securities and obligations of states and political subdivisions, may differ from its contractual maturity because of the exercise of call options.
Proceeds from sales of securities available for sale were $23 million in 2009, $92 million in 2008 and $39 million in 2007. Substantially all of the proceeds in 2008 and 2007 came from the sale of portfolios acquired in business combinations. Realized gross gains and losses were insignificant.
Securities with carrying values of $1.39 billion at December 31, 2009 and $1.69 billion at December 31, 2008 were sold under repurchase agreements, pledged to secure public deposits or pledged for other purposes.
The composition of the Companys loan portfolio follows.
The Bank makes loans in the normal course of business to directors and executive officers of the Company and the Bank and to their associates. Loans to such related parties carry substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risks of collectibility when originated. An analysis of the changes in loans to related parties during 2009 follows.
Outstanding unfunded commitments and letters of credit to related parties totaled $121 million and $125 million at December 31, 2009 and 2008, respectively.
ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS
A summary analysis of changes in the allowance for loan losses follows.
A summary analysis of changes in the reserve for losses on unfunded credit commitments follows. The reserve is reported with accrued expenses and other liabilities in the consolidated balance sheets.
IMPAIRED LOANS, NONPERFORMING LOANS, FORECLOSED ASSETS AND SURPLUS PROPERTY
Information on loans evaluated for possible impairment loss follows.
The following is a summary of nonperforming loans and foreclosed assets and surplus property. All of the impaired loans summarized above are included in the nonperforming loan totals.
Interest income is recognized on certain nonaccrual loans as payments are received. Interest payments on other nonaccrual loans are accounted for under the cost recovery method, but this interest may later be recognized in income when loan collections exceed expectations or when workout efforts result in fully rehabilitated credits. The following compares estimated contractual interest income on nonaccrual loans and restructured loans with the cash-basis and cost-recovery interest actually recognized on these loans.
The Bank and one of its subsidiaries own various property interests that were acquired in routine banking transactions generally before 1933. There was no ready market for these assets when they were initially acquired, and, as was general banking practice at the time, they were written down to a nominal value. The assets include direct and indirect ownership interests in scattered undeveloped acreage, various mineral interests, and a few commercial and residential sites primarily in southeast Louisiana.
The revenues and direct expenses related to these grandfathered property interests that are included in the statements of income follow.
BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment by asset classification follows.
Provisions for depreciation and amortization included in noninterest expense were as follows.
At December 31, 2009, the Bank was obligated under a number of noncancelable operating leases, substantially all related to premises. Certain of these leases have escalation clauses and renewal options. Total rental expense was $11.2 million in 2009, $11.0 million in 2008 and $9.8 million in 2007.
As of December 31, 2009, the future minimum rentals under noncancelable operating leases having an initial lease term in excess of one year were as follows.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist mainly of identifiable intangibles, such as the value of deposit relationships, and goodwill acquired in business combinations accounted for as purchases. There were no acquisitions or dispositions of intangible assets during 2009. The balance of goodwill that will not generate future tax deductions was $427 million at December 31, 2009.
Goodwill is tested for impairment at least annually. 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 the acquisition of the whole unit, such as estimated discounted cash flows, the quoted market price of Whitneys common stock including an estimated control premium, and observable average price-to-earnings and price-to-book multiples of our competitors. No indication of goodwill impairment was identified in the annual assessments as of September 30, 2009 and 2008. Given the current economic environment and potential for volatility in the fair value estimate, management has been updating the impairment test for goodwill quarterly throughout 2009. No indication of goodwill impairment was identified in these interim tests. For the most recent impairment test as of December 31, 2009, the discounted cash flow analysis resulted in a fair value estimate approximately 7% higher than book value. Either a 10 basis point reduction in the expected net interest margin, a .50% lower projected growth rate or a .50% higher discount rate would reduce the estimated fair value by approximately 7%.
Forecasting cash flows, credit losses and growth in addition to valuing the Companys assets with any degree of assurance in the current economic environment is very difficult and subject to change over very short time periods. Management will continue to update its impairment analysis as circumstances change in this environment of volatile and unpredictable market conditions. As a result, it is possible that a noncash goodwill impairment charge may be required in future periods.
Identifiable intangible assets with finite lives are amortized over the periods benefited and are evaluated for impairment similar to other long-lived assets. The Companys only significant identifiable intangible assets reflect the value of deposit relationships, all of which have finite lives. The weighted-average remaining life of identifiable intangible assets was approximately 2.6 years at December 31, 2009.
The carrying value of intangible assets subject to amortization was as follows, including changes during 2009.
Amortization of intangible assets included in noninterest expense was as follows.
The following shows estimated amortization expense for the five succeeding years, calculated based on current amortization schedules.