Whitney Holding 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission file number 0-1026
228 St. Charles Avenue
New Orleans, Louisiana 70130
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
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 ü No __
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 __ No ü
As of October 31, 2008, 64,013,683 shares of the registrant’s no par value common stock were outstanding.
WHITNEY HOLDING CORPORATION
TABLE OF CONTENTS
WHITNEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Whitney Holding Corporation and its subsidiaries (the Company or Whitney). The Company’s principal subsidiary is Whitney National Bank (the Bank), which represents virtually all of the Company’s operations and net income. All significant intercompany balances and transactions have been eliminated.
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. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Whitney’s financial condition, results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.
Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), some financial information and disclosures have been condensed or omitted in preparing the consolidated financial statements presented in this quarterly report on Form 10-Q. These financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2007. Financial information reported in these financial statements is not necessarily indicative of the Company’s financial condition, results of operations or cash flows of any other interim or annual periods.
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 operates 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 Company expects to merge Parish National Bank into Whitney National Bank before the end of 2008 upon the completion of systems-integration work and regulatory approval. The transaction was valued at approximately $158 million, with approximately $97 million paid to Parish’s shareholders in cash and the remainder in Whitney stock totaling approximately 3.33 million shares. The purchase price allocation for this transaction has not yet been completed.
On March 2, 2007, Whitney completed its acquisition of Signature Financial Holdings, Inc. (Signature), headquartered in St. Petersburg, Florida and 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. The transaction was valued at approximately $61 million, with $13 million paid to Signature’s shareholders in cash and the remainder in Whitney common stock totaling approximately 1.49 million shares. Applying purchase accounting to this transaction, the Company recorded goodwill of $39 million and a $4 million intangible asset for the estimated value of deposit relationships with a weighted-average life of 2.4 years. Signature Bank has been merged into the Bank.
Whitney’s financial statements include the results from acquired operations since the acquisition dates.
The composition of the Company’s loan portfolio was as follows.
ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR LOSSES ON UNFUNDED CREDIT COMMITMENTS, IMPAIRED LOANS AND NONPERFORMING LOANS
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.
Information on loans evaluated for possible impairment loss follows.
The following is a summary of nonperforming loans. Substantially all of the impaired loans summarized above are included in the nonperforming loan totals.
The composition of deposits was as follows.
Time deposits of $100,000 or more include balances in treasury-management deposit products for commercial and certain other larger deposit customers. Balances maintained in such products totaled $447 million at September 30, 2008 and $705 million at December 31, 2007. Most of these deposits mature on a daily basis.
Short-term borrowings consisted of the following.
The Bank borrows funds on a secured basis by selling securities under agreements to repurchase, mainly in connection with treasury-management services offered to its deposit customers. Repurchase agreements generally mature daily.
Advances from the Federal Home Loan Bank (FHLB) mature within one month and are secured by a blanket lien on Bank loans secured by real estate.
Federal funds purchased are unsecured borrowings from other banks, generally on an overnight basis.
Under the Treasury Investment Program, excess U.S. Treasury receipts are loaned to participating financial institutions at 25 basis points under the federal funds rate. Repayment of these borrowed funds can be demanded at any time. The Bank participates up to a maximum of $40 million and has pledged securities with a comparable value as collateral.
OTHER ASSETS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The more significant components of other assets and accrued expenses and other liabilities were as follows.
In late May 2008, Whitney paid premiums of $150 million to purchase life insurance policies under a newly-adopted bank-owned life insurance program. The policies are carried at their cash surrender value, which represents the amount that could be realized as of the reporting date. Earnings on these policies are reported in noninterest income and are not taxable.
OTHER NONINTEREST INCOME
The components of other noninterest income were as follows.
In the first quarter of 2008, Whitney recognized a $2.3 million gain from the mandatory redemption of Visa Inc. (Visa) shares as discussed in Note 13. This gain is reflected in year-to-date other operating income.
During the third quarter of 2007, Whitney reached a final settlement on insurance claims primarily arising from the hurricanes that struck portions of its market area in the late summer of 2005. With this settlement, the Company recognized a gain of $31.3 million, which is reported in other operating income.
OTHER NONINTEREST EXPENSE
The components of other noninterest expense were as follows.
Miscellaneous operating losses for the third quarter and first nine months of 2008 include $2.1 million of casualty losses and expenses incurred during recent hurricanes. In the first quarter of 2008, Whitney reversed a $1.0 million liability related to an indemnification agreement with Visa as discussed in Note 13. The impact is also reflected in year-to-date miscellaneous operating losses.
EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Income Plans
Whitney has maintained a noncontributory qualified defined-benefit pension plan covering substantially all of its employees, subject to minimum age and service-related requirements. Whitney also has an unfunded nonqualified defined-benefit pension plan that provides retirement benefits to designated executive officers.
Subsequent to September 30, 2008, Whitney’s Board of Directors approved amendments to the qualified plan (a) to limit eligibility to those employees who are employed on December 31, 2008 and (b) to freeze benefit accruals for all participants other than those who are fully vested and whose age and years of benefit service combined equal at least 50 as of December 31, 2008. The Company anticipates recognizing a curtailment gain before year end as a result of these amendments, but the amount of the gain is still being determined.
Concurrent with these defined-benefit plan amendments, the Board also approved amendments to Whitney’s employee savings plan. These amendments authorize the Company to make discretionary profit sharing contributions, beginning in 2009, on behalf of participants in the savings plan who are either (a) ineligible to participate in the qualified defined-benefit plan or (b) subject to the freeze in benefit accruals under the defined-benefit plan. The discretionary profit sharing contribution for a plan year is 4% of the participants’ eligible compensation for such year and is allocated only to participants who are employed at year end. Participants must complete three years of service to become vested in the Company’s contributions, subject to earlier vesting in the case of retirement, death or disability.
The Company made a $10 million contribution to the qualified plan during the third quarter of 2008. The performance of the pension trust fund through the end of the third quarter of 2008 was substantially below the long-term expected rate of return, reflecting conditions in the equity and corporate debt markets. Management is monitoring fund performance as it considers whether it would be desirable to make an additional contribution before year end. The components of net pension expense were as follows for the combined qualified and nonqualified plans.
The actuarial gains or losses and prior service costs or credits with respect to a retirement benefit plan that arise in a period but are not immediately recognized as components of net periodic benefit expense are recognized, net of tax, as a component of other comprehensive income. The amounts included in accumulated other comprehensive income are adjusted as they are recognized as components of net periodic benefit expense in subsequent periods.
Health and Welfare Plans
Whitney has offered health care and life insurance benefit plans for retirees and their eligible dependents. The Company funds its obligations under these plans as contractual payments come due to health care organizations and insurance companies. In the first quarter of 2007, Whitney amended these plans to eliminate postretirement health benefits for all participants other than retirees already receiving benefits and those active participants who were eligible to receive benefits by December 31, 2007 and to eliminate dental benefits for all participants. The amendment also froze the Company’s health care benefit subsidy level and eliminated the life insurance benefit for employees who retire after December 31, 2007. The amounts recognized as net periodic expense for postretirement benefits were insignificant in both 2008 and 2007.
Whitney maintains incentive compensation plans that incorporate share-based compensation. The plans for both employees and directors have been approved by the Company’s shareholders. Descriptions of these plans, including the terms of awards and the number of Whitney shares authorized for issuance, were included in Note 16 to the consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007.
In June 2008, annual share-based compensation awards were made under the employee plan as follows.
Employees forfeit their restricted stock units if they terminate employment within three years of the award date, although they can retain a prorated number of units in the case of retirement, death, disability and, in limited circumstances, involuntary termination. During the three-year period, they cannot transfer or otherwise dispose of the units awarded. The performance-based restricted stock units that ultimately vest will be determined with reference to Whitney’s financial performance over a three-year period in relation to that of a designated peer group.
Employees can first exercise their stock options from the 2008 award three years from the grant date, provided they are still employed. A prorated number of options can vest and become immediately exercisable upon an employee’s retirement, death or disability within this three-year period. All employee options expire after ten years, although an earlier expiration applies in the case of retirement, death or disability. The exercise price for employee options is set at an amount not lower than the opening market price for Whitney’s stock on the grant date.
The Company recognized share-based compensation expense with respect to awards under the employee plan of $2.8 million ($1.8 million after-tax) in the third quarter of 2008 and $3.3 million ($2.2 million after-tax) in the third quarter of 2007. Share-based compensation expense for the employee plan was $8.5 million ($5.5 million after-tax) for the first nine months of 2008 and $10.8 million ($7.0 million after-tax) for the comparable period in 2007.
During June 2008, annual share-based compensation awards were made under the directors’ plan as follows.
Directors’ stock grants are fully vested upon award, and their stock options are immediately exercisable and expire no later than ten years from the grant date. The exercise price for the directors’ options was set at $18.30, the closing market price for the Company’s stock on the grant date.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is tested for impairment at least annually. No indication of goodwill impairment was identified in the annual assessment as of September 30, 2008.
The Company is party to various legal proceedings arising in the ordinary course of business. After reviewing pending and threatened actions with legal counsel, management believes that the ultimate resolution of these actions will not have a material effect on Whitney’s financial condition, results of operations or cash flows.
In October 2007, Visa completed restructuring transactions that modified the obligation of members of Visa USA, including Whitney, to indemnify Visa against pending and possible settlements of certain litigation matters. Whitney recorded a $1.0 million liability in the fourth quarter of 2007 for the estimated value of its obligations under the indemnification agreement. In the first quarter of 2008, Visa completed an initial public offering of its shares and used the proceeds to redeem a portion of Visa USA members’ equity interests and to establish an escrow account that will fund any settlement of the members’ obligations under the indemnification agreement. Whitney recognized a $2.3 million gain from the redemption proceeds and reversed the $1.0 million liability for its indemnification obligations. Although the Company remains obligated to indemnify Visa for losses in connection with certain litigation matters whose claims exceed amounts set aside in the escrow account, Whitney’s interest in the escrow balance approximates management’s current estimate of the value of the Company’s indemnification obligation.
The amount of offering proceeds escrowed for litigation settlements will reduce the number of shares of Visa stock to which Whitney will ultimately be entitled as a result of the restructuring.
STOCK REPURCHASE PROGRAM
During the first six months of 2008, Whitney repurchased 2,039,788 shares of its common stock at an average cost of $24.75 per share. This completed the repurchase program announced in November 2007. Under this program Whitney repurchased a total of 3,934,879 shares at an average cost of $25.41 per share.
EARNINGS PER SHARE
The components used to calculate basic and diluted earnings per share were as follows.