Annual Report (Form 10-K), fiscal year 1994

Item 1: BUSINESS
Whitney Holding Corporation (the "Company") is a Louisiana bank holding company registered pursuant to the Bank Holding Company Act of 1956. The Company became an operating entity in 1962 with Whitney National Bank (the "Louisiana Bank") as its only significant subsidiary. In December, 1994, the Company established the Whitney Bank of Alabama (the "Alabama Bank") and, through this new banking subsidiary, acquired the Mobile area operations of The Peoples Bank, Elba, Alabama on February 17, 1995. The Louisiana Bank, which has its headquarters in Orleans Parish, has been engaged in general banking business in Louisiana and the City of New Orleans since 1883.
The Company, through its banking subsidiaries, engages in commercial and retail banking and in trust business, including the taking of deposits, the making of secured and unsecured loans, the financing of commercial transactions, the issuance of credit cards, the performance of corporate, pension and personal trust services, investment services and safe deposit rentals. The Louisiana Bank is active as a correspondent for other banks. The Banks render specialized services of different kinds in connection with all of the foregoing, and operate forty-four offices in south Louisiana, five offices in the Mobile area, and a foreign branch on Grand Cayman in the British West Indies.
There is significant competition within the financial services industry in general as well as with respect to the particular financial services provided by the Banks. Within its market areas, the Banks compete directly with several major banking institutions of comparable or larger size and resources as well as with various other smaller banking organizations and local and national "non-bank" competitors, including savings and loans, credit unions, mortgage companies, personal and commercial finance companies, investment brokerage firms, and registered investment companies (mutual funds).
In recent years there has been a significant consolidation within the financial services industry, particularly with respect to the banking and savings and loan segments of this industry. This movement to consolidation has been driven both by the large number of bank and S&L failures experienced during the crisis of the late 1980's and early 1990's as well as by general competitive pressures. All of the Banks' major direct banking competitors have been relatively active in expansion through acquisition. In recent years, the Company has entered into two acquisitions of banking operations involving approximately $200 million of assets and liabilities. The trend toward industry consolidation is expected to continue in the near term.
All material funds of the Company are invested in the Banks. The Banks have a large number of customer relationships which have been acquired over a period of many years and are not dependent upon any single customer or upon a few customers, so the loss of any single customer or a few customers would not have a material adverse effect on the Banks or the Company. The Louisiana Bank has customers in a number of foreign countries but the portion of revenue derived from these foreign customers is not a material portion of its overall revenues.
The Company and the Banks and their related operations are subject to federal, state and local laws applicable to banks and bank holding companies and to the regulations of the Board of Governors of the Federal Reserve System, the Comptroller of Currency and the Federal Deposit Insurance Corporation.
The Company does not believe that compliance with existing federal, state or local environmental laws and regulations will impose any material financial obligation on the Company or materially affect the realizable value of its assets.
Page 3 of 56
Item 2:



Item 2: PROPERTIES
The Company owns no real estate in its own name. The Louisiana Bank owns the fourteen-story Whitney National Bank Building at 228 St. Charles Avenue in New Orleans. The Louisiana Bank occupies approximately 68.0% of the 364,863 square feet in this building, and the balance is either leased to third parties or available to be leased. The Banks also own the premises for twelve branches in Orleans Parish, six branches in Jefferson Parish, four branches in Mobile County, four branches in Lafayette Parish, six branches in East Baton Rouge Parish and three branches in St. Tammany Parish, one of which is located on leased ground. None of these properties is subject to any significant encumbrances.
The Banks hold a variety of property interest acquired throughout the years in settlement of loans. Reference is made to Note 7 to the financial statements included in Item 8 for further information as to such property interest as of December 31, 1994.
Item 3:

Item 3: LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than routine litigation incidental to the business, to which the Company or its subsidiaries is a party or to which any of their property is subject.
Item 4:

Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 4a: EXECUTIVE OFFICERS OF THE REGISTRANT
William L. Marks, 51, Chairman of the Board and Chief Executive Officer of the Louisiana Bank and the Company since February 28, 1990. Former Senior Executive Vice President and Regional Executive of AmSouth Bank NA, headquartered in Birmingham, Alabama, responsible for a division with $1 billion in assets and 702 employees.
R. King Milling, 54, since 1979, Director, and since December, 1984, Director and President, of the Louisiana Bank and the Company.
G. Blair Ferguson, 51, since July, 1993, Executive Vice President, of the Louisiana Bank and the Company. Former Executive Vice President and Regional Director of First City, Dallas, Texas.
Edward B. Grimball, 50, from September, 1990 to October, 1991, Vice President and Chief Financial Officer, and since October, 1991, Executive Vice President and Chief Financial Officer of the Louisiana Bank and the Company. Former Senior Vice President, Comptroller and Secretary of Bank South Corp., a $5-billion multi-bank holding company headquartered in Atlanta, Georgia.
Kenneth A. Lawder, Jr., 53, since December, 1991, Executive Vice President of the Louisiana Bank and the Company. Former Senior Vice President, Wachovia Bank NA., a $17-billion bank headquartered in Winston-Salem, North Carolina.
Joseph W. May, 49, since December, 1993, Executive Vice President of the Louisiana Bank and the Company. Former Executive Vice President and Chief Credit Policy Officer, Comerica, Inc., a $27-billion bank holding company headquartered in Detroit, Michigan.
John C. Hope, III, 46, since October, 1994, Chairman of the Board and Chief Executive Officer of Whitney Bank of Alabama, and Executive Vice President of the Company. Former Executive Vice President and Manager, Southern Area of AmSouth Bank of Alabama.
Page 4 of 56
PART II
Item 5:

Item 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
a) The Company's stock price is reported on the National Association of Securities Dealers Automated Quotation (NASDAQ) system under the symbol WTNY. The following table shows the range of closing prices of the Company's stock for each calendar quarter of 1994 and 1993 as reported on the NASDAQ National Market System.
1994 1993 ---------------- ---------------- 1st Quarter 21 1/2 - 24 15 3/4 - 23 1/2 2nd Quarter 21 3/4 - 27 1/4 19 - 23 1/2 3rd Quarter 25 3/4 - 28 1/2 19 1/2 - 25 5/8 4th Quarter 21 - 27 21 3/4 - 26
b) The approximate number of shareholders of record of the Company, as of March 1, 1995, is as follows: Title of Class Shareholders of Record -------------------------- ---------------------- Common Stock, no par value 2,854
c) During 1994 and 1993, the Company declared dividends as follows:
1994 1993 ------------- ------------- 1st Quarter $ 0.15 $ 0.07 2nd Quarter 0.15 0.10 3rd Quarter 0.17 0.13 4th Quarter 0.17 0.13
The Company declared an increase in its quarterly on January 25, 1995 to $0.20 per share payable April 3, 1995.
Per-share stock price and dividend information shown above has been adjusted where appropriate to give retroactive effect to the three-for-two stock splits that were effective February 22, 1993 and November 29, 1993.
Page 5 of 56
Item 6:

Item 6: SELECTED FINANCIAL DATA
Page 6 of 56
Item 7:

Item 7: MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Whitney Holding Corporation earned $52.8 million in 1994 or $3.63 per share. These results include the effects of a $6.1 million recovery of a charged-off loan which the Company was able to transfer to income and of an additional $20 million reduction in the level of the reserve for possible loan losses. The transfer of the recovery and the reserve reduction together contributed $17.0 million or $1.17 per share to 1994 earnings on an after-tax basis. For 1993, the Company reported earnings of $76.4 million or $5.30 per share, including an after-tax contribution to earnings of $39.5 million or $2.74 per share resulting from a total of $60.0 million in loan loss reserve reductions during that year.
Net interest income and non-interest income both increased in 1994 as compared to 1993, as did non-interest expense. Net interest income increased $3.4 million or 2.8% while the taxable-equivalent net interest margin was essentially unchanged at 4.79% in 1994 compared to 4.75% in 1993. The $1.3 million or 4.3% overall increase in non-interest income reflected improvement in virtually all income categories. Non-interest expense was $4.2 million or 4.2% higher in 1994 compared to 1993, largely as a result of increased personnel expenses from acquisitions, merit pay increases, and various employee and management incentives and benefits as well as from essential staff additions and changes.
Non-performing assets continued their steady decrease of the past several years in 1994. At December 31, 1994, non-performing assets were $22.1 million, down 56% from $49.9 million at December 31, 1993. The reserve for possible loan losses was $34.4 million on December 31, 1994, an amount which represented 224% of non-performing loans and 3.2% of total loans. At year end 1993, the reserve coverage was 132% of non-performing loans and 4.6% of total loans on that date.
For 1994, average earning assets were $2.67 billion, an increase of $62 million or 2.4% from $2.61 billion in 1993. Average accruing loans outstanding were $956 million in 1994 compared to $904 million in the previous year, an increase of $52 million or 5.8%. This loan growth is attributable to both the Baton Rouge acquisition, as discussed below, which was completed in the first quarter of 1994 and to a strengthening of demand for both commercial and consumer credit in the Company's market areas. At December 31, 1994, total loans outstanding were $1.06 billion, an increase of $84 million or 8.6% over the $976 million of total loans outstanding on December 31, 1993.
Average total deposits showed modest growth between 1994 and 1993, increasing $37 million to $2.45 billion. The impact of the deposits assumed in the Baton Rouge acquisition was partially offset by the movement of some deposit funds to higher yielding alternative investment instruments with the rise in market rates in 1994.
The Company's average investment in securities increased by $75 million or 4.9% to $1.62 billion in 1994 as compared to $1.55 billion in 1993. Throughout 1994, however, the level of the increase over 1993 has been declining. The funding of recent loan demand and deposit outflows is evident in this trend. From December 31, 1993, the Company's total investment in securities has decreased approximately $101 million or 6.2% to 1994's year end.
On March 31, 1994, the Company and the Louisiana Bank completed a purchase and assumption transaction with Baton Rouge Bank and Trust Company. Included in the acquired assets, which totalled approximately $118 million, were $59 million in commercial, real estate mortgage and personal loans, and six banking offices in the Baton Rouge area. The deposits assumed included approximately $24 million in non-interest-bearing demand deposits and $94 million in interest-bearing transaction, savings and time deposit accounts. All six branch locations have been integrated into the Louisiana Bank.
Subsequent to year end 1994, the Company, through the Alabama Bank, its newly formed banking subsidiary, acquired the Mobile area operations of The Peoples Bank, Elba, Alabama, for a purchase price of approximately $12 million. The assets and deposit liabilities associated with the five banking locations acquired in this transaction totalled approximately $90 million, including $47 million in loans. This impact of this acquisition will be reflected in the Company's consolidated financial statements beginning in 1995.
The Company declared quarterly dividends in 1994 totalling $0.64 per share compared with $0.43 per share in 1993, an increase of $0.21 per share or 49%. During 1993, the Company's Board of Directors twice approved three-for-two stock splits which were effective in February and November of that year. All share and per-share data in this report on Form 10-K reflect the effect of these stock splits.
Page 7 of 56
FINANCIAL CONDITION
Loans For 1994, the Company's average loans outstanding increased $27 million or 2.8% as compared to 1993. Average loans outstanding of $1.02 billion for the fourth quarter of 1994, however, are $29 million above the level in 1994's third quarter and $79 million or 8.4% above the fourth quarter of 1993. The Baton Rouge acquisition in the first quarter of 1994, an improving regional economy and a more aggressive effort to market both retail and commercial loan products all contributed to the growth in the loan portfolio throughout 1994.
The improvement in economic conditions in the Company's market area, which is primarily southern Louisiana and Mississippi and, most recently, southern Alabama, has come after several years of a weaker economy which had been reflected in limited loan demand and in efforts by many commercial loan customers to reduce their existing debt levels. During that period the Louisiana Bank also consciously reduced its exposure to credits whose performance had been adversely affected by these adverse economic conditions. The significant reduction in non-performing loans over the past several years is shown in below in table of non-performing assets.
During 1994, the Company continued to expand its lending resources, market areas and loan products, and management expects to continue and intensify these efforts in 1995 as the Banks compete to place high quality credits in the communities they serve. Unfunded loan commitments outstanding at December 31, 1994 have increased to approximately $582 million, some $183 million above the level at December 31, 1993.
Page 8 of 56
Deposits and Short-term Borrowings
The Company's average deposit base increased $37 million or 1.5% to $2.45 billion in 1994 from $2.42 billion in 1993. Underlying this modest overall increase is the effect of the acquisition of Baton Rouge Bank & Trust Company, offset in part by some net deposit outflow of interest-bearing deposits other than time certificates of deposit.
As is shown in the table of average balance sheets, non-interest-bearing demand deposits increased on average by $27 million or 3.7% in 1994 as compared to 1993. This table also shows that average time deposits, which includes both core deposits and certificates of deposit of $100,000 and over, increased $45 million or 8.6% between 1993 and 1994. Virtually all of the growth within the time deposit category came from core certificates of deposit of under $100,000. The growth in the non-interest demand and time deposit categories in 1994 exceeded the amount attributable to the Baton Rouge acquisition for each category.
Average savings, interest-bearing demand, and money market account deposits decreased $35 million or 3.0% in 1994 compared with 1993. These changes have resulted in part from the increasing attractiveness of alternative investment opportunities in 1994 as market rates have risen.
The Company's short-term borrowings consist of purchases of federal funds and sales of securities under repurchase agreements. Such borrowings are used both as a source of funding for certain short-term lending facilities and as part of the Banks' services to correspondent banks and certain other customers. The Company's average short-term borrowing position, net of federal funds sold, was approximately $135 million in 1994 and $122 million in 1993.
Page 9 of 56
Investment in Securities
The Company's annual average investment in securities increased by $76 million or 4.9% to $1.62 billion in 1994 from $1.55 billion in 1993. Between the fourth quarters of 1993 and 1994, however, the average investment in securities decreased $84 million or 5.2%, reflecting in part the recent strengthening of loan demand. From December 31, 1993, the Company's total investment in securities has decreased approximately $101 million or 6.2% to $1.53 billion at 1994's year end.
Both the period-end and average investment in securities constituted approximately 54% of total assets and 59% of earning assets in both 1994 and 1993. The mix of period-end and average investment in securities also remained relatively stable between these periods, with U.S. Treasury and government agency issues, excluding mortgage-backed issues, representing approximately 80% of total investments. The weighted average maturity of the overall portfolio of securities was 28 months at year end 1994 as compared with 34 months at year end 1993. The weighted average taxable-equivalent portfolio yield increased 10 basis points to 5.81% at December 31, 1994 from 5.71% at December 31, 1993.
Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The statement specifies criteria for classifying investments as either trading securities, securities held to maturity, or securities available for sale, and establishes reporting standards for each classification.
Management has considered the Company's existing investment portfolio and underlying asset/liability management policies and strategies in light of SFAS No. 115 and determined that its investments in mortgage-backed securities meet the criteria for classification as securities available for sale. These securities were reported at their estimated fair values at December 31, 1994 and 1993. Any unrealized gain or loss associated with these securities at year end 1994 and 1993 was reported, net of tax, as a separate component of shareholders' equity. The tax-effected unrealized loss at December 31, 1994 was approximately $5.1 million. The remaining portfolio of securities was classified as held to maturity and continues to be reported at amortized cost. The Company maintained no trading portfolio in 1994 or 1993.
In accordance with SFAS No. 115, reported information on investment securities from before the date of adoption has not been restated. On an ongoing basis, investment securities are classified as they are acquired and the continued propriety of classifications is periodically evaluated by management.
The Company does not maintain any investment or participation in financial instruments or agreements whose value is linked to, or derived from, changes in the value of some underlying asset or index. Such instruments or agreements include futures, forward contracts, option contracts, interest-rate swap agreements, and other financial arrangements with similar characteristics, and are commonly referred to as derivatives.
Page 10 of 56
Page 11 of 56
Asset Quality
Over the past four years, overall asset quality has improved steadily. As is shown in the non-performing assets table, during this period, the Company has been very successful in its efforts to reduce its non-performing assets through the full rehabilitation of nonaccruing loans, the workout of troubled credits, and the sale of repossessed loan collateral. Non-performing assets totalled $22.1 million at December 31, 1994, a decrease of $27.8 million or 56% from $49.9 million at year end 1993.
Of the $15.4 million in nonaccruing loans at December 31, 1994, approximately $4.0 million represented loans on which interest payments are being recognized in income as collected. Nonaccruing loans totalling $6.6 million at year end 1994 were secured by real property collateral. Another $7.7 million consisted of various commercial credits.
In 1994, the Company was successful in recovering $19.7 million of previously charged-off loans. For the same period, the Company identified approximately $3.6 million of loans to be charged off, a decrease of 44% from the $6.4 million of charge-offs in 1993. As is shown in the table summarizing loan loss experience, the Company ended 1994 in a net recovery position of approximately $16.1 million, an improvement of $10.1 million over 1993.
The reserve for possible loan losses is maintained at a level believed by management to be adequate to absorb potential losses in the portfolio. With the significant recoveries during 1994 and the continued improvement in overall asset quality, the Company was able to return $26.1 million of the reserves for possible loan losses to income. In 1993, the Company had reduced the reserve for possible loan losses by a total of $60 million, reflecting the improvement in asset quality and management's determination that the steps taken in recent years to deal with asset quality issues at the Louisiana Bank had yielded lasting positive results. In management's judgment, some of the reserve levels that had been established in recognition of these asset quality issues were no longer needed. The reserve for possible loan losses was $34.4 million at December 31, 1994, which represented a 224% coverage of total non-performing loans and 3.3% of total loans.
During 1994, the Company disposed of other real estate owned ("OREO") properties with a carrying value at the time of sale totalling approximately $11.2 million. The value of OREO properties acquired in settlement of loans during the year was $1.6 million. The $6.7 million balance of OREO at December 31, 1994 consisted mainly of commercial land and buildings.
The Company has several property interests which were acquired through routine banking transactions generally prior to 1933 and which are recorded in its financial records at a nominal value. Management continually investigates ways to maximize the return on these assets. There were no significant dispositions of these property interests in 1994. Future dispositions may result in the recognition of substantial gains.
The Company has not extended any credit in connection with what would be defined under regulatory guidelines as highly leveraged transactions, nor has it acquired any investment securities arising from such transactions. The Company's foreign lending and investing activities are currently insignificant. Note 3 to the consolidated financial statements discusses credit concentrations in the loan portfolio.
Page 12 of 56
ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES (dollars in thousands)
Page 13 of 56
Capital Adequacy
The strong earnings reported for 1994, including the effect of the reduction in the reserve for loan losses, are reflected in the increase in the Company's regulatory capital ratios between December 31, 1994 and 1993.
The Company's regulatory capital ratios are shown above compared to the minimums currently required for regulatory classification as a "well-capitalized" institution. The regulatory capital ratios for the Banks were also well in excess of minimum requirements at December 31, 1994. The Company is committed to maintaining a strong capital base to support its philosophy of soundness, profitability and growth.
Regulatory agencies have proposed rules through which a measure of interest rate risk will be incorporated in the level of regulatory capital that an institution is required to maintain. These rules are not yet finalized, but they are likely to become effective in 1995. Management believes that implementation of the proposed rules will not have a significant impact on the Company's or the Banks' ability to satisfy regulatory capital requirements.
Page 14 of 56
RESULTS OF OPERATIONS
Net Interest Income
Taxable-equivalent net interest income increased $3.9 million or 3.1% in 1994 as compared to 1993, as the net interest margin rose to 4.79% from 4.75%. A combination of factors contributed to this increase, the components of which are detailed in the following tables analyzing changes in interest income and expense.
Loan interest income increased $8.9 million or 11.8% in 1994 as compared to 1993. Approximately half of this increase was driven by the growth in average loans outstanding during 1994 with the other half driven by the rise in the effective yield on the Company's loan portfolio. Market interest rates generally rose throughout 1994, and bank prime rates increased a full two percentage points during the year. The effective yield on the Company's average loan portfolio, approximately 40% of which reprices with changes in prime, increased 69 basis points in 1994 as compared to 1993. The increase in the effective yield was partly influenced by an adjustment recorded in 1994 to recognize $2.6 million of previously collected but unrecognized interest on loans that had at times in prior years been accounted for under the cost recovery method.
Interest income on investment securities decreased approximately $1.5 million or 1.6% in 1994 as compared to 1993, despite an increase between these years in the average investment in securities outstanding. The effective yield on the investment securities portfolio is not as immediately responsive to rising market rates as are loan yields. The effective yield was 5.75% in 1994 and 6.13% in 1993, a decrease which reflects the lingering impact of the falling rate environment that had prevailed until earlier this year. During 1994, the overall effective investment yield registered small but steady increases.
The net increase in total interest income between 1993 and 1994 was $6.7 million or 3.9%. This overall net increase was driven by the $62.2 million growth in total average earning assets outstanding in 1994 as compared to 1993. The overall effective earning-asset yield in 1994 was 6.73%, an increase of 10 basis points from 6.63% in 1993.
Interest expense increased $2.9 million or 5.8% in 1994 as compared to 1993. This increase reflects the impact of the rising rate environment during 1994 and a shift in the deposit mix toward core time deposits from other lower cost deposit categories, a shift which is partly attributable to the Baton Rouge acquisition. The average maturity of certificates of deposit outstanding also lengthened somewhat during 1994 as consumer deposit rates increased. The overall cost of funds rate on interest-bearing liabilities was 2.74% in 1994 as compared to 2.57% in 1993, an increase of 17 basis points.
Page 15 of 56
Page 16 of 56
Page 17 of 56
Other Income and Expense
Non-interest income, adjusted to exclude gains on securities sales and the net gain from sales of OREO, increased $1.7 million, or 6.1%, to $29.0 million in 1994 from $27.3 million in 1993. This followed an increase of $1.5 million or 5.8% from 1992 to 1993.
Income from service charges on deposit accounts, which accounted for approximately 57% of adjusted non-interest income in each of these three years, increased 4.5% between 1993 and 1994, largely reflecting the impact of the Baton Rouge acquisition. Improvement in the economy of the Company's service area in 1994 was evident in higher credit transaction volume which supported a 14.5% increase over 1993 in income from credit card related operations. Improved economic conditions and enhanced products and delivery systems helped generate a 23.5% increase in 1994 income from services which support the international activities of the Company's customers.
The rise in market interest rates throughout 1994 stimulated demand for the services of the Company's investment department, leading to a 27.5% increase over 1993 in investment service fee income. Higher interest rates in 1994, however, also had the effect of reducing the volume of activity in, and the income from, the Company's secondary mortgage loan operations as compared to 1993. Secondary market income, which is included with other fees and charges in the accompanying table of non-interest income, decreased 43.7% or approximately $300 thousand. The Company expanded its ATM facilities in 1994 and fees generated from ATM operations, which are also included with other fees and charges, increased 180% or approximately $450 thousand over 1993.
In 1994, the Company sold certain held-to-maturity securities shortly before they were scheduled to mature and recognized a small gain of $46 thousand. There were no sales from the investment securities portfolios in 1993. In 1992, the Company recognized a $5.4 million gain on the sale of a block of mortgage-backed securities that was experiencing excessive prepayments as market interest rates declined. This block of securities was replaced with another offering a more stable return.
Non-interest operating expenses, adjusted to exclude provisions for or recoveries of losses on OREO and other problem assets, were $105.3 million in 1994, an increase of $7.1 million or 7.2%, over 1993's total of $98.2 million. Between 1992 and 1993, the increase in adjusted non-interest operating expenses was $1.4 million or 1.4%.
As is shown in the accompanying table of non-interest expense, salaries and benefits expense in 1994 increased $5.5 million or 11.3% as compared to 1993. Approximately 25% of this increase can be attributed to the new banking operations in Baton Rouge acquired in the first quarter of 1994. The implementation of a 401(k) employee savings plan in the fourth quarter of 1993 contributed another 12% to the overall increase in personnel expense in 1994. The remainder of the 1994 increase resulted from merit pay increases and various employee and management incentives as well as from essential staff additions and changes.
Excluding personnel-related expenses, the Baton Rouge acquisition increased 1994 non-interest expense by a total of approximately $1.4 million as compared to 1993, with the increase concentrated primarily in occupancy expense and the amortization of intangible assets. Enhancements to the Company's data processing systems and automation capabilities in 1994 as well as the expansion of the ATM network contributed to an 18.7% increase over 1993 in the expense for furnishings and equipment. The increase in credit card operating expense for 1994 is consistent with the increase in income from these operations as discussed above.
The 59.0% increase in 1994's expense for taxes and insurance is almost entirely a consequence of the improved earnings and equity of the Louisiana Bank which are used to compute the assessment base for certain state ad valorem taxes. The continued improvement in asset quality was an important factor in the 25.0% reduction in 1994's expense for legal and other professional services and the 14.5% reduction in the expense of maintaining and operating OREO properties prior to sale. During 1994, the Company also recovered approximately $1.1 million previously identified valuation losses on OREO.
Page 18 of 56
Income Taxes
The Company provided for income taxes at an overall effective rate of 32.4% in 1994, up from the 32.0% rate in 1993. The effective rates in each period differ from the statutory rate of 35% primarily because of the tax- exempt income earned on investments in state and municipal obligations.
Page 19 of 56
ASSET/LIABILITY MANAGEMENT
The asset/liability management process has as its focus the development and implementation of strategies in the funding and deployment of the Company's financial resources which are expected to maximize soundness and profitability over time. Such strategies reflect the goals set by the Company for capital adequacy and liquidity, and the tolerance for risk established in Company policies.
Interest Rate Risk/Interest Rate Sensitivity
The Company's and the Banks' financial assets and liabilities are subject to scheduled and unscheduled repricing opportunities over time. The potential for generating net interest income, as well as the current market values of financial assets and liabilities, are related to the levels of market interest rates available as these repricing opportunities arise. Interest rate risk is a measure of this potential volatility in net interest income and market values.
As part of the asset/liability management process, the Company and the Banks use a variety of tools, including an earnings simulation model, to measure interest rate risk and to evaluate the impact of proposed changes in its internal strategies and potential changes in its economic environment. The interest rate sensitivity gap analysis, which compares the volume of repricing assets against repricing liabilities over time, is a relatively simple tool which is useful in highlighting significant short-term repricing volume mismatches but is limited in measuring the potential impact of dynamic change on earnings and net asset values.
The interest rate sensitivity table presents the rate sensitivity gap analysis at December 31, 1994. The interest rates on most of the outstanding commercial loans vary with changes in the Banks' prime rates or the prime rates of certain money-center banks. These loans are assigned to the earliest repricing period in the rate sensitivity analysis. A substantial portion of loans shown in the analysis as repricing after one year is made up of fixed-rate real estate loans, both retail and commercial. These loans generally mature within five years. In preparing this analysis, deposit funding sources with no scheduled maturity or contractual repricing date are assigned to a particular repricing period after consideration of past and expected customer behavior in response to general market rate changes. Surveying the twelve-month period from December 31, 1994, the analysis indicates that the Company is in a slightly liability-sensitive position on a cumulative basis.
Page 20 of 56
Liquidity
The Company and the Banks manage liquidity to ensure their ability to satisfy customer demand for credit, to fund deposit withdrawals, to meet operating and other corporate obligations, and to take advantage of investment opportunities, all in a timely and cost-effective manner. Traditionally, these liquidity needs have been met by maintaining a strong base of core deposits and by carefully managing the maturity structure of the investment portfolio. The funds provided by current operations and forecasts of loan repayments are also considered in the liquidity management process.
The Banks may enter into short-term borrowing arrangements by purchasing federal funds and selling securities under repurchase agreements, both as a source of funding for certain short-term lending facilities and as part of services to correspondent banks and certain other customers. Neither the Company nor the Banks have accessed long-term debt markets as part of liquidity management.
Page 21 of 56
The following tables present information concerning deposits and short-term borrowings for the years 1994, 1993 and 1992.
Average core deposits, defined as all deposits other than time deposits of $100,000 or more, increased approximately $32 million in 1994 over the prior year. During both 1994 and 1993, core deposits comprised approximately 90% of total average deposits.
As of December 31, 1994, $283 million or approximately 20% of the portfolio of investment securities held to maturity was scheduled to mature within one year. An additional $137 million of investment securities are classified as available for sale at year end 1994, although management's determination of this classification does not derive primarily from liquidity considerations.
The Louisiana Bank had $582 million in unfunded loan commitments outstanding at December 31, 1994, an increase of $183 million from the level at December 31, 1993. Contingent obligations under letters of credit and financial guarantees of $72 million and available credit card lines of $29 million at year end 1994 were up approximately $15 million and $3 million, respectively, from the amounts outstanding at year end 1993. Customer draws under these financial commitments are not expected to place any unusual strain on the Louisiana Bank's or the Company's liquidity positions.
Page 22 of 56
Page 23 of 56
Page 24 of 56
Page 26 of 56
Notes To Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Whitney Holding Corporation and its subsidiaries (the "Company") follow generally accepted accounting principles and policies within the banking industry. The following is a summary of the more significant policies.
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of Whitney Holding Corporation and its wholly-owned subsidiaries, Whitney National Bank (the "Louisiana Bank") and, in 1994, Whitney Bank of Alabama (the "Alabama Bank"). Whitney Bank of Alabama had not commenced significant operations as of December 31, 1994. Intercompany accounts and transactions have been eliminated in consolidation.
Certain balances in prior years have been reclassified to conform with this year's presentation.
CASH AND DUE FROM FINANCIAL INSTITUTIONS
The Company considers cash and cash due from financial institutions as cash and cash equivalents for purposes of the consolidated statement of cash flows.
INVESTMENT IN SECURITIES
In May, 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, debt securities which the Company both positively intends and has the ability to hold to maturity are carried at amortized cost. These criteria 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.
Debt securities and equity securities with readily determinable fair values that are acquired with the intention of being resold in the near term are classified under SFAS No. 115 as trading securities and are carried at fair value, with unrealized holding gains and losses recognized in current earnings. The Company does not currently hold any securities for trading purposes.
Securities not meeting the criteria of either trading securities or securities held to maturity are classified as available for sale and carried at fair value. Unrealized holding gains and losses for these securities are recognized, net of related tax effects, as a separate component of shareholders' equity.
The Company adopted this standard effective December 31, 1993. As a result, investments in mortgage-backed securities were reclassified as of that date as securities available for sale and are being reported at fair value. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect this change in accounting principle.
Interest and dividend income earned on securities either held to maturity or available for sale is included in current earnings, including the amortization of premiums and the accretion of discounts using the interest method. The gain or loss realized on the sale of a security held to maturity or available for sale is computed with reference to its amortized cost and is also included in current earnings.
LOANS
Loans are generally carried at the principal amounts outstanding, less unearned income and the reserve for possible loan losses.
Interest on loans is accrued and credited to income based on the outstanding loan principal amounts. The accrual of interest on loans is discontinued when, in management's judgment, there is an indication that a borrower will be unable to meet contractual payments as they become due. For commercial and real estate loans, this generally occurs when a loan falls 90-days past due as to principal or interest, and the loan is not otherwise both well secured and in the process of collection. Upon discontinuance, accrued but uncollected interest is reversed against current income. Interest payments received on nonaccrual loans are used to reduce the reported loan principal under the cost recovery method when the collectibility of the remaining principal is not reasonably assured; otherwise, these payments are recognized as interest income. Page 27 of 56
A nonaccrual loan may be reinstated to accrual status when full payment of contractual principal and interest is expected and this expectation is supported by current performance.
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is maintained at a level which, in management's judgment, is considered adequate to absorb potential losses inherent in the loan portfolio. The adequacy of the reserve is evaluated by management on an ongoing basis. As adjustments to the level of reserves become necessary, they are reported in current earnings. The factors considered in this evaluation include estimated potential losses from specific lending relationships, including unused loan commitments and credit guarantees; general economic conditions; economic conditions affecting specific classes of borrowers or types of loan collateral; historical loss experience; and various trends in loan portfolio characteristics, such as volume, maturity, customer mix, delinquencies and nonaccruals.
As actual loan losses are incurred, they are charged against the reserve. Recoveries on loans previously charged off are added back to the reserve.
In 1995, the Company will adopt SFAS No. 114, as amended by SFAS No. 118, which addresses the accounting by creditors for impairment of certain loans. The Company's reserve for possible loan losses will include a measure of impairment related to those loans identified for evaluation under the new standard. This measurement will be based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan's original effective interest rate or, in the case of certain collateral-dependent loans, the fair value of the underlying collateral. Adoption of this standard will not have a material impact on the Company's financial position or results of operations.
FORECLOSED ASSETS
Collateral acquired through foreclosure or in settlement of loans is classified as either other real estate owned ("OREO") or other assets and is carried at its fair value, net of estimated costs to sell, or the remaining investment in the loan, whichever is lower. At acquisition, any excess of the recorded loan value over the estimated fair value of the collateral is charged against the allowance for possible loan losses. After acquisition, valuation allowances are established with a charge to current earnings to adjust the reported value of foreclosed assets to reflect changes in the estimate of a property's fair value or selling costs. Revenues and expenses associated with the management of foreclosed assets prior to sale are included in current earnings.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are carried at cost, net of accumulated depreciation, as follows (in thousands):
Accumulated depreciation was $63,528,000 in 1994 and $57,408,000 in 1993. Provisions for depreciation included in non-interest expenses were computed primarily on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range mainly from 15 to 45 years for buildings and from 3 to 7 years for furnishings and equipment.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." In general, under this accounting standard, the tax consequences of all temporary differences that arise between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either tax liabilities to be settled in the future or tax assets that will be realized as a reduction of future taxes. The change in net deferred assets or liabilities between periods is recognized as a deferred tax expense or benefit in the consolidated statements of operations.
Prior to 1993, a deferred tax expense or benefit was provided on those items of income and expense which were recognized in different time periods for financial statement and income tax purposes. See Note 4 for a more detailed discussion of the accounting for income taxes and of the impact of the adoption of SFAS No. 109 in 1993.
Page 28 of 56
EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of shares outstanding during each period presented. Potentially dilutive common stock equivalents consist of stock options which have been granted to certain officers and directors. Incorporating these common stock equivalents into the calculation of earnings per share using the treasury method does not materially affect the reported results whether on a primary or fully-diluted basis.
All share and per-share data in this annual report reflect the three-for-two stock splits that were effective February 22, 1993 and November 29, 1993.
(2) INVESTMENT IN SECURITIES
Summary information regarding securities available for sale and securities held to maturity follows.
As discussed in Note 1, the Company adopted SFAS No. 115 effective December 31, 1993. As a result, investments in mortgage-backed securities were reclassified as of that date as securities available for sale and are being reported at fair value.
Page 29 of 56
At December 31, 1994 and 1993, U.S. Treasury and agency securities with a carrying value of $508,725,000 and $477,904,000, respectively, were pledged to secure public and trust deposits or were sold under repurchase agreements.
During 1994, the Company sold certain securities classified as held to maturity and recognized a gain of $46,000. The proceeds from these sales totalled $25,066,000. All of these sales occurred shortly before the securities were to mature. There were no sales from the securities portfolios during 1993. Proceeds from sales of investment securities during 1992 were $150,120,000. In 1992, the Company sold a block of mortgage-backed securities that was experiencing excessive early payoffs because of declining mortgage rates and replaced it with a block of mortgage-backed securities that offered a more stable return. The Company realized a $5,400,000 gain as a result of this transaction.
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 1994 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
(3) LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
The composition of the Company's loan portfolio at December 31, was as follows (in thousands):
The Company's lending activity, both commercial and retail, is conducted primarily among customers in Louisiana, Mississippi and southern Alabama. In its market areas, the Company serves a broad base of commercial customers in diverse industries.
Within the portfolio, the Company maintains a relatively significant concentration of outstanding credits and loan commitments to customers involved in the oil and gas industry. At December 31, 1994, outstanding loans to this industry totalled $86,141,000, and unused loan commitments and letters of credit and guarantees were $59,395,000 and $14,641,000, respectively. The operations of this industry have stabilized in recent years, following a period of severe decline and major restructuring which had adversely impacted the overall economy of the Company's market area. Management continues to closely monitor its lending relationships in this industry.
The total of commercial and other real estate loans shown above includes both those for which the primary source of repayment is the operation or sale of the underlying project, as well as those secured by real estate otherwise employed in the operations of the customer. Unfunded commitments for loans secured by commercial or other real estate were otherwise $6,204,000 at December 31, 1994. Real estate values had declined steeply during the period of economic contraction in the Company's market area, but have in recent periods stabilized and registered increases. The Company's portfolio of commercial and other real estate loans is diversified as to both the types of collateral property and the industries in which the properties are employed.
Page 30 of 56
Loans on which the accrual of interest had been discontinued totalled $15,396,000 and $33,631,000 at December 31, 1994 and 1993, respectively. With respect to certain nonaccrual loans, interest income is recognized as cash interest payments are received. Interest payments on nonaccrual loans that had been accounted for under the cost recovery method may also subsequently be recognized as interest income as loan collections exceed previous expectations or as workout efforts result in fully rehabilitated credits. The following compares contractual interest income on nonaccrual loans with the interest income reported with respect to such loans (in thousands):
During 1994, the Company recorded an adjustment to recognize $2,612,000 of previously collected but unrecognized interest on loans that had at times in prior years been accounted for under the cost recovery method. Through management's continuing review of the Louisiana Bank's loan portfolios to ensure compliance with internal policies, it was determined that the cost recovery method had not been warranted for these loans. No portion of the total adjustment related to a particular prior period was material.
The Louisiana Bank has made loans, in the normal course of business, to certain directors and executive officers of the Company and to their associates (related parties). The aggregate amount of these loans was $31,591,000 and $31,341,000 at December 31, 1994 and 1993, respectively. During 1994, $147,353,000 of new loan advances were made, and repayments totalled $147,603,000. Outstanding commitments and letters of credit to related parties totaled $37,734,000 and $39,517,000 at December 31, 1994 and 1993, respectively. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and do not involve more than the normal risk of collectibility.
Changes in the reserve for possible loan losses for the three years in the period ended December 31, 1994 were as follows (in thousands):
During 1994, the Company recovered approximately $6,139,000 on a loan previously charged off and, with the continued improvement in credit quality in recent years, was able to transfer this recovery to income. Total reductions in the reserve for possible loan losses, including the transfer of this large recovery, were $26,139,000 in 1994 and $60,000,000 in 1993, reflecting the improvement in overall asset quality and management's determination that efforts to deal with asset quality issues have yielded lasting positive results. In management's judgement, some of the reserve levels established previously in recognition of these asset quality issues were no longer needed.
Page 31 of 56
(4) INCOME TAXES
Income tax expense (benefit) consisted of the following components for the three years in the period ended December 31, 1994 (in thousands):
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." Under this standard the tax consequences of all temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements represent either tax liabilities to be settled in the future or tax assets that will be realized as a reduction of future taxes. Among other provisions, SFAS No. 109 requires the use of currently enacted tax rates to measure these deferred tax assets and liabilities. The impact of any change in the enacted tax rates is included in the deferred tax expense or benefit recognized in the period in which the change occurs. The change in the net deferred tax asset or liability between periods represents the deferred tax expense or benefit to be recognized in the financial statements. With the adoption of SFAS No. 109, the Company recognized an additional net deferred asset of $4,574,000, which is reported in the consolidated statement of operations for 1993 as a cumulative effect of an accounting change (Note 6).
Net deferred income tax assets, which are included in other assets on the consolidated balance sheets, were approximately $17,181,000 and $19,046,000 at December 31, 1994 and 1993, respectively. The components of the net deferred tax assets were as follows (in thousands):
Page 32 of 56
Under SFAS No. 109, the Company is required to establish a valuation allowance against the deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the asset will not be realized. Management has weighed the evidence, including current earnings performance, taxable income generated during available carryback periods, and the nature of significant deductible temporary differences, and believes that no valuation reserve is required as of December 31, 1994. Rules issued by regulatory agencies impose additional limitations on the amount of deferred tax assets that may be recognized when calculating regulatory capital ratios. The Company's ratio calculations were not affected by these rules at December 31, 1994.
For years ending before January 1, 1993, deferred tax expense (benefit) resulted from timing differences in the recognition of revenue and expense for income tax and financial statement purposes. For the year ended December 31, 1992, the most significant timing difference was the excess of interest income recognized for tax purposes over the amount recognized for financial statement purposes. The sources of timing differences and the tax effects for the year ended December 31, 1992 is summarized as follows (in thousands):
The effective tax rate is less than the statutory federal income tax rate in each of the three years in the period ended December 31, 1994 because of the following:
Page 33 of 56
(5) EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company has a noncontributory qualified defined benefit pension plan covering substantially all of its employees. The benefits are based on an employee's total years of service and his or her highest five-year level of compensation during the final ten years of employment. Contributions are made in amounts sufficient to meet funding requirements set forth in federal employee benefit and tax laws plus such additional amounts as the Company may determine to be appropriate from time to time.
The actuarial present value of vested and of total accumulated benefit obligations (both excluding projected future increases in compensation levels) were $32,361,000 and $35,306,000, respectively, as of December 31, 1994, and $34,012,000 and $37,375,000, respectively, as of December 31, 1993.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated financial statements (in thousands):
Page 34 of 56
The net pension expense (benefit) recognized for 1994, 1993, and 1992 is comprised of the following components (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.25% in 1994, 7.5% in 1993 and 8.0% in 1992. For all periods presented, the Company assumed an 8.0% expected long-term rate of return on plan assets and an annual rate of increase in future compensation levels of 5.0%. The decrease in the benefit obligations between year end 1993 and 1994 reflects both actuarial gains related mainly to the composition of the employee base and the impact of the increase in the discount rate used to determine actuarial values.
For certain participants in the qualified defined benefit plan whose calculated benefits are reduced as a result of limitations under federal tax laws, the Company sponsored an unfunded non-qualified plan that provides benefits equal to those reductions. The non-qualified plan has been terminated, effective as of January 1, 1993, with accrued benefits preserved for participants. The Company intends to replace the non-qualified plan with another form of supplemental executive retirement plan.
Effective October 1, 1993, the Company converted its noncontributory employee thrift plan into an employee savings plan under Section 401(k) of the Internal Revenue Code. Under the new plan, which covers substantially all full-time employees, the Company will match the savings of each participant up to 3.0% of his or her compensation. Annual participant savings are limited by tax law. Participants are fully vested in their savings and in the matching Company contributions at all times. The expense of the Company's matching contributions was approximately $922,000 in 1994 and $245,000 in 1993. There had been no Company contributions to the noncontributory thrift plan in 1993 or 1992.
Health and Welfare Plans
The Company also maintains certain health care and life insurance benefit plans for retirees and their eligible dependents. Participant contributions are required under the health plan, and the Company has established annual and lifetime maximum health care benefit limits. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." This statement requires that the expected cost of providing these postretirement benefits be recognized during the period employees are actively working. Prior to 1993, the Company recognized the cost only as benefit payments were made to or on behalf of retirees. The Company continues to fund its obligations under the postretirement benefit plans as the benefit payments are made.
Upon adoption of SFAS No. 106, the Company elected to immediately recognize the accumulated postretirement benefit obligation of $5,963,000. The expense related to the recognition of this transition obligation was reported, net of income tax effects of $2,023,000, as the cumulative effect of a accounting change in 1993 in the consolidated statements of operations (Note 6).
At December 31, 1994, the net postretirement benefit liability reported with other liabilities in the consolidated balance sheets was approximately $6,702,000. The net periodic postretirement benefit expense recognized under SFAS No. 106 for 1994 and 1993 was $300,000 and $450,000, respectively. The benefit expense includes components for the portion of the expected benefit obligation attributed to current service, for interest on the accumulated benefit obligation, and for amortization of unrecognized actuarial gains or losses. The expense recognized is not materially different from that which would have been reported under the previous accounting method.
For the actuarial calculation of its postretirement benefit obligations at December 31, 1994 and 1993, the Company assumed annual health care cost increases beginning at 12% and decreasing 0.6% per year to a 5.5% rate. Discount rates of 8.25% in 1994 and 7.5% in 1993 were used in determining the present value of projected benefits. A 1.0% rise in the assumed health care cost trend rates would not materially impact the accumulated benefit obligation or the periodic net benefit expense.
Page 35 of 56
The FASB has issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which was effective January 1, 1994. Postemployment benefits are those provided to former or inactive employees after active employment but before retirement. Given the current structure of such benefit programs offered by the Company, application of this accounting standard does not have a significant impact on the Company's financial position or results of operations.
Incentive and Other Plans
The Company has a long-term incentive program for which all employees are eligible. As of December 31, 1994, 384,125 shares of treasury stock are reserved for the purposes of this program, which include the granting of stock options, restricted stock, and performance and phantom stock. The Company granted 50,100 shares of restricted stock to certain employees during 1994 for no cash consideration. During 1993 and 1992, restricted stock grants totalled 36,000 and 37,125 shares, respectively. Employees receiving the grants are restricted from transferring or otherwise disposing of the stock for five years from the date of grant. The market values of the restricted shares, determined as of the grant dates, were $1,357,000, $699,000 and $491,000, respectively, for 1994, 1993 and 1992. These amounts are being amortized as compensation expense over the five year restriction periods. Compensation expense recognized during 1994, 1993 and 1992 related to these stock grants was $340,000, $168,000 and $49,000, respectively.
The following table summarizes stock option activity under the long-term incentive program for employees for the three years ended December 31, 1994. The incentive and non-qualified options are fully exercisable six months after the date of grant.
On February 28, 1990, an executive officer was granted options to purchase 33,750 shares of common stock of the Company at a price of $18.11 per share through February 28, 2000. At December 31, 1994, none of these options had been exercised. If this officer terminates his employment with the Company, the options will be exercisable for six months after his date of termination. The options will also be exercisable up to one year past the date of his death, but in no event beyond February 28, 2000.
During 1994, the Company adopted a revised Directors' Compensation Plan which provides for, among other matters, the annual award of 150 shares of common stock and the annual grant of nonqualified options to purchase 1,000 shares of common stock to each director who is not an employee of the Company or its subsidiaries. As of December 31, 1994, options to purchase 12,000 shares of common stock at an exercise price of $26.25, the market price or the grant date, were outstanding. No options were exercised in 1994. An expense of $47,000 was recognized in 1994 in connection with the award of stock under this plan.
Page 36 of 56
(6) NET CUMULATIVE EFFECT OF ACCOUNTING CHANGES
The net cumulative effect of accounting changes reported in the consolidated statement of operations for 1993 consisted of the following (in thousands):
(7) OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is comprised of real property collateral acquired through foreclosure or in settlement of loans and surplus banking OREO property. With the exception of the pre-1933 properties discussed below, these properties are reported at their fair value, less expected disposition costs, or the recorded investment in the related loan, whichever is lower. Activity in the OREO valuation reserve for the three years in the period ended December 31, 1994 was as follows (in thousands):
OREO includes a variety of property interests which were acquired though routine banking transactions generally prior to 1933 and for which there existed no ready market. These were subsequently written down to a nominal holding value in accordance with general banking practice at that time. These property interests include a few commercial and residential site locations principally in the New Orleans area, ownership interests in scattered undeveloped acreage, and various mineral interests. Revenues derived from these interests and related expenses have not been significant over the three-year period ended December 31, 1994.
Not included in OREO are real estate interests evidenced by stock ownership. Such stock is carried as an investment in securities and dividends are recognized as investment income.
Page 37 of 56
(8) NON-INTEREST INCOME
The components of non-interest income were as follows for the three years in the period ended December 31, 1994 (in thousands):
(9) NON-INTEREST EXPENSE
The components of non-interest expense were as follows for the three years in the period ended December 31, 1994 (in thousands):
Page 38 of 56
(10) OTHER ASSETS AND LIABILITIES
The significant components of other assets and other liabilities at December 31, 1994 and 1993, were as follows (in thousands):
Costs in excess of the net tangible assets acquired in current and prior years' business combinations are being amortized over remaining lives ranging from one to fourteen years as of December 31, 1994.
(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." In cases where quoted market prices are not available, fair values have been estimated using present value or other valuation techniques. The results of these techniques are highly sensitive to the assumptions used, such as those concerning appropriate discount rates and estimates of future cash flows, which require considerable judgement. Accordingly, estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current settlement of the underlying financial instruments. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. These disclosures should not be interpreted as representing an aggregate measure of the underlying value of the Company.
The Company does not maintain any investment or participation in financial instruments or agreements whose value is linked to, or derived from, changes in the value of some underlying asset or index. Such instruments or agreements include futures, forward contracts, option contracts, interest-rate swap agreements, and other financial arrangements with similar characteristics, and are commonly referred to as derivatives.
Page 39 of 56
The following significant methods and assumptions were used by the Company in estimating the fair value of financial instruments.
Cash and short-term investments
The carrying value of highly liquid instruments, such as cash on hand, interest- and non-interest-bearing deposits in financial institutions, and federal funds sold, provides a reasonable estimate of their fair value.
Investment securities
Substantially all of the Company's investment securities are traded in active markets. Fair value estimates for these securities are based on quoted market prices obtained from independent pricing services. The carrying amount of accrued interest on securities approximates its fair value.
Loans, net
For loans with rates that are repriced in coordination with movements in market rates and with no significant change in credit risk, fair value estimates are based on carrying values. The fair values for other loans are estimated through discounted cash flow analysis, using current rates at which loans with similar terms would be made to borrowers of similar credit quality. Appropriate adjustments are made to reflect probable credit losses. The carrying amount of accrued interest on loans approximates it fair value.
Deposits
SFAS No. 107 specifies that the fair value of deposit liabilities with no defined maturity is to be disclosed as the amount payable on demand at the reporting date, i.e., at their carrying or book value. These deposits, which include interest and non-interest checking, passbook savings, and money market accounts, represented approximately 77% of total deposits at December 31, 1994 and 1993. The fair value of fixed maturity deposits is estimated using a discounted cash flow calculation that applies rates currently offered for time deposits of similar remaining maturities. The carrying amount of accrued interest payable on deposits approximates its fair value.
The economic value attributable to the relationship with depositors who provide low-cost funds to the Company is viewed as a separate intangible asset and is excluded in SFAS No. 107 from the definition of a financial instrument.
Short-term borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, approximate their fair values.
Page 40 of 56
Off-balance-sheet instruments
Off-balance-sheet financial instruments include commitments to extend credit, letters of credit, and other financial guarantees. The fair value of such instruments is estimated using fees currently charged for similar arrangements in the marketplace, adjusted for changes in terms and credit risk as appropriate. The estimated fair value for these instruments was insignificant at December 31, 1994 and 1993.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In order to meet the financing needs of its customers, the Company deals in financial instruments that expose it to off-balance-sheet risk. These financial instruments include commitments to extend credit, letters of credit, and other financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial position.
The Company's exposure to credit loss in the event of nonperformance by other parties for commitments to extend credit and letters of credit and other financial guarantees written is represented by the contractual amount of those instruments. The Company follows the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit and credit card lines are agreements to make a loan to a customer as long as there is no violation of any condition established in the commitment or credit card contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount outstanding does not necessarily represent total future cash outlay requirements.
The amount of collateral, if any, required by the Company upon issuance of a commitment is based on management's credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Letters of credit and financial guarantees written are conditional agreements issued by the Company to guarantee the performance of a customer to a third party. These agreements are primarily issued to support commercial trade. Agreements totalling $10,051,000 at December 31, 1994 have original maturities greater than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds marketable securities as collateral to support those letters of credit and guarantees for which collateral is deemed necessary. Letters of credit and financial guarantees outstanding at December 31, 1994 range from unsecured to fully secured.
Page 41 of 56
(13) REGULATORY MATTERS
The Banks are required to maintain non-interest-bearing reserve balances with the Federal Reserve Bank to fulfill their reserve requirements. The average reserve balances maintained were approximately $42,731,000 in 1994 and $63,243,000 in 1993.
Minimum regulatory capital requirements have been established with respect to banks and bank holding companies, expressed in terms of regulatory capital ratios. At December 31, 1994, the Company's and the Banks' ratios satisfied all of the minimum capital requirements.
(14) MERGERS AND ACQUISITIONS
On March 31, 1994, the Company and the Louisiana Bank purchased substantially all of the assets and assumed the deposit and certain other liabilities of Baton Rouge Bank and Trust Company. Included in the tangible assets acquired, whose fair value totalled approximately $118,000,000, were cash and cash items of $41,000,000, investment securities and federal funds sold of $13,000,000, and $59,000,000 in commercial, real estate mortgage and personal loans, as well as six banking offices in the Baton Rouge area. The deposits assumed included approximately $24,000,000 in non-interest-bearing demand deposits and $94,000,000 in interest-bearing transaction, savings and time deposit accounts. The operating results from this acquisition are reflected in the consolidated income statements beginning April 1, 1994.
As part of the acquisition price, which totalled approximately $9,000,000, Whitney Holding Corporation issued 90,909 shares of its common stock with a value of $2,000,000.
On February 17, 1995, the Company, through its newly formed state-chartered banking subsidiary, Whitney Bank of Alabama, purchased the assets and assumed the deposit liabilities of the five Mobile branch offices of The Peoples Bank, Elba, Alabama. The assets acquired and deposits assumed totalled approximately $90,000,000, including $47,000,000 in loans. The purchase price was approximately $12,000,000.
(15) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. After reviewing with outside legal counsel pending and threatened actions, management is of the opinion that the ultimate resolution of these actions will not have a material effect on the Company's financial condition and results of operations.
Management also does not believe that compliance with existing federal, state or local environmental laws and regulations will impose any material financial obligation on the Company or materially affect the realizable value of its assets.
The Company owns its own main office building as well as most of its branch banking facilities and has not entered into material commitments under non-cancelable leases for facilities or equipment. The defined benefit retirement plan is sufficiently funded on an actuarial basis so as not to have required an additional contribution by the Company during 1994. Current projections do not indicate that a contribution will be required for 1995.
Page 42 of 56
(16) PARENT COMPANY FINANCIAL STATEMENTS
Summarized parent-company-only financial statements of Whitney Holding Corporation follow (in thousands):
Page 43 of 56
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Whitney Holding Corporation is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgement where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements.
The Company's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to Arthur Andersen LLP during its audit were valid and appropriate.
Management of the Company has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the system of internal control for compliance. The Company maintains a strong internal control auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. As part of their audit of the Company's 1994 financial statements, Arthur Andersen LLP considered the Company's system of internal control to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Management has considered the recommendations of the internal auditors and Arthur Andersen LLP concerning the Company's system of internal control and has taken actions that it believes are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1994, the Company's system of internal control is adequate to accomplish the objectives discussed herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF WHITNEY HOLDING CORPORATION: We have audited the accompanying consolidated balance sheets of Whitney Holding Corporation (a Louisiana corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Whitney Holding Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 4 and 5 to the consolidated financial statements, effective January 1, 1993, the Company changed its methods of accounting for income taxes and for post retirement benefits other than pensions. As discussed in notes 1 and 2 to the consolidated financial statements, effective December 31, 1993, the Company changed its method of accounting for certain investments in debt and equity securities.
New Orleans, Louisiana Arthur Andersen LLP January 13, 1995 (except with respect to the last paragraph of Note 14 as to which the date is February 17, 1995)
Page 44 of 56
SUMMARY OF QUARTERLY FINANCIAL INFORMATION The following quarterly financial information is unaudited. In the opinion of management all normal recurring adjustments necessary to present fairly the results of operations for such periods are reflected.
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 45 of 56
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In response to this item, registrant incorporates by reference the section entitled "Election of Directors" of its Proxy Statement dated March 10, 1995.
Item 11: EXECUTIVE COMPENSATION
In response to this item, registrant incorporates by reference the section entitled "Executive Compensation" of its Proxy Statement dated March 10, 1995.
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this item, registrant incorporates by reference the sections entitled "Voting Securities and Principal Holders Thereof" and "Election of Directors" of its Proxy Statement dated March 10, 1995.
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this item, registrant incorporates by reference the section entitled "Certain Transactions" of its Proxy Statement dated March 10, 1995.
Page 46 of 56
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the Company and its subsidiaries are included in Part II Item 8: