UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2005

 

 

 

 

 

or

 

 

 

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from               to              

 

Commission File Number 1-6887

 

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

(IRS Employer Identification No.)

 

 

 

130 Merchant Street, Honolulu, Hawaii

 

96813

(Address of principal executive offices)

 

(Zip Code)

 

1-(888)-643-3888

(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 ý     No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý     No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.01 Par Value; outstanding at April 22, 2005 — 52,346,380 shares

 

 



 

Bank of Hawaii Corporation

Form 10-Q

INDEX

 

 

 

Page

Part I. - Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Statements of Income - Three months ended March 31, 2005 and 2004

3

 

 

 

 

 

 

 

Consolidated Statements of Condition – March 31, 2005, December 31, 2004, and March 31, 2004

4

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2005 and 2004

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows – Three months ended March 31, 2005 and 2004

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

Part II. - Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

 

33

 



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

Interest Income

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

86,467

 

$

81,428

 

Income on Investment Securities - Available for Sale

 

27,319

 

20,846

 

Income on Investment Securities - Held to Maturity

 

5,825

 

6,976

 

Deposits

 

23

 

1,231

 

Funds Sold

 

75

 

417

 

Other

 

449

 

858

 

Total Interest Income

 

120,158

 

111,756

 

Interest Expense

 

 

 

 

 

Deposits

 

11,604

 

9,200

 

Securities Sold Under Agreements to Repurchase

 

3,325

 

1,926

 

Funds Purchased

 

733

 

231

 

Short-Term Borrowings

 

32

 

15

 

Long-Term Debt

 

3,806

 

4,353

 

Total Interest Expense

 

19,500

 

15,725

 

Net Interest Income

 

100,658

 

96,031

 

Provision for Loan and Lease Losses

 

 

 

Net Interest Income After Provision for Loan and Lease Losses

 

100,658

 

96,031

 

Non-Interest Income

 

 

 

 

 

Trust and Asset Management

 

14,622

 

13,864

 

Mortgage Banking

 

2,590

 

1,977

 

Service Charges on Deposit Accounts

 

10,179

 

9,950

 

Fees, Exchange, and Other Service Charges

 

13,836

 

13,239

 

Insurance

 

5,788

 

4,658

 

Other

 

5,300

 

5,154

 

Total Non-Interest Income

 

52,315

 

48,842

 

Non-Interest Expense

 

 

 

 

 

Salaries and Benefits

 

44,769

 

46,001

 

Net Occupancy Expense

 

9,545

 

9,386

 

Net Equipment Expense

 

5,471

 

5,964

 

Other

 

21,078

 

21,671

 

Total Non-Interest Expense

 

80,863

 

83,022

 

Income Before Income Taxes

 

72,110

 

61,851

 

Provision for Income Taxes

 

26,588

 

22,052

 

Net Income

 

$

45,522

 

$

39,799

 

Basic Earnings Per Share

 

$

0.85

 

$

0.73

 

Diluted Earnings Per Share

 

$

0.83

 

$

0.69

 

Dividends Declared Per Share

 

$

0.33

 

$

0.30

 

Basic Weighted Average Shares

 

53,401,787

 

54,286,648

 

Diluted Weighted Average Shares

 

55,020,050

 

57,746,520

 

 

3



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

(dollars in thousands)

 

March 31,
2005

 

December 31,
2004

 

March 31,
2004

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

5,897

 

$

4,592

 

$

479,882

 

Investment Securities - Available for Sale

 

2,495,447

 

2,483,719

 

1,995,713

 

Investment Securities - Held to Maturity
(Market Value of $547,764, $585,836, and $719,308)

 

558,834

 

589,908

 

717,867

 

Funds Sold

 

70,000

 

21,000

 

255,000

 

Loans Held for Sale

 

20,897

 

17,642

 

67,328

 

Loans and Leases

 

6,015,790

 

5,986,930

 

5,714,996

 

Allowance for Loan and Lease Losses

 

(105,006)

 

(106,796)

 

(127,185)

 

Net Loans

 

5,910,784

 

5,880,134

 

5,587,811

 

Total Earning Assets

 

9,061,859

 

8,996,995

 

9,103,601

 

Cash and Non-Interest-Bearing Deposits

 

306,852

 

225,359

 

313,090

 

Premises and Equipment

 

141,615

 

146,095

 

155,488

 

Customers’ Acceptance Liability

 

1,054

 

1,406

 

1,844

 

Accrued Interest Receivable

 

38,427

 

36,044

 

34,658

 

Foreclosed Real Estate

 

183

 

191

 

4,416

 

Mortgage Servicing Rights

 

18,510

 

18,769

 

21,138

 

Goodwill

 

34,959

 

36,216

 

36,216

 

Other Assets

 

304,571

 

305,116

 

342,991

 

Total Assets

 

$

9,908,030

 

$

9,766,191

 

$

10,013,442

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-Interest-Bearing Demand

 

$

1,943,616

 

$

1,977,703

 

$

1,915,678

 

Interest-Bearing Demand

 

1,702,158

 

1,536,323

 

1,407,494

 

Savings

 

2,968,624

 

2,960,351

 

2,888,877

 

Time

 

1,146,264

 

1,090,290

 

1,151,873

 

Total Deposits

 

7,760,662

 

7,564,667

 

7,363,922

 

Securities Sold Under Agreements to Repurchase

 

664,206

 

568,981

 

1,039,204

 

Funds Purchased

 

76,100

 

149,635

 

98,370

 

Short-Term Borrowings

 

8,376

 

15,000

 

11,349

 

Banker’s Acceptances Outstanding

 

1,054

 

1,406

 

1,844

 

Retirement Benefits Payable

 

66,233

 

65,708

 

62,298

 

Accrued Interest Payable

 

7,669

 

7,021

 

6,978

 

Taxes Payable and Deferred Taxes

 

274,164

 

229,928

 

228,785

 

Other Liabilities

 

90,254

 

96,373

 

95,091

 

Long-Term Debt

 

242,656

 

252,638

 

319,833

 

Total Liabilities

 

9,191,374

 

8,951,357

 

9,227,674

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value); authorized 500,000,000 shares;
issued / outstanding: March 2005 - 81,711,752 / 52,826,818,
December 2004 - 81,711,752 / 54,960,857,
March 2004 - 81,641,545 / 54,216,350

 

815

 

813

 

807

 

Capital Surplus

 

453,227

 

450,998

 

396,335

 

Accumulated Other Comprehensive Income (Loss)

 

(33,469)

 

(12,917)

 

4,289

 

Retained Earnings

 

1,310,070

 

1,282,425

 

1,222,602

 

Deferred Stock Grants

 

(8,145)

 

(8,433)

 

(7,594)

 

Treasury Stock, at Cost (Shares: March 2005 - 28,884,934,
December 2004 - 26,750,895, March 2004 - 27,425,195)

 

(1,005,842)

 

(898,052)

 

(830,671)

 

Total Shareholders’ Equity

 

716,656

 

814,834

 

785,768

 

Total Liabilities and Shareholders’ Equity

 

$

9,908,030

 

$

9,766,191

 

$

10,013,442

 

 

4



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

(dollars in thousands)

 

Total

 

Common Stock

 

Capital
Surplus

 

Accum. Other Compre- hensive Income (Loss)

 

Retained Earnings

 

Deferred Stock Grants

 

Treasury Stock

 

Compre- hensive Income

 

Balance at December 31, 2004

 

$

814,834

 

$

813

 

$

450,998

 

$

(12,917)

 

$

1,282,425

 

$

(8,433)

 

$

(898,052)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

45,522

 

 

 

 

45,522

 

 

 

$

45,522

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and
Losses on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities

 

(20,552)

 

 

 

(20,552)

 

 

 

 

(20,552)

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

24,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans
and Related Tax Benefits (278,339 shares)

 

9,027

 

2

 

2,229

 

 

(282)

 

288

 

6,790

 

 

 

Treasury Stock Purchased (2,411,752 shares)

 

(114,580)

 

 

 

 

 

 

(114,580)

 

 

 

Cash Dividends Paid

 

(17,595)

 

 

 

 

(17,595)

 

 

 

 

 

Balance at March 31, 2005

 

$

716,656

 

$

815

 

$

453,227

 

$

(33,469)

 

$

1,310,070

 

$

(8,145)

 

$

(1,005,842)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

793,132

 

$

807

 

$

391,701

 

$

(5,711)

 

$

1,199,077

 

$

(8,309)

 

$

(784,433)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

39,799

 

 

 

 

39,799

 

 

 

$

39,799

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and
Losses on Investment Securities

 

10,000

 

 

 

10,000

 

 

 

 

10,000

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

49,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans
and Related Tax Benefits (611,820 shares)

 

18,482

 

 

4,634

 

 

144

 

715

 

12,989

 

 

 

Treasury Stock Purchased (1,323,050 shares)

 

(59,227)

 

 

 

 

 

 

(59,227)

 

 

 

Cash Dividends Paid

 

(16,418)

 

 

 

 

(16,418)

 

 

 

 

 

Balance at March 31, 2004

 

$

785,768

 

$

807

 

$

396,335

 

$

4,289

 

$

1,222,602

 

$

(7,594)

 

$

(830,671)

 

 

 

 

5



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net Income

 

$

45,522

 

$

39,799

 

Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:

 

 

 

 

 

Goodwill Impairment

 

1,257

 

 

Depreciation and Amortization

 

5,153

 

5,331

 

Amortization of Deferred Loan and Lease Fees

 

(273)

 

(636)

 

Amortization/(Accretion) of Premiums/Discounts on Investment Securities, Net

 

2,272

 

3,013

 

Deferred Stock Grants

 

1,273

 

1,047

 

Deferred Income Taxes

 

4,024

 

3,205

 

Proceeds from Sales of Loans Held for Sale

 

110,673

 

78,837

 

Originations of Loans Held for Sale

 

(113,928)

 

(136,954)

 

Net Change in Other Assets and Other Liabilities

 

43,836

 

(41,006)

 

Net Cash Provided (Used) by Operating Activities

 

99,809

 

(47,364)

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Proceeds from Sales and Redemptions of Investment Securities - Available for Sale

 

137,544

 

142,489

 

Purchases of Investment Securities - Available for Sale

 

(183,233)

 

(134,098)

 

Proceeds from Redemptions of Investment Securities - Held to Maturity

 

30,654

 

45,436

 

Purchases of Investment Securities - Held to Maturity

 

 

(36,445)

 

Net (Increase) Decrease in Loans and Leases

 

(28,477)

 

40,920

 

Premises and Equipment, Net

 

(673)

 

(814)

 

Net Cash (Used) Provided by Investing Activities

 

(44,185)

 

57,488

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Increase in Demand Deposits

 

131,748

 

32,914

 

Net Increase in Savings Deposits

 

8,273

 

55,498

 

Net Increase (Decrease) in Time Deposits

 

55,974

 

(57,269)

 

Net Increase in Short-Term Borrowings

 

15,066

 

554,386

 

Repayments of Long-Term Debt

 

(9,982)

 

(4,235)

 

Proceeds from Issuance of Common Stock

 

7,270

 

13,969

 

Repurchase of Common Stock

 

(114,580)

 

(59,227)

 

Cash Dividends Paid

 

(17,595)

 

(16,418)

 

Net Cash Provided by Financing Activities

 

76,174

 

519,618

 

 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

131,798

 

529,742

 

Cash and Cash Equivalents at Beginning of Period

 

250,951

 

518,230

 

Cash and Cash Equivalents at End of Period

 

$

382,749

 

$

1,047,972

 

 

6



 

Bank of Hawaii Corporation

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1.   Summary of Significant Accounting Policies

 

Bank of Hawaii Corporation (the “Company”) is a bank holding company providing a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands and American Samoa).  The Company’s principal subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

 

Certain prior period amounts have been reclassified to conform to current period classifications.

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2004 Annual Report on Form 10-K.  Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations.  Stock-based employee compensation expense associated with stock options is not reflected in net income as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”):

 

7



 

 

 

Three Months Ended
March 31,

 

(dollars in thousands except per share and option data)

 

2005

 

20041

 

Net Income, as reported

 

$

45,522

 

$

39,799

 

Less:

 Total Stock-Based Employee Compensation Expense Associated with Stock Options Determined Under Fair Value Method For All Option Awards, Net of Related Tax Effects 2

 

(710)

 

(1,516)

 

Pro Forma Net Income

 

$

44,812

 

$

38,283

 

Earnings per share:

 

 

 

 

 

Basic-as reported

 

$

0.85

 

$

0.73

 

Basic-pro forma

 

$

0.84

 

$

0.71

 

Diluted-as reported

 

$

0.83

 

$

0.69

 

Diluted-pro forma

 

$

0.81

 

$

0.66

 

 


1 Prior period amounts restated to account for forfeitures and adjustment to dividend yield calculation.

2 A Black-Scholes option pricing model was used to determine the fair values of the options granted.

 

Recent Accounting Standards

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123SFAS No. 123(R) supersedes APB No. 25 and amends FASB Statement No. 95, Statement of Cash Flows.  SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense through the income statement based on their fair values at issue date.  Pro forma disclosure will no longer be an alternative.  SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow required under current guidelines.  On April 14, 2005, the Securities and Exchange Commission announced that it would provide for a phased-in-implementation process for SFAS No. 123(R).  Under this process, the Company will be required to adopt SFAS No. 123(R) no later than the beginning of the first fiscal year that begins after June 15, 2005.  The Company plans to adopt SFAS No. 123(R) on January 1, 2006.

 

The Company plans to adopt SFAS No. 123(R) using the “modified prospective” method.  Under this method, awards that are granted, modified, or settled after January 1, 2006, will be measured and accounted for in accordance with SFAS No.123(R).  Also under this method, expense will be recognized in the income statement for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123.

 

As permitted by SFAS No. 123, the Company currently accounts for share-based payments using the intrinsic value method of APB No. 25, and accordingly recognizes no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.  The adoption of SFAS No. 123(R) will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.  Had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share shown in the table above.

 

Note 2.   Business Segments

 

The information under the caption “Business Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

 

8



 

Note 3.   Pension Plans and Postretirement Benefit Plan

 

Components of net periodic cost for the aggregated pension plans and the postretirement benefit plan are presented in the following table:

 

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

Three Months Ended March 31,

 

(dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

Components of Net Periodic Cost:

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

255

 

$

247

 

Interest Cost

 

1,125

 

1,092

 

450

 

443

 

Expected Return on Plan Assets

 

(1,185)

 

(1,182)

 

 

 

Amortization of Unrecognized Net Transition Obligation

 

 

 

147

 

147

 

Recognized Net Actuarial (Gain) Loss

 

420

 

328

 

(42)

 

(156)

 

Total Components of Net Periodic Cost

 

$

360

 

$

238

 

$

810

 

$

681

 

 

There were no significant changes from the previously reported $1.8 million in contributions expected to be paid during 2005.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This report, including its Financial Outlook, contains forward-looking statements concerning, among other things, the economic and business environment in the Company’s service area and elsewhere, credit quality, the expected level of loan and lease loss provisioning, anticipated net income and other financial and business matters in future periods.  The Company’s forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, fiscal and monetary policies, or legislation in Hawaii and the other markets the Company serves; 2) changes in the Company’s credit quality or risk profile which may increase or decrease the required level of allowance for loan and lease losses; 3) changes in market interest rates that may affect the Company’s credit markets and ability to maintain its net interest margin; 4) changes to the amount and timing of the Company’s proposed equity repurchases and repayment of maturing debt; 5) inability to achieve expected benefits of the Company’s business process improvements; 6) real or threatened acts of war or terrorist activity affecting business conditions; and 7) adverse weather and other natural conditions impacting the Company and its customers’ operations.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  The Company does not undertake any obligation to update forward-looking statements to reflect later events or circumstances.

 

9



 

OVERVIEW

 

The Company is in the second year of its 2004-2006 plan (the “Plan”), which continues to build on the objective of maximizing shareholder value over time.  This objective was established in the previous three-year strategic plan.

 

The Plan consists of five key elements:

                  Accelerate revenue growth in our island markets

                  Better integrate our business segments

                  Continue to develop our management teams

                  Improve operating efficiency

                  Maintain a culture of dependable risk and capital management

 

During the first quarter of 2005, the Company continued to meet the key financial objectives of the Plan.  Total revenue, consisting of net interest income and non-interest income, for the first quarter of 2005 increased 6% from the same prior year period.  Loans and leases outstanding and deposits were 5% higher as of March 31, 2005 compared to the same period in 2004.

 

The Company continues to better integrate the Company’s three primary business segments — Retail Banking, Commercial Banking and the Investment Services Group — through improved processes, training and communications.  As a result, the needs of its customers are better addressed and customer relationships continue to strengthen.

 

The Company utilizes various financial measures to evaluate its performance against the objectives of the Plan, many of which are discussed below.

 

Operating efficiency improved in the first quarter of 2005 compared to the same period in 2004, as the Company continues to improve processes.  The efficiency ratio for the first three months of 2005 was 52.86% compared to 57.31% in the same period in 2004.  In the first quarter of 2005 compared to the same period in 2004, operating leverage, which is defined as the relative change in income before the provision for loan and lease losses and income taxes, was 16.59%.

 

The management of both risk and capital continues to be dependable and disciplined in 2005.  As of March 31, 2005 and December 31, 2004, the ratio of the allowance for loan and lease losses to loans and leases outstanding was 1.75% and 1.78%, respectively.  As of the same dates, the leverage ratio was 7.42% and 8.29%, respectively.

 

The Company’s net income for the first quarter of 2005 was $45.5 million, an increase of 14% from $39.8 million reported in the same prior year period.  Additional results for the first three months of 2005 compared to the same period in 2004 were as follows:

 

                  Diluted earnings per share were $0.83, an increase of 20%

                  The net interest margin was 4.43%, an increase of 13 basis points

                  Return on average assets increased to 1.88% from 1.65%

                  Return on average equity increased to 23.66% from 19.98%

 

The Company’s overall financial results are more fully discussed in the following sections of this report.

 

Table 1 presents the Company’s financial highlights and performance ratios for the three months ended March 31, 2005 and 2004.

 

10



 

Highlights (Unaudited)

 

Table 1

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

At March 31,

 

 

 

 

 

Balance Sheet Totals

 

 

 

 

 

Total Assets

 

$

9,908,030

 

$

10,013,442

 

Net Loans

 

5,910,784

 

5,587,811

 

Deposits

 

7,760,662

 

7,363,922

 

Long-Term Debt

 

242,656

 

319,833

 

Shareholders’ Equity

 

716,656

 

785,768

 

 

 

 

 

 

 

Average Assets

 

9,845,765

 

9,677,903

 

Average Loans and Leases

 

6,000,572

 

5,742,368

 

Average Deposits

 

7,687,798

 

7,319,902

 

Average Shareholders’ Equity

 

780,271

 

801,247

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

Operating Results

 

 

 

 

 

Interest Income

 

$

120,158

 

$

111,756

 

Net Interest Income

 

100,658

 

96,031

 

Net Income

 

45,522

 

39,799

 

Basic Earnings Per Share

 

0.85

 

0.73

 

Diluted Earnings Per Share

 

0.83

 

0.69

 

Dividends Declared Per Share

 

0.33

 

0.30

 

 

 

 

 

 

 

Performance Ratios

 

 

 

 

 

Net Income to Average Total Assets (ROA)

 

1.88

%

1.65

%

Net Income to Average Shareholders’ Equity (ROE)

 

23.66

 

19.98

 

Net Interest Margin 1

 

4.43

 

4.30

 

Efficiency Ratio 2

 

52.86

 

57.31

 

Allowance for Loan and Lease Losses to Loans and Leases Outstanding

 

1.75

 

2.23

 

Dividend Payout Ratio

 

38.82

 

41.10

 

Book Value Per Common Share

 

13.57

 

14.49

 

Average Equity to Average Assets

 

7.92

 

8.28

 

Tier 1 Capital Ratio

 

10.79

 

11.98

 

Total Capital Ratio

 

13.16

 

14.81

 

Leverage Ratio

 

7.42

 

7.88

 

 

 

 

 

 

 

Employees (FTE)

 

2,593

 

2,703

 

Branches and offices

 

87

 

89

 

 

 

 

 

 

 

Market Price Per Share of Common Stock for the Quarter Ended:

 

 

 

 

 

Closing

 

$

45.26

 

$

46.33

 

High

 

$

50.95

 

$

47.45

 

Low

 

$

44.33

 

$

41.75

 

 


1 The net interest margin is defined as net interest income, annualized and on a fully-taxable equivalent basis, as a percentage of average earning assets.

 

2 The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income).

 

11



 

ANALYSIS OF STATEMENT OF INCOME

 

Net Interest Income

 

Net interest income on a taxable equivalent basis for the first quarter of 2005 increased $4.6 million or 5% from the comparable period in 2004.  The net interest margin was 4.43% in the first quarter of 2005, a 13 basis point increase from the same prior year period.  The increase in net interest income was primarily a result of higher income earned on the investment securities portfolio, commercial and industrial loans and home equity loans.  The investment securities portfolio experienced an increase in interest income due to an increase in average balances resulting from the deployment of a portion of the Company's excess liquidity into the investment securities portfolio as well as a reduction in prepayments on mortgage-backed securities.  Interest income on commercial and industrial loans increased primarily due to higher average yields earned which were consistent with increases in benchmark interest rates.  Home equity loans experienced higher interest income due to a 39% increase in the average balance outstanding and re-pricing of initial introductory rates to fully indexed rates.  Partially offsetting these positive increases in interest income was an increase in interest expense due to a rise in interest rates on deposits, short-term borrowings and on long-term debt.

 

Average balances, related income and expenses, and resulting yields and rates are presented in Table 2.  An analysis of the change in net interest income is presented in Table 3.

 

12



 

Consolidated Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)

Table 2

 

 

 

Three Months Ended
March 31, 2005

 

Three Months Ended
December 31, 2004

 

Three Months Ended
March 31, 2004

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(dollars in millions)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

4.8

 

$

 

1.93

%

$

21.0

 

$

0.1

 

2.05

%

$

249.6

 

$

1.2

 

1.98

%

Funds Sold

 

12.6

 

0.1

 

2.37

 

74.3

 

0.4

 

1.92

 

168.9

 

0.4

 

0.99

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

2,491.1

 

27.4

 

4.40

 

2,444.9

 

26.4

 

4.32

 

1,988.5

 

20.8

 

4.20

 

Held to Maturity

 

574.6

 

5.8

 

4.06

 

615.1

 

6.1

 

4.00

 

719.6

 

7.0

 

3.88

 

Loans Held for Sale

 

13.2

 

0.2

 

5.40

 

15.9

 

0.2

 

5.72

 

15.4

 

0.2

 

5.33

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

904.3

 

13.2

 

5.90

 

790.7

 

11.4

 

5.71

 

844.5

 

10.1

 

4.81

 

Construction

 

124.1

 

1.7

 

5.44

 

115.2

 

1.5

 

5.10

 

100.4

 

1.1

 

4.31

 

Commercial Mortgage

 

605.9

 

8.5

 

5.73

 

624.4

 

8.6

 

5.47

 

634.1

 

8.6

 

5.45

 

Residential Mortgage

 

2,332.1

 

32.6

 

5.59

 

2,304.9

 

32.3

 

5.61

 

2,317.5

 

33.3

 

5.75

 

Installment

 

736.8

 

15.0

 

8.27

 

721.1

 

15.4

 

8.51

 

650.9

 

14.3

 

8.84

 

Home Equity

 

678.8

 

9.5

 

5.65

 

632.6

 

8.4

 

5.25

 

489.2

 

5.8

 

4.75

 

Purchased Home Equity

 

116.8

 

1.0

 

3.54

 

134.4

 

1.2

 

3.71

 

204.9

 

2.7

 

5.18

 

Lease Financing

 

501.8

 

4.8

 

3.88

 

511.1

 

5.1

 

3.97

 

500.9

 

5.4

 

4.33

 

Total Loans and Leases

 

6,000.6

 

86.3

 

5.80

 

5,834.4

 

83.9

 

5.73

 

5,742.4

 

81.3

 

5.68

 

Other

 

53.9

 

0.4

 

3.38

 

60.7

 

0.3

 

1.74

 

77.5

 

0.9

 

4.45

 

Total Earning Assets 2

 

9,150.8

 

120.2

 

5.29

 

9,066.3

 

117.4

 

5.17

 

8,961.9

 

111.8

 

5.00

 

Cash and Non-Interest-Bearing Deposits

 

315.6

 

 

 

 

 

307.5

 

 

 

 

 

327.6

 

 

 

 

 

Other Assets

 

379.4

 

 

 

 

 

369.2

 

 

 

 

 

388.4

 

 

 

 

 

Total Assets

 

$

9,845.8

 

 

 

 

 

$

9,743.0

 

 

 

 

 

$

9,677.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

1,618.1

 

1.7

 

0.42

 

$

1,500.0

 

1.3

 

0.33

 

$

1,370.0

 

0.5

 

0.15

 

Savings

 

2,972.3

 

4.4

 

0.60

 

2,998.5

 

3.6

 

0.48

 

2,871.6

 

3.3

 

0.46

 

Time

 

1,114.7

 

5.5

 

2.02

 

1,063.7

 

5.1

 

1.92

 

1,188.8

 

5.4

 

1.83

 

Total Interest-Bearing Deposits

 

5,705.1

 

11.6

 

0.82

 

5,562.2

 

10.0

 

0.71

 

5,430.4

 

9.2

 

0.68

 

Short-Term Borrowings

 

706.2

 

4.1

 

2.35

 

776.0

 

3.5

 

1.82

 

862.3

 

2.2

 

1.01

 

Long-Term Debt

 

248.7

 

3.8

 

6.14

 

252.6

 

3.9

 

6.16

 

320.9

 

4.3

 

5.44

 

Total Interest-Bearing Liabilities

 

6,660.0

 

19.5

 

1.19

 

6,590.8

 

17.4

 

1.05

 

6,613.6

 

15.7

 

0.96

 

Net Interest Income

 

 

 

$

100.7

 

 

 

 

 

$

100.0

 

 

 

 

 

$

96.1

 

 

 

Interest Rate Spread

 

 

 

 

 

4.10

%

 

 

 

 

4.12

%

 

 

 

 

4.04

%

Net Interest Margin

 

 

 

 

 

4.43

%

 

 

 

 

4.40

%

 

 

 

 

4.30

%

Non-Interest-Bearing Demand Deposits

 

1,982.7

 

 

 

 

 

1,954.2

 

 

 

 

 

1,889.5

 

 

 

 

 

Other Liabilities

 

422.8

 

 

 

 

 

419.4

 

 

 

 

 

373.6

 

 

 

 

 

Shareholders’ Equity

 

780.3

 

 

 

 

 

778.6

 

 

 

 

 

801.2

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

9,845.8

 

 

 

 

 

$

9,743.0

 

 

 

 

 

$

9,677.9

 

 

 

 

 

 


1 Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.

 

2 Interest income includes taxable-equivalent basis adjustment based upon a statutory tax rate of 35%.

 

13



 

Analysis of Change in Net Interest Income - Taxable Equivalent Basis (Unaudited)

Table 3

 

 

 

Three Months Ended March 31, 2005 Compared to March 31, 2004

 

(dollars in millions)

 

Volume 1

 

Rate 1

 

Total

 

Change in Interest Income:

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

(1.2)

 

$

 

$

(1.2)

 

Funds Sold

 

(0.6)

 

0.3

 

(0.3)

 

Investment Securities

 

 

 

 

 

 

 

Available for Sale

 

5.5

 

1.1

 

6.6

 

Held to Maturity

 

(1.5)

 

0.3

 

(1.2)

 

Loans and Leases

 

 

 

 

 

 

 

Commercial and Industrial

 

0.7

 

2.4

 

3.1

 

Construction

 

0.3

 

0.3

 

0.6

 

Commercial Mortgage

 

(0.4)

 

0.3

 

(0.1)

 

Residential Mortgage

 

0.2

 

(0.9)

 

(0.7)

 

Installment

 

1.7

 

(1.0)

 

0.7

 

Home Equity

 

2.5

 

1.2

 

3.7

 

Purchased Home Equity

 

(1.0)

 

(0.7)

 

(1.7)

 

Lease Financing

 

 

(0.6)

 

(0.6)

 

Total Loans and Leases

 

4.0

 

1.0

 

5.0

 

Other

 

(0.3)

 

(0.2)

 

(0.5)

 

Total Change in Interest Income

 

5.9

 

2.5

 

8.4

 

Change in Interest Expense:

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

Demand

 

0.1

 

1.1

 

1.2

 

Savings

 

0.1

 

1.0

 

1.1

 

Time

 

(0.4)

 

0.5

 

0.1

 

Total Interest-Bearing Deposits

 

(0.2)

 

2.6

 

2.4

 

Short-Term Borrowings

 

(0.5)

 

2.4

 

1.9

 

Long-Term Debt

 

(1.0)

 

0.5

 

(0.5)

 

Total Change in Interest Expense

 

(1.7)

 

5.5

 

3.8

 

Change in Net Interest Income

 

$

7.6

 

$

(3.0)

 

$

4.6

 

 


1  The changes for each category of interest income and expense are divided between the portion of changes attributable to the variance in volume or rate for that category.

 

Provision for Loan and Lease Losses

 

In the first quarter of both 2005 and 2004, the Company recorded no Provision for Loan and Lease Losses (“Provision”).  For information on the reserve for credit losses, refer to “Corporate Risk Profile — Reserve for Credit Losses” section of this report.

 

Non-Interest Income

 

Non-interest income increased $3.5 million or 7% for the first quarter of 2005 from the comparable period in 2004.

 

Trust and asset management income increased $0.8 million or 5% during the first three months of 2005 compared to the same period in 2004.  The increase in fee income was due to an improvement in market conditions, which resulted in an increase in the average market value of assets under management, and an increase in investment advisory fees on money market assets.

 

14



 

Mortgage banking income increased $0.6 million or 31% for the three months ended March 31, 2005 compared to the same period in 2004.  The increase was due to an increase in mortgage loan production of 8% in the first quarter of 2005 compared to the same prior year period and a reduction in amortization of mortgage servicing rights, as prepayments continued to decline in 2005.

 

Fees, exchange and other service charges increased $0.6 million or 5% for the three months ended March 31, 2005 compared to the same prior year period.  This increase was primarily due to higher merchant card transaction income, resulting from increased sales volume, and higher loan fees, partially offset by a decrease in foreign exchange income.

 

Insurance income increased $1.1 million or 24% for the three months ended March 31, 2005 compared to the same prior year period primarily from increased sales volume of annuity and life insurance products.

 

Non-Interest Expense

 

Non-interest expense decreased $2.2 million or 3% for the three months ended March 31, 2005 compared to the same prior year period.

 

Salaries and benefits expense decreased $1.2 million or 3% for the three months ended March 31, 2005 compared to the same prior year period.  The decline in expense was primarily a result of decreases in base salaries and stock-based compensation.  Base salaries decreased $0.7 million or 3% from the same period in 2004 as a result of a 4% decline in the number of employees.  Partially offsetting these decreases was an increase in commission expense as a result of higher mortgage loan originations and annuity sales.

 

Salaries and Benefits (Unaudited)

 

Table 4

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands)

 

2005

 

2004

 

Salaries

 

$

26,053

 

$

27,204

 

Incentive Compensation

 

3,968

 

3,816

 

Stock-Based Compensation

 

1,715

 

2,896

 

Commission Expense

 

2,252

 

1,627

 

Retirement and Other Benefits

 

4,768

 

4,357

 

Payroll Taxes

 

3,453

 

3,430

 

Medical, Dental, and Life Insurance

 

2,231

 

2,104

 

Separation Expense

 

329

 

567

 

Total Salaries and Benefits

 

$

44,769

 

$

46,001

 

 

Other non-interest expense decreased $0.6 million or 3% for the three months ended March 31, 2005 compared to the same period in 2004.  This decrease was primarily due to the positive impact of a $1.1 million gain realized on the sale of a foreclosed commercial real estate property and reduced professional fees.  A goodwill impairment charge of $1.3 million was recorded in the first quarter of 2005 related to the Company’s insurance business.  The charge related to a reduction in staff in that business unit which led to lower projected revenues.

 

Provision for Income Taxes

 

The effective tax rate for the three months ended March 31, 2005 was 36.87% compared to 35.65% for the comparable period of 2004.  The increase was largely due to the goodwill impairment charge, which was not tax deductible.

 

15



 

BALANCE SHEET ANALYSIS

 

Short-Term Earning Assets

 

Short-term earning assets, consisting of interest-bearing deposits and funds sold, totaled $75.9 million at March 31, 2005, an increase of $50.3 million from December 31, 2004 and a decrease of $659.0 million from March 31, 2004.  The decline from March 31, 2004 was mainly due to a reduction in excess liquidity.

 

Investment Securities

 

Investment securities remained stable at $3.1 billion as of March 31, 2005 and December 31, 2004 and increased by $340.7 million from March 31, 2004.  At March 31, 2005 and December 31, 2004 investment securities with a book value of $1.5 billion were pledged to secure deposits of government entities and repurchase agreements.

 

Table 5 presents the details of the investment securities portfolio at March 31, 2005 and December 31, 2004.

 

Investment Securities (Unaudited)

 

Table 5

 

 

 

Amortized

 

Fair

 

(dollars in thousands)

 

Cost

 

Value

 

March 31, 2005

 

 

 

 

 

Securities-Available for Sale:

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Agencies

 

$

35,943

 

$

36,148

 

Debt Securities Issued by States and Municipalities

 

7,813

 

7,833

 

Mortgage-Backed Securities

 

2,126,470

 

2,109,187

 

Other Debt Securities

 

349,099

 

342,279

 

Total

 

$

2,519,325

 

$

2,495,447

 

Securities-Held to Maturity:

 

 

 

 

 

Debt Securities Issued by States and Municipalities

 

$

90

 

$

94

 

Mortgage-Backed Securities

 

558,744

 

547,670

 

Total

 

$

558,834

 

$

547,764

 

December 31, 2004

 

 

 

 

 

Securities-Available for Sale:

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Agencies

 

$

38,551

 

$

38,942

 

Debt Securities Issued by States and Municipalities

 

7,958

 

8,081

 

Mortgage-Backed Securities

 

2,090,510

 

2,098,994

 

Other Debt Securities

 

338,495

 

337,702

 

Total

 

$

2,475,514

 

$

2,483,719

 

Securities-Held to Maturity:

 

 

 

 

 

Debt Securities Issued by States and Municipalities

 

$

90

 

$

96

 

Mortgage-Backed Securities

 

589,818

 

585,740

 

Total

 

$

589,908

 

$

585,836

 

 

16



 

Table 6 presents temporarily impaired investment securities as of March 31, 2005 and December 31, 2004.

 

Temporarily Impaired Investment Securities (Unaudited) 

Table 6

 

 

 

Temporarily Impaired
Less Than 12 Months

 

Temporarily Impaired
12 Months or Longer

 

Total

 

(dollars thousands)

 

Fair Value

 

Gross
Unrealized Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the
U.S. Treasury and Agencies

 

$

10,980

 

$

(92)

 

$

 

$

 

$

10,980

 

$

(92

)

Debt Securities Issued by
State and Municipalities

 

3,613

 

(53)

 

 

 

3,613

 

(53)

 

Mortgage-Backed Securities

 

1,496,917

 

(15,955)

 

670,601

 

(21,139)

 

2,167,518

 

(37,094)

 

Foreign Bonds

 

318,686

 

(7,085)

 

 

 

318,686

 

(7,085)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Temporarily Impaired Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2005

 

$

1,830,196

 

$

(23,185)

 

$

670,601

 

$

(21,139)

 

$

2,500,797

 

$

(44,324)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2004

 

$

1,184,863

 

$

(10,374)

 

$

284,389

 

$

(4,774)

 

$

1,469,252

 

$

(15,148)

 

 

The gross unrealized losses on temporarily impaired investment securities at March 31, 2005 represents 1% of the total amortized cost of total investment securities.  These unrealized losses were primarily attributable to an increase in interest rates during the first quarter of 2005.  The Company has both the intent and ability to hold the securities for the time necessary to recover the amortized cost.

 

Loans Held for Sale

 

Loans held for sale, consisting of residential mortgage loans, totaled $20.9 million at March 31, 2005, $17.6 million at December 31, 2004 and $67.3 million at March 31, 2004.  The change in 2005 as compared to both periods in 2004 was a result of the impact of mortgage loan sales activity and production volume.

 

Loans and Leases

 

As of March 31, 2005, loans and leases outstanding were $6.0 billion, a modest increase of $28.9 million compared to December 31, 2004 and an increase of $300.8 million from March 31, 2004.  Total commercial loans decreased slightly from December 31, 2004 as a result of payoffs exceeding originations due to the continued strong economy and liquidity in the Hawaii marketplace, which may continue into the second quarter of 2005.  Growth has continued in the consumer loan portfolios as a result of loan promotions.  Table 7 presents the composition of the loan portfolio by major categories and Table 8 presents the composition of consumer loans by geographic area.

 

17



 

Loan Portfolio Balances (Unaudited)

 

 

 

 

 

Table 7

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

$

918,878

 

$

909,264

 

$

822,655

 

Commercial Mortgage

 

609,689

 

602,678

 

650,565

 

Construction

 

107,403

 

122,355

 

91,002

 

Lease Financing

 

468,349

 

479,100

 

474,288

 

Total Commercial

 

2,104,319

 

2,113,397

 

2,038,510

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

2,342,062

 

2,326,385

 

2,273,333

 

Home Equity

 

694,261

 

657,164

 

510,378

 

Purchased Home Equity

 

109,632

 

122,728

 

191,066

 

Other Consumer

 

734,836

 

734,721

 

666,893

 

Lease Financing

 

30,680

 

32,535

 

34,816

 

Total Consumer

 

3,911,471

 

3,873,533

 

3,676,486

 

Total Loans and Leases

 

$

6,015,790

 

$

5,986,930

 

$

5,714,996

 

 

 

 

 

 

 

 

 

Consumer Loans by Geographic Area (Unaudited)

 

 

 

 

 

Table 8

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Hawaii

 

 

 

 

 

 

 

Residential Mortgage

 

$

2,091,181

 

$

2,076,964

 

$

2,042,032

 

Home Equity

 

682,351

 

646,980

 

502,261

 

Other Consumer

 

558,712

 

559,135

 

517,418

 

Lease Financing

 

30,680

 

32,535

 

34,816

 

Guam

 

 

 

 

 

 

 

Residential Mortgage

 

215,600

 

210,563

 

207,174

 

Home Equity

 

8,431

 

7,631

 

8,117

 

Other Consumer

 

100,599

 

98,309

 

75,675

 

U.S. Mainland

 

 

 

 

 

 

 

Purchased Home Equity

 

109,632

 

122,728

 

191,066

 

Other Pacific Islands

 

 

 

 

 

 

 

Residential Mortgage

 

5,715

 

5,675

 

5,448

 

Home Equity

 

3,479

 

2,553

 

 

Other Consumer

 

75,525

 

77,277

 

73,800

 

Foreign

 

 

 

 

 

 

 

Residential Mortgage

 

29,566

 

33,183

 

18,679

 

Total Consumer Loans

 

$

3,911,471

 

$

3,873,533

 

$

3,676,486

 

 

Mortgage Servicing Rights

 

As of March 31, 2005, the Company’s portfolio of residential loans serviced for third parties totaled $2.6 billion.  In the first quarter of 2005, overall prepayment speeds continued to slow as interest rates increased, which resulted in a higher market value of the mortgage servicing rights.  Recent prepayment speeds for Hawaii mortgages continued to either approximate or were slightly higher than national averages.

 

Table 9 presents the changes in the carrying value of mortgage servicing rights, net of valuation allowance.

 

Mortgage Servicing Rights (Unaudited)

 

 

 

Table 9

 

 

 

 

 

 

 

(dollars in thousands)

 

Three Months Ended
March 31, 2005

 

Year Ended
December 31, 2004

 

Balance at Beginning of Period

 

$

18,769

 

$

22,178

 

Originated Mortgage Servicing Rights

 

1,135

 

3,895

 

Purchased Servicing Rights

 

8

 

235

 

Valuation Allowance

 

 

(13)

 

Amortization

 

(1,402)

 

(7,526)

 

Balance at End of Period

 

$

18,510

 

$

18,769

 

Fair Value at End of Period

 

$

23,197

 

$

22,154

 

 

18



 

Other Assets and Other Liabilities

 

Table 10 presents the major components of other assets and other liabilities.

 

Other Assets and Other Liabilities (Unaudited)

 

 

 

 

 

Table 10

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Other Assets:

 

 

 

 

 

 

 

Bank-Owned Life Insurance

 

$

145,837

 

$

144,370

 

$

139,977

 

Federal Home Loan Bank and Federal Reserve Bank Stock

 

54,021

 

53,847

 

78,120

 

Low Income Housing Investments

 

33,387

 

34,597

 

41,429

 

Accounts Receivable

 

20,724

 

25,568

 

23,979

 

Other

 

50,602

 

46,734

 

59,486

 

Total Other Assets

 

$

304,571

 

$

305,116

 

$

342,991

 

Other Liabilities:

 

 

 

 

 

 

 

Incentive Plans Payable

 

$

4,904

 

$

12,090

 

$

4,885

 

Insurance Premiums Payable

 

6,226

 

7,940

 

6,802

 

Reserve for Unfunded Commitments 1

 

4,900

 

6,800

 

 

Self Insurance Reserve

 

6,634

 

6,366

 

6,722

 

Stock Repurchases Payable

 

2,699

 

 

8,737

 

Other

 

64,891

 

63,177

 

67,945

 

Total Other Liabilities

 

$

90,254

 

$

96,373

 

$

95,091

 

 


1     Prior to December 31, 2004, reserve for unfunded commitments was a component of the allowance for loan and lease losses.  At March 31, 2004, the reserve for unfunded commitments was $6.2 million.

 

Deposits

 

As of March 31, 2005, deposits totaled $7.8 billion, an increase of $196.0 million and $396.7 million from December 31, 2004 and March 31, 2004, respectively.  Deposit growth continued primarily in interest-bearing demand and savings deposits.

 

Average time deposits of $100,000 or more is presented in Table 11.

 

Average Time Deposits of $100,000 or More (Unaudited)

 

 

 

 

 

Table 11

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Average Time Deposits

 

$

588,921

 

$

543,382

 

$

607,497

 

 

Short-Term Borrowings and Long-Term Debt

 

Short-term borrowings, including securities sold under agreements to repurchase, funds purchased and other short-term borrowings, totaled $748.7 million at March 31, 2005, an increase of $15.1 million from December 31, 2004 and a decrease of $400.2 million from March 31, 2004.  The decrease in short-term borrowings from March 31, 2004 was due to maturities of placements received from government entities in the form of securities sold under agreements to repurchase.  Long-term debt totaled $242.7 million at March 31, 2005, a decrease of $10.0 million and $77.2 million from December 31, 2004 and March 31, 2004, respectively.  The decrease from December 31, 2004 was due to a $10.0 million Federal Home Loan Bank advance that matured in the first quarter of 2005.  The decrease from March 31, 2004 was due to the maturity of privately-placed notes in the second and third quarter of 2004.  For additional information, refer to the “Corporate Risk Profile – Liquidity Management” section of this report.

 

19



 

Shareholders’ Equity

 

The Company’s capital position remains strong.  The net reduction in capital from December 31, 2004 to March 31, 2005 is attributable to the Company’s continuing common stock repurchase program and to dividends paid, partially offset by net earnings for the first quarter of 2005.  A further discussion of the Company’s capital is included in the “Corporate Risk Profile – Capital Management” section of this report.

 

Guarantees

 

The Company’s standby letters of credit totaled $107.6 million at March 31, 2005, an increase of $5.3 million from December 31, 2004 and a decrease of $2.6 million from March 31, 2004.

 

BUSINESS SEGMENTS

 

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group and Treasury and Other Corporate.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of overhead, the Provision and capital.  This process is dynamic and requires certain allocations based on judgment and subjective factors.  Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to U.S. generally accepted accounting principles. Results for prior periods have been reclassified to conform to current period classifications.

 

The business segments are primarily managed with a focus on performance measures, including net income after capital charge (“NIACC”) and risk adjusted return on capital (“RAROC”).  NIACC is net income less a charge for the cost of allocated capital.  The cost of allocated capital is determined by multiplying management’s estimate of a shareholder’s minimum required rate of return on capital invested (currently 11%) by the segment’s allocated equity.  The Company assumes a cost of capital that is equal to a risk-free rate plus a risk premium.  RAROC is the ratio of net income to risk-adjusted equity.  Equity is allocated to each business segment based on an assessment of its inherent risk.  The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of management decisions and assumptions that are subject to change based on changes in current interest rate and market conditions.  The Provision charged to the Treasury and Other Corporate segment represents changes in the level of the reserve for credit losses.  The Provision recorded in the Retail Banking, Commercial Banking and Investment Services Group segments represents actual net charge-offs of these segments.

 

The financial results for each of the business segments for the three months ended March 31, 2005 and 2004 are discussed below and are presented in Table 12.

 

20



 

Retail Banking

 

The Company’s Retail Banking segment offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases and installment loans.  Deposit products include checking, savings and time deposit accounts.  The Retail Banking segment also provides merchant services to its small business customers.  Products and services from the Retail Banking segment are delivered to customers through 74 Hawaii branch locations, 500 ATMs, e-Bankoh (on-line banking service) and a 24-hour telephone banking service.  Also included in the segment is Bankoh Investment Services, Inc., a full service brokerage offering equities, mutual funds, life insurance and annuity products.

 

The improvement in the segment’s key financial measures for the three months ended March 31, 2005 as compared to the same period in 2004 was driven primarily by an increase in non-interest income which was largely due to policy initiatives, growth in the number of transactional deposit accounts, higher mortgage banking income and greater insurance and annuity sales volume.  Also contributing to the positive trend was an increase in net interest income from deposit and loan portfolio growth.  Non-interest expense remained relatively unchanged for the three month ended March 31, 2005 as compared to the same period in 2004.

 

Commercial Banking

 

The Commercial Banking segment offers products including corporate banking and commercial real estate loans, lease financing, auto dealer financing, deposit and cash management products and property and casualty insurance products.  Lending, deposit and cash management services are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages are focused on customers that include investors, developers and builders primarily domiciled in Hawaii.  The Commercial Banking unit also includes the Company’s operations at its 12 branches in the Pacific Islands.

 

The improvement in the segment’s financial measures for the three months ended March 31, 2005 compared to the same period in 2004 was primarily a result of an increase in non-interest income, a decrease in non-interest expense and a decrease in the capital charge. The increase in non-interest income was primarily due to a gain on the sale of leased assets.  The decrease in non-interest expense was a result of reduced staffing levels and a gain on the sale of a foreclosed real estate property.  The goodwill impairment charge partially offsets these reductions.  The decrease in the capital charge was primarily the result of improvements in credit quality.

 

Investment Services Group

 

The Investment Services Group includes private banking, trust services, asset management and institutional investment advice.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust group assist individuals and families in building and preserving their wealth by providing investment, credit and trust expertise to high-net-worth individuals.  The asset management group manages portfolios and creates investment products.  Institutional sales and service offers investment advice to corporations, government entities and foundations.

 

21



 

The segment’s key financial measures were relatively flat for the three months ended March 31, 2005 compared to the same period in 2004.  Net interest income increased primarily due to higher loan and deposit balances.  The increase in trust and asset management fee income resulted from the improvement in market conditions. The increase in non-interest income was partially offset by a gain on the sale of the corporate trust business recognized in the same prior year period.  Non-interest expense increased slightly for the three months ended March 31, 2005 as compared to the same period in 2004 as a result of higher allocated expenses.

 

Treasury and Other Corporate

 

The primary income earning component of this segment is Treasury, which consists of corporate asset and liability management activities, including interest rate risk management and foreign exchange business.  This segment’s assets and liabilities (and related net interest income) consist of interest-bearing deposits, investment securities, funds sold and purchased, government deposits and short- and long-term borrowings.  The primary source of foreign exchange income relates to customer driven currency requests from merchants and island visitors.  The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of inter-company transactions.

 

This segment also includes divisions (Technology and Operations, Human Resources, Finance, Credit and Risk Management and Corporate and Regulatory Administration) that provide a wide-range of support to the other business segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

 

The improvement in the segment’s NIACC for the three months ended March 31, 2005, compared to the same period in 2004, was primarily due to an increase in net interest income and a decrease in non-interest expense.  The increase in net interest income was due to higher average balances in the investment securities portfolio.  Non-interest expense was reduced due to lower stock-based compensation.

 

22



 

Business Segment Selected Financial Information (Unaudited)

 

 

 

 

 

Table 12

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Retail
Banking

 

Commercial
Banking

 

Investment
Services
Group

 

Treasury
and Other
Corporate

 

Consolidated
Total

 

Three Months Ended March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

52,351

 

$

34,562

 

$

2,888

 

$

10,857

 

$

100,658

 

Provision for Loan and Lease Losses

 

3,485

 

416

 

 

(3,901)

 

 

Net Interest Income After Provision for Loan and Lease Losses

 

48,866

 

34,146

 

2,888

 

14,758

 

100,658

 

Non-Interest Income

 

24,242

 

11,531

 

14,626

 

1,916

 

52,315

 

 

 

73,108

 

45,677

 

17,514

 

16,674

 

152,973

 

Non-Interest Expense

 

(43,049)

 

(22,560)

 

(13,219)

 

(2,035)

 

(80,863)

 

Income Before Income Taxes

 

30,059

 

23,117

 

4,295

 

14,639

 

72,110

 

Provision for Income Taxes

 

(11,122)

 

(8,598)

 

(1,590)

 

(5,278)

 

(26,588)

 

Allocated Net Income

 

18,937

 

14,519

 

2,705

 

9,361

 

45,522

 

Allowance Funding Value

 

(162)

 

(602)

 

(6)

 

770

 

 

GAAP Provision

 

3,485

 

416

 

 

(3,901)

 

 

Economic Provision

 

(3,505)

 

(2,458)

 

(90)

 

(2)

 

(6,055)

 

Tax Effect of Adjustments

 

67

 

978

 

36

 

1,159

 

2,240

 

Income Before Capital Charge

 

18,822

 

12,853

 

2,645

 

7,387

 

41,707

 

Capital Charge

 

(5,456)

 

(4,636)

 

(1,341)

 

(10,027)

 

(21,460)

 

Net Income (Loss) After Capital Charge (NIACC)

 

$

13,366

 

$

8,217

 

$

1,304

 

$

(2,640

)

$

20,247

 

 

 

 

 

 

 

 

 

 

 

 

 

RAROC (ROE for the Company)

 

38%

 

31%

 

22%

 

20%

 

24%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets at March 31, 2005

 

$

3,796,459

 

$

2,390,204

 

$

137,698

 

$

3,583,669

 

$

9,908,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

50,157

 

$

34,019

 

$

2,812

 

$

9,043

 

$

96,031

 

Provision for Loan and Lease Losses

 

2,747

 

(253)

 

49

 

(2,543)

 

 

Net Interest Income After Provision for Loan and Lease Losses

 

47,410

 

34,272

 

2,763

 

11,586

 

96,031

 

Non-Interest Income

 

21,016

 

10,432

 

14,442

 

2,952

 

48,842

 

 

 

68,426

 

44,704

 

17,205

 

14,538

 

144,873

 

Non-Interest Expense

 

(43,217)

 

(23,144)

 

(13,030)

 

(3,631)

 

(83,022)

 

Income Before Income Taxes

 

25,209

 

21,560

 

4,175

 

10,907

 

61,851

 

Provision for Income Taxes

 

(9,327)

 

(7,958)

 

(1,545)

 

(3,222)

 

(22,052)

 

Allocated Net Income

 

15,882

 

13,602

 

2,630

 

7,685

 

39,799

 

Allowance Funding Value

 

(128)

 

(737)

 

(8)

 

873

 

 

GAAP Provision

 

2,747

 

(253)

 

49

 

(2,543)

 

 

Economic Provision

 

(3,396)

 

(2,777)

 

(94)

 

(4)

 

(6,271)

 

Tax Effect of Adjustments

 

287

 

1,394

 

20

 

620

 

2,321

 

Income Before Capital Charge

 

15,392

 

11,229

 

2,597

 

6,631

 

35,849

 

Capital Charge

 

(5,771)

 

(5,266)

 

(1,283)

 

(9,720)

 

(22,040)

 

Net Income (Loss) After Capital Charge (NIACC)

 

$

9,621

 

$

5,963

 

$

1,314

 

$

(3,089)

 

$

13,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RAROC (ROE for the Company)

 

29%

 

24%

 

22%

 

25%

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets at March 31, 2004

 

$

3,694,709

 

$

2,295,748

 

$

116,791

 

$

3,906,194

 

$

10,013,442

 

 

CORPORATE RISK PROFILE

 

Credit Risk

 

Credit Risk is defined as the risk that borrowers or counterparties will not be able to repay their obligations to the Company.  Credit exposures reflect legally binding commitments for loans, leases, banker’s acceptances, financial and performance standby letters of credit and overnight overdrafts.

 

23



 

The Company’s credit risk position remained generally stable during the first quarter of 2005.  With respect to asset quality, the Company continued to observe lower levels of internally criticized loans, non-performing assets and loans charged-off.  The ratio of non-accrual loans to total loans at March 31, 2005 was 0.21%, slightly reduced, from 0.23% at December 31, 2004.  Net loan charge-offs (annualized) for the first three months of 2005 as a percent of average loans outstanding was 0.25%, a decline from 0.31% for the three months ended December 31, 2004 and an increase from same prior year period, due to larger commercial recoveries in the first quarter of 2004.

 

The risk profile of the Hawaii and Guam-based loan portfolios continued to improve, primarily due to the expanding local economies led by the construction and real estate industries and record levels of tourism.

 

Compared with the rest of the Company’s portfolio, domestic legacy airline carriers have a higher risk profile with continued negative trends.  Outstandings related to the aircraft operations of domestic legacy carriers as of March 31, 2005 were $19.2 million and are included in the United States National Passenger Carriers total, as shown in Table 13 below.  Recent record-high oil prices have had a pronounced impact on these already struggling airline carriers.  In the evaluation of the reserve for credit losses, the Company considered the current financial strain on airlines, which offset the impact of the improvement in other components of the loan portfolio.

 

Air Transportation Credit Exposure (Unaudited)

 

 

 

 

 

 

 

Table 13

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2005 1

 

Dec. 31, 2004 1

 

Mar. 31, 2004

 

(dollars in thousands)

 

Outstanding

 

Unused
Commitments

 

Total
Exposure

 

Total
Exposure

 

Total
Exposure

 

Air Transportation

 

 

 

 

 

 

 

 

 

 

 

United States Regional Passenger Carriers

 

$

42,617

 

$

10,131

 

$

52,748

 

$

54,981

 

$

58,176

 

United States National Passenger Carriers

 

37,605

 

 

37,605

 

37,377

 

37,413

 

Passenger Carriers Based Outside United States

 

24,888

 

 

24,888

 

25,910

 

30,475

 

Cargo Carriers

 

13,475

 

 

13,475

 

13,771

 

14,122

 

Total Air Transportation

 

$

118,585

 

$

10,131

 

$

128,716

 

$

132,039

 

$

140,186

 


Exposure includes loans, leverage leases and operating leases.

1  Certain amounts converted from April 25, 2005 earnings release.

 

Non-Performing Assets

 

Non-performing assets (“NPAs”) consist of non-accrual loans, foreclosed real estate and other investments.  NPAs decreased by $0.5 million from December 31, 2004 to $13.4 million as of March 31, 2005.

 

Impaired loans totaled $2.9 million at March 31, 2005, a decrease of $1.0 million from $3.8 million at December 31, 2004.  These loans had a related Allowance of less than $0.1 million at March 31, 2005 and December 31, 2004.

 

Loans Past Due 90 Days or More and Still Accruing Interest

 

Accruing loans past due 90 days or more were $4.4 million at March 31, 2005, an increase of $2.3 million from December 31, 2004.  The increase was due to a commercial mortgage in Guam that was past its maturity, but current in payments.  Full repayment of the obligation is expected.

 

Refer to Table 14 for further information on non-performing assets and accruing loans past due 90 days or more.

 

24



 

Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited)

 

Table 14

 

 

 

 

 

(dollars in thousands)

 

March 31,
2005

 

December 31,
2004

 

September 30,
2004

 

June 30,
2004

 

March 31,
2004

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

470

 

$

683

 

$

775

 

$

680

 

$

6,009

 

Commercial Mortgage

 

1,922

 

2,106

 

5,552

 

5,649

 

7,388

 

Lease Financing

 

2,418

 

2,973

 

1,913

 

1,948

 

1,962

 

Total Commercial

 

4,810

 

5,762

 

8,240

 

8,277

 

15,359

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

7,503

 

7,688

 

7,278

 

7,688

 

7,685

 

Home Equity

 

185

 

218

 

251

 

306

 

406

 

Total Consumer

 

7,688

 

7,906

 

7,529

 

7,994

 

8,091

 

Total Non-Accrual Loans

 

12,498

 

13,668

 

15,769

 

16,271

 

23,450

 

Foreclosed Real Estate

 

183

 

191

 

208

 

4,889

 

4,416

 

Other Investments

 

684

 

 

 

 

 

Total Non-Performing Assets

 

$

13,365

 

$

13,859

 

$

15,977

 

$

21,160

 

$

27,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing Loans Past Due 90 Days or More

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

29

 

$

52

 

$

65

 

$

19

 

$

707

 

Commercial Mortgage

 

2,243

 

 

688

 

693

 

702

 

Total Commercial

 

2,272

 

52

 

753

 

712

 

1,409

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

604

 

387

 

2,588

 

698

 

595

 

Purchased Home Equity

 

70

 

183

 

97

 

32

 

107

 

Other Consumer

 

1,417

 

1,433

 

1,533

 

1,142

 

1,180

 

Lease Financing

 

 

30

 

32

 

57

 

 

Total Consumer

 

2,091

 

2,033

 

4,250

 

1,929

 

1,882

 

Total Accruing Loans Past Due 90 Days or More

 

$

4,363

 

$

2,085

 

$

5,003

 

$

2,641

 

$

3,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans and Leases

 

$

6,015,790

 

$

5,986,930

 

$

5,815,575

 

$

5,787,314

 

$

5,714,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Non-Accrual Loans to Total Loans

 

0.21%

 

0.23%

 

0.27%

 

0.28%

 

0.41%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Non-Performing Assets to Total Loans, Foreclosed Real Estate and Other Investments

 

0.22%

 

0.23%

 

0.27%

 

0.37%

 

0.49%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Non-Performing Assets and Accruing Loans Past Due 90 Days or More to Total Loans

 

0.29%

 

0.27%

 

0.36%

 

0.41%

 

0.55%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter to Quarter Changes in Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Quarter

 

$

13,859

 

$

15,977

 

$

21,160

 

$

27,866

 

$

31,724

 

Additions

 

2,796

 

5,164

 

2,094

 

3,909

 

3,293

 

Reductions

 

 

 

 

 

 

 

 

 

 

 

Payments

 

(2,202)

 

(6,435)

 

(1,386)

 

(4,232)

 

(4,555)

 

Return to Accrual

 

(698)

 

(456)

 

(1,122)

 

(2,700)

 

(1,444)

 

Sales of Foreclosed Assets

 

(129)

 

(206)

 

(682)

 

(147)

 

(310)

 

Charge-offs/Write-downs

 

(261)

 

(185)

 

(88)

 

(3,536)

 

(842)

 

Transfer to Premises

 

 

 

(3,999)

 

 

 

Total Reductions

 

(3,290)

 

(7,282)

 

(7,277)

 

(10,615)

 

(7,151)

 

Balance at End of Quarter

 

$

13,365

 

$

13,859

 

$

15,977

 

$

21,160

 

$

27,866

 

 

25



 

Reserve for Credit Losses

 

There are two components to the Company’s reserve for credit losses which are the Allowance for Loan and Lease Losses (“Allowance”) and a Reserve for Unfunded Commitments (“Unfunded Reserve”).  The Unfunded Reserve was reclassified on a prospective basis at December 31, 2004 from the Allowance to other liabilities in the Company’s Consolidated Statements of Condition.

 

The Company maintains the Allowance at a level adequate to cover management’s estimate of probable credit losses inherent in its lending portfolios.  The Unfunded Reserve is maintained at an adequate level to cover management’s estimate of probable credit losses inherent in unfunded commitments to extend credit.  The adequacy of the Allowance and the Unfunded Reserve is based on a comprehensive quarterly analysis of historical loss experience, supplemented by judgmental expectations of portfolio performance and economic conditions as of a given balance sheet date.

 

The Allowance declined by $1.8 million at March 31, 2005 from December 31, 2004 primarily due to net loan charge-offs of $3.7 million.  The ratio of the Allowance to total loans and leases outstanding was 1.75% at March 31, 2005, a decrease of 3 basis points from December 31, 2004 primarily due to the increase in average loans outstanding.

 

The Unfunded Reserve declined by $1.9 million from December 31, 2004 primarily due to the cancellation of a letter of credit to an air transportation company.

 

The Allowance and the Unfunded Reserve are both increased and decreased through the Provision.  After considering net charge-offs, the changes in the Allowance and the Unfunded Reserve resulted in no Provision being recorded for the three months ended March 31, 2005.

 

A summary of the reserve for credit losses is presented in Table 15.

 

26



 

Consolidated Reserve for Credit Losses (Unaudited)

 

 

 

 

 

Table 15

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Balance at Beginning of Period

 

$

113,596

 

$

124,651

 

$

129,080

 

Loans Charged-Off

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

574

 

465

 

387

 

Commercial Mortgage

 

 

 

574

 

Lease Financing

 

 

774

 

228

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

315

 

128

 

145

 

Purchased Home Equity

 

292

 

343

 

90

 

Other Consumer

 

4,582

 

4,903

 

4,655

 

Lease Financing

 

34

 

47

 

36

 

Total Loans Charged-Off

 

5,797

 

6,660

 

6,115

 

Recoveries on Loans Previously Charged-Off

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

541

 

542

 

980

 

Commercial Mortgage

 

62

 

119

 

689

 

Construction

 

 

 

435

 

Lease Financing

 

32

 

1

 

15

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

106

 

109

 

294

 

Home Equity

 

25

 

5

 

39

 

Purchased Home Equity

 

35

 

16

 

 

Other Consumer

 

1,287

 

1,267

 

1,663

 

Lease Financing

 

19

 

23

 

55

 

Foreign

 

 

23

 

50

 

Total Recoveries on Loans Previously Charged-Off

 

2,107

 

2,105

 

4,220

 

Net Loan Charge-Offs

 

(3,690)

 

(4,555)

 

(1,895)

 

Provision for Loan and Lease Losses

 

 

(6,500)

 

 

Balance at End of Period 1

 

$

109,906

 

$

113,596

 

$

127,185

 

 

 

 

 

 

 

 

 

 

 

 

Components

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

$

105,006

 

$

106,796

 

127,185

 

Reserve for Unfunded Commitments 2

 

4,900

 

6,800

 

 

Total Reserve for Credit Losses

 

$

109,906

 

$

113,596

 

$

127,185

 

 

 

 

 

 

 

 

 

 

 

 

Average Loans Outstanding 2

 

$

6,000,572

 

$

5,834,379

 

$

5,742,368

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Net Loan Charge-Offs to Average Loans Outstanding (annualized)

 

0.25%

 

0.31%

 

0.13%

 

 

 

 

 

 

 

 

 

Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding 2

 

1.75%

 

1.78%

 

2.23%

 

 


1               Included in this analysis is the activity related to the Company’s Unfunded Reserve, which is separately recorded in other liabilities in the Consolidated Statements of Condition.

2               The reclassification of the Unfunded Reserve to other liabilities occurred in the fourth quarter of 2004 on a prospective basis.  Thus, March 31, 2004 Allowance and Unfunded Reserve were reported together.  At March 31, 2004, the Unfunded Reserve was $6.2 million.

 

Market Risk

 

Market risk is the potential of loss arising from adverse changes in interest rates and prices.  The Company is exposed to market risk as a consequence of the normal course of conducting its business activities.  Financial products that expose the Company to market risk include investment securities, loans, deposits, debt and derivative financial instruments.  The Company’s market risk management process involves measuring, monitoring, controlling and managing risks that can significantly impact the Company’s financial position and operating results.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance and shareholder value, while limiting the volatility of each.  The activities associated with these market risks are categorized into “trading” and “other than trading.”

 

27



 

The Company’s trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk.  These transactions are primarily executed on behalf of customers and at times for the Company’s own account.

 

The Company’s “other than trading” activities include normal business transactions that expose the Company’s balance sheet profile to varying degrees of market risk.

 

Interest Rate Risk

 

The Company’s balance sheet is sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from the Company’s normal business activities of making loans and taking deposits.  Many other factors also affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions and historical pricing relationships.

 

Table 16 presents, as of March 31, 2005, December 31, 2004 and March 31, 2004, the estimate of the change in net interest income (“NII”) that would result from a gradual 200 basis point decrease or increase in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII.  The 200 basis point increase would equate to an average increase of $1.9 million in NII per quarter.  The Company’s balance sheet continues to be asset-sensitive.

 

Market Risk Exposure to Interest Rate Changes (Unaudited)

Table 16

 

 

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

 

 

Interest Rate Change
(in basis points)

 

Interest Rate Change
(in basis points)

 

Interest Rate Change
(in basis points)

 

(dollars in thousands)

 

-200

 

+200

 

-200

 

+200

 

-200

 

+200

 

Estimated Exposure as a Percent of Net Interest Income

 

(5.3)%

 

1.9%

 

(6.5)%

 

2.0%

 

(5.2)%

 

4.3%

 

Estimated Exposure to Net Interest Income Per Quarter

 

$

(5,409)

 

$

1,939

 

$

(6,347)

 

$

1,953

 

$

(5,021)

 

$

4,152

 

 

In managing interest rate risk, the Company uses several approaches to manage its risk position.  Approaches that are used in an effort to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities include changing product pricing strategies, modifying investment portfolio characteristics, or using financial derivative instruments.  The use of financial derivatives has been limited over the past several years.

 

Liquidity Management

 

Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, reasonably priced funding to conduct its business in a normal manner.

 

The Bank is a member of the Federal Home Loan Bank of Seattle (“FHLB”), which provides an additional source of short- and long-term funding.  Outstanding borrowings from the FHLB were $77.5 million at March 31, 2005, compared to $87.5 million at December 31, 2004 and $64.5 million at March 31, 2004.  The decrease from December 31, 2004 was from a $10.0 million advance that matured in the first quarter of 2005.

 

Additionally, the Bank maintains a $1.0 billion senior and subordinated bank note program.  Under this facility, the Bank may issue additional notes provided that the aggregate amount outstanding does not exceed $1.0 billion.  Subordinated notes outstanding under this bank note program totaled $124.8 million at March 31, 2005 and December 31, 2004 and $124.7 million at March 31, 2004.

 

28



 

Capital Management

 

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well capitalized” financial institution, while over the long term optimize shareholder value, support asset growth, reflect risks inherent in its markets, provide protection against unforeseen losses and comply with regulatory requirements.

 

At March 31, 2005, shareholders’ equity totaled $716.7 million, a 12% net decrease from December 31, 2004.  The decrease in shareholders’ equity during the first three months of 2005 was primarily attributable to the Company’s repurchase of its common stock under the repurchase program and to dividends paid, partially offset by earnings.

 

During the three months ended March 31, 2005, 2.4 million shares of common stock were repurchased under the repurchase program at an average cost of $47.52 per share, totaling $112.6 million.  From the beginning of the share repurchase program in July 2001 through March 31, 2005, the Company repurchased a total of 37.3 million shares and returned a total of $1.2 billion to its shareholders at an average cost of $32.17 per share.  In April 2005, the Company’s Board of Directors increased the authorization under the share repurchase program by an additional $100.0 million.  This new authorization, combined with the previously announced authorizations of $1.25 billion, brings the total repurchase authority to $1.35 billion.  From April 1, 2005 through April 22, 2005, the Company repurchased an additional 502,100 shares of common stock at an average cost of $45.16 per share for a total of $22.7 million, resulting in remaining buyback authority under the repurchase program of $127.2 million.

 

In April 2005, the Company’s Board of Directors declared a quarterly cash dividend of $0.33 per share on the Company’s outstanding shares.  The dividend will be payable on June 14, 2005 to shareholders of record at the close of business on May 31, 2005.

 

Table 17 presents the regulatory capital and ratios as of March 31, 2005, December 31, 2004 and March 31, 2004.

 

Regulatory Capital and Ratios (Unaudited)

 

 

 

 

 

Table 17

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

March 31, 2005

 

December 31, 2004

 

March 31, 2004

 

Regulatory Capital

 

 

 

 

 

 

 

Shareholders’ Equity

 

$

716,656

 

$

814,834

 

$

785,768

 

Add:

8.25% Capital Securities of Bancorp Hawaii Capital Trust I

 

31,425

 

31,425

 

31,425

 

Less:

Goodwill

 

34,959

 

36,216

 

36,216

 

 

Unrealized Valuation and Other Adjustments

 

(15,300)

 

5,251

 

20,771

 

Tier 1 Capital

 

728,422

 

804,792

 

760,206

 

Allowable Reserve for Loan and Lease Losses

 

84,678

 

83,292

 

79,941

 

Qualifying Subordinated Debt

 

74,863

 

99,808

 

99,777

 

Unrealized Gains on Available for Sale Equity Securities

 

32

 

31

 

79

 

Total Regulatory Capital

 

887,995

 

$

987,923

 

$

940,003

 

 

 

 

 

 

 

 

 

 

 

Risk Weighted Assets

 

6,749,018

 

$

6,633,082

 

$

6,348,075

 

 

 

 

 

 

 

 

 

Key Regulatory Capital Ratios

 

 

 

 

 

 

 

Average Equity/Average Assets Ratio

 

7.92%

 

7.81%

 

8.28%

 

Tier 1 Capital Ratio

 

10.79%

 

12.13%

 

11.98%

 

Total Capital Ratio

 

13.16%

 

14.89%

 

14.81%

 

Leverage Ratio

 

7.42%

 

8.29%

 

7.88%

 

 

29



 

Financial Outlook

 

The Company revised its earnings estimate and now believes that net income for the full year of 2005 should be approximately $176.0 million to $179.0 million.  Net income estimates for 2005 include a $10.0 million Provision.  An analysis of credit quality is performed quarterly to determine the adequacy of the Allowance.  The results of this analysis determine the timing and amount of the Provision.  Earnings per share and return on equity projections continue to be dependent upon, among other things, the terms and timing of share repurchases.

 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk.

 

Item 4.           Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2005.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Changes in Internal Controls over Financial Reporting

 

None.

 

Part II. - Other Information

 

Items 1, 3, and 4 omitted pursuant to instructions.

 

30



 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

Period

 

Total Number of
Shares Purchased 1

 

Average Price
Paid Per Share

 

Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs

 

Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs 2

 

January 1 - 31, 2005

 

850,955

 

$

48.50

 

825,000

 

$

122,516,276

 

February 1 - 28, 2005

 

1,047,395

 

47.36

 

1,047,300

 

72,917,552

 

March 1 - 31, 2005

 

513,402

 

46.18

 

497,900

 

49,911,855

 

Total

 

2,411,752

 

$

47.51

 

2,370,200

 

 

 

 


1               The months of January, February and March included 25,955, 95 and 15,502 mature shares, respectively, purchased from employees in connection with stock option exercises and the vesting of restricted stock. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Company’s common stock on the dates of purchase.

2               The Company repurchased shares during the first quarter of 2005 pursuant to its ongoing share repurchase program that was first announced in July 2001. The Company announced an additional authorization for share repurchases of $100.0 million on January 24, 2005. In April 2005, the Company’s Board of Directors increased the authorization under the share repurchase program by an additional $100.0 million. As of April 22, 2005, $127.2 million remained of the total $1.35 billion total repurchase amount authorized by the Company’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.

 

Item 5.  Other Information

 

The following information amends the disclosure that the Company provided in Part I Item 1 under the caption “Supervision and Regulation” in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

Subject to certain limits, under the Riegle-Neal Interstate Banking and Branching Efficiency Act (the “Riegle-Neal Act”), an adequately capitalized and adequately managed bank holding company (“BHC”) may acquire control of banks in any state.  An interstate acquisition may not be approved if immediately following the acquisition the BHC would control 30% or more of the total Federal Deposit Insurance Corporation (“FDIC”)-insured deposits in that state (or such lesser or greater amount set by the state), unless the acquisition is the BHC’s initial entry into the state.  An adequately capitalized and adequately managed bank may apply for permission to merge with an out-of-state bank and convert all branches of both parties into branches of a single bank.  An interstate bank merger may not be approved, if immediately following the acquisition, the acquirer would control 30% or more of the total FDIC-insured deposits in that state (or such lesser or greater amount set by the state), unless the acquisition is the acquirer’s initial entry into the state.  Banks are also permitted to open newly established branches in any state in which it does not already have banking branches if such state enacts a law permitting such de novo branching.

 

In addition to local competition, the Company is subject to the entry of out-of-state financial institutions into the Hawaii market.  In 2001, Hawaii enacted a statute that authorizes interstate branching under the Riegle-Neal Act.  Out-of-state banks may engage in mergers with Hawaii banks or acquisitions of substantially all of their assets, following which any such out-of-state bank may operate the branches of the Hawaii bank it has acquired.  The Hawaii Commissioner of Financial Institutions is authorized to waive the federal limit on concentration of FDIC-insured deposits.  This statute also permits out-of-state banks to acquire branches of Hawaii banks, and to open branches in Hawaii on a de novo basis.

 

31



 

Item 6.  Exhibits

 

Exhibit Index

 

Exhibit Number

 

12

 

Statement Regarding Computation of Ratios

 

 

 

31.1

 

Rule 13a-14(a) Certifications

 

 

 

31.2

 

Rule 13a-14(a) Certifications

 

 

 

32

 

Section 1350 Certification, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date:    April 27, 2005

 

Bank of Hawaii Corporation and Subsidiaries

 

 

 

 

By:

/s/ Allan R. Landon

 

 

 

Allan R. Landon

 

 

Chairman of the Board,

 

 

Chief Executive Officer and President

 

 

 

 

 

 

 

By:

/s/ Richard C. Keene

 

 

 

Richard C. Keene

 

 

Chief Financial Officer

 

33



 

EXHIBIT INDEX

 

Exhibit Number

 

12                                    Statement Regarding Computation of Ratios

 

31.1                           Rule 13a-14(a) Certifications

 

31.2                           Rule 13a-14(a) Certifications

 

32                                    Section 1350 Certification, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

34


Exhibit 12

 

Bank of Hawaii Corporation and Subsidiaries
Statement Regarding Computation of Ratios

 

 

 

Three Months Ended

 

(dollars in thousands)

 

March 31, 2005

 

March 31, 2004

 

Earnings:

 

 

 

 

 

1.                        Income Before Income Taxes

 

$72,110

 

$61,851

 

2.                        Plus: Fixed Charges Including Interest on Deposits

 

19,500

 

15,725

 

3.                        Earnings Including Fixed Charges

 

91,610

 

77,576

 

4.                        Less: Interest on Deposits

 

11,604

 

9,200

 

5.                        Earnings Excluding Interest on Deposits

 

$80,006

 

$68,376

 

 

 

 

 

 

 

Fixed Charges:

 

 

 

 

 

6.                        Fixed Charges Including Interest on Deposits

 

$19,500

 

$15,725

 

7.                        Less: Interest on Deposits

 

11,604

 

9,200

 

8.                        Fixed Charges Excluding Interest on Deposits

 

$7,896

 

$6,525

 

 

 

 

 

 

 

Ratio of Earnings to Fixed Charges:

 

 

 

 

 

Including Interest on Deposits (Line 3 divided by Line 6)

 

4.7 x

 

4.9 x

 

Excluding Interest on Deposits (Line 5 divided by Line 8)

 

10.1 x

 

10.5 x

 

 


Exhibit 31.1

 

Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications

 

I, Allan R. Landon, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:

 

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2005

 

 

/s/ Allan R. Landon

 

 

Allan R. Landon

 

Chairman of the Board,
Chief Executive Officer and President

 


Exhibit 31.2

 

Bank of Hawaii Corporation and Subsidiaries
Rule 13a-14(a) Certifications

 

I, Richard C. Keene, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;

 

2.               Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(15(f)) for the registrant and have:

 

a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)              Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2005

 

 

/s/ Richard C. Keene

 

 

Richard C. Keene

 

Chief Financial Officer

 


Exhibit 32

 

Bank of Hawaii Corporation and Subsidiaries
Section 1350 Certification,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

 

We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation (the “Issuer”) for the quarterly period ended March 31, 2005 (the “Periodic Report”):

 

                                          fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

                                          the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

 

 

Date:  April 29, 2005

 

 

 

/s/ Allan R. Landon

 

 

Allan R. Landon

 

Chairman of the Board,
Chief Executive Officer and President

 

 

 

 

 

/s/ Richard C. Keene

 

 

Richard C. Keene

 

Chief Financial Officer

 

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Periodic Report or as a separate disclosure document.