Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2010

 

 

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)

 

(I.R.S. 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 x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

As of October 19, 2010, there were 48,217,442 shares of common stock outstanding.

 

 

 



Table of Contents

 

Bank of Hawaii Corporation

Form 10-Q

Index

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Statements of Income –
Three and nine months ended September 30, 2010 and 2009

2

 

 

 

 

Consolidated Statements of Condition –
September 30, 2010, December 31, 2009, and September 30, 2009

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2010 and 2009

4

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended September 30, 2010 and 2009

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

47

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(dollars in thousands, except per share amounts)

2010

2009

 

2010

2009

Interest Income

 

 

 

 

 

   Interest and Fees on Loans and Leases

$            70,198

$            79,530

 

$          219,466

$          249,464

   Income on Investment Securities

 

 

 

 

 

      Trading

-

-

 

-

594

      Available-for-Sale

40,775

46,419

 

129,605

116,875

      Held-to-Maturity

1,553

2,179

 

5,116

7,115

   Deposits

5

3

 

21

18

   Funds Sold

211

320

 

916

1,423

   Other

278

277

 

832

829

Total Interest Income

113,020

128,728

 

355,956

376,318

Interest Expense

 

 

 

 

 

   Deposits

7,041

12,235

 

23,278

43,741

   Securities Sold Under Agreements to Repurchase

6,670

6,394

 

19,571

19,523

   Funds Purchased

10

5

 

23

15

   Long-Term Debt

673

1,207

 

2,877

4,239

Total Interest Expense

14,394

19,841

 

45,749

67,518

Net Interest Income

98,626

108,887

 

310,207

308,800

Provision for Credit Losses

13,359

27,500

 

50,009

81,077

Net Interest Income After Provision for Credit Losses

85,267

81,387

 

260,198

227,723

Noninterest Income

 

 

 

 

 

   Trust and Asset Management

10,534

10,915

 

33,699

34,428

   Mortgage Banking

6,811

4,656

 

14,027

18,777

   Service Charges on Deposit Accounts

12,737

14,014

 

41,407

40,310

   Fees, Exchange, and Other Service Charges

15,500

14,801

 

45,810

45,187

   Investment Securities Gains (Losses), Net

7,877

(5)

 

42,849

63

   Insurance

2,646

7,304

 

7,652

17,689

   Other

7,020

5,115

 

18,337

30,543

Total Noninterest Income

63,125

56,800

 

203,781

186,997

Noninterest Expense

 

 

 

 

 

   Salaries and Benefits

46,840

46,387

 

138,904

137,595

   Net Occupancy

10,186

10,350

 

30,484

30,686

   Net Equipment

4,545

4,502

 

13,469

13,320

   Professional Fees

905

2,642

 

4,988

9,196

   FDIC Insurance

3,159

3,290

 

9,366

14,091

   Other

24,255

16,816

 

60,303

56,616

Total Noninterest Expense

89,890

83,987

 

257,514

261,504

Income Before Provision for Income Taxes

58,502

54,200

 

206,465

153,216

Provision for Income Taxes

14,438

17,729

 

63,101

49,699

Net Income

$            44,064

$            36,471

 

$          143,364

$          103,517

Basic Earnings Per Share

$                0.91

$                0.76

 

$                2.98

$                2.17

Diluted Earnings Per Share

$                0.91

$                0.76

 

$                2.96

$                2.16

Dividends Declared Per Share

$                0.45

$                0.45

 

$                1.35

$                1.35

Basic Weighted Average Shares

48,189,358

47,745,375

 

48,062,385

47,665,146

Diluted Weighted Average Shares

48,462,154

48,045,873

 

48,386,647

47,930,271

 

 

 

 

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

 

2



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

 

Consolidated Statements of Condition (Unaudited)

 

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

2010

 

2009

 

2009

 

Assets

 

 

 

 

 

 

Interest-Bearing Deposits

$                    2,641

 

$                    8,755

 

$                    5,863

 

Funds Sold

174,288

 

291,546

 

401,200

 

Investment Securities

 

 

 

 

 

 

   Available-for-Sale

6,213,949

 

5,330,834

 

4,827,588

 

   Held-to-Maturity (Fair Value of $148,631; $186,668; and $201,118)

141,192

 

181,018

 

194,444

 

Loans Held for Sale

18,765

 

16,544

 

19,346

 

Loans and Leases

5,312,054

 

5,759,785

 

5,931,358

 

   Allowance for Loan and Lease Losses

(147,358)

)

(143,658)

)

(142,658

)

     Net Loans and Leases

5,164,696

 

5,616,127

 

5,788,700

 

Total Earning Assets

11,715,531

 

11,444,824

 

11,237,141

 

Cash and Noninterest-Bearing Deposits

267,597

 

254,766

 

291,480

 

Premises and Equipment

108,855

 

110,976

 

110,173

 

Customers' Acceptances

1,087

 

1,386

 

950

 

Accrued Interest Receivable

40,606

 

45,334

 

43,047

 

Foreclosed Real Estate

5,910

 

3,132

 

201

 

Mortgage Servicing Rights

24,316

 

25,970

 

25,437

 

Goodwill

31,517

 

31,517

 

34,959

 

Other Assets

521,184

 

496,922

 

464,637

 

Total Assets

$           12,716,603

 

$           12,414,827

 

$           12,208,025

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

   Noninterest-Bearing Demand

$             2,290,033

 

$             2,252,083

 

$             2,055,872

 

   Interest-Bearing Demand

1,814,934

 

1,609,413

 

1,588,705

 

   Savings

4,423,095

 

4,405,969

 

4,365,257

 

   Time

1,074,400

 

1,142,211

 

1,240,266

 

Total Deposits

9,602,462

 

9,409,676

 

9,250,100

 

Funds Purchased

9,832

 

8,888

 

8,670

 

Short-Term Borrowings

7,100

 

6,900

 

7,200

 

Securities Sold Under Agreements to Repurchase

1,616,243

 

1,618,717

 

1,524,755

 

Long-Term Debt

40,292

 

90,317

 

91,424

 

Banker's Acceptances

1,087

 

1,386

 

950

 

Retirement Benefits Payable

35,461

 

37,435

 

43,918

 

Accrued Interest Payable

6,492

 

7,026

 

9,740

 

Taxes Payable and Deferred Taxes

219,525

 

229,140

 

254,375

 

Other Liabilities

138,548

 

109,369

 

114,094

 

Total Liabilities

11,677,042

 

11,518,854

 

11,305,226

 

Shareholders' Equity

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;

 

 

 

 

 

 

   issued / outstanding: September 30, 2010 - 57,115,287 / 48,265,014;

 

 

 

 

 

 

   December 31, 2009 - 57,028,239 / 48,018,943;

 

 

 

 

 

 

   and September 30, 2009 - 57,028,554 / 47,937,543)

570

 

569

 

569

 

Capital Surplus

499,437

 

494,318

 

492,346

 

Accumulated Other Comprehensive Income

66,953

 

6,925

 

37,307

 

Retained Earnings

914,901

 

843,521

 

825,709

 

Treasury Stock, at Cost (Shares: September 30, 2010 - 8,850,273;

 

 

 

 

 

 

   December 31, 2009 - 9,009,296; and September 30, 2009 - 9,091,011)

(442,300)

)

(449,360)

)

(453,132

)

Total Shareholders' Equity

1,039,561

 

895,973

 

902,799

 

Total Liabilities and Shareholders' Equity

$           12,716,603

 

$           12,414,827

 

$           12,208,025

 

 

 

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

 

3



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity (Unaudited)

 

 

 

 

Accum.

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

 

 

hensive

 

 

Compre-

 

 

Common

Capital

Income

Retained

Treasury

hensive

(dollars in thousands)

Total

Stock

Surplus

(Loss)

Earnings

Stock

Income

Balance as of December 31, 2009

$   895,973

$        569

$   494,318

$      6,925

$   843,521

$ (449,360)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

143,364

-

-

-

143,364

-

$  143,364

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Change in Unrealized Gains and Losses

 

 

 

 

 

 

 

           on Investment Securities Available-for-Sale

58,886

-

-

58,886

-

-

58,886

        Amortization of Net Losses Related to Defined Benefit Plans

1,142

-

-

1,142

-

-

1,142

     Total Comprehensive Income

 

 

 

 

 

 

$  203,392

Share-Based Compensation

2,703

-

2,703

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

      Compensation Plans and Related Tax Benefits (522,542 shares)

15,716

1

2,416

-

(6,850)

20,149

 

Common Stock Repurchased (276,471 shares)

(13,089)

-

-

-

-

(13,089)

 

Cash Dividends Paid

(65,134)

-

-

-

(65,134)

-

 

Balance as of September 30, 2010

$ 1,039,561

$        570

$   499,437

$   66,953

$   914,901

$ (442,300)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

$   790,704

$        568

$   492,515

$  (28,888)

$   787,924

$ (461,415)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

103,517

-

-

-

103,517

-

$  103,517

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Change in Unrealized Gains and Losses

 

 

 

 

 

 

 

           on Investment Securities Available-for-Sale

65,121

-

-

65,121

-

-

65,121

        Amortization of Net Losses Related to Defined Benefit Plans

1,074

-

-

1,074

-

-

1,074

     Total Comprehensive Income

 

 

 

 

 

 

$  169,712

Share-Based Compensation

1,700

-

1,700

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

      Compensation Plans and Related Tax Benefits (209,847 shares)

6,202

1

(1,869)

-

(1,101)

9,171

 

Common Stock Repurchased (25,675 shares)

(888)

-

-

-

-

(888)

 

Cash Dividends Paid

(64,631)

-

-

-

(64,631)

-

 

Balance as of September 30, 2009

$   902,799

$        569

$   492,346

$   37,307

$   825,709

$ (453,132)

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

 

4



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Nine Months Ended

 

 

September 30,

 

(dollars in thousands)

2010

2009

Operating Activities

 

 

   Net Income

$          143,364

$          103,517

   Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

 

 

     Provision for Credit Losses

50,009

81,077

     Depreciation and Amortization

10,008

10,130

     Amortization of Deferred Loan and Lease Fees

(2,019)

(1,754)

     Amortization and Accretion of Premiums/Discounts on Investment Securities, Net

31,474

4,920

     Share-Based Compensation

2,703

1,700

     Benefit Plan Contributions

(2,559)

(12,302)

     Deferred Income Taxes

(15,193)

(21,235)

     Net Gain on Sale of Proprietary Mutual Funds

(2,852)

-

     Gains on Sale of Insurance Business

(904)

(742)

     Net Gains on Sales of Leases

(292)

(13,332)

     Net Gains on Investment Securities

(42,849)

(63)

     Net Change in Trading Securities

-

91,500

     Proceeds from Sales of Loans Held for Sale

418,650

902,169

     Originations of Loans Held for Sale

(412,158)

(863,849)

     Tax Benefits from Share-Based Compensation

(2,725)

(122)

     Net Change in Other Assets and Other Liabilities

(24,215)

(5,589)

   Net Cash Provided by Operating Activities

150,442

276,025

 

 

 

Investing Activities

 

 

   Investment Securities Available-for-Sale:

 

 

      Proceeds from Prepayments and Maturities

1,047,571

1,341,645

      Proceeds from Sales

1,289,679

169,952

      Purchases

(3,109,587)

(3,722,753)

   Investment Securities Held-to-Maturity:

 

 

      Proceeds from Prepayments and Maturities

39,685

44,892

   Proceeds from Sale of Proprietary Mutual Funds

4,424

-

   Proceeds from Sale of Insurance Business

904

1,769

   Net Change in Loans and Leases

395,020

548,355

   Premises and Equipment, Net

(7,887)

(4,183)

   Net Cash Used in Investing Activities

(340,191)

(1,620,323)

 

 

 

Financing Activities

 

 

   Net Change in Deposits

192,786

958,002

   Net Change in Short-Term Borrowings

(1,330)

491,156

   Repayments of Long-Term Debt

(50,000)

(143,971)

   Tax Benefits from Share-Based Compensation

2,725

122

   Proceeds from Issuance of Common Stock

13,250

6,569

   Repurchase of Common Stock

(13,089)

(888)

   Cash Dividends Paid

(65,134)

(64,631)

   Net Cash Provided by Financing Activities

79,208

1,246,359

 

 

 

Net Change in Cash and Cash Equivalents

(110,541)

(97,939)

Cash and Cash Equivalents at Beginning of Period

555,067

796,482

Cash and Cash Equivalents at End of Period

$          444,526

$          698,543

Supplemental Information

 

 

   Cash Paid for Interest

$            46,284

$            71,615

   Cash Paid for Income Taxes

115,374

56,347

   Non-Cash Investing Activities:

 

 

     Transfer from Loans to Foreclosed Real Estate

3,478

92

     Transfers from Loans to Loans Held for Sale

8,713

36,126

     Replacement of a Leveraged Lease with a Direct Financing Lease

-

32,437

 

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

 

5



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii.  Bank of Hawaii Corporation and its subsidiaries (the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands.  The Parent’s principal subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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 accompanying notes 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 information has been reclassified to conform to the current period presentation.

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.  Actual results may differ from those estimates and such differences could be material to the financial statements.

 

Fair Value Measurements and Disclosures

 

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions of this ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  The adoption of these provisions, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.  See Note 11 to the Consolidated Financial Statements for the disclosures required by this ASU.

 

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis, rather than as a net number as currently permitted.  This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011.  As this provision amends only the disclosure requirements for Level 3 fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.

 

Future Application of Accounting Pronouncements

 

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).  This ASU will also require the Company to disclose additional information related to credit quality indicators, nonaccrual and past due information, and information related to impaired loans and loans modified in a troubled debt restructuring.  The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010.  As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption will have no impact on the Company’s statements of income and condition.

 

6



Table of Contents

 

Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2010, December 31, 2009, and September 30, 2009 were as follows:

 

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

September 30, 2010

 

 

 

 

Available-for-Sale:

 

 

 

 

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

$                 536,690

$                   26,903

$                       (11)

$                 563,582

Debt Securities Issued by States and Political Subdivisions

54,563

2,911

(10)

57,464

Debt Securities Issued by U.S. Government-Sponsored Enterprises

750

14

-

764

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

5,346,832

106,984

(2,265)

5,451,551

    U.S. Government-Sponsored Enterprises

134,774

5,814

-

140,588

Total Mortgage-Backed Securities

5,481,606

112,798

(2,265)

5,592,139

Total

$              6,073,609

$                 142,626

$                  (2,286)

$              6,213,949

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   50,480

$                     3,329

$                           -

$                   53,809

    U.S. Government-Sponsored Enterprises

90,712

4,110

-

94,822

Total

$                 141,192

$                     7,439

$                           -

$                 148,631

 

 

 

 

 

December 31, 2009

 

 

 

 

Available-for-Sale:

 

 

 

 

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

$                 711,223

$                   11,248

$                  (1,679)

$                 720,792

Debt Securities Issued by States and Political Subdivisions

52,742

1,391

(17)

54,116

Debt Securities Issued by U.S. Government-Sponsored Enterprises

751

41

-

792

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

4,015,816

26,900

(20,029)

4,022,687

    U.S. Government-Sponsored Enterprises

509,225

23,276

(54)

532,447

Total Mortgage-Backed Securities

4,525,041

50,176

(20,083)

4,555,134

Total

$              5,289,757

$                   62,856

$                (21,779)

$              5,330,834

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   59,542

$                     1,879

$                           -

$                   61,421

    U.S. Government-Sponsored Enterprises

121,476

3,771

-

125,247

Total

$                 181,018

$                     5,650

$                           -

$                 186,668

 

 

 

 

 

September 30, 2009

 

 

 

 

Available-for-Sale:

 

 

 

 

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

$                 537,636

$                   14,937

$                     (462)

$                 552,111

Debt Securities Issued by States and Political Subdivisions

61,968

2,343

(12)

64,299

Debt Securities Issued by U.S. Government-Sponsored Enterprises

751

51

-

802

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

2,869,636

39,826

(4,331)

2,905,131

    U.S. Government-Sponsored Enterprises

1,145,778

52,845

-

1,198,623

Private-Label Mortgage-Backed Securities

91,668

50

(10,292)

81,426

Total Mortgage-Backed Securities

4,107,082

92,721

(14,623)

4,185,180

Other Debt Securities

25,081

116

(1)

25,196

Total

$              4,732,518

$                 110,168

$                (15,098)

$              4,827,588

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   62,502

$                     2,314

$                           -

$                   64,816

    U.S. Government-Sponsored Enterprises

131,942

4,360

-

136,302

Total

$                 194,444

$                     6,674

$                           -

$                 201,118

 

7



Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2010. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

 

(dollars in thousands)

Cost

Gains

Losses

Fair Value

Available-for-Sale:

 

 

 

 

Due in One Year or Less

$             92,145

$                  429

$                  -

$             92,574

Due After One Year Through Five Years

248,224

4,776

(6)

252,994

Due After Five Years Through Ten Years

107,438

6,818

(15)

114,241

Due After Ten Years

144,196

17,805

-

162,001

 

592,003

29,828

(21)

621,810

Mortgage-Backed Securities issued by

 

 

 

 

  Government Agencies

5,346,832

106,984

(2,265)

5,451,551

  U.S. Government-Sponsored Enterprises

134,774

5,814

-

140,588

Total Mortgage-Backed Securities

5,481,606

112,798

(2,265)

5,592,139

Total

$        6,073,609

$           142,626

$            (2,286)

$        6,213,949

 

 

 

 

 

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities issued by

 

 

 

 

  Government Agencies

$             50,480

$               3,329

$                     -

$             53,809

  U.S. Government-Sponsored Enterprises

90,712

4,110

-

94,822

Total

$           141,192

$               7,439

$                     -

$           148,631

 

 

Investment securities with carrying values of $3.0 billion, $2.7 billion, and $2.9 billion as of September 30, 2010, December 31, 2009, and September 30, 2009, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.  As of September 30, 2010, December 31, 2009, and September 30, 2009, the Company did not pledge any investment securities where the secured party had the right to sell or repledge the collateral.

 

Gross gains on the sales of investment securities were $7.9 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively, and were $42.9 million and $0.6 million for the nine months ended September 30, 2010 and 2009, respectively.  Gross losses on the sales of investment securities were not material for the three months and nine months ended September 30, 2010 and were $0.6 million for the three months and nine months ended September 30, 2009.  Realized gains and losses on investment securities were recorded in noninterest income using the specific identification method.

 

8



Table of Contents

 

The Company’s investment securities in an unrealized loss position, segregated by continuous length of impairment, were as follows:

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

 

Unrealized

 

 

Unrealized

 

 

Unrealized

(dollars in thousands)

Fair Value

Losses

 

Fair Value

Losses

 

Fair Value

Losses

September 30, 2010

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$                -

$             -

 

$          1,479

$           (11)

 

$       1,479

$          (11)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

4,992

(10)

 

-

-

 

4,992

(10)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

465,433

(2,265)

 

-

-

 

465,433

(2,265)

Total

$     470,425

$    (2,275)

 

$          1,479

$           (11)

 

$   471,904

$     (2,286)

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$     347,324

$    (1,656)

 

$          1,703

$           (23)

 

$   349,027

$     (1,679)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

878

(5)

 

322

(12)

 

1,200

(17)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

2,171,588

(20,029)

 

-

-

 

2,171,588

(20,029)

 

U.S. Government-Sponsored Enterprises

8,982

(54)

 

-

-

 

8,982

(54)

Total Mortgage-Backed Securities

2,180,570

(20,083)

 

-

-

 

2,180,570

(20,083)

Total

$  2,528,772

$  (21,744)

 

$          2,025

$           (35)

 

$ 2,530,797

$   (21,779)

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$       86,656

$       (427)

 

$          1,831

$           (35)

 

$     88,487

$        (462)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

559

(1)

 

323

(11)

 

882

(12)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

393,823

(4,331)

 

-

-

 

393,823

(4,331)

Private-Label Mortgage-Backed Securities

-

-

 

71,152

(10,292)

 

71,152

(10,292)

Total Mortgage-Backed Securities

393,823

(4,331)

 

71,152

(10,292)

 

464,975

(14,623)

Other Debt Securities

-

-

 

34

(1)

 

34

(1)

Total

$     481,038

$    (4,759)

 

$        73,340

$    (10,339)

 

$   554,378

$   (15,098)

 

 

The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2010, which were comprised of 24 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

 

As of September 30, 2010, the gross unrealized losses reported for mortgage-backed securities related to investment securities issued by the Government National Mortgage Association.

 

9



Table of Contents

 

Note 3.  Mortgage Servicing Rights

 

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.2 billion as of September 30, 2010, $3.1 billion as of December 31, 2009, and $3.0 billion as of September 30, 2009.  The Company’s residential mortgage loans sold to third parties are generally sold on a non-recourse basis.  The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $2.2 million and $2.1 million for the three months ended September 30, 2010 and 2009, respectively, and $6.2 million and $5.7 million for the nine months ended September 30, 2010 and 2009, respectively.  Servicing income is recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income.  The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.

 

For the three and nine months ended September 30, 2010 and 2009, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Balance at Beginning of Period

 

$

13,840

 

$

16,833

 

 

 

$

15,332

 

$

19,553

 

Changes in Fair Value:

 

 

 

 

 

 

 

 

 

 

 

Due to Change in Valuation Assumptions 1

 

(1,954

)

(78

)

 

 

(2,600

)

29

 

Due to Paydowns and Other 2

 

(642

)

(783

)

 

 

(1,488

)

(3,610

)

Total Changes in Fair Value of Mortgage Servicing Rights

 

(2,596

)

(861

)

 

 

(4,088

)

(3,581

)

Balance at End of Period

 

$

11,244

 

$

15,972

 

 

 

$

11,244

 

$

15,972

 

 

1        Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.

2        Principally represents changes due to loan payoffs.

 

For the three and nine months ended September 30, 2010 and 2009, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of a valuation allowance, was as follows:

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Balance at Beginning of Period

 

$

11,806

 

$

7,898

 

 

 

$

10,638

 

$

1,796

 

Servicing Rights that Resulted From Asset Transfers

 

1,711

 

1,802

 

 

 

3,552

 

8,169

 

Amortization

 

(445

)

(235

)

 

 

(1,118

)

(500

)

Balance at End of Period

 

$

13,072

 

$

9,465

 

 

 

$

13,072

 

$

9,465

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation Allowance:

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

 

$

 

 

 

$

 

$

292

 

Recoveries

 

 

 

 

 

 

(292

)

Balance at End of Period

 

$

 

$

 

 

 

$

 

$

 

Mortgage Servicing Rights Accounted for Under
the Amortization Method, Net of a Valuation Allowance

 

$

13,072

 

$

9,465

 

 

 

$

13,072

 

$

9,465

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Mortgage Servicing Rights Accounted for  
Under the Amortization Method

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

$

15,044

 

$

10,301

 

 

 

$

14,853

 

$

1,504

 

End of Period

 

$

14,159

 

$

12,156

 

 

 

$

14,159

 

$

12,156

 

 

10



Table of Contents

 

The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2010, December 31, 2009, and September 30, 2009 were as follows:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2010

 

2009

 

2009

 

Weighted-Average Constant Prepayment Rate 1

 

16.68

%

14.45

%

15.12

%

Weighted-Average Life (in years)

 

4.79

 

5.55

 

5.17

 

Weighted-Average Note Rate

 

5.13

%

5.27

%

5.34

%

Weighted-Average Discount Rate 2

 

6.76

%

8.00

%

7.80

%

 

1        Represents annualized loan repayment rate assumption.

2        Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.

 

A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of September 30, 2010, December 31, 2009, and September 30, 2009 is presented in the following table.

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Constant Prepayment Rate

 

 

 

 

 

 

 

Decrease in fair value from 25 basis points (“bps”) adverse change

 

$

(285

)

$

(315

)

$

(294

)

Decrease in fair value from 50 bps adverse change

 

(563

)

(624

)

(596

)

Discount Rate

 

 

 

 

 

 

 

Decrease in fair value from 25 bps adverse change

 

(334

)

(385

)

(350

)

Decrease in fair value from 50 bps adverse change

 

(662

)

(755

)

(685

)

 

 

This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear.  Also, the effect of changing one key assumption without changing other assumptions is not realistic.

 

 

Note 4.  Securities Sold Under Agreements to Repurchase

 

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Statements of Condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.

 

As of September 30, 2010, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:

 

(dollars in thousands)

 

Amount

 

Overnight

 

$

-

 

2 to 30 Days

 

240,845

 

31 to 90 Days

 

720,558

 

Over 90 Days

 

654,840

 

Total

 

$

1,616,243

 

 

11



Table of Contents

 

Note 5.  Comprehensive Income

 

The following table presents the components of comprehensive income for the three and nine months ended September 30, 2010 and 2009:

 

(dollars in thousands)

Before Tax

Tax  Effect

Net of Tax

Three Months Ended September 30, 2010

 

 

 

Net Income

$                      58,502

$                    14,438

$                    44,064

Other Comprehensive Income:

 

 

 

  Net Unrealized Gains on Investment Securities

 

 

 

    Available-for-Sale

16,686

6,548

10,138

  Reclassification of Net Gains on Investment Securities

 

 

 

    Available-for-Sale Included in Net Income

(7,877)

(3,091)

(4,786)

  Change in Unrealized Gains and Losses on

 

 

 

    Investment Securities Available-for-Sale

8,809

3,457

5,352

  Amortization of Net Losses Related to Defined Benefit Plans

595

214

381

Change in Accumulated Other Comprehensive Income (Loss)

9,404

3,671

5,733

Total Comprehensive Income

$                      67,906

$                    18,109

$                    49,797

 

 

 

 

Three Months Ended September 30, 2009

 

 

 

Net Income

$                      54,200

$                    17,729

$                    36,471

Other Comprehensive Income:

 

 

 

  Net Unrealized Gains on Investment Securities

 

 

 

    Available-for-Sale

60,650

21,834

38,816

  Reclassification of Net Losses on Investment Securities

 

 

 

    Available-for-Sale Included in Net Income

5

2

3

  Change in Unrealized Gains and Losses on

 

 

 

    Investment Securities Available-for-Sale

60,655

21,836

38,819

  Amortization of Net Losses Related to Defined Benefit Plans

559

201

358

Change in Accumulated Other Comprehensive Income (Loss)

61,214

22,037

39,177

Total Comprehensive Income

$                    115,414

$                    39,766

$                    75,648

 

 

 

 

Nine Months Ended September 30, 2010

 

 

 

Net Income

$                    206,465

$                    63,101

$                  143,364

Other Comprehensive Income:

 

 

 

  Net Unrealized Gains on Investment Securities

 

 

 

    Available-for-Sale

142,112

57,811

84,301

  Reclassification of Net Gains on Investment Securities

 

 

 

    Available-for-Sale Included in Net Income

(42,849)

(17,434)

(25,415)

  Change in Unrealized Gains and Losses on

 

 

 

    Investment Securities Available-for-Sale

99,263

40,377

58,886

  Amortization of Net Losses Related to Defined Benefit Plans

1,784

642

1,142

Change in Accumulated Other Comprehensive Income (Loss)

101,047

41,019

60,028

Total Comprehensive Income

$                    307,512

$                  104,120

$                  203,392

 

 

 

 

Nine Months Ended September 30, 2009

 

 

 

Net Income

$                    153,216

$                    49,699

$                  103,517

Other Comprehensive Income:

 

 

 

  Net Unrealized Gains on Investment Securities

 

 

 

    Available-for-Sale

101,814

36,653

65,161

  Reclassification of Net Gains on Investment Securities

 

 

 

    Available-for-Sale Included in Net Income

(63)

(23)

(40)

  Change in Unrealized Gains and Losses on

 

 

 

    Investment Securities Available-for-Sale

101,751

36,630

65,121

  Amortization of Net Losses Related to Defined Benefit Plans

1,678

604

1,074

Change in Accumulated Other Comprehensive Income (Loss)

103,429

37,234

66,195

Total Comprehensive Income

$                    256,645

$                    86,933

$                  169,712

 

12



Table of Contents

 

Note 6.  Earnings Per Share

 

There were no adjustments to net income, the numerator, for purposes of computing basic earnings per share.  The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share and antidilutive shares outstanding for the three and nine months ended September 30, 2010 and 2009:

 

 

                 Three Months Ended

 

               Nine Months Ended

 

                 September 30,

 

              September 30,

 

2010

2009

 

2010

2009

Denominator for Basic Earnings Per Share

48,189,358

47,745,375

 

48,062,385

47,665,146

Dilutive Effect of Stock Options

257,170

273,236

 

303,919

245,796

Dilutive Effect of Restricted Stock

15,626

27,262

 

20,343

19,329

Denominator for Diluted Earnings Per Share

48,462,154

48,045,873

 

48,386,647

47,930,271

 

 

 

 

 

 

Antidilutive Shares Outstanding

203,802

422,590

 

277,272

472,766

 

 

Note 7.  Business Segments

 

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury.  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 income, expense, the provision for credit losses, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.  Previously reported results have been reclassified to conform to the current organizational reporting structure.

 

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 the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to Treasury.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

 

Retail Banking

 

Retail Banking 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.  Retail Banking also offers retail life insurance products and provides merchant services to its small business customers.  Products and services from Retail Banking are delivered to customers through 71 Hawaii branch locations, 492 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.

 

Commercial Banking

 

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products.  Commercial lending and deposit products are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii.  Commercial Banking also includes international banking and operations at the Bank’s 12 branches in the Pacific Islands.

 

Investment Services

 

Investment Services includes private banking, trust services, asset management, and institutional investment advisory services.  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 assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services 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.  This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.

 

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Table of Contents

 

Treasury

 

Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign exchange business.  This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, and short- and long-term borrowings.  The primary sources of noninterest income are from bank-owned life insurance and foreign exchange income related to customer driven currency requests from merchants and island visitors.  The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.

 

Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury provide a wide-range of support to the Company’s other income earning segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

 

Selected business segment financial information as of and for the three and nine months ended September 30, 2010 and 2009 were as follows:

 

 

Retail

Commercial

Investment

Treasury

Consolidated

(dollars in thousands)

Banking

Banking

Services

and Other

Total

Three Months Ended September 30, 2010

 

 

 

 

 

Net Interest Income

$          46,746

$          35,236

$            4,043

$          12,601

$          98,626

Provision for Credit Losses

6,288

7,121

(19)

(31)

13,359

Net Interest Income After Provision for Credit Losses

40,458

28,115

4,062

12,632

85,267

Noninterest Income

28,049

9,745

16,478

8,853

63,125

Noninterest Expense

(43,391)

(23,370)

(13,851)

(9,278)

(89,890)

Income Before Provision for Income Taxes

25,116

14,490

6,689

12,207

58,502

Provision for Income Taxes

(9,293)

(421)

(2,475)

(2,249)

(14,438)

Net Income

$          15,823

$           14,069

$            4,214

$            9,958

$          44,064

Total Assets as of September 30, 2010

$     3,094,047

$      2,251,004

$        242,312

$     7,129,240

$   12,716,603

 

 

 

 

 

 

Three Months Ended September 30, 2009

 

 

 

 

 

Net Interest Income

$          53,441

$          40,232

$            4,275

$          10,939

$        108,887

Provision for Credit Losses

15,599

11,918

33

(50)

27,500

Net Interest Income After Provision for Credit Losses

37,842

28,314

4,242

10,989

81,387

Noninterest Income

25,095

14,668

14,026

3,011

56,800

Noninterest Expense

(42,380)

(25,072)

(14,952)

(1,583)

(83,987)

Income Before Provision for Income Taxes

20,557

17,910

3,316

12,417

54,200

Provision for Income Taxes

(7,636)

(6,037)

(1,227)

(2,829)

(17,729)

Net Income

$          12,921

$          11,873

$            2,089

$            9,588

$          36,471

Total Assets as of September 30, 2009

$     3,441,050

$     2,547,978

$        253,580

$     5,965,417

$   12,208,025

 

 

 

 

 

 

Nine Months Ended September 30, 2010

 

 

 

 

 

Net Interest Income

$        144,311

$        112,682

$          12,582

$          40,632

$        310,207

Provision for Credit Losses

31,516

18,468

69

(44)

50,009

Net Interest Income After Provision for Credit Losses

112,795

94,214

12,513

40,676

260,198

Noninterest Income

77,322

31,461

45,814

49,184

203,781

Noninterest Expense

(129,160)

(72,210)

(43,450)

(12,694)

(257,514)

Income Before Provision for Income Taxes

60,957

53,465

14,877

77,166

206,465

Provision for Income Taxes

(22,554)

(14,742)

(5,505)

(20,300)

(63,101)

Net Income

$          38,403

$          38,723

$            9,372

$          56,866

$        143,364

Total Assets as of September 30, 2010

$     3,094,047

$     2,251,004

$        242,312

$     7,129,240

$   12,716,603

 

 

 

 

 

 

Nine Months Ended September 30, 2009

 

 

 

 

 

Net Interest Income

$        164,534

$        121,328

$          12,593

$          10,345

$        308,800

Provision for Credit Losses

44,921

34,868

1,583

(295)

81,077

Net Interest Income After Provision for Credit Losses

119,613

86,460

11,010

10,640

227,723

Noninterest Income

78,761

55,032

43,086

10,118

186,997

Noninterest Expense

(130,165)

(78,453)

(47,309)

(5,577)

(261,504)

Income Before Provision for Income Taxes

68,209

63,039

6,787

15,181

153,216

Provision for Income Taxes

(25,287)

(26,120)

(2,511)

4,219

(49,699)

Net Income

$          42,922

$          36,919

$            4,276

$          19,400

$        103,517

Total Assets as of September 30, 2009

$     3,441,050

$     2,547,978

$        253,580

$     5,965,417

$   12,208,025

 

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Note 8.  Pension Plans and Postretirement Benefit Plan

 

The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three and nine months ended September 30, 2010 and 2009 were as follows:

 

 

             Pension Benefits

 

Postretirement Benefits

(dollars in thousands)

2010

2009

 

2010

2009

Three Months Ended September 30,

 

 

 

 

 

Service Cost

$                 -

$                 -

 

$            117

$            109

Interest Cost

1,294

1,285

 

439

419

Expected Return on Plan Assets

(1,642)

(1,332)

 

-

-

Amortization of:

 

 

 

 

 

  Prior Service Credit

-

-

 

(53)

(53)

  Net Actuarial Losses (Gains)

724

732

 

(76)

(119)

Net Periodic Benefit Cost

$            376

$            685

 

$            427

$            356

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

Service Cost

$                 -

$                 -

 

$            352

$            328

Interest Cost

3,883

3,854

 

1,318

1,258

Expected Return on Plan Assets

(4,926)

(3,995)

 

-

-

Amortization of:

 

 

 

 

 

  Prior Service Credit

-

-

 

(160)

(159)

  Net Actuarial Losses (Gains)

2,172

2,195

 

(228)

(358)

Net Periodic Benefit Cost

$         1,129

$         2,054

 

$         1,282

$         1,069

 

 

The net periodic benefit cost for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the Consolidated Statements of Income.  For the three and nine months ended September 30, 2010, the Company contributed $0.1 million and $1.3 million, respectively, to the pension plans.  For the three and nine months ended September 30, 2010, the Company contributed $0.3 million and $1.3 million, respectively, to the postretirement benefit plan.  The Company expects to contribute $1.6 million to the pension plans and $1.5 million to the postretirement benefit plan for the year ending December 31, 2010.

 

Note 9.  Derivative Financial Instruments

 

The following table presents the Company’s derivative financial instruments, their fair values, and balance sheet location as of September 30, 2010, December 31, 2009, and September 30, 2009:

 

 

 

September 30, 2010

 

December 31, 2009

 

September 30, 2009

 

Derivative Financial Instruments Not Designated
as Hedging Instruments1  (dollars in thousands)

 

Asset
Derivatives

 

Liability
Derivatives

 

Asset
Derivatives

 

Liability
Derivatives

 

Asset
Derivatives

 

Liability
Derivatives

 

Interest Rate Lock Commitments

 

$

6,218

 

$

189

 

$

564

 

$

580

 

$

1,671

 

$

57

 

Forward Commitments

 

396

 

1,423

 

1,123

 

5

 

121

 

430

 

Interest Rate Swap Agreements

 

35,671

 

35,959

 

18,834

 

18,998

 

23,788

 

23,994

 

Foreign Exchange Contracts

 

299

 

99

 

175

 

402

 

206

 

464

 

Total

 

$

42,584

 

$

37,670

 

$

20,696

 

$

19,985

 

$

25,786

 

$

24,945

 

 

1  Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the Consolidated Statements of Condition.

 

The following table presents the Company’s derivative financial instruments and the amount and location of the net gains and losses recognized in the statements of income for the three and nine months ended September 30, 2010 and 2009:

 

 

Location of Net Gains

 

Three Months Ended

 

Nine Months Ended

Derivative Financial Instruments Not Designated   

(Losses) Recognized in the

 

September 30,

 

September 30,

  as Hedging Instruments  (dollars in thousands)

Statements of Income

 

2010

 

2009

 

2010

 

2009

Interest Rate Lock Commitments

 Mortgage Banking

 

$

10,282

 

$

4,124

 

$

17,527     

$

11,146

Forward Commitments

 Mortgage Banking

 

(3,461

)

(942

)

(5,469)    

952

Interest Rate Swap Agreements

 Other Noninterest Income

 

22

 

31

 

136     

808

Foreign Exchange Contracts

 Other Noninterest Income

 

707

 

815

 

2,119     

2,126

Total

 

 

$

  7,550

 

$

     4,028

 

$

14,313     

$

 15,032

 

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Table of Contents

 

Management has received authorization from the Bank’s Board of Directors to use derivative financial instruments as an end-user in connection with its risk management activities and to accommodate the needs of its customers.  As with any financial instrument, derivative financial instruments have inherent risks.  Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices.  Market risks associated with derivative financial instruments are balanced with the expected returns to enhance earnings performance and shareholder value, while limiting the volatility of each.  The Company uses various processes to monitor its overall market risk exposure, including sensitivity analysis, value-at-risk calculations, and other methodologies.

 

Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in accordance with the underlying contractual terms.  Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional on-balance sheet financial instruments.  The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty, adhering to the same credit approval process used for commercial lending activities.

 

Derivative financial instruments are required to be carried at their fair value on the Company’s Consolidated Statements of Condition.  As of September 30, 2010, December 31, 2009, and September 30, 2009, the Company did not designate any derivative financial instruments as accounting hedges.  The Bank’s free-standing derivative financial instruments have been recorded at fair value on the Company’s Consolidated Statements of Condition.  These financial instruments have been limited to interest rate lock commitments, forward commitments, interest rate swap agreements, and foreign exchange contracts.

 

The Company enters into interest rate lock commitments for residential mortgage loans that the Company intends to sell in the secondary market.  Interest rate exposure from interest rate lock commitments is hedged with forward commitments for the future sale of residential mortgage loans.  The interest rate lock commitments and forward commitments are free-standing derivatives which are carried at fair value with changes recorded in the mortgage banking component of noninterest income.  Changes in the fair value of interest rate lock commitments and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

 

The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers.  The Company mitigates this risk by entering into equal and offsetting interest rate swap agreements with highly rated third parties.  The interest rate swap agreements are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Company’s Consolidated Statements of Income.

 

The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers.  The foreign exchange contracts are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Company’s Consolidated Statements of Income.

 

 

Note 10.  Credit Commitments

 

The Company’s credit commitments as of September 30, 2010, December 31, 2009, and September 30, 2009 were as follows:

 

(dollars in thousands)

September 30,
2010

December 31,

2009

September 30,
2009

 

Unfunded Commitments to Extend Credit

$            1,949,955

$        2,039,056

$       2,063,415

 

Standby Letters of Credit

99,281

84,012

85,527

 

Commercial Letters of Credit

25,240

23,163

24,677

 

Total Credit Commitments

$            2,074,476

$        2,146,231

$       2,173,619

 

 

Unfunded Commitments to Extend Credit

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

 

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Table of Contents

 

Standby and Commercial Letters of Credit

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party.  The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company.  The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit, and holds cash and deposits as collateral on those standby letters of credit for which collateral is deemed necessary.

 

 

Note 11.  Fair Value of Assets and Liabilities

 

Fair Value Hierarchy

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.  GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1:                             Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.  A contractually binding sales price also provides reliable evidence of fair value.

 

Level 2:                             Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

 

Level 3:                             Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.

 

Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements.  Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Investment Securities Available-for-Sale

 

Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service.  This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information.  Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications.  If quoted prices were available in an active market, investment securities were classified as Level 1 measurements.  Level 1 investment securities included debt securities issued by the U.S. Treasury.  If quoted prices in active markets were not available, fair values were estimated primarily by the use of pricing models.  Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises.  In certain cases where there were limited or less transparent information provided by the Company’s third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

 

On a quarterly basis, management reviews the pricing information received from the Company’s third-party pricing service.  This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Company’s third-party pricing service.

 

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Table of Contents

 

Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets.  Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs.  For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued.  As of September 30, 2010, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

 

Mortgage Servicing Rights

 

Mortgage servicing rights do not trade in an active market with readily observable market data.  As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company stratifies its mortgage servicing portfolio on the basis of loan type.  The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates.  Significant assumptions in the valuation of mortgage servicing rights include changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors.  Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

 

Other Assets

 

Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements.  Quoted prices for these investments, primarily in mutual funds, are available in active markets.  Thus, the Company’s investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.

 

Derivative Financial Instruments

 

Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate lock commitments, forward commitments, interest rate swap agreements, and foreign exchange contracts.  The fair values of interest rate lock commitments are calculated using a discounted cash flow approach utilizing inputs such as the fall-out ratio.  The fall-out ratio is derived from the Bank’s internal data and is adjusted using significant management judgment as to the percentage of loans which are currently in a lock position which will ultimately not close.  Interest rate lock commitments are deemed Level 3 measurements as significant unobservable inputs and management judgment are required.  The fair values of forward commitments are deemed Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period.  The fair values of interest rate swap agreements are also calculated using a discounted cash flow approach and utilize inputs such as the London Inter Bank Offered Rate swap curve, effective date, maturity date, notional amount, and stated interest rate.  Interest rate swap agreements are deemed Level 3 measurements as significant unobservable inputs and management judgment are required.  The fair values of foreign exchange contracts are calculated using the Bank’s multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with market data information such as the spot rates of specific currency and yield curves.  Foreign exchange contracts are deemed Level 2 measurements because while they are valued using the Bank’s multi-currency accounting system, significant management judgment or estimation is not required.

 

The Company is exposed to credit risk if borrowers or counterparties fail to perform.  The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements.  The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings.  Credit risk associated with borrowers or counterparties as well as the Company’s non-performance risk is factored into the determination of the fair value of derivative financial instruments.

 

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Table of Contents

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, December 31, 2009, and September 30, 2009:

 

 

Quoted Prices in
Active Markets for
Identical Assets
or Liabilities

Significant
Other
Observable
Inputs

Significant
Unobservable
Inputs

 

(dollars in thousands)

(Level 1)

(Level 2)

(Level 3)

Total

September 30, 2010

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

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

$             561,512

$         2,070

$                     -

$       563,582

Debt Securities Issued by States and Political Subdivisions

-

57,464

-

57,464

Debt Securities Issued by U.S. Government-Sponsored Enterprises

-

764

-

764

Mortgage-Backed Securities Issued by

 

 

 

 

Government Agencies

-

5,451,551

-

5,451,551

U.S. Government-Sponsored Enterprises

-

140,588

-

140,588

Total Mortgage-Backed Securities

-

5,592,139

-

5,592,139

Total Investment Securities Available-for-Sale

561,512

5,652,437

-

6,213,949

Mortgage Servicing Rights

-

-

11,244

11,244

Other Assets

9,985

-

-

9,985

Net Derivative Assets and Liabilities

-

(827)

5,741

4,914

Total Assets Measured at Fair Value on a Recurring Basis
as of September 30, 2010

$             571,497

$   5,651,610

$           16,985

$    6,240,092

 

 

 

 

 

December 31, 2009

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

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

$             718,388

$         2,404

$                    -

$       720,792

Debt Securities Issued by States and Political Subdivisions

-

54,116

-

54,116

Debt Securities Issued by U.S. Government-Sponsored Enterprises

-

792

-

792

Mortgage-Backed Securities Issued by

 

 

 

 

Government Agencies

-

4,022,687

-

4,022,687

U.S. Government-Sponsored Enterprises

-

532,447

-

532,447

Total Mortgage-Backed Securities

-

4,555,134

-

4,555,134

Total Investment Securities Available-for-Sale

718,388

4,612,446

-

5,330,834

Mortgage Servicing Rights

-

-

15,332

15,332

Other Assets

8,979

-

-

8,979

Net Derivative Assets and Liabilities

-

891

(180)

711

Total Assets Measured at Fair Value on a Recurring Basis
as of December 31, 2009

$             727,367

$  4,613,337

$          15,152

$    5,355,856

 

 

 

 

 

September 30, 2009

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

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

$             549,582

$         2,529

$                    -

$       552,111

Debt Securities Issued by States and Political Subdivisions

-

64,299

-

64,299

Debt Securities Issued by U.S. Government-Sponsored Enterprises

-

802

-

802

Mortgage-Backed Securities Issued by

 

 

 

 

Government Agencies

-

2,905,131

-

2,905,131

U.S. Government-Sponsored Enterprises

-

1,198,623

-

1,198,623

Private-Label Mortgage-Backed Securities

-

81,426

-

81,426

Total Mortgage-Backed Securities

-

4,185,180

-

4,185,180

Other Debt Securities

-

25,196

-

25,196

Total Investment Securities Available-for-Sale

549,582

4,278,006

-

4,827,588

Mortgage Servicing Rights

-

-

15,972

15,972

Other Assets

8,382

-

-

8,382

Net Derivative Assets and Liabilities

-

(567)

1,408

841

Total Assets Measured at Fair Value on a Recurring Basis
as of September 30, 2009

$             557,964

$  4,277,439

$          17,380

$    4,852,783

 

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Table of Contents

 

For the three and nine months ended September 30, 2010 and 2009, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

 

Assets  (dollars in thousands)

 

Mortgage
Servicing
 Rights 1 

 

Net Derivative
Assets and Liabilities
 2

 

Total

 

Three Months Ended September 30, 2010

 

 

 

 

 

 

 

Balance as of July 1, 2010

 

$

13,840

 

$

2,007

 

$

15,847

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

Included in Net Income

 

(2,596

)

10,304

 

7,708

 

Purchases, Sales, Issuances, and Settlements, Net

 

-

 

(6,570

)

(6,570

)

Balance as of September 30, 2010

 

$

11,244

 

$

5,741

 

$

16,985

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2010

 

$

(1,954

)

$

5,741

 

$

3,787

 

 

 

 

 

 

 

 

 

Assets  (dollars in thousands)

 

Mortgage
Servicing Rights
1

 

Net Derivative
Assets and Liabilities
 2

 

Total

 

Three Months Ended September 30, 2009

 

 

 

 

 

 

 

Balance as of July 1, 2009

 

$

16,833

 

$

741

 

$

17,574

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

Included in Net Income

 

(861

)

4,155

 

3,294

 

Purchases, Sales, Issuances, and Settlements, Net

 

-

 

(3,488

)

(3,488

)

Balance as of September 30, 2009

 

$

15,972

 

$

1,408

 

$

17,380

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2009

 

$

(78

)

$

1,408

 

$

1,330

 

 

 

 

 

 

 

 

 

Assets  (dollars in thousands)

 

Mortgage
Servicing Rights
1

 

Net Derivative
Assets and Liabilities
 2

 

Total

 

Nine Months Ended September 30, 2010

 

 

 

 

 

 

 

Balance as of January 1, 2010

 

$

15,332

 

$

(180

)

$

15,152

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

Included in Net Income

 

(4,088

)

17,663

 

13,575

 

Purchases, Sales, Issuances, and Settlements, Net

 

-

 

(11,742

)

(11,742

)

Balance as of September 30, 2010

 

$

11,244

 

$

5,741

 

$

16,985

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2010

 

$

(2,600

)

$

5,741

 

$

3,141

 

 

 

 

 

 

 

 

 

 

 

Assets  (dollars in thousands)

 

Investment Securities
Available-for-Sale
3

 

Mortgage Servicing Rights 1

 

Net Derivative
Assets and Liabilities
 2

 

Total

 

Nine Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2009

 

$

55,715

 

$

19,553

 

$

3,051

 

$

78,319

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

 

Included in Net Income

 

-

 

(3,581

)

11,954

 

8,373

 

Purchases, Sales, Issuances, and Settlements, Net

 

(55,715

)

-

 

(13,597

)

(69,312

)

Balance as of September 30, 2009

 

$

-

 

$

15,972

 

$

1,408

 

$

17,380

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains Included in Net Income
Related to Assets Still Held as of September 30, 2009

 

$

-

 

$

29

 

$

1,408

 

$

1,437

 

 

 

 

 

 

 

 

 

 

 

Liabilities  (dollars in thousands)

 

Long-Term Debt 4

 

Total

 

 

 

 

 

Nine Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2009

 

$

119,275

 

$

119,275

 

 

 

 

 

Unrealized Gains Included in Net Income

 

(304

)

(304

)

 

 

 

 

Purchases, Sales, Issuances, and Settlements, Net

 

(118,971

)

(118,971

)

 

 

 

 

Balance as of September 30, 2009

 

$

-

 

$

-

 

 

 

 

 

 

1

Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s Consolidated Statements of Income.

2

Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Company’s Consolidated Statements of Income. Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Company’s Consolidated Statements of Income.

3

Unrealized gains and losses related to investment securities available-for-sale are reported as a component of other comprehensive income in the Company’s Consolidated Statements of Condition.

4

Unrealized gains related to long-term debt were reported as a component of other noninterest income in the Company’s Consolidated Statements of Income.

 

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Table of Contents

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or impairment write-downs of individual assets.  As of September 30, 2010, December 31, 2009, and September 30, 2009, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.

 

Disclosures about Fair Value of Financial Instruments

 

These disclosures exclude financial instruments that are recorded at fair value on a recurring basis on the Company’s Consolidated Statements of Condition as well as short-term financial assets such as cash and cash equivalents, and liabilities such as short-term borrowings, for which the carrying amounts approximate fair value.  The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

 

Investment Securities Held-to-Maturity

 

The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service.  Quoted prices in active markets were used whenever available.  If quoted prices were not available, fair values were measured using pricing models or other valuation techniques such as the present value of future cash flows, adjusted for credit loss assumptions.

 

Loans Held for Sale

 

The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.

 

Loans

 

The fair value of the Company’s loans was determined by discounting the expected future cash flows of pools of loans with similar characteristics.  Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate and loan quality categories.  Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

 

Deposit Liabilities

 

The fair values of the Company’s noninterest-bearing and interest-bearing demand deposits and savings deposits were equal to the amount payable on demand (i.e., their carrying amounts) because these products have no stated maturity.  The fair values of the Company’s time deposits were estimated using discounted cash flow analyses.  The discount rates used were based on rates currently offered for deposits with similar remaining maturities.  The fair values of the Company’s deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

 

Long-Term Debt

 

The fair values of the Company’s long-term debt were calculated using a discounted cash flow approach and applying discount rates currently offered for new notes with similar remaining maturities and considering the Company’s non-performance risk.

 

The following presents the carrying amount and fair values of the Company’s financial instruments as of September 30, 2010, December 31, 2009, and September 30, 2009:

 

 

 

September 30, 2010

 

December 31, 2009

 

September 30, 2009

 

(dollars in thousands)

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Financial Instruments - Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

$

141,192

 

$

148,631

 

$

181,018

 

$

186,668

 

$

194,444

 

$

201,118

 

Loans Held for Sale

 

18,765

 

18,765

 

16,544

 

16,552

 

19,346

 

19,346

 

Loans 1

 

4,819,324

 

5,105,231

 

5,217,472

 

5,443,649

 

5,352,297

 

5,557,554

 

Financial Instruments - Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

9,602,462

 

9,618,888

 

9,409,676

 

9,421,423

 

9,250,100

 

9,265,131

 

Long-Term Debt 2

 

31,338

 

34,660

 

81,338

 

83,265

 

82,437

 

84,318

 

 

1

Comprised of loans, net of unearned income and the allowance for loan losses.

2

Excludes capitalized lease obligations.

 

21



Table of Contents

 

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

 

Forward-Looking Statements

 

This report contains forward-looking statements concerning, among other things, the economic and business environment in our service area and elsewhere, credit quality, our contributions to the Company’s pension plans and the postretirement benefit plan, and other financial and business matters in future periods.  Our 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 because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) the effect of the increase in government intervention in the U.S. financial system; 4) competitive pressure among financial services and products; 5) the impact of recent legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), relating to overdraft fees, credit cards, and other bank services; 6) changes in fiscal and monetary policies of the markets in which we operate; 7) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements to be adopted by the Basel Committee on Banking Supervision and U.S. regulators; 8) actual or alleged conduct which could harm our reputation; 9) changes in accounting standards; 10) changes in tax laws or regulations or the interpretation of such laws and regulations; 11) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 12) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 13) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements and judgments; 14) changes to the amount and timing of proposed common stock repurchases; and 15) natural disasters, or adverse weather, public health, and other conditions impacting us and our customers’ operations.  For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, refer to the section entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2009, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission (the “SEC”).  Words such as “appears,” “may,” “believes,” “anticipates,” “expects,” “intends,” “targeted,” “plans,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  We do not undertake an obligation to update forward-looking statements to reflect later events or circumstances.

 

Reclassifications

 

Certain prior period information in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been reclassified to conform to current period classifications.

 

Overview

 

Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii.  The Parent’s principal and only operating subsidiary is Bank of Hawaii (the “Bank”).

 

The Bank, directly and through its subsidiaries, provides a broad range of financial services to businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands.  References to “we,” “our,” “us,” or the “Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes.

 

Our vision is “exceptional people building exceptional value for our customers, our island communities, our shareholders, and each other.”  “Maximizing shareholder value over time” remains our governing objective.

 

In striving to achieve our vision and governing objective, our business plan is balanced between growth and risk management, including the flexibility to adjust, given the uncertainties in the current economy.  We remain concerned about the economy, interest rates, and loan demand.  For the remainder of 2010, we intend to continue to focus on opportunities to further serve our customers, improve productivity, and efficiently manage capital.

 

Hawaii Economy

 

Hawaii’s economy continued to recover during the third quarter of 2010 due to a stronger visitor industry and stable home prices.  From April through July 2010, total visitor arrivals increased 8.4% compared to the same period in 2009 and were widespread among the counties in the state.  Hotel occupancy improved to 74% and visitor spending trended upward.  Overall, state job growth in July 2010 was 1.0% as visitor industry gains were partially offset by declines in other sectors.  Construction continued to be the industry most adversely impacted by the economy with 9.3% fewer jobs in July 2010 compared with the same period in 2009.  The September 2010 statewide unemployment rate remained stable at 6.3% on a seasonally-adjusted basis.  Home prices and sales volume remained fairly strong during the third quarter of 2010.

 

22



Table of Contents

 

Financial Highlights

 

For the third quarter of 2010, net income was $44.1 million, an increase of $7.6 million or 21% compared to the third quarter of 2009.  Diluted earnings per share were $0.91 per share, an increase of $0.15 per share from the third quarter of 2009.  Our higher net income for the third quarter of 2010 was primarily due to the following:

 

·                  The provision for credit losses (the “Provision”) decreased by $14.1 million in the third quarter of 2010, as asset quality measures appear to have stabilized.

 

·                  Net gains from the sale of investment securities increased by $7.9 million in the third quarter of 2010.

 

·                  We recognized net gains of $2.9 million from the sale of our proprietary mutual funds in the third quarter of 2010.

 

·                  We recognized a net gain of $2.6 million from the sale of our equity interest in a railcar leveraged lease in the third quarter of 2010.  This was comprised of a $1.4 million pre-tax loss and a tax gain of $4.0 million.

 

·                  Mortgage banking income increased by $2.2 million in the third quarter of 2010, primarily due to higher refinancing activity resulting from lower interest rates.

 

The impact of these items was partially offset by a $10.3 million decrease in net interest income as a result of the decline in our loan and lease portfolio balances as well as lower yields from our investment securities portfolio.  We also incurred $5.2 million in early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase in the third quarter of 2010.

 

For the first nine months of 2010, net income was $143.4 million, an increase of $39.8 million or 38% compared to the first nine months of 2009.  Diluted earnings per share were $2.96 per share, an increase of $0.80 per share from the first nine months of 2009.  Our higher net income for the first nine months of 2010 was primarily due to the following:

 

·                  The Provision decreased by $31.1 million for the first nine months of 2010, as credit risk in our loan and lease portfolio appears to have moderated.

 

·                  Net gains from the sale of investment securities increased by $42.8 million for the first nine months of 2010.

 

·                  Our Federal Deposit Insurance Corporation (“FDIC”) insurance expense decreased by $4.7 million for the first nine months of 2010, primarily due to the Company’s $5.7 million share of an industry-wide

 

FDIC assessment recorded in the second quarter of 2009.

 

·                  Professional fees decreased by $4.2 million for the first nine months of 2010, primarily due to lower legal and other professional fees.

 

The impact of these items was partially offset by a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009.  Our insurance income also decreased by $10.0 million due to the sale of our retail insurance brokerage and wholesale insurance businesses in 2009.  A more detailed discussion of the changes in the various components of net income is presented in the following sections of MD&A.

 

We also continued to strengthen our balance sheet during the first nine months of 2010, with higher reserves for credit losses, liquidity, and capital.

 

·                  Our Allowance for Loan and Lease Losses (the “Allowance”) was $147.4 million as of September 30, 2010, an increase of $3.7 million or 3% from December 31, 2009.  The ratio of our Allowance to total loans and leases outstanding increased to 2.77% as of September 30, 2010, compared to 2.49% as of December 31, 2009.  Based on the lower levels of net charge-offs of loans and leases for the last several quarters, our current loss projections, as well as economic and risk indicators, we did not increase our Allowance during the third quarter of 2010.

 

·                  We continued to invest excess liquidity primarily in mortgage-backed securities issued by the Government National Mortgage Association, with base durations of less than three years.  The liquidity in our investment securities portfolio allows for the flexibility to redeploy funds as opportunities arise.

 

·                  We continued to increase our capital levels during the first nine months of 2010.  Shareholders’ equity was $1.0 billion as of September 30, 2010, an increase of $143.6 million or 16% from December 31, 2009.  We resumed share repurchases under our share repurchase program in the third quarter of 2010 and purchased 208,500 shares of our common stock at an average cost per share of $46.93 and a total cost of $9.8 million.  Also, the fair value of our available-for-sale investment securities, net of tax, increased by $58.9 million since December 31, 2009.

 

·                  As of September 30, 2010, all of our key regulatory capital ratios were higher compared to our ratios as of December 31, 2009.  Our Tier 1 capital ratio was 17.71% as of September 30, 2010, compared to 14.84% as of December 31, 2009.  Our ratio of tangible common equity to risk-weighted assets was 19.50% as of September 30, 2010, compared to 15.45% as of December 31, 2009.

 

23



Table of Contents

 

Table 1 presents our financial highlights for the three and nine months ended September 30, 2010 and 2009 and as of September 30, 2010, December 31, 2009, and September 30, 2009.

 

Financial Highlights

 

 

 

 

 

Table 1

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

For the Period:

 

 

 

 

 

 

 

 

 

Operating Results

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

98,626

 

$

108,887

 

$

310,207

 

$

308,800

 

Provision for Credit Losses

 

13,359

 

27,500

 

50,009

 

81,077

 

Total Noninterest Income

 

63,125

 

56,800

 

203,781

 

186,997

 

Total Noninterest Expense

 

89,890

 

83,987

 

257,514

 

261,504

 

Net Income

 

44,064

 

36,471

 

143,364

 

103,517

 

Basic Earnings Per Share

 

0.91

 

0.76

 

2.98

 

2.17

 

Diluted Earnings Per Share

 

0.91

 

0.76

 

2.96

 

2.16

 

Dividends Declared Per Share

 

0.45

 

0.45

 

1.35

 

1.35

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

1.37

%

1.21

%

1.52

%

1.19

%

Return on Average Shareholders’ Equity

 

16.64

 

16.44

 

19.28

 

16.24

 

Efficiency Ratio 1

 

55.57

 

50.69

 

50.10

 

52.74

 

Operating Leverage 2

 

(17.29

)

11.77

 

9.47

 

(7.21

)

Net Interest Margin 3

 

3.27

 

3.85

 

3.50

 

3.78

 

Dividend Payout Ratio 4

 

49.45

 

59.21

 

45.30

 

62.21

 

Average Shareholders’ Equity to Average Assets

 

8.21

 

7.34

 

7.90

 

7.34

 

 

 

 

 

 

 

 

 

 

 

Average Balances

 

 

 

 

 

 

 

 

 

Average Loans and Leases

 

$

5,368,177

 

$

6,034,956

 

$

5,524,672

 

$

6,245,117

 

Average Assets

 

12,797,219

 

11,988,995

 

12,594,282

 

11,616,237

 

Average Deposits

 

9,576,936

 

9,131,064

 

9,452,406

 

9,036,247

 

Average Shareholders’ Equity

 

1,050,535

 

880,003

 

994,319

 

852,347

 

 

 

 

 

 

 

 

 

 

 

Market Price Per Share of Common Stock

 

 

 

 

 

 

 

 

 

Closing

 

$

44.92

 

$

41.54

 

$

44.92

 

$

41.54

 

High

 

51.60

 

42.92

 

54.10

 

45.24

 

Low

 

43.77

 

33.65

 

41.60

 

25.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

 

 

2010

 

2009

 

2009

 

As of Period End:

 

 

 

 

 

 

 

 

 

Balance Sheet Totals

 

 

 

 

 

 

 

 

 

Loans and Leases

 

 

 

$

5,312,054

 

$

5,759,785

 

$

5,931,358

 

Total Assets

 

 

 

12,716,603

 

12,414,827

 

12,208,025

 

Total Deposits

 

 

 

9,602,462

 

9,409,676

 

9,250,100

 

Long-Term Debt

 

 

 

40,292

 

90,317

 

91,424

 

Total Shareholders’ Equity

 

 

 

1,039,561

 

895,973

 

902,799

 

 

 

 

 

 

 

 

 

 

 

Asset Quality

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

 

 

$

147,358

 

$

143,658

 

$

142,658

 

Non-Performing Assets 5

 

 

 

45,174

 

48,331

 

48,536

 

 

 

 

 

 

 

 

 

 

 

Financial Ratios

 

 

 

 

 

 

 

 

 

Allowance to Loans and Leases Outstanding

 

 

 

2.77

%

2.49

%

2.41

%

Tier 1 Capital Ratio 6

 

 

 

17.71

 

14.84

 

13.39

 

Total Capital Ratio 7

 

 

 

18.98

 

16.11

 

14.66

 

Leverage Ratio 8

 

 

 

7.15

 

6.76

 

6.65

 

Tangible Common Equity to Total Assets 9

 

 

 

7.93

 

6.96

 

7.11

 

Tangible Common Equity to Risk-Weighted Assets 9

 

 

 

19.50

 

15.45

 

14.56

 

 

 

 

 

 

 

 

 

 

 

Non-Financial Data

 

 

 

 

 

 

 

 

 

Full-Time Equivalent Employees

 

 

 

2,428

 

2,418

 

2,474

 

Branches and Offices

 

 

 

83

 

83

 

85

 

ATMs

 

 

 

492

 

485

 

485

 

 

1

Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).

2

Operating leverage is defined as the percentage change in income before the provision for credit losses and the provision for income taxes. Measures are presented on a linked quarter basis.

3

Net interest margin is defined as net interest income, on a taxable equivalent basis, as a percentage of average earning assets.

4

Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.

5

Excluded from non-performing assets are contractually binding non-accrual loans held for sale of $4.2 million and $7.7 million as of December 31, 2009 and September 30, 2009, respectively.

6

Tier 1 Capital Ratio as of December 31, 2009 and September 30, 2009 was revised from 14.88% and 13.43%, respectively.

7

Total Capital Ratio as of December 31, 2009 and September 30, 2009 was revised from 16.15% and 14.70%, respectively.

8

Leverage Ratio as of December 31, 2009 and September 30, 2009 was revised from 6.78% and 6.67%, respectively.

9

Tangible common equity, a non-GAAP financial measure, is defined by the Company as shareholders’ equity minus goodwill and intangible assets. Intangible assets are included as a component of other assets in the Consolidated Statements of Condition.

 

24



Table of Contents

 

Analysis of Statements of Income

 

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, on a taxable equivalent basis, is presented in Table 3.

 

Average Balances and Interest Rates - Taxable Equivalent Basis

 

Table 2

 

 

 

Three Months Ended

 

Three Months Ended

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2010

 

September 30, 2009

 

 

September 30, 2010

 

September 30, 2009

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(dollars in millions)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$        4.4

 

$      -

 

0.49

%

$        5.1

 

$        -

 

0.28

%

 

$        5.2

 

$         -

 

0.54

%

$        5.0

 

$        -

 

0.49

%

Funds Sold

 

303.4

 

0.2

 

0.27

 

489.7

 

0.3

 

0.26

 

 

450.5

 

0.9

 

0.27

 

743.7

 

1.4

 

0.25

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

-

 

-

 

-

 

-

 

-

 

-

 

 

-

 

-

 

-

 

16.1

 

0.6

 

4.92

 

Available-for-Sale

 

6,158.5

 

41.0

 

2.66

 

4,491.2

 

46.7

 

4.16

 

 

5,646.9

 

130.3

 

3.08

 

3,600.8

 

117.8

 

4.36

 

Held-to-Maturity

 

148.2

 

1.6

 

4.19

 

202.0

 

2.2

 

4.31

 

 

160.7

 

5.1

 

4.24

 

218.9

 

7.1

 

4.33

 

Loans Held for Sale

 

12.7

 

0.1

 

4.59

 

25.2

 

0.2

 

2.95

 

 

10.0

 

0.8

 

10.16

 

23.7

 

0.7

 

3.82

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

750.6

 

7.8

 

4.13

 

884.4

 

9.0

 

4.06

 

 

768.1

 

25.9

 

4.50

 

966.1

 

29.4

 

4.06

 

Commercial Mortgage

 

808.8

 

10.4

 

5.10

 

787.0

 

10.2

 

5.14

 

 

824.2

 

31.4

 

5.10

 

760.7

 

29.7

 

5.23

 

Construction

 

87.6

 

1.1

 

4.95

 

140.9

 

1.4

 

3.81

 

 

98.6

 

3.7

 

5.08

 

146.5

 

4.4

 

4.02

 

Commercial Lease Financing

 

380.1

 

2.6

 

2.79

 

464.0

 

3.0

 

2.56

 

 

396.0

 

9.0

 

3.03

 

459.0

 

10.1

 

2.95

 

Residential Mortgage

 

2,076.0

 

29.5

 

5.68

 

2,273.8

 

33.0

 

5.81

 

 

2,114.9

 

90.3

 

5.69

 

2,356.1

 

104.0

 

5.89

 

Home Equity

 

849.4

 

10.7

 

4.99

 

963.3

 

12.3

 

5.08

 

 

878.0

 

32.9

 

5.01

 

996.9

 

38.0

 

5.09

 

Automobile

 

229.1

 

4.4

 

7.54

 

304.5

 

6.1

 

7.88

 

 

250.2

 

14.3

 

7.64

 

328.6

 

19.5

 

7.93

 

Other 2

 

186.6

 

3.5

 

7.55

 

217.1

 

4.3

 

7.95

 

 

194.7

 

11.2

 

7.65

 

231.3

 

13.7

 

7.90

 

Total Loans and Leases

 

5,368.2

 

70.0

 

5.20

 

6,035.0

 

79.3

 

5.24

 

 

5,524.7

 

218.7

 

5.29

 

6,245.2

 

248.8

 

5.32

 

Other

 

79.8

 

0.3

 

1.39

 

79.7

 

0.3

 

1.39

 

 

79.8

 

0.8

 

1.39

 

79.7

 

0.8

 

1.39

 

Total Earning Assets 3

 

12,075.2

 

113.2

 

3.74

 

11,327.9

 

129.0

 

4.54

 

 

11,877.8

 

356.6

 

4.01

 

10,933.1

 

377.2

 

4.60

 

Cash and Noninterest-Bearing
Deposits

 

227.3

 

 

 

 

 

203.5

 

 

 

 

 

 

226.1

 

 

 

 

 

216.8

 

 

 

 

 

Other Assets

 

494.7

 

 

 

 

 

457.6

 

 

 

 

 

 

490.4

 

 

 

 

 

466.3

 

 

 

 

 

Total Assets

 

$12,797.2

 

 

 

 

 

$11,989.0

 

 

 

 

 

 

$12,594.3

 

 

 

 

 

$11,616.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$  1,770.1

 

0.2

 

0.06

 

$ 1,625.6

 

0.2

 

0.06

 

 

$ 1,697.7

 

0.8

 

0.06

 

$   1,806.4

 

0.9

 

0.06

 

Savings

 

4,460.9

 

3.5

 

0.31

 

4,190.2

 

6.6

 

0.63

 

 

4,457.7

 

12.2

 

0.37

 

3,922.4

 

22.6

 

0.77

 

Time

 

1,075.7

 

3.3

 

1.22

 

1,264.7

 

5.4

 

1.69

 

 

1,101.5

 

10.3

 

1.25

 

1,364.5

 

20.3

 

1.98

 

Total Interest-Bearing Deposits

 

7,306.7

 

7.0

 

0.38

 

7,080.5

 

12.2

 

0.69

 

 

7,256.9

 

23.3

 

0.43

 

7,093.3

 

43.8

 

0.82

 

Short-Term Borrowings

 

26.6

 

-

 

0.15

 

18.1

 

-

 

0.12

 

 

24.3

 

-

 

0.12

 

17.7

 

-

 

0.11

 

Securities Sold Under Agreements
to Repurchase

 

1,706.2

 

6.7

 

1.53

 

1,464.3

 

6.4

 

1.71

 

 

1,675.0

 

19.5

 

1.54

 

1,191.2

 

19.5

 

2.16

 

Long-Term Debt

 

40.3

 

0.7

 

6.68

 

91.4

 

1.2

 

5.26

 

 

68.2

 

2.9

 

5.63

 

103.4

 

4.2

 

5.47

 

Total Interest-Bearing Liabilities

 

9,079.8

 

14.4

 

0.63

 

8,654.3

 

19.8

 

0.91

 

 

9,024.4

 

45.7

 

0.67

 

8,405.6

 

67.5

 

1.07

 

Net Interest Income

 

 

 

$ 98.8

 

 

 

 

 

$ 109.2

 

 

 

 

 

 

$ 310.9

 

 

 

 

 

$ 309.7

 

 

 

Interest Rate Spread

 

 

 

 

 

3.11

%

 

 

 

 

3.63

%

 

 

 

 

 

3.34

%

 

 

 

 

3.53

%

Net Interest Margin

 

 

 

 

 

3.27

%

 

 

 

 

3.85

%

 

 

 

 

 

3.50

%

 

 

 

 

3.78

%

Noninterest-Bearing Demand
Deposits

 

2,270.2

 

 

 

 

 

2,050.5

 

 

 

 

 

 

2,195.5

 

 

 

 

 

1,943.0

 

 

 

 

 

Other Liabilities

 

396.7

 

 

 

 

 

404.2

 

 

 

 

 

 

380.1

 

 

 

 

 

415.3

 

 

 

 

 

Shareholders’ Equity

 

1,050.5

 

 

 

 

 

880.0

 

 

 

 

 

 

994.3

 

 

 

 

 

852.3

 

 

 

 

 

Total Liabilities and
Shareholders’ Equity

 

$12,797.2

 

 

 

 

 

$11,989.0

 

 

 

 

 

 

$12,594.3

 

 

 

 

 

$11,616.2

 

 

 

 

 

 

1

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

2

Comprised of other consumer revolving credit, installment, and consumer lease financing.

3

Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $199,000 and $329,000 for the three months ended September 30, 2010 and 2009, respectively, and $675,000 and $886,000 for the nine months ended September 30, 2010 and 2009, respectively.

 

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Analysis of Change in Net Interest Income - Taxable Equivalent Basis

 

Table 3

 

 

 

Nine Months Ended September 30, 2010

 

 

 

Compared to September 30, 2009

 

(dollars in millions)

 

Volume 1

 

Rate 1

 

Total

 

Change in Interest Income:

 

 

 

 

 

 

 

Funds Sold

 

$

(0.6

)

$

0.1

 

$

(0.5

)

Investment Securities

 

 

 

 

 

 

 

Trading

 

(0.3

)

(0.3

)

(0.6

)

Available-for-Sale

 

53.8

 

(41.3

)

12.5

 

Held-to-Maturity

 

(1.9

)

(0.1

)

(2.0

)

Loans Held for Sale

 

(0.6

)

0.7

 

0.1

 

Loans and Leases

 

 

 

 

 

 

 

Commercial and Industrial

 

(6.4

)

2.9

 

(3.5

)

Commercial Mortgage

 

2.5

 

(0.8

)

1.7

 

Construction

 

(1.7

)

1.0

 

(0.7

)

Commercial Lease Financing

 

(1.4

)

0.3

 

(1.1

)

Residential Mortgage

 

(10.3

)

(3.4

)

(13.7

)

Home Equity

 

(4.5

)

(0.6

)

(5.1

)

Automobile

 

(4.5

)

(0.7

)

(5.2

)

Other 2

 

(2.1

)

(0.4

)

(2.5

)

Total Loans and Leases

 

(28.4

)

(1.7

)

(30.1

)

Total Change in Interest Income

 

22.0

 

(42.6

)

(20.6

)

 

 

 

 

 

 

 

 

Change in Interest Expense:

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

Demand

 

(0.1

)

-

 

(0.1

)

Savings

 

2.7

 

(13.1

)

(10.4

)

Time

 

(3.4

)

(6.6

)

(10.0

)

Total Interest-Bearing Deposits

 

(0.8

)

(19.7

)

(20.5

)

Securities Sold Under Agreements to Repurchase

 

6.6

 

(6.6

)

-

 

Long-Term Debt

 

(1.5

)

0.2

 

(1.3

)

Total Change in Interest Expense

 

4.3

 

(26.1

)

(21.8

)

 

 

 

 

 

 

 

 

Change in Net Interest Income

 

$

17.7

 

$

(16.5

)

$

1.2

 

 

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

2  Comprised of other consumer revolving credit, installment, and consumer lease financing.

 


Net Interest Income

 

Net interest income is affected by both changes in interest rates (rate) and the amount and composition of earning assets and interest-bearing liabilities (volume).  Net interest margin is defined as net interest income, on a taxable equivalent basis, as a percentage of average earning assets.

 

As demand for new lending opportunities remained soft in 2009 and 2010, we invested most of our liquidity into investment securities.

 

Net interest income, on a taxable equivalent basis, decreased by $10.4 million or 10% for the third quarter of 2010 compared to the same period in 2009 primarily due to lower yields on our earning assets.  Net interest income, on a taxable equivalent basis, increased by $1.2 million or less than 1% for the first nine months of 2010 compared to the same period in

2009.  Our net interest margin decreased by 58 basis points in the third quarter of 2010 and by 28 basis points for the first nine months of 2010 compared to the same periods in 2009.

 

Yields on our earning assets decreased by 80 basis points in the third quarter of 2010 and by 59 basis points for the first nine months of 2010 compared to the same periods in 2009, reflective of lower interest rates and the higher level of investment securities.  Yields on our investment securities available-for-sale portfolio decreased by 150 basis points in the third quarter of 2010 and by 128 basis points for the first nine months of 2010 compared to the same periods in 2009.  Partially offsetting the lower yields on our earning assets were lower funding costs primarily due to lower rates paid on our interest-bearing deposits, reflective of the re-pricing of our liabilities at the lower interest rate.  Rates paid on our savings deposits decreased by 32 basis points in the third quarter of 2010 and by 40 basis points for the first nine months of 2010


 

26



Table of Contents

 


compared to the same periods in 2009.  Rates paid on our time deposits decreased by 47 basis points in the third quarter of 2010 and by 73 basis points for the first nine months of 2010 compared to the same periods in 2009.  Also contributing to our lower funding costs were lower rates paid on our securities sold under agreements to repurchase.  Rates paid on our securities sold under agreements to repurchase decreased by 62 basis points for the first nine months of 2010 compared to the same period in 2009 primarily due to lower rates paid on placements with government entities.

 

Average balances of our earning assets increased by $747.3 million or 7% in the third quarter of 2010 and by $944.7 million or 9% for the first nine months of 2010 compared to the same periods in 2009.  Average balances in our investment securities available-for-sale portfolio increased by $1.7 billion in the third quarter of 2010 and by $2.0 billion for the first nine months of 2010 compared to the same periods in 2009, primarily due to the investment of excess liquidity in mortgage-backed securities issued by government agencies.  Partially offsetting the increase in our investment securities available-for-sale portfolio was a decrease in our average loan and lease portfolio balances of $666.8 million or 11% in the third quarter of 2010 and $720.4 million or 12% for the first nine months of 2010 compared to the same periods in 2009.  These decreases were due to continued pay downs in loan and lease balances, along with weak demand for new lending opportunities.  Average balances of our interest-bearing liabilities increased by $425.5 million or 5% in the third quarter of 2010 and by $618.8 million or 7% for the first nine months of 2010 compared to the same periods in 2009, primarily due to an increase in average balances in our interest-bearing deposits and securities sold under agreements to repurchase.  The increase in average balances in our interest-bearing deposits from 2009 was primarily due to growth in our bonus rate savings and business money market savings products.  This was partially offset by a decrease in our average time deposit balances as some customers moved their deposits to more liquid savings products.  The increase in our securities sold under agreements to repurchase from 2009 was primarily due to new placements to accommodate local government entities.  This was partially offset by the prepayment of three repurchase agreements with private institutions in the third quarter of 2010.

 

Provision for Credit Losses

 

The Provision reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance.  We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period.  The Allowance is determined through detailed quarterly analyses of the loan and lease portfolio.  The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of credit quality.  We recorded a Provision of $13.4 million in the third quarter of 2010 and $50.0 million for the first nine months of 2010 compared to a Provision of $27.5 million in the third quarter of 2009 and $81.1 million for the first nine months of 2009.  The lower Provision recorded in the third quarter of 2010 and for the first nine months of 2010 was

reflective of a Hawaii economy which continues to show signs of recovery.  For further discussion on the Allowance, see the “Corporate Risk Profile — Reserve for Credit Losses” section in MD&A.

 

Noninterest Income

 

Noninterest income increased by $6.3 million or 11% in the third quarter of 2010 and by $16.8 million or 9% for the first nine months of 2010 compared to the same periods in 2009.

 

Trust and asset management income decreased by $0.4 million or 3% in the third quarter of 2010 compared to the same period in 2009.  This decrease was primarily due to a $1.1 million decrease in mutual fund management fees due in large part to the sale/liquidation of our proprietary mutual funds in July 2010.  This decrease was partially offset by a combined $0.7 million increase in agency fees and irrevocable trust fees primarily due to higher fee rates for assets previously invested in our proprietary mutual funds.  Trust and asset management income decreased by $0.7 million or 2% for the first nine months of 2010 compared to the same period in 2009.  This decrease was primarily due to a $3.1 million decrease in mutual fund management fees due to the previously noted sale/liquidation of our proprietary mutual funds, combined with an increase in fee waivers and a decrease in the holdings of our money market mutual funds.  This decrease was partially offset by a combined $1.5 million increase in agency fees and irrevocable trust fees primarily due to higher market values and the previously noted higher fee rates for assets previously invested in our proprietary mutual funds.  Also partially offsetting the decrease was a $0.8 million increase in special service fees.  Total trust assets under administration were $9.6 billion as of September 30, 2010, and $9.9 billion as of December 31, 2009 and September 30, 2009.

 

Mortgage banking income increased by $2.2 million or 46% in the third quarter of 2010 compared to the same period in 2009.  This increase was primarily due to higher loan origination volume, the result of higher refinancing activity due to lower interest rates in the third quarter of 2010 compared to the same period in 2009.  Residential mortgage loan originations were $292.8 million in the third quarter of 2010, a $71.8 million or 32% increase compared to the same period in 2009.  Mortgage banking income decreased by $4.8 million or 25% for the first nine months of 2010 compared to the same period in 2009.  This decrease was primarily due to lower loan origination volume for the first nine months of 2010 compared to the same period in 2009.  Residential mortgage loan originations were $587.8 million for the first nine months of 2010, a $431.6 million or 42% decrease compared to the same period in 2009.

 

Service charges on deposit accounts decreased by $1.3 million or 9% in the third quarter of 2010 compared to the same period in 2009.  This decrease was primarily due to a $1.0 million decline in overdraft fees mainly resulting from the Federal Reserve Board’s amendments of Regulation E.  Beginning on July 1, 2010 for new customers and August 15, 2010 for existing customers, these amendments prohibit a


 

27



Table of Contents

 


financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the customer consents in advance (“opts-in”).  Service charges on deposit accounts increased by $1.1 million or 3% for the first nine months of 2010 compared to the same period in 2009.  This increase was primarily due to a $1.9 million increase in overdraft fees resulting from higher transaction volume, partially offset by the recent decrease in transaction fees as a result of the amendments to Regulation E noted above.  Also partially offsetting the increase was a $0.7 million decrease in account analysis fees due to a decline in the number of accounts subscribing to this service.

 

Fees, exchange, and other service charges increased by $0.7 million or 5% in the third quarter of 2010 compared to the same period in 2009.  This increase was primarily due to an increase in debit card income.  In July 2010, the Dodd-Frank Act became law.  Among the provisions is that debit card interchange fees will be regulated by the Federal Reserve Board (the “FRB”) which may result in lower fee income in future periods.  Included in fees, exchange, and other service charges is debit card interchange fees of approximately $5.6 million in the third quarter of 2010 and approximately $16.1 million for the first nine months of 2010.  Fees, exchange, and other service charges increased by $0.6 million or 1% for the first nine months of 2010 compared to the same period in 2009.  This increase was primarily due to a $2.6 million increase in debit card income resulting mainly from account growth, partially offset by a $1.0 million decrease in ATM fees due to lower transaction volume and a $0.6 million decrease in merchant income.

 

Net gains from the sales of investment securities were $7.9 million in the third quarter of 2010 and $42.8 million for the first nine months of 2010.  We primarily sold available-for-sale investment securities to preserve capital levels while managing our duration and extension risk in a volatile interest rate environment.  Net gains from the sales of investment securities in the third quarter of 2009 and for the first nine months of 2009 were not material.

Insurance income decreased by $4.7 million or 64% in the third quarter of 2010 and by $10.0 million or 57% for the first nine months of 2010 compared to the same periods in 2009.  These decreases were largely due to the sales of assets of our retail insurance brokerage operation, Bank of Hawaii Insurance Services, Inc. in the second quarter of 2009, and our wholesale insurance business, BOH Wholesale Insurance Agency, Inc. (formerly known as Triad Insurance Agency, Inc.) in the fourth quarter of 2009.

 

Other noninterest income increased by $1.9 million or 37% in the third quarter of 2010 compared to the same period in 2009.  This increase was primarily due to net gains of $2.9 million resulting from the sale of our proprietary mutual funds in July 2010.  In addition, we recognized income of $0.9 million from a contingent payment received in the third quarter of 2010 related to the previously noted sale of our retail insurance brokerage operation in the second quarter of 2009.  Partially offsetting the increase in other noninterest income was a $1.4 million loss resulting from the sale of our equity interest in a railcar leveraged lease in the third quarter of 2010.  Other noninterest income decreased by $12.2 million or 40% for the first nine months of 2010 compared to the same period in 2009.  This decrease was primarily due to a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009 and a $2.8 million gain resulting from the sale of our equity interest in a cargo aircraft leveraged lease in the second quarter of 2009.

 

Noninterest Expense

 

Noninterest expense increased by $5.9 million or 7% in the third quarter of 2010 and decreased by $4.0 million or 2% for the first nine months of 2010 compared to the same periods in 2009.

 

Table 4 presents the components of salaries and benefits expense for the third quarter of 2010 and 2009 and for the first nine months of 2010 and 2009.


 

 

Salaries and Benefits

 

 

 

 

 

 

Table 4

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

Salaries

 

 

 

$

30,080

 

$

29,988

 

 

 

$

89,165

 

$

90,565

 

Incentive Compensation

 

 

 

3,403

 

5,524

 

 

 

10,296

 

12,223

 

Share-Based Compensation and Cash Grants for the Purchase of
Company Stock

 

 

 

1,045

 

595

 

 

 

5,585

 

1,986

 

Commission Expense

 

 

 

1,836

 

1,523

 

 

 

4,441

 

5,528

 

Retirement and Other Benefits

 

 

 

4,178

 

3,962

 

 

 

12,144

 

12,385

 

Payroll Taxes

 

 

 

2,287

 

2,176

 

 

 

8,051

 

8,020

 

Medical, Dental, and Life Insurance

 

 

 

2,263

 

2,619

 

 

 

7,224

 

6,519

 

Separation Expense

 

 

 

1,748

 

-

 

 

 

1,998

 

369

 

Total Salaries and Benefits

 

 

 

$

46,840

 

$

46,387

 

 

 

$

138,904

 

$

137,595

 

 

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Salaries and benefits expense increased by $0.5 million or 1% in the third quarter of 2010 compared to the same period in 2009.  This increase was primarily due to a $1.7 million increase in separation expense, a $0.5 million increase in share-based compensation and cash grants for the purchase of company stock, and a $0.3 million increase in commission expense.  This increase was partially offset by a $2.1 million decrease in incentive compensation.

 

Salaries and benefits expense increased by $1.3 million or 1% for the first nine months of 2010 compared to the same period in 2009.  This increase was primarily due to a $3.6 million increase in share-based compensation and cash grants for the purchase of company stock and a $1.6 million increase in separation expense.  This increase was partially offset by a $1.9 million decrease in incentive compensation and a $1.4 million decrease in base salaries due to fewer full-time equivalent employees.

 

Professional fees decreased by $1.7 million or 66% in the third quarter of 2010 compared to the same period in 2009.  This decrease was primarily due to a $1.1 million decrease in legal fees and a $0.6 million decrease in other professional services.  Professional fees decreased by $4.2 million or 46% for the first nine months of 2010 compared to the same period in 2009.  This decrease was primarily due to a $2.5 million decrease in legal fees and a $1.4 million decrease in other professional services.

 

FDIC insurance expense decreased by $0.1 million or 4% in the third quarter of 2010 and by $4.7 million or 34% for the first nine months of 2010 compared to the same periods in 2009.  The decrease for the first nine months of 2010 was primarily due to the Company’s $5.7 million share of an industry-wide assessment by the FDIC recorded in the second quarter of 2009.  This decrease was partially offset by the Company utilizing its credits from the Federal Deposit Insurance Reform Act of 2005, which were available to offset

our deposit insurance assessments.  These credits were fully utilized by the end of the first quarter of 2009.

 

Other noninterest expense increased by $7.4 million or 44% in the third quarter of 2010 compared to the same period in 2009.  This increase was primarily due to:

 

·                  $5.2 million in early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase recorded in the third quarter of 2010;

·                  $1.5 million increase in operational losses; and

·                  $0.7 million increase in mileage program travel expense due to an increase in the reimbursable cost per mile.

 

Other noninterest expense increased by $3.7 million or 7% for the first nine months of 2010 compared to the same period in 2009.  This increase was primarily due to:

 

·                  the previously noted $5.2 million in early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase which was recorded in the third quarter of 2010; and

·                  $1.7 million increase in mileage program travel expense due to an increase in the reimbursable cost per mile.

 

This increase was partially offset by:

 

·               $1.5 million increase of our legal reserve recorded in 2009;

·               $0.9 million premium related to the early repayment of our privately placed notes recorded in 2009; and

·               $0.7 million decrease in operational losses.

 

 

 


 

Provision for Income Taxes

 

Table 5 presents our provision for income taxes and effective tax rates for the third quarter of 2010 and 2009 and for the first nine months of 2010 and 2009.

 

Provision for Income Taxes and Effective Tax Rates

 

 

 

 

 

Table 5

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Provision for Income Taxes

 

$

14,438

 

$

17,729

 

 

 

$

63,101

 

$

49,699

 

Effective Tax Rates

 

24.68

%

32.71

%

 

 

30.56

%

32.44

%

 


The lower effective tax rate for the third quarter of 2010 compared to the same period in 2009 was primarily due to the sale of our equity interest in two leveraged leases, which resulted in a $4.4 million credit to the provision for income taxes in the third quarter of 2010.

 

 

The lower effective tax rate for the first nine months of 2010 compared to the same period in 2009 was primarily due to the previously noted leveraged lease transactions.  Also contributing to the lower effective tax rate for the first nine months of 2010 was the tax benefits related to the utilization of capital losses on the sale of a low-income housing investment recorded in the first quarter of 2010.


 

29


 


Table of Contents


Analysis of Statements of Condition

 

Investment Securities

 

The carrying value of our investment securities was $6.4 billion as of September 30, 2010, $5.5 billion as of December 31, 2009, and $5.0 billion as of September 30, 2009.  The increase in the carrying value of our investment securities from December 31, 2009 and September 30, 2009 was primarily due to additional investments made in mortgage-backed securities issued by the Government National Mortgage Association.  These investments in high grade securities with base durations of less than three years allow us to maintain flexibility to redeploy funds as opportunities arise.  Gross unrealized gains in our investment securities portfolio were $150.1 million as of September 30, 2010, $68.5 million as of December 31, 2009, and $116.8 million as of September 30, 2009.

 

 

Gross unrealized losses on our temporarily impaired investment securities were $2.3 million as of September 30, 2010, $21.8 million as of December 31, 2009, and $15.1 million as of September 30, 2009.  As of September 30, 2010, the gross unrealized losses were primarily related to mortgage-backed securities issued by government agencies attributable to changes in interest rates, relative to when the investment securities were purchased.

 

As of September 30, 2010, we did not own any subordinated debt, or preferred or common stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.  As of September 30, 2010, we also did not own any private-label mortgage backed securities.  See Note 2 to the Consolidated Financial Statements for more information.


 

 

Loans and Leases

 

Table 6 presents the composition of our loan and lease portfolio by major categories.

 

Loan and Lease Portfolio Balances

 

 

 

 

 

Table 6

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

$

736,385

 

$

795,167

 

$

845,056

 

Commercial Mortgage

 

817,752

 

841,431

 

777,498

 

Construction

 

88,671

 

108,395

 

137,414

 

Lease Financing

 

353,962

 

412,933

 

458,696

 

Total Commercial

 

1,996,770

 

2,157,926

 

2,218,664

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

2,073,340

 

2,190,677

 

2,246,729

 

Home Equity

 

836,990

 

921,571

 

952,076

 

Automobile

 

221,265

 

283,937

 

299,657

 

Other 1

 

183,689

 

205,674

 

214,232

 

Total Consumer

 

3,315,284

 

3,601,859

 

3,712,694

 

Total Loans and Leases

 

$

5,312,054

 

$

5,759,785

 

$

5,931,358

 

 

1 Comprised of other revolving credit, installment, and lease financing.

 


Total loans and leases as of September 30, 2010 decreased by $447.7 million or 8% from December 31, 2009 and decreased by $619.3 million or 10% from September 30, 2009.

 

Commercial loans and leases as of September 30, 2010 decreased by $161.2 million or 7% from December 31, 2009, with balances decreasing in all commercial lending categories.  Demand for commercial lending opportunities continues to remain soft as a result of current economic conditions.  Commercial loans and leases as of September 30, 2010 decreased by $221.9 million or 10% from September 30, 2009.  Commercial loans and leases decreased in all lending categories, except for commercial mortgage, which was

consistent with the slow economy in Hawaii and our efforts to reduce risk in our positions in leveraged leases.  The increase in our commercial mortgage portfolio from September 30, 2009 was primarily due to our purchase of a $47.5 million portfolio of seasoned loans, secured by real estate in Hawaii, in the fourth quarter of 2009.

 

Consumer loans and leases as of September 30, 2010 decreased by $286.6 million or 8% from December 31, 2009 and decreased by $397.4 million or 11% from September 30, 2009.  Balances in all consumer lending categories decreased over the past 12 months due to reduced customer demand in a slow economy.


 

 

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Table of Contents

 

Table 7 presents the composition of our loan and lease portfolio by geographic area and by major categories.

 

Geographic Distribution of Loan and Lease Portfolio

 

 

 

 

 

Table 7

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Commercial

 

 

 

 

 

 

 

Hawaii

 

 

 

 

 

 

 

Commercial and Industrial

 

$

626,976

 

$

632,415

 

$

649,686

 

Commercial Mortgage

 

755,739

 

769,303

 

701,712

 

Construction

 

88,671

 

108,395

 

133,668

 

Lease Financing

 

44,134

 

39,664

 

43,079

 

U.S. Mainland 1

 

 

 

 

 

 

 

Commercial and Industrial

 

47,358

 

90,345

 

121,495

 

Commercial Mortgage

 

2,172

 

2,570

 

4,050

 

Construction

 

-

 

-

 

3,746

 

Lease Financing

 

275,228

 

335,507

 

378,605

 

Guam

 

 

 

 

 

 

 

Commercial and Industrial

 

53,357

 

62,197

 

62,599

 

Commercial Mortgage

 

57,757

 

66,113

 

68,205

 

Lease Financing

 

15,460

 

18,600

 

17,848

 

Other Pacific Islands

 

 

 

 

 

 

 

Commercial and Industrial

 

5,305

 

7,047

 

7,557

 

Commercial Mortgage

 

29

 

1,330

 

1,409

 

Foreign 2

 

 

 

 

 

 

 

Commercial and Industrial

 

3,389

 

3,163

 

3,719

 

Commercial Mortgage

 

2,055

 

2,115

 

2,122

 

Lease Financing

 

19,140

 

19,162

 

19,164

 

Total Commercial

 

1,996,770

 

2,157,926

 

2,218,664

 

Consumer

 

 

 

 

 

 

 

Hawaii

 

 

 

 

 

 

 

Residential Mortgage

 

1,896,511

 

1,996,713

 

2,046,966

 

Home Equity

 

799,943

 

879,502

 

908,051

 

Automobile

 

166,131

 

208,130

 

216,843

 

Other 3

 

148,070

 

159,010

 

163,092

 

U.S. Mainland 1

 

 

 

 

 

 

 

Home Equity

 

16,032

 

19,659

 

21,093

 

Automobile

 

19,888

 

29,645

 

32,675

 

Guam

 

 

 

 

 

 

 

Residential Mortgage

 

170,020

 

186,374

 

192,078

 

Home Equity

 

18,613

 

19,043

 

19,884

 

Automobile

 

32,769

 

42,482

 

46,095

 

Other 3

 

18,570

 

23,630

 

25,639

 

Other Pacific Islands

 

 

 

 

 

 

 

Residential Mortgage

 

6,809

 

7,590

 

7,685

 

Home Equity

 

2,402

 

2,966

 

3,048

 

Automobile

 

2,477

 

3,680

 

4,044

 

Other 3

 

17,047

 

23,027

 

25,497

 

Foreign 2

 

 

 

 

 

 

 

Home Equity

 

-

 

401

 

-

 

Other 3

 

2

 

7

 

4

 

Total Consumer

 

3,315,284

 

3,601,859

 

3,712,694

 

Total Loans and Leases

 

$

5,312,054

 

$

5,759,785

 

$

5,931,358

 

 

1 For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower’s business operations are conducted.

2 Loans classified as Foreign represent those which are recorded in the Company’s international business units. Lease financing classified as Foreign represent those with air transportation carriers based outside the United States.

3 Comprised of other revolving credit, installment, and lease financing.

 


Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes leveraged lease financing and

participation in Shared National Credits.  Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.


 

31


 


Table of Contents

 

Other Assets

 

Table 8 presents the major components of other assets as of September 30, 2010, December 31, 2009, and September 30, 2009.

 

Other Assets

 

 

 

 

 

Table 8

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Bank-Owned Life Insurance

 

$

207,412

 

$

202,649

 

$

200,986

 

Federal and State Tax Deposits

 

83,400

 

82,500

 

82,500

 

Federal Home Loan Bank and Federal Reserve Bank Stock

 

79,817

 

79,758

 

79,723

 

Prepaid Expenses

 

42,287

 

49,789

 

12,471

 

Low-Income Housing and Other Equity Investments

 

33,404

 

27,814

 

27,146

 

Derivative Financial Instruments

 

42,584

 

20,696

 

25,786

 

Accounts Receivable

 

11,443

 

13,821

 

16,109

 

Other

 

20,837

 

19,895

 

19,916

 

Total Other Assets

 

$

521,184

 

$

496,922

 

$

464,637

 

 


Other assets as of September 30, 2010 increased by $24.3 million or 5% from December 31, 2009.  The increase in other assets from December 31, 2009 was primarily due to a $17.0 million increase in the fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities.  Also contributing to the increase in other assets was a $5.6 million increase in the balance of our low-income housing and other equity investments and a $4.8 million increase in the value of our bank-owned life insurance.  This was partially offset by a $7.5 million decrease in prepaid expenses, primarily due to the amortization of prepaid FDIC assessments.

 

Other assets as of September 30, 2010 increased by $56.5 million or 12% from September 30, 2009.  The increase in other assets from September 30, 2009 was primarily due to a $42.3 million prepayment of our FDIC quarterly risk-based assessments for 2010, 2011, and 2012 which was made in December 2009.  The remaining balance of this prepayment to the FDIC was $34.0 million as of September 30, 2010.  Also contributing to the increase in other assets was a $12.0 million increase in the fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities, as well as a $6.4 million increase in the value of our bank-owned life insurance and a $6.3 million increase in the balance of our low-income housing and other equity

investments.  This was partially offset by a $4.7 million decrease in accounts receivable, primarily due to our sale of BOH Wholesale Insurance Agency, Inc. in the fourth quarter of 2009.

 

As of September 30, 2010, the carrying value of our Federal Home Loan Bank of Seattle (“FHLB”) stock was $61.3 million.  Our investment in the FHLB is a condition of membership and, as such, is required to obtain credit and other services from the FHLB.  As of June 30, 2010, the FHLB met all of its regulatory capital requirements, but remained classified as “undercapitalized” by its primary regulator, the Federal Housing Finance Agency, due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements.  Due to this determination, the FHLB remains unable to repurchase or redeem capital stock or to pay dividends.  The Bank continues to use and has access to the services of the FHLB.  Management considers several factors in evaluating impairment including the commitment of the issuer to perform its obligations and to provide services to the Bank.  Based upon the foregoing, management has not recorded an impairment of the carrying value of our FHLB stock as of September 30, 2010.


 

 

32



Table of Contents

 

Deposits

 

Table 9 presents the composition of our deposits by major customer categories.

 

Deposits

 

 

 

 

 

Table 9

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Consumer

 

$

4,976,317

 

$

4,926,567

 

$

4,776,626

 

Commercial

 

4,053,306

 

4,115,286

 

4,002,619

 

Public and Other

 

572,839

 

367,823

 

470,855

 

Total Deposits

 

$

9,602,462

 

$

9,409,676

 

$

9,250,100

 

 


Deposit balances as of September 30, 2010 increased by $192.8 million or 2% from December 31, 2009.  The increase was primarily due to a $238.3 million increase in our public deposits, a $120.5 million increase in our consumer bonus rate savings products, and a $62.6 million increase in our personal and business non-interest bearing demand accounts.  This was partially offset by a $143.8 million decrease in our consumer and business time deposits, and an $80.2 million decrease in our business money market savings accounts.

 

Deposit balances as of September 30, 2010 increased by $352.4 million or 4% from September 30, 2009.  The increase was primarily due to a $225.7 million increase in our

consumer bonus rate savings products, a $221.0 million increase in our business non-interest bearing demand accounts, a $152.0 million increase in our public deposits, and a $122.9 million increase in our personal and business interest-bearing accounts.  This was partially offset by $259.6 million decrease in our consumer and business time deposits, and a $114.0 million decrease in our business money market savings accounts.

 

The increase in deposit balances over the past 12 months was due, in part, to an increased level of savings by customers during uncertain economic conditions.


 

 

Table 10 presents the composition of our savings deposits.

 

Savings Deposits

 

 

 

 

 

Table 10

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Money Market

 

$

1,880,144

 

$

1,967,554

 

$

2,008,094

 

Regular Savings

 

2,542,951

 

2,438,415

 

2,357,163

 

Total Savings Deposits

 

$

4,423,095

 

$

4,405,969

 

$

4,365,257

 

 

 

Table 11 presents our quarterly average balance of time deposits of $100,000 or more.

 

Average Time Deposits of $100,000 or More

 

 

 

 

Table 11

 

 

Three Months Ended

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Average Time Deposits

 

$

632,329

 

$

670,985

 

$

709,323

 

 


Borrowings and Long-Term Debt

 

Borrowings consisted of funds purchased and short-term borrowings.  Borrowings were $16.9 million as of September 30, 2010, a $1.1 million or 7% increase from December 31, 2009 and from September 30, 2009.  We manage the level of our borrowings to provide adequate sources of liquidity.  Due to our high level of deposits and increased capital levels, we have minimized the level of borrowings as a source of funds.

Long-term debt was $40.3 million as of September 30, 2010, a $50.0 million or 55% decrease from December 31, 2009, and a $51.1 million or 56% decrease from September 30, 2009.  The decrease in long-term debt from December 31, 2009 and September 30, 2009 was primarily due to a $50.0 million FHLB advance that we repaid in the second quarter of 2010.


 

 

33



Table of Contents

 

Securities Sold Under Agreements to Repurchase

 

Table 12 presents the composition of our securities sold under agreements to repurchase as of September 30, 2010, December 31, 2009, and September 30, 2009.

 

Securities Sold Under Agreements to Repurchase

 

 

 

 

 

Table 12

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Government Entities

 

$

1,016,243

 

$

943,717

 

$

849,755

 

Private Institutions

 

600,000

 

675,000

 

675,000

 

Total Securities Sold Under Agreements to Repurchase

 

$

1,616,243

 

$

1,618,717

 

$

1,524,755

 

 


Securities sold under agreements to repurchase as of September 30, 2010 decreased by $2.5 million or less than 1% from December 31, 2009 and increased by $91.5 million or 6% from September 30, 2009.  The increase from September 30, 2009 was primarily due to new placements to accommodate local government entities, partially offset by the prepayment of three repurchase agreements with private institutions totaling $75.0 million.  As of September 30, 2010, the weighted average maturity was 41 days for our securities sold under agreements to repurchase with government entities and 7.0 years for securities sold under agreements to repurchase with private institutions, subject to the private institutions’ right to terminate agreements at earlier specified dates which could decrease the weighted average maturity to 1.3 years.  As of September 30, 2010, $100.0 million of our securities sold under agreements to repurchase placed with private institutions were indexed to the London Inter Bank Offered Rate (“LIBOR”) with the remaining $500.0 million at fixed interest rates.  If the agreements indexed to LIBOR with private institutions are not terminated by specified dates, the interest rates on the agreements become fixed, at rates ranging from 4.25% to 4.50%, for the remaining term of the respective agreements.  As of September 30, 2010, the weighted average interest rate for outstanding agreements with government entities and private institutions was 0.09% and 3.92%, respectively.  We have not entered into agreements in which the securities sold and the related liability was not recorded on the Consolidated Statements of Condition.

Shareholders’ Equity

 

As of September 30, 2010, shareholders’ equity was $1.0 billion, an increase of $143.6 million or 16% from December 31, 2009, and an increase of $136.8 million or 15% from September 30, 2009.  The increase in shareholders’ equity from December 31, 2009 was primarily due to earnings for the first nine months of 2010 of $143.4 million and changes in the fair value of our investment securities available-for-sale, net of tax, of $58.9 million.  This change in the fair value of our investment securities available-for-sale, net of tax, was primarily due to a lower interest rate environment and our larger investment securities portfolio as of September 30, 2010.  This was partially offset by cash dividends of $65.1 million paid in the first nine months of 2010.  We also resumed repurchases under our share repurchase program in the third quarter of 2010 with the repurchase of 208,500 shares of our common stock at an average cost per share of $46.93 and a total cost of $9.8 million.  We plan to continue repurchases of our common stock in the fourth quarter of 2010, but the actual amount and timing of share repurchases will depend on market conditions and various other factors.  Further discussion on our capital structure is included in the “Corporate Risk Profile — Capital Management” section of MD&A.


 

 

34



Table of Contents

 

Analysis of Business Segments

 

Our business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury.

 

Table 13 summarizes net income from our business segments for the three and nine months ended September 30, 2010 and 2009. Additional information about segment performance is presented in Note 7 to the Consolidated Financial Statements.

 

Business Segment Net Income

 

 

 

 

 

 

 

Table 13

 

 

 

 

Three Months Ended  September 30, 

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2010

 

2009

 

Retail Banking

 

$

15,823

 

$

12,921

 

$

38,403

 

$

42,922

 

Commercial Banking

 

14,069

 

11,873

 

38,723

 

36,919

 

Investment Services

 

4,214

 

2,089

 

9,372

 

4,276

 

Total

 

34,106

 

26,883

 

86,498

 

84,117

 

Treasury and Other

 

9,958

 

9,588

 

56,866

 

19,400

 

Consolidated Total

 

$

44,064

 

$

36,471

 

$

143,364

 

$

103,517

 

 


Retail Banking

 

Net income increased by $2.9 million or 22% in the third quarter of 2010 compared to the same period in 2009 primarily due to an increase in noninterest income and a decrease in the Provision.  This was partially offset by a decrease in net interest income.  The $3.0 million increase in noninterest income was primarily due to an increase in mortgage banking income from higher loan origination activity, partially offset by a decrease in overdraft fee income mainly resulting from the FRB’s amendments to Regulation E.  As previously noted, beginning July 1, 2010 for new customers and August 15, 2010 for existing customers, these amendments prohibit a financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the customer consents in advance (“opt-in”).  The $9.3 million decrease in the Provision was primarily due to a reduction in the allocation to the segment’s home equity portfolio.  The $6.7 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio combined with lower loan and lease balances, partially offset by higher average deposit balances.

 

Net income decreased by $4.5 million or 11% for the first nine months of 2010 compared to the same period in 2009 primarily due to a decrease in net interest income, partially offset by a decrease in the Provision.  The $20.2 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio combined with lower loan and lease balances, partially offset by higher average deposit balances.  The $13.4 million decrease in the Provision was primarily due to a lower allocation to the segment’s home equity portfolio.

 

Commercial Banking

 

Net income increased by $2.2 million or 19% in the third quarter of 2010 compared to the same period in 2009

primarily due to decreases in net interest income and noninterest income.  This was partially offset by decreases in the Provision and noninterest expense.  The $5.0 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances.  The $4.9 million decrease in noninterest income was primarily due to lower insurance income of $4.7 million as a result of the sale of assets of our wholesale and retail insurance businesses in 2009.  Also contributing to the decrease in noninterest income was a $1.4 million loss resulting from the sale of our equity interest in a railcar leveraged lease in the third quarter of 2010.  The $4.8 million decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment.  The $1.7 million decrease in noninterest expense was primarily due to the sale of assets of our wholesale and retail insurance businesses in 2009.

 

Net income increased $1.8 million or 5% for the first nine months of 2010 compared to the same period in 2009 primarily due to lower noninterest income and net interest income.  This was partially offset by decreases in the Provision and noninterest expense.  The $23.6 million decrease in noninterest income was primarily due to a $10.0 million gain on the sale of our equity interest in two watercraft leveraged leases and a $2.8 million gain on the sale of our equity interest in an aircraft leveraged lease, both of which occurred in 2009.  Also contributing to the decrease in noninterest income was lower insurance income of $10.0 million as a result of the sale of assets of our wholesale and retail insurance businesses in 2009.  The $8.6 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances.  The $16.4 million decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment.  The $6.2 million decrease in noninterest expense was primarily due to the sale of assets of our wholesale and retail insurance businesses in 2009.


 

 

35


 


Table of Contents

 


Investment Services

 

Net income increased by $2.1 million in the third quarter of 2010 compared to the same period in 2009 primarily due to an increase in noninterest income combined with a decrease in noninterest expense.  The $2.5 million increase in noninterest income was primarily due to the gain on sale of our proprietary mutual funds.  The $1.1 million decrease in noninterest expense was primarily due to lower legal fees and allocated expenses.

 

Net income increased by $5.1 million for the first nine months of 2010 compared to the same period in 2009 primarily due to an increase in noninterest income combined with decreases in noninterest expense and the Provision.  The $2.7 million increase in noninterest income was primarily due to the gain on sale of our proprietary mutual funds.  The $3.9 million decrease in noninterest expense was primarily due to lower legal fees, other professional services, and operational losses. The $1.5 million decrease in the Provision was due to lower net charge-offs of loans in the segment.

 

Treasury

 

Net income increased by $0.4 million in the third quarter of 2010 compared to the same period in 2009 primarily due to an increase in noninterest income and net interest income.   This was partially offset by an increase in noninterest expense. The $5.8 million increase in noninterest income was primarily due to higher gains on the sale of investment securities.  The $1.7 million increase in net interest income was primarily due to lower funding costs of the segment’s deposit balances, partially offset by lower yields on our investment securities portfolio.  The $7.7 million increase in noninterest expense was primarily due to the early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase.

 

Net income increased by $37.5 million for the first nine months of 2010 compared to the same period in 2009 primarily due to an increase in net interest income and noninterest income.  This was partially offset by an increase in noninterest expense.  The $30.3 million increase in net interest income was primarily due to lower funding costs of the segment’s deposit balances and our larger investment securities portfolio.  The $39.1 million increase in noninterest income was primarily due to higher net gains from the sale of investment securities.  The $7.1 million increase in noninterest expense was primarily due to the previously noted early termination costs related to the prepayment of $75.0 million in securities sold under agreements to repurchase.

 

Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury provide a wide-range of support to our other income earning segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

Corporate Risk Profile

 

Credit Risk

 

As of September 30, 2010, our overall credit risk position is reflective of a Hawaii economy that continues to show signs of recovering.

 

The higher risk we have experienced in our loan portfolio appears to have moderated based on current asset quality measures but we remain vigilant in light of an uncertain macroeconomic environment.  As of September 30, 2010, the higher risk segments within our loan portfolio continue to be concentrated in residential home building, residential land loans, and home equity loans.

 

We also continue to have higher risk in our air transportation leasing portfolio.  Relative to our total loan and lease portfolio, domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, consumer demand, and marginal pricing power.  We believe that volatile fuel costs, coupled with a weak economy, could place additional pressure on the financial health of air transportation carriers for the foreseeable future.

 

Since the start of the economic downturn, we have increased monitoring of the loan and lease portfolio to identify higher risk segments.  We have also actively managed exposures with deteriorating asset quality to reduce levels of potential loss exposure and have systematically built our reserves and capital base to address both anticipated and unforeseen issues.  Risk management activities have included making policy changes to tighten underwriting and curtailing activities in higher risk segments.  We have also conducted detailed analysis of portfolio segments and stress tested those segments to ensure that reserve and capital levels are appropriate.  We are also performing frequent loan and lease-level risk monitoring and risk rating which provides opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.

 

 


 

36



Table of Contents

 

Table 14 presents balances in our loan and lease portfolio which demonstrate a higher risk profile.

 

Higher Risk Loans and Leases Outstanding

 

 

 

 

 

Table 14

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Residential Home Building 1

 

$

18,444

 

$

31,067

 

$

38,592

 

Residential Land Loans 2

 

28,149

 

37,873

 

43,128

 

Home Equity Loans 3

 

23,957

 

28,076

 

24,339

 

Air Transportation Leases 4

 

38,611

 

50,426

 

60,996

 

Total

 

$

109,161

 

$

147,442

 

$

167,055

 

 

1   Residential home building loans were $39.7 million as of September 30, 2010, $60.3 million as of December 31, 2009, and $85.4 million as of September 30, 2009.  Higher risk loans within this segment are defined as those loans with a well-defined weakness or weaknesses that jeopardize the orderly repayment of the loan. 

2   We consider all of our residential land loans, which are consumer loans secured by unimproved lots, to be of higher risk due to the volatility in the value of the underlying collateral. 

3   Higher risk home equity loans are defined as those loans originated in 2005 or later, with current monitoring credit scores below 600, and with original loan-to-value (“LTV”) ratios greater than 70%.

4   We consider all of our air transportation leases to be of higher risk due to the weak financial profile of the industry.


As of September 30, 2010, our higher risk loans and leases outstanding decreased by $38.3 million or 26% from December 31, 2009 and by $57.9 million or 35% from September 30, 2009.

 

Higher risk exposure in our residential home building portfolio was $18.4 million as of September 30 2010, of which $3.3 million was included in non-performing assets (“NPAs”).  As of September 30, 2010, $5.8 million of this higher risk exposure relates to residential development projects on Hawaiian islands other than Oahu.  The decrease in this higher risk segment from December 31, 2009 was primarily due to the sale of a $10.0 million exposure to a regional home builder with operations on Oahu in the second quarter of 2010.

 

Our Hawaii residential land loan portfolio was $28.1 million as of September 30, 2010, of which $24.5 million related to properties on Hawaiian islands other than Oahu.  The decrease in this higher risk segment from December 31, 2009 was primarily due to loan pay downs.

The higher risk segment within our Hawaii home equity lending portfolio was $24.0 million or 3% of our total home equity loans outstanding as of September 30, 2010.  The decrease in this higher risk segment from December 31, 2009 was primarily due to loan charge-offs and pay downs.

 

As of September 30, 2010, air transportation leases totaled $38.6 million, of which $27.8 million was comprised of four leveraged leases on aircraft that were originated in the 1990’s and prior.  The decrease in this higher risk segment from December 31, 2009 was primarily due to the sale of our equity interest in an aircraft leveraged lease in the first quarter of 2010.

 

All of these higher risk loans and leases have been considered in our quarterly evaluation of the adequacy of the Allowance.


 

37



Table of Contents

 

Non-Performing Assets

 

Table 15 presents information on NPAs and accruing loans and leases past due 90 days or more.

 

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

 

Table 15

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Non-Performing Assets 1

 

 

 

 

 

 

 

Non-Accrual Loans and Leases

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

$

1,287

 

$

6,646

 

$

9,924

 

Commercial Mortgage

 

5,071

 

1,167

 

1,193

 

Construction

 

3,569

 

8,154

 

15,534

 

Lease Financing

 

117

 

631

 

690

 

Total Commercial

 

10,044

 

16,598

 

27,341

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

26,917

 

19,893

 

16,718

 

Home Equity

 

2,303

 

5,153

 

3,726

 

Other 2

 

-

 

550

 

550

 

Total Consumer

 

29,220

 

25,596

 

20,994

 

Total Non-Accrual Loans and Leases

 

39,264

 

42,194

 

48,335

 

Non-Accrual Loans Held for Sale

 

-

 

3,005

 

-

 

Foreclosed Real Estate

 

5,910

 

3,132

 

201

 

Total Non-Performing Assets

 

$

45,174

 

$

48,331

 

$

48,536

 

 

 

 

 

 

 

 

 

Accruing Loans and Leases Past Due 90 Days or More

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

$

62

 

$

623

 

$

137

 

Construction

 

-

 

-

 

3,005

 

Lease Financing

 

-

 

120

 

-

 

Total Commercial

 

62

 

743

 

3,142

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

8,031

 

8,979

 

5,951

 

Home Equity

 

1,246

 

2,210

 

1,698

 

Automobile

 

348

 

875

 

749

 

Other 2

 

857

 

886

 

739

 

Total Consumer

 

10,482

 

12,950

 

9,137

 

Total Accruing Loans and Leases Past Due 90 Days or More

 

$

10,544

 

$

13,693

 

$

12,279

 

 

 

 

 

 

 

 

 

Total Loans and Leases

 

$

5,312,054

 

$

5,759,785

 

$

5,931,358

 

 

 

 

 

 

 

 

 

Ratio of Non-Accrual Loans and Leases to Total Loans and Leases

 

0.74%

 

0.73%

 

0.81%

 

 

 

 

 

 

 

 

 

Ratio of Non-Performing Assets to Total Loans and Leases,
Loans Held for Sale, and Foreclosed Real Estate

 

0.85%

 

0.84%

 

0.82%

 

 

 

 

 

 

 

 

 

Ratio of Commercial Non-Performing Assets to Total Commercial Loans and
Leases, Commercial Loans Held for Sale, and Commercial Foreclosed Real Estate

 

0.75%

 

1.03%

 

1.23%

 

 

 

 

 

 

 

 

 

Ratio of Consumer Non-Performing Assets to Total Consumer Loans
and Leases and Consumer Foreclosed Real Estate

 

0.91%

 

0.72%

 

0.57%

 

 

 

 

 

 

 

 

 

Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More
to Total Loans and Leases, Loans Held for Sale, and Foreclosed Real Estate

 

1.04%

 

1.07%

 

1.02%

 

 

 

 

 

 

 

 

 

Quarter to Quarter Changes in Non-Performing Assets 1

 

 

 

 

 

 

 

Balance at Beginning of Quarter

 

$

43,241

 

$

48,536

 

$

39,054

 

Additions

 

10,606

 

14,874

 

22,856

 

Reductions

 

 

 

 

 

 

 

Payments

 

(3,432

)

(4,128

)

(6,899

)

Return to Accrual Status

 

(964

)

(1,818

)

(3,373

)

Transfer to Foreclosed Real Estate

 

(2,070

)

 

-

 

-

Sales of Foreclosed Real Estate

 

(700

)

(38

)

(237

)

Charge-offs/Write-downs

 

(1,507

)

(9,095

)

(2,865

)

Total Reductions

 

(8,673

)

(15,079

)

(13,374

)

Balance at End of Quarter

 

$

45,174

 

$

48,331

 

$

48,536

 

 

1 Excluded from non-performing assets were contractually binding non-accrual loans held for sale of $4.2 million and $7.7 million as of December 31, 2009 and September 30, 2009, respectively.

2 Comprised of other revolving credit, installment, and lease financing.

 

38



Table of Contents

 


NPAs consist of non-accrual loans and leases, including those held for sale and foreclosed real estate.  Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they return to accrual status.

 

Total NPAs were $45.2 million as of September 30, 2010, a decrease of $3.2 million from December 31, 2009.  The ratio of our NPAs to total loans and leases, loans held for sale, and foreclosed real estate was 0.85% as of September 30, 2010, compared to 0.84% as of December 31, 2009.  Although NPAs are at lower levels compared to December 31, 2009, NPAs are expected to increase in the near-term due to an often lengthy legal resolution process associated with real estate-secured loans in Hawaii.

 

Commercial and industrial non-accrual loans decreased by $5.4 million from December 31, 2009, primarily due to $4.1 million in net charge-offs and $2.0 million in resolutions.  This was partially offset by the addition of $0.7 million in commercial and industrial loans to non-accrual status.

 

Commercial mortgage non-accrual loans increased by $3.9 million from December 31, 2009 due to the addition of four loans.  Each of these loans were evaluated for impairment and we have taken partial charge-offs on three of these loans totaling $1.3 million.

 

Construction non-accrual loans and construction non-accrual loans held for sale decreased by $7.6 million from December 31, 2009, primarily due to the payoff of two loans totaling $4.3 million and the transfer of a $2.1 million loan to foreclosed real estate in the third quarter of 2010.  As of September 30, 2010, the remaining non-accrual loan exposure in this portfolio is comprised of two construction loans.  We have evaluated each of these loans for impairment and have taken a partial charge-off on one loan and believe that we are well-secured on the other loan.

 

Residential mortgage non-accrual loans increased by $7.0 million from December 31, 2009, primarily due to a slow legal resolution process.  Additions to residential mortgage non-accrual loans declined during the third quarter of 2010 as a result of our continued loss mitigation efforts, including programs to provide comprehensive workout solutions to our customers.  As of September 30, 2010, our residential mortgage non-accrual loans were comprised of 86 loans with a weighted average current LTV ratio of 74.5%.

 

Home equity non-accrual loans decreased by $2.9 million from December 31, 2009, primarily due to increased charge-offs during the first quarter of 2010 due to a change in our charge-off policy requiring a full balance charge-off when the borrower becomes 90 days past due and we do not hold the first mortgage.

 

Foreclosed real estate increased by $2.8 million from December 31, 2009, primarily due to the previously noted transfer of a $2.1 million construction loan to this category.

 

As of September 30, 2010, our foreclosed real estate balance of $5.9 million was primarily comprised of 2 construction properties totaling $4.9 million, with the remaining balance being comprised of residential properties.

 

Impaired loans are defined as loans which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement.  As of September 30, 2010, impaired loans were $41.4 million and were comprised of $31.5 million in loans whose terms had been modified in a troubled debt restructuring (“TDR”) and $9.9 million in non-accrual commercial loans.  Impaired loans were $24.7 million as of December 31, 2009 and $32.4 million as of September 30, 2009.  Impaired loans had a related Allowance of $3.6 million as of September 30, 2010, $2.3 million as of December 31, 2009, and $4.1 million as of September 30, 2009.  We have recorded charge-offs of $12.3 million related to our impaired loans as of September 30, 2010.

 

Table 16 presents information on loans whose terms have been modified in a TDR.

 

Loans Modified in a Troubled Debt Restructuring

Table 16

 

(dollars in thousands)

 

September 30, 2010

 

December 31, 2009

 

September 30, 2009

 

Restructured Loans on
Accrual Status

 

$      23,021

 

$       7,274

 

$       7,578

 

Restructured Loans Included in
Non-Accrual Loans or Accruing
Loans Past Due 90 Days or More

 

8,431

 

1,911

 

825

 

Total Restructured Loans

 

$      31,452

 

$       9,185

 

$       8,403

 

 

As of September 30, 2010, our loans whose terms had been modified in a TDR were primarily in our commercial and industrial, residential mortgage, and consumer automobile loan portfolios.  Loans modified in a TDR were primarily the result of the modification of interest rates to below market rates and extensions of maturity dates.

 

Loans and Leases Past Due 90 Days or More and Still Accruing Interest

 

Loans and leases in this category are 90 days or more past due, as to principal or interest, and still accruing interest because they are well secured and in the process of collection.  Loans and leases past due 90 days or more and still accruing interest were $10.5 million as of September 30, 2010, a $3.1 million decrease from December 31, 2009, and a $1.7 million decrease from September 30, 2009.  The decrease in loans and leases past due 90 days or more and still accruing interest from December 31, 2009 was primarily due to decreased delinquency activity in our residential mortgage loan portfolio and the repayment of a commercial loan.  The decrease in loans and leases past due 90 days or more and still accruing interest from September 30, 2009 was primarily due to the repayment of a $3.0 million construction loan, partially offset by increased delinquency activity in our residential mortgage loan portfolio.


39



 

Reserve for Credit Losses

 

Table 17 presents the activity in our reserve for credit losses.

 

Reserve for Credit Losses

Table 17

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Balance at Beginning of Period

 

$

152,777

 

$

142,835

 

 

 

$

149,077

 

$

128,667

 

Loans and Leases Charged-Off

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

(7,635

)

(4,769

)

 

 

(14,597

)

(23,493

)

Commercial Mortgage

 

-

 

(2,092

)

 

 

(1,303

)

(2,092

)

Construction

 

-

 

(5,845

)

 

 

(2,274

)

(5,845

)

Lease Financing

 

(108

)

(120

)

 

 

(405

)

(4,613

)

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

(1,325

)

(2,430

)

 

 

(8,957

)

(5,071

)

Home Equity

 

(2,871

)

(3,614

)

 

 

(13,193

)

(9,233

)

Automobile

 

(1,530

)

(2,602

)

 

 

(5,309

)

(7,694

)

Other 1

 

(2,826

)

(3,032

)

 

 

(8,178

)

(10,252

)

Total Loans and Leases Charged-Off

 

(16,295

)

(24,504

)

 

 

(54,216

)

(68,293

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

433

 

252

 

 

 

1,658

 

1,022

 

Commercial Mortgage

 

-

 

-

 

 

 

24

 

-

 

Lease Financing

 

28

 

49

 

 

 

40

 

81

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

696

 

448

 

 

 

1,354

 

719

 

Home Equity

 

333

 

67

 

 

 

630

 

239

 

Automobile

 

822

 

849

 

 

 

2,401

 

2,311

 

Other 1

 

624

 

581

 

 

 

1,800

 

2,004

 

Total Recoveries on Loans and Leases Previously Charged-Off

 

2,936

 

2,246

 

 

 

7,907

 

6,376

 

Net Loans and Leases Charged-Off

 

(13,359

)

(22,258

)

 

 

(46,309

)

(61,917

)

Provision for Credit Losses

 

13,359

 

27,500

 

 

 

50,009

 

81,077

 

Provision for Unfunded Commitments

 

-

 

-

 

 

 

-

 

250

 

Balance at End of Period 2

 

$

152,777

 

$

148,077

 

 

 

$

152,777

 

$

148,077

 

 

 

 

 

 

 

 

 

 

 

 

 

Components

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

$

147,358

 

$

142,658

 

 

 

$

147,358

 

$

142,658

 

Reserve for Unfunded Commitments

 

5,419

 

5,419

 

 

 

5,419

 

5,419

 

Total Reserve for Credit Losses

 

$

152,777

 

$

148,077

 

 

 

$

152,777

 

$

148,077

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Loans and Leases Outstanding

 

$

5,368,177

 

$

6,034,956

 

 

 

$

5,524,672

 

$

6,245,117

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of Net Loans and Leases Charged-Off to
Average Loans and Leases Outstanding (annualized)

 

0.99%

 

1.46%

 

 

 

1.12%

 

1.33%

 

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

 

2.77%

 

2.41%

 

 

 

2.77%

 

2.41%

 

 

1  Comprised of other revolving credit, installment, and lease financing.

 

2  Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition.

 

40




We maintain a Reserve that consists of two components, the Allowance and a Reserve for Unfunded Commitments (“Unfunded Reserve”).  The Reserve provides for the risk of credit losses inherent in the loan and lease portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.

 

The level of the Allowance is adjusted by recording an expense or recovery through the Provision.  The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.  The Provision equaled net charge-offs of loans and leases for the third quarter of 2010 and exceeded net charge-offs of loans and leases by $3.7 million for the first nine months of 2010.

 

Net charge-off activity in our commercial lending portfolios decreased by $5.2 million in the third quarter of 2010 and by $18.1 million for the first nine months of 2010 compared to the same periods in 2009.  This decrease was primarily due to several large charge-offs recorded in 2009 related to loan sales in our commercial and industrial portfolio and charge-offs on several construction loans in the third quarter of 2009.  The charge-offs in our commercial lending portfolios for the first nine months of 2010 were primarily due to Hawaii small to middle-market borrowers that have been adversely impacted by the slow economy in Hawaii.

 

Net charge-off activity in our consumer lending portfolios decreased by $3.7 million in the third quarter of 2010 compared to the same period in 2009, primarily due to decreased losses in our home equity and residential mortgage loan portfolios.  Net charge-off activity in our consumer lending portfolios increased by $2.5 million for the first nine months of 2010 compared to the same period in 2009, with $5.6 million of that increase occurring in the first quarter of 2010.  The increase in consumer lending charge-offs in the first quarter of 2010 was primarily due to increased losses in our home equity and residential mortgage portfolios.  The increase in net charge-offs in these portfolios was primarily due to the prolonged effects of a weak economy in Hawaii.

 

As of September 30, 2010, the Allowance was $147.4 million or 2.77% of total loans and leases outstanding.  This represents an increase of 28 basis points from December 31, 2009 and an increase of 36 basis points from September 30, 2009.

 

Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of September 30, 2010, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.

The Reserve for Unfunded Commitments

 

Unfunded Reserve was $5.4 million as of September 30, 2010, unchanged from December 31, 2009 and September 30, 2009.  The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors.

 

Market Risk

 

Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Our market risk management process involves measuring, monitoring, controlling, and managing risks that can significantly impact our statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.  The activities associated with these market risks are categorized into “trading” and “other than trading.”

 

Our trading activities include foreign currency and foreign exchange contracts that expose us to a small degree of foreign currency risk.  These transactions are primarily executed on behalf of customers.  Our other than trading activities include normal business transactions that expose our balance sheet profile to varying degrees of market risk.

 

Our primary market risk exposure is interest rate risk.

 

Interest Rate Risk

 

The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

 

The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans.  Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.

 

Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. government and its agencies, particularly the FRB.  The monetary policies of the FRB influence, to a significant extent, the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.  The nature and impact of future changes in monetary policies are generally not predictable.


 

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Table of Contents

 

In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates.  The ALCO utilizes several techniques to manage interest rate risk, which include:

 

·      adjusting balance sheet mix or altering the interest rate characteristics of assets and liabilities;

·      changing product pricing strategies;

·      modifying characteristics of the investment securities portfolio; or

·      using derivative financial instruments.

 

The use of derivative financial instruments has generally been limited.  This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities, with deposits and other interest-bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO.  Natural and offsetting hedges reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, we may use different techniques to manage interest rate risk.

 

A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model.

 

 

The model is used to estimate and measure the balance sheet sensitivity to changes in interest rates.  These estimates are based on assumptions on the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits.  While such assumptions are inherently uncertain, we believe that these assumptions are reasonable.  As a result, the simulation model attempts to capture the dynamic nature of the balance sheet.

 

We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates.  Table 18 presents, as of September 30, 2010 and 2009, an estimate of the change in net interest income during a quarterly time frame that would result from a gradual change in interest rates, moving in a parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario.  The base case scenario assumes the balance sheet and interest rates are generally unchanged.  Based on the net interest income simulation as of September 30, 2010, net interest income sensitivity to changes in interest rates as of September 30, 2010 was more sensitive to changes in interest rates compared to the sensitivity profile as of September 30, 2009.  As a result of our strategy to shorten the investment portfolio’s duration, net interest income is now asset sensitive.  Economic conditions and government intervention continue to result in interest rates remaining relatively low.

 

 

Net Interest Income Sensitivity Profile

 

 

 

 

 

 

 

Table 18

 

 

 

Impact on Future Quarterly Net Interest Income

(dollars in thousands)

 

September 30, 2010

 

September 30, 2009

 

Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

+200

 

$

1,763

 

1.7

%

$

(723

)

(0.7

)%

+100

 

1,348

 

1.3

 

(206

)

(0.2

)

-100

 

(2,592

)

(2.5

)

(1,135

)

(1.1

)

 

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Table of Contents

 

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated.  These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time.  Conversely, if the yield curve should steepen, net interest income may increase.  We also use the Market Value of Equity (“MVE”) sensitivity analysis to estimate the net present value change in our net assets (i.e., assets, liabilities, and off-balance sheet instruments) from changes in interest rates.  Our MVE was approximately $1.9 billion as of September 30, 2010 and approximately $2.0 billion as of September 30, 2009.

 

Table 19 presents, as of September 30, 2010 and 2009, an estimate of the change in the MVE that would occur from an instantaneous 100 and 200 basis point increase or a 100 basis point decrease in interest rates, moving in a parallel fashion over the entire yield curve.  The MVE sensitivity generally increased as of September 30, 2010 compared to September 30, 2009, as a result of changes in the composition of the balance sheet, particularly from a decrease in the investment portfolio duration.  Higher interest rates could increase the value of our deposits, which will be partially offset by the reduced value of our investment portfolio.  A further decline in interest rates effectively creates a 0% interest rate environment which could reduce the estimated value of our deposits and increase runoff in our mortgage assets.

 

Market Value of Equity Sensitivity Profile

 

 

 

 

 

 

 

Table 19 

 

 

 

Change in Market Value of Equity

(dollars in thousands)

 

September 30, 2010

 

September 30, 2009

 

Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

+200

 

$

29,639

 

1.5

%

$

(45,976

)

(2.3

)%

+100

 

43,256

 

2.2

 

13,149

 

0.7

 

-100

 

(137,105

)

(7.1

)

(30,625

)

(1.6

)

 

Further enhancing the MVE sensitivity analysis is:

 

·                  value-at-risk metrics;

·                  key rate analysis;

·                  duration of equity analysis; and

·                  exposure to basis risk and non-parallel yield curve shifts.

 

There are inherent limitations to these measures; however, used along with the MVE sensitivity analysis, we obtain better overall insight for managing our exposures to changes in interest rates.  Based on the additional analyses, we estimate that our greatest exposure is in scenarios where interest rates fall significantly from current levels.

 

Liquidity Management

 

Liquidity is managed in an effort to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancings, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity.  Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

 

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities.  The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including investment securities available-for-sale.  Assets generate long-term liquidity through cash flows from investment securities and loans.  With respect to liabilities, short-term liquidity is generated from securities sold under agreements to repurchase and other short-term funding sources such as federal funds while long-term liquidity is generated through growth in deposits and long-term debt.

 

We continued to maintain a strong liquidity position during the third quarter of 2010.  Total deposits were $9.6 billion as of September 30, 2010, a $192.8 million or 2% increase from December 31, 2009, and a $352.4 million or 4% increase from September 30, 2009.  During 2010, we continued to invest excess liquidity primarily in mortgage-backed securities issued by the Government National Mortgage Association.  These investments in high grade securities with base durations of less than three years allow us to maintain flexibility to redeploy funds as opportunities arise.

 

 

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Capital Management

 

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation to ensure capital adequacy.  As of September 30, 2010, the Company and the Bank were “well capitalized” under this regulatory framework.  There have been no conditions or events since September 30, 2010 that management believes have changed either the Company’s or the Bank’s capital classifications.

 

In response to a slowing economy and economic uncertainty, we began in the second half of 2008 to increase capital.  As of September 30, 2010, shareholders’ equity was $1.0 billion, an increase of $143.6 million or 16% from December 31, 2009, and an increase of $136.8 million or 15% from September 30, 2009.  As of September 30, 2010, all of our key regulatory capital ratios were higher, compared to our ratios as of December 31, 2009 and September 30, 2009.  As of September 30, 2010, our Tier 1 capital ratio was 17.71%, our total capital ratio was 18.98%, our leverage ratio was 7.15%, and our ratio of tangible common equity to risk-weighted assets was 19.50%.

 

We resumed repurchases under our share repurchase program in the third quarter of 2010 and purchased 208,500 shares of our common stock at an average cost per share of $46.93 and a total cost of $9.8 million.  From the beginning of our share repurchase program in July 2001 through September 30, 2010, we repurchased a total of 45.8 million shares of common stock and returned $1.6 billion to our shareholders at an average cost of $35.50 per share.  As of September 30, 2010, remaining buyback authority under the Parent’s share repurchase program was $75.6 million of the total $1.70 billion repurchase amount authorized by the Parent’s Board of Directors.

 

In October 2010, the Parent’s Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parent’s outstanding shares.  The dividend will be payable on December 14, 2010 to shareholders of record at the close of business on November 30, 2010.

 

Regulatory Initiatives Related to Capital and Liquidity

 

The Basel Committee on Banking Supervision (the “Basel Committee”) released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”).  In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals.

 

In September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods providing:  (i) the minimum requirement for the Tier 1 common equity ratio will be increased from the current 2.0% level to 4.5% (to be phased in by January 1, 2015); (ii) the minimum requirement for the Tier 1 capital ratio will be increased from the current 4.0% to 6.0% (to be phased in by January 1, 2015); (iii) an additional 2.5% of Tier 1 common equity to total risk-weighted assets (to be phased in between January 1, 2016 and January 1, 2019; and (iv) a minimum leverage ratio of 3.0% (to be tested starting January 1, 2013).  The proposals also narrow the definition of capital, excluding instruments that no longer qualify as Tier 1 common equity as of January 1, 2013, and phasing out other instruments over several years.  It is unclear how U.S. banking regulators will define “well-capitalized” in their implementation of Basel III.

 

The liquidity proposals under Basel III include:  (i) a liquidity coverage ratio (to become effective January 1, 2015); (ii) a net stable funding ratio (to become effective January 1, 2018); and (iii) a set of monitoring tools for banks to report minimum types of information to their regulatory supervisors.

 

Many of the details of the new framework related to minimum capital levels and minimum liquidity requirements in the Basel Committee’s proposals will remain uncertain until the final release is issued later this year.  Implementation of the final provisions of Basel III will require implementing regulations and guidelines by U.S. banking regulators.  Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to the future liquidity and capital requirements for financial institutions.  Therefore, we are not able to predict at this time the content of liquidity and capital guidelines or regulations that may be adopted by regulatory agencies or the impact that any changes in regulation may have on the Company and the Bank.

 

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Table of Contents

 

Table 20 presents our regulatory capital and ratios as of September 30, 2010, December 31, 2009, and September 30, 2009.

 

Regulatory Capital and Ratios

 

 

 

 

 

Table 20

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

2009

 

Regulatory Capital

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

$

1,039,561

 

$

895,973

 

$

902,799

 

Less:

Goodwill

 

31,517

 

31,517

 

34,959

 

 

Postretirement Benefit Liability Adjustments

 

5,396

 

5,644

 

6,748

 

 

Net Unrealized Gains on Investment Securities

 

85,176

 

26,290

 

60,845

 

 

Other

 

2,234

 

2,398

 

2,346

 

Tier 1 Capital

 

915,238

 

830,124

 

797,901

 

Allowable Reserve for Credit Losses

 

65,687

 

70,909

 

75,393

 

Total Regulatory Capital

 

$

980,925

 

$

901,033

 

$

873,294

 

 

 

 

 

 

 

 

 

Risk-Weighted Assets

 

$

5,167,838

 

$

5,594,532

 

$

5,958,763

 

 

 

 

 

 

 

 

 

Key Regulatory Capital Ratios

 

 

 

 

 

 

 

 

Tier 1 Capital Ratio 1

 

17.71

%

14.84

%

13.39

%

Total Capital Ratio 2

 

18.98

 

16.11

 

14.66

 

Leverage Ratio 3

 

7.15

 

6.76

 

6.65

 

 

1  Tier 1 Capital Ratio as of December 31, 2009 and September 30, 2009 was revised from 14.88% and 13.43%, respectively.

2  Total Capital Ratio as of December 31, 2009 and September 30, 2009 was revised from 16.15% and 14.70%, respectively.

3  Leverage Ratios as of December 31, 2009 and September 30, 2009 was revised from 6.78% and 6.67%, respectively.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

Off-Balance Sheet Arrangements

 

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships. Such entities are often referred to as Variable Interest Entities (“VIEs”). We routinely sell residential mortgage loans to investors, with servicing rights retained. Our residential mortgage loans sold to third parties are generally sold on a non-recourse basis.

 

Contractual Obligations

 

Our contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Item 3.                                   Quantitative and Qualitative Disclosures About Market Risk

 

See the “Market Risk” section of MD&A.

 

Item 4.                                   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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2010.  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 September 30, 2010.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

Part II - Other Information

 

Item 1A.                          Risk Factors

 

The impact from the implementation of recent legislative and regulatory initiatives, the Dodd-Frank Act in particular, has not been fully realized.  Some of the provisions that may adversely impact the Company’s results of operations, financial condition, or liquidity include a mandate to limit debit card interchange fees, amendments to the Electronic Fund Transfer Act regarding overdraft fees, and the Credit Card Accountability, Responsibility, and Disclosure Act, involving interest rates and fees on card accounts.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection, which will have the authority to administer and enforce the new federal regulatory framework of consumer financial regulation.  These provisions may limit the type of products we offer, the methods of offering them, and prices at which they are offered.  They may also increase the cost of offering these products.  The future impact of the many provisions in the Dodd-Frank Act and other legislative and regulatory initiatives on the Company’s business and results of operations will depend upon regulatory interpretation and rulemaking that will be undertaken over the next several months and years.

 

In October 2010, the Department of Justice and credit card companies, Visa and Mastercard, settled an investigation related to various “processing fees” that the two electronic payment networks charge to merchants, depending on the type of card a customer uses.  The proposed settlement will allow merchants to offer more options, including discounts to customers who pay using the least-expensive credit and debit cards.  The impact of this settlement on the Company’s business and result of operations is unpredictable at this time, as it too will depend on future actions by regulators, merchants, and consumers.

 

In September 2010, the Basel Committee on Banking Supervision announced proposed new requirements related to capital and liquidity.  For further discussion on the proposed new requirements, see the “Regulatory Initiatives Related to Capital and Liquidity” section in MD&A.

 

Other than the additional risk factors noted above, there were no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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

 

The Parent’s repurchases of equity securities for the third quarter of 2010 were as follows:

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

Total Number of Shares

 

Approximate Dollar Value

 

 

 

 

 

 

 

Purchased as Part of

 

of Shares that May Yet Be

 

 

 

Total Number of

 

Average Price

 

Publicly Announced Plans

 

Purchased Under the

 

Period

 

Shares Purchased 1

 

Paid Per Share

 

or Programs

 

Plans or Programs 2

 

July 1 - 31, 2010

 

13,589

 

$

49.94

 

13,500

 

$

84,682,010

 

August 1 - 31, 2010

 

97,726

 

47.74

 

97,500

 

80,027,911

 

September 1 - 30, 2010

 

97,663

 

45.72

 

97,500

 

75,570,381

 

Total

 

208,978

 

$

46.94

 

208,500

 

 

 

 

1  The months of July, August, and September 2010 included 89, 226, and 163 shares purchased for a Rabbi Trust and income tax withholdings related to stock option exercises.  These shares were not purchased as part of the publicly announced program.  The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.

2  The Parent repurchased shares during the third quarter of 2010 pursuant to its ongoing share repurchase program that was first announced in July 2001.  As of  September 30, 2010, $75.6 million remained of the total $1.70 billion total repurchase amount authorized by the Parent’s Board of Directors under the share repurchase program.  The program has no set expiration or termination date.

 

Item 6.                                   Exhibits

 

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.

 

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Table of Contents

 

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:    October 25, 2010

 

Bank of Hawaii Corporation

 

 

 

 

 

 

 

By:

/s/ Peter S. Ho

 

 

Peter S. Ho

 

 

Chairman of the Board,

 

 

Chief Executive Officer, and

 

 

President

 

 

 

 

 

 

 

By:

/s/ Kent T. Lucien

 

 

Kent T. Lucien

 

 

Chief Financial Officer

 

47



Table of Contents

 

Exhibit Index

 

Exhibit Number

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

Interactive Data File

 


Exhibit 31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

Under the Securities Exchange Act of 1934

 

I, Peter S. Ho, 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: October 25, 2010

/s/ Peter S. Ho

 

Peter S. Ho

 

Chairman of the Board,

 

Chief Executive Officer, and

 

President

 


Exhibit 31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

Under the Securities Exchange Act of 1934

 

I, Kent T. Lucien, 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: October 25, 2010

/s/ Kent T. Lucien

 

Kent T. Lucien

 

Chief Financial Officer

 


Exhibit 32

 

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, 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 for the quarterly period ended September 30, 2010 (the “Periodic Report”):

 

·                  fully complies with the requirements of Section 13(a) or 15(d), as applicable, 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 Bank of Hawaii Corporation.

 

Date: October 25, 2010

/s/ Peter S. Ho

 

Peter S. Ho

 

Chairman of the Board,

 

Chief Executive Officer, and

 

President

 

 

 

 

 

/s/ Kent T. Lucien

 

Kent T. Lucien

 

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.