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 March 31, 2009

 

 

 

 

 

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   o     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

 

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

 

As of April 17, 2009, there were 47,811,853 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 months ended
March 31, 2009 and 2008

2

 

 

 

 

Consolidated Statements of Condition – March 31, 2009,
December 31, 2008, and March 31, 2008

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Three months ended
March 31, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Cash Flows – Three months ended
March 31, 2009 and 2008

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 6.

Exhibits

42

 

 

 

Signatures

43

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands, except per share amounts)

 

2009

 

2008

 

Interest Income

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

86,592

 

$

104,413

 

Income on Investment Securities

 

 

 

 

 

Trading

 

594

 

1,160

 

Available-for-Sale

 

32,301

 

34,251

 

Held-to-Maturity

 

2,567

 

3,239

 

Deposits

 

10

 

195

 

Funds Sold

 

577

 

992

 

Other

 

276

 

426

 

Total Interest Income

 

122,917

 

144,676

 

Interest Expense

 

 

 

 

 

Deposits

 

17,025

 

27,465

 

Securities Sold Under Agreements to Repurchase

 

6,652

 

10,617

 

Funds Purchased

 

5

 

633

 

Short-Term Borrowings

 

 

34

 

Long-Term Debt

 

2,173

 

3,747

 

Total Interest Expense

 

25,855

 

42,496

 

Net Interest Income

 

97,062

 

102,180

 

Provision for Credit Losses

 

24,887

 

14,427

 

Net Interest Income After Provision for Credit Losses

 

72,175

 

87,753

 

Noninterest Income

 

 

 

 

 

Trust and Asset Management

 

11,632

 

15,086

 

Mortgage Banking

 

8,678

 

4,297

 

Service Charges on Deposit Accounts

 

13,386

 

12,083

 

Fees, Exchange, and Other Service Charges

 

14,976

 

15,391

 

Investment Securities Gains, Net

 

56

 

130

 

Insurance

 

5,641

 

7,130

 

Other

 

15,996

 

32,008

 

Total Noninterest Income

 

70,365

 

86,125

 

Noninterest Expense

 

 

 

 

 

Salaries and Benefits

 

47,028

 

55,473

 

Net Occupancy

 

10,328

 

10,443

 

Net Equipment

 

4,316

 

4,321

 

Professional Fees

 

2,549

 

2,613

 

Other

 

23,712

 

20,582

 

Total Noninterest Expense

 

87,933

 

93,432

 

Income Before Provision for Income Taxes

 

54,607

 

80,446

 

Provision for Income Taxes

 

18,567

 

23,231

 

Net Income

 

$

36,040

 

$

57,215

 

Basic Earnings Per Share

 

$

0.76

 

$

1.19

 

Diluted Earnings Per Share

 

$

0.75

 

$

1.18

 

Dividends Declared Per Share

 

$

0.45

 

$

0.44

 

Basic Weighted Average Shares

 

47,566,005

 

47,965,722

 

Diluted Weighted Average Shares

 

47,802,249

 

48,628,427

 

 

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)

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

5,031

 

$

5,094

 

$

55,916

 

Funds Sold

 

895,595

 

405,789

 

240,000

 

Investment Securities

 

 

 

 

 

 

 

Trading

 

 

91,500

 

99,966

 

Available-for-Sale

 

3,106,608

 

2,519,239

 

2,672,286

 

Held-to-Maturity (Fair Value of $233,633; $242,175; and $277,536)

 

228,177

 

239,635

 

277,256

 

Loans Held for Sale

 

24,121

 

21,540

 

13,096

 

Loans and Leases

 

6,338,726

 

6,530,233

 

6,579,337

 

Allowance for Loan and Lease Losses

 

(134,416

)

(123,498

)

(99,998

)

Net Loans and Leases

 

6,204,310

 

6,406,735

 

6,479,339

 

Total Earning Assets

 

10,463,842

 

9,689,532

 

9,837,859

 

Cash and Noninterest-Bearing Deposits

 

299,393

 

385,599

 

314,863

 

Premises and Equipment

 

114,536

 

116,120

 

116,683

 

Customers’ Acceptances

 

822

 

1,308

 

992

 

Accrued Interest Receivable

 

36,928

 

39,905

 

46,316

 

Foreclosed Real Estate

 

346

 

428

 

294

 

Mortgage Servicing Rights

 

23,528

 

21,057

 

27,149

 

Goodwill

 

34,959

 

34,959

 

34,959

 

Other Assets

 

473,774

 

474,567

 

443,686

 

Total Assets

 

$

11,448,128

 

$

10,763,475

 

$

10,822,801

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

1,970,041

 

$

1,754,724

 

$

2,000,226

 

Interest-Bearing Demand

 

1,926,576

 

1,854,611

 

1,579,943

 

Savings

 

3,905,709

 

3,104,863

 

2,798,635

 

Time

 

1,410,465

 

1,577,900

 

1,724,051

 

Total Deposits

 

9,212,791

 

8,292,098

 

8,102,855

 

Funds Purchased

 

9,665

 

15,734

 

23,800

 

Short-Term Borrowings

 

10,000

 

4,900

 

9,726

 

Securities Sold Under Agreements to Repurchase

 

844,283

 

1,028,835

 

1,231,962

 

Long-Term Debt (includes $119,275 and $128,932 carried at fair value
as of December 31, 2008 and March 31, 2008, respectively)

 

59,003

 

203,285

 

239,389

 

Banker’s Acceptances

 

822

 

1,308

 

992

 

Retirement Benefits Payable

 

54,450

 

54,776

 

29,755

 

Accrued Interest Payable

 

10,010

 

13,837

 

18,322

 

Taxes Payable and Deferred Taxes

 

258,505

 

229,699

 

300,188

 

Other Liabilities

 

154,664

 

128,299

 

99,065

 

Total Liabilities

 

10,614,193

 

9,972,771

 

10,056,054

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding:
March 31, 2009 - 57,019,595 / 47,803,544; December 31, 2008 - 57,019,887 / 47,753,371;
and March 31, 2008 - 56,995,352 / 47,990,432)

 

569

 

568

 

568

 

Capital Surplus

 

491,352

 

492,515

 

487,139

 

Accumulated Other Comprehensive Income (Loss)

 

(1,319

)

(28,888

)

5,553

 

Retained Earnings

 

802,195

 

787,924

 

720,540

 

Treasury Stock, at Cost (Shares: March 31, 2009 - 9,216,051;
December 31, 2008 - 9,266,516; and March 31, 2008 - 9,004,920)

 

(458,862

)

(461,415

)

(447,053

)

Total Shareholders’ Equity

 

833,935

 

790,704

 

766,747

 

Total Liabilities and Shareholders’ Equity

 

$

11,448,128

 

$

10,763,475

 

$

10,822,801

 

 

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, 2008

 

$

790,704

 

$

568

 

$

492,515

 

$

(28,888

)

$

787,924

 

$

(461,415

)

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

36,040

 

 

 

 

36,040

 

 

$

36,040

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on Investment
Securities Available-for-Sale

 

27,243

 

 

 

27,243

 

 

 

27,243

 

Amortization of Net Loss Related to Pension and
Postretirement Benefit Plans

 

326

 

 

 

326

 

 

 

326

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

63,609

 

Share-Based Compensation

 

235

 

 

235

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

(442

)

 

(442

)

 

 

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans (71,244 shares)

 

2,069

 

1

 

(956

)

 

(258

)

3,282

 

 

 

Common Stock Repurchased (21,071 shares)

 

(729

)

 

 

 

 

(729

)

 

 

Cash Dividends Paid

 

(21,511

)

 

 

 

(21,511

)

 

 

 

Balance as of March 31, 2009

 

$

833,935

 

$

569

 

$

491,352

 

$

(1,319

)

$

802,195

 

$

(458,862

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2007

 

$

750,255

 

$

567

 

$

484,790

 

$

(5,091

)

$

688,638

 

$

(418,649

)

 

 

Cumulative-Effect Adjustment of a Change in
Accounting Principle, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”

 

(2,736

)

 

 

 

(2,736

)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

57,215

 

 

 

 

57,215

 

 

$

57,215

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on Investment
Securities Available-for-Sale

 

10,595

 

 

 

10,595

 

 

 

10,595

 

Amortization of Net Loss Related to Pension and
Postretirement Benefit Plans

 

49

 

 

 

49

 

 

 

49

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

67,859

 

Share-Based Compensation

 

1,751

 

 

1,751

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

583

 

 

583

 

 

 

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans (95,360 shares)

 

3,182

 

1

 

15

 

 

(1,378

)

4,544

 

 

 

Common Stock Repurchased (686,313 shares)

 

(32,948

)

 

 

 

 

(32,948

)

 

 

Cash Dividends Paid

 

(21,199

)

 

 

 

(21,199

)

 

 

 

Balance as of March 31, 2008

 

$

766,747

 

$

568

 

$

487,139

 

$

5,553

 

$

720,540

 

$

(447,053

)

 

 

 

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)

 

 

Three Months Ended

 

 

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net Income

 

$

36,040

 

$

57,215

 

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

 

 

 

 

 

Provision for Credit Losses

 

24,887

 

14,427

 

Depreciation and Amortization

 

3,399

 

3,504

 

Amortization of Deferred Loan and Lease Fees

 

(625

)

(448

)

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

 

1,211

 

578

 

Share-Based Compensation

 

235

 

1,751

 

Benefit Plan Contributions

 

(421

)

(515

)

Deferred Income Taxes

 

(3,811

)

(17,379

)

Net Gains on Investment Securities

 

(56

)

(130

)

Net Change in Trading Securities

 

91,500

 

(32,680

)

Proceeds from Sales of Loans Held for Sale

 

392,876

 

144,837

 

Originations of Loans Held for Sale

 

(395,457

)

(145,592

)

Tax Benefits from Share-Based Compensation

 

(17

)

(669

)

Net Change in Other Assets and Other Liabilities

 

41,129

 

21,073

 

Net Cash Provided by Operating Activities

 

190,890

 

45,972

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

243,329

 

252,970

 

Proceeds from Sales

 

21,791

 

125,000

 

Purchases

 

(810,966

)

(470,716

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

11,347

 

15,207

 

Net Change in Loans and Leases

 

177,913

 

(3,456

)

Premises and Equipment, Net

 

(1,814

)

(3,010

)

Net Cash Used in Investing Activities

 

(358,400

)

(84,005

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

920,693

 

160,483

 

Net Change in Short-Term Borrowings

 

(185,521

)

150,321

 

Repayments of Long-Term Debt

 

(143,971

)

 

Tax Benefits from Share-Based Compensation

 

17

 

669

 

Proceeds from Issuance of Common Stock

 

2,069

 

3,214

 

Repurchase of Common Stock

 

(729

)

(32,948

)

Cash Dividends Paid

 

(21,511

)

(21,199

)

Net Cash Provided by Financing Activities

 

571,047

 

260,540

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

403,537

 

222,507

 

Cash and Cash Equivalents at Beginning of Period

 

796,482

 

388,272

 

Cash and Cash Equivalents at End of Period

 

$

1,200,019

 

$

610,779

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

Cash Paid for:

 

 

 

 

 

Interest

 

$

29,682

 

$

44,650

 

Income Taxes

 

1,390

 

2,289

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

Transfers from Loans to Foreclosed Real Estate

 

 

110

 

 

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 and the Pacific Islands (Guam, nearby islands, and American Samoa).  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.

 

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.

 

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, 2008.  Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 

Non-Marketable Equity Securities

 

The Company is required to hold non-marketable equity securities, comprised of Federal Home Loan Bank of Seattle (“FHLB”) and Federal Reserve Bank stock, as a condition of membership.  These securities are accounted for at cost which equals par or redemption value.  Ownership is restricted and there is no market for these securities.  These securities are redeemable at par by the issuing government supported institutions.  These securities, recorded as a component of other assets, are periodically evaluated for impairment, considering the ultimate recoverability of the par value.  The primary factor supporting the carrying value is the ability of the issuer to redeem the securities at par.

 

Fair Value Measurements

 

On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for the Company’s financial assets and financial liabilities.  In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” the Company deferred the effective date of SFAS No. 157 for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009.  The adoption of the fair value measurement provisions of SFAS No. 157 for the Company’s nonfinancial assets and nonfinancial liabilities had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.

 

6



Table of Contents

 

Derivative Financial Instruments

 

On January 1, 2009, the Company adopted the provisions of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.”  SFAS No. 161 amended the disclosure requirements for derivative financial instruments and hedging activities.  Expanded qualitative disclosures required under SFAS No. 161 include: (1) how and why an entity uses derivative financial instruments; (2) how derivative financial instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related interpretations; and (3) how derivative financial instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also requires several added quantitative disclosures in financial statements.  As SFAS No. 161 amended only the disclosure requirements for derivative financial instruments and hedged items, the adoption had no impact on the Company’s statements of income and condition.  See Note 5 for the disclosures required under the provisions of SFAS No. 161.

 

Future Application of Accounting Pronouncements

 

In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

 

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly.  FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly.  The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009.  Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s statements of income and condition.

 

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements.  The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009.  As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s statements of income and condition.

 

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009.  Management is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Company’s statements of income and condition.

 

Note 2.  Lease Transactions

 

In March 2009, the Company sold its equity interest in two watercraft leveraged leases resulting in a $10.0 million pre-tax gain for the Company.  This pre-tax gain was recorded as a component of other noninterest income in the statement of income.  After-tax gains from these transactions were $6.2 million.

 

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Table of Contents

 

Note 3.  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.

 

Selected financial information for each business segment is presented below as of and for the three months ended March 31, 2009 and 2008.

 

Business Segments Selected Financial Information (Unaudited)

 

 

Retail

 

Commercial

 

Investment

 

Treasury

 

Consolidated

 

(dollars in thousands)

 

Banking

 

Banking

 

Services

 

and Other

 

Total

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

54,081

 

$

40,906

 

$

3,992

 

$

(1,917

)

$

97,062

 

Provision for Credit Losses

 

14,516

 

9,809

 

804

 

(242

)

24,887

 

Net Interest Income (Loss) After
Provision for Credit Losses

 

39,565

 

31,097

 

3,188

 

(1,675

)

72,175

 

Noninterest Income

 

31,982

 

20,414

 

14,443

 

3,526

 

70,365

 

Noninterest Expense

 

(45,297

)

(24,549

)

(16,559

)

(1,528

)

(87,933

)

Income Before Provision for Income Taxes

 

26,250

 

26,962

 

1,072

 

323

 

54,607

 

Provision for Income Taxes

 

(9,727

)

(9,935

)

(396

)

1,491

 

(18,567

)

Net Income

 

$

16,523

 

$

17,027

 

$

676

 

$

1,814

 

$

36,040

 

Total Assets as of March 31, 2009

 

$

3,582,200

 

$

2,887,927

 

$

256,962

 

$

4,721,039

 

$

11,448,128

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

58,426

 

$

42,835

 

$

3,870

 

$

(2,951

)

$

102,180

 

Provision for Credit Losses

 

7,952

 

7,226

 

 

(751

)

14,427

 

Net Interest Income (Loss) After
Provision for Credit Losses

 

50,474

 

35,609

 

3,870

 

(2,200

)

87,753

 

Noninterest Income

 

28,547

 

22,249

 

18,261

 

17,068

 

86,125

 

Noninterest Expense

 

(43,769

)

(24,721

)

(16,863

)

(8,079

)

(93,432

)

Income Before Provision for Income Taxes

 

35,252

 

33,137

 

5,268

 

6,789

 

80,446

 

Provision for Income Taxes

 

(13,043

)

(12,301

)

(1,949

)

4,062

 

(23,231

)

Net Income

 

$

22,209

 

$

20,836

 

$

3,319

 

$

10,851

 

$

57,215

 

Total Assets as of March 31, 2008

 

$

3,681,581

 

$

3,066,272

 

$

232,882

 

$

3,842,066

 

$

10,822,801

 

 

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Table of Contents

 

Note 4.  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 months ended March 31, 2009 and 2008 are presented in the following table:

 

Pension Plans and Postretirement Benefit Plan (Unaudited)

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

Three Months Ended March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Service Cost

 

$

 

$

 

$

109

 

$

89

 

Interest Cost

 

1,285

 

1,298

 

419

 

420

 

Expected Return on Plan Assets

 

(1,332

)

(1,522

)

 

 

Amortization of Prior Service Credit

 

 

 

(53

)

(53

)

Recognized Net Actuarial Losses (Gains)

 

732

 

270

 

(119

)

(140

)

Net Periodic Benefit Cost

 

$

685

 

$

46

 

$

356

 

$

316

 

 

The net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan are recorded as a component of salaries and benefits in the statements of income.  There were no significant changes from the previously reported $10.2 million that the Company expects to contribute to the pension plans and the $1.2 million that it expects to contribute to the postretirement benefit plan for the year ending December 31, 2009.  For the three months ended March 31, 2009, the Company contributed $0.1 million to its pension plans and $0.3 million to its postretirement benefit plan.

 

Note 5.  Derivative Financial Instruments

 

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

 

Fair Values of Derivative Financial Instruments (Unaudited)

 

As of March 31, 2009

 

(dollars in thousands)

 

Asset Derivatives

 

Liability Derivatives

 

Derivative Financial Instruments Not Designated as

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

Hedging Instruments under SFAS No. 133

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Forward Commitments

 

Other Assets

 

$

96

 

Other Liabilities

 

$

770

 

Interest Rate Lock Commitments

 

Other Assets

 

2,978

 

Other Liabilities

 

13

 

Interest Rate Swap Agreements

 

Other Assets

 

31,152

 

Other Liabilities

 

31,372

 

Foreign Exchange Contracts

 

Other Assets

 

339

 

Other Liabilities

 

1,468

 

Total Derivative Financial Instruments Not Designated as Hedging Instruments under SFAS No. 133

 

 

 

$

34,565

 

 

 

$

33,623

 

 

The following table presents the Company’s derivative financial instruments and the amount and location of the net gain recognized in the statement of income for the three months ended March 31, 2009:

 

The Effect of Derivative Financial Instruments on the Statement of Income (Unaudited)

 

 

 

Three Months Ended March 31, 2009

 

(dollars in thousands)

 

Location of Net Gain

 

Amount of Net Gain

 

Derivative Financial Instruments Not Designated as

 

Recognized in the

 

Recognized in the

 

Hedging Instruments under SFAS No. 133

 

Statement of Income

 

Statement of Income

 

Forward Commitments

 

Mortgage Banking

 

$

587

 

Interest Rate Lock Commitments

 

Mortgage Banking

 

6,925

 

Interest Rate Swap Agreements

 

Other Noninterest Income

 

142

 

Foreign Exchange Contracts

 

Other Noninterest Income

 

598

 

Total Derivative Financial Instruments Not Designated as
Hedging Instruments under SFAS No. 133

 

 

 

$

8,252

 

 

9



Table of Contents

 

Management has received authorization from the Parent’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.  The Company has elected not to qualify for hedge accounting methods addressed under current provisions of GAAP.  All risk management derivative instruments are stated at fair value in the Consolidated Statements of Condition with changes in fair value reported in current period earnings.

 

The Company is a party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest and foreign exchange rates.  Where derivative financial instruments have been entered into to facilitate the risk management activities of our customers, the Company generally enters into transactions with dealers to offset its risk exposure.  These financial instruments have been limited to forward commitments, interest rate lock commitments, interest rate swap agreements, and foreign exchange contracts.

 

The Company enters into forward commitments for the future delivery of residential mortgage loans to reduce interest rate risk associated with loans held for sale and interest rate lock commitments to fund loans at a specified interest rate.  Changes in the estimated fair value of forward commitments and interest rate lock 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.  At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments.

 

The Company’s interest rate swap agreements are 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.

 

The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers.  Changes in the estimated fair value of the Company’s foreign exchange contracts are included in other noninterest income in the Company’s Consolidated Statements of Income.

 

As with any financial instrument, derivative financial instruments have inherent risks.  Adverse changes in interest rates, foreign exchange rates, and equity prices affect the Company’s market risks.  The market risks 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.

 

The Company’s exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract.  Credit risk associated with derivative financial instruments is similar to those relating to traditional on-balance sheet financial instruments.  The Company manages derivative credit risk with the same standards and procedures applied to its commercial lending activities.

 

10



Table of Contents

 

Note 6.  Fair Value of Financial Assets and Liabilities

 

Fair Value Hierarchy

 

SFAS No. 157 defines fair value 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.  SFAS No. 157 establishes 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.

 

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 are derived principally from or can be corroborated by observable market data by correlation or other means.

 

Level 3:          Inputs to the valuation methodology are unobservable and significant to the fair value measurement.  Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

A financial asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  Management reviews and updates the fair value hierarchy classifications of the Company’s financial assets and liabilities on a quarterly basis.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2009, December 31, 2008, and March 31, 2008:

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Unaudited)

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

Identical Assets

 

Significant Other

 

Significant

 

 

 

 

 

or Liabilities

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

March 31, 2009

 

 

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

$

425,037

 

$

2,681,571

 

$

 

$

3,106,608

 

Mortgage Servicing Rights

 

 

 

17,904

 

17,904

 

Other Assets

 

6,343

 

 

 

6,343

 

Net Derivative Assets and Liabilities

 

 

(1,803

)

2,745

 

942

 

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

 

$

431,380

 

$

2,679,768

 

$

20,649

 

$

3,131,797

 

 

The Company sold its investment securities trading portfolio during the three months ended March 31, 2009.  The change in fair value of the trading portfolio had been expected by the Company to offset changes in valuation assumptions related to the Company’s mortgage servicing rights accounted for under the fair value measurement method. 

 

11



Table of Contents

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Unaudited) - Continued

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

Identical Assets

 

Significant Other

 

Significant

 

 

 

 

 

or Liabilities

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Investment Securities Trading

 

$

 

$

91,500

 

$

 

$

91,500

 

Investment Securities Available-for-Sale

 

577

 

2,462,947

 

55,715

 

2,519,239

 

Mortgage Servicing Rights

 

 

 

19,553

 

19,553

 

Other Assets

 

6,674

 

 

 

6,674

 

Net Derivative Assets and Liabilities

 

 

(951

)

3,051

 

2,100

 

Total Assets Measured at Fair Value on a Recurring Basis as of December 31, 2008

 

$

7,251

 

$

2,553,496

 

$

78,319

 

$

2,639,066

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

 

$

 

$

119,275

 

$

119,275

 

Total Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008

 

$

 

$

 

$

119,275

 

$

119,275

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

 

 

 

 

 

 

 

 

 

Investment Securities Trading

 

$

 

$

99,966

 

$

 

$

99,966

 

Investment Securities Available-for-Sale

 

1,998

 

2,575,069

 

95,219

 

2,672,286

 

Mortgage Servicing Rights

 

 

 

27,149

 

27,149

 

Other Assets

 

5,971

 

 

 

5,971

 

Net Derivative Assets and Liabilities

 

(202

)

1,596

 

810

 

2,204

 

Total Assets Measured at Fair Value on a Recurring Basis
as of March 31, 2008

 

$

7,767

 

$

2,676,631

 

$

123,178

 

$

2,807,576

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

 

$

 

$

128,932

 

$

128,932

 

Total Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2008

 

$

 

$

 

$

128,932

 

$

128,932

 

 

For the three months ended March 31, 2009 and March 31, 2008, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

 

 

Investment

 

 

 

 

 

 

 

 

 

Securities

 

Mortgage

 

Net Derivative

 

 

 

 

 

Available-

 

Servicing

 

Assets and

 

 

 

Assets (Unaudited)   (dollars in thousands)

 

-for-Sale 1

 

Rights 2

 

Liabilities 3

 

Total

 

Three Months Ended March 31, 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

 

 

(1,649

)

7,067

 

5,418

 

Purchases, Sales, Issuances, and Settlements, Net

 

 

 

(7,373

)

(7,373

)

Transfers out of Level 3

 

(55,715

)

 

 

(55,715

)

Balance as of March 31, 2009

 

$

 

$

17,904

 

$

2,745

 

$

20,649

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of March 31, 2009

 

$

 

$

(92

)

$

2,745

 

$

2,653

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term

 

 

 

 

 

 

 

Liabilities (Unaudited)   (dollars in thousands)

 

Debt 4

 

Total

 

 

 

 

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2009

 

$

119,275

 

$

119,275

 

 

 

 

 

Realized Gains Included in Net Income

 

(304

)

(304

)

 

 

 

 

Purchases, Sales, Issuances, and Settlements, Net

 

(118,971

)

(118,971

)

 

 

 

 

Balance as of March 31, 2009

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains Included in Net Income Related to Liabilities Still Held as of March 31, 2009

 

$

 

$

 

 

 

 

 

 

12



Table of Contents

 

 

 

Investment

 

 

 

 

 

 

 

 

 

Securities

 

Mortgage

 

Net Derivative

 

 

 

 

 

Available-

 

Servicing

 

Assets and

 

 

 

Assets (Unaudited)   (dollars in thousands)

 

-for-Sale 1

 

Rights 2

 

Liabilities 3

 

Total

 

Three Months Ended March 31, 2008

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2008

 

$

218,980

 

$

27,588

 

$

113

 

$

246,681

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(2,358

)

(1,076

)

(3,434

)

Included in Other Comprehensive Income

 

1,228

 

 

 

1,228

 

Purchases, Sales, Issuances, and Settlements, Net

 

(124,989

)

1,919

 

1,773

 

(121,297

)

Balance as of March 31, 2008

 

$

95,219

 

$

27,149

 

$

810

 

$

123,178

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of March 31, 2008

 

$

 

$

(1,548

)

$

810

 

$

(738

)

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term

 

 

 

 

 

 

 

Liabilities (Unaudited)   (dollars in thousands)

 

Debt 4

 

Total

 

 

 

 

 

Three Months Ended March 31, 2008

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2008

 

$

129,032

 

$

129,032

 

 

 

 

 

Unrealized Net Gains Included in Net Income

 

(100

)

(100

)

 

 

 

 

Balance as of March 31, 2008

 

$

128,932

 

$

128,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains Included in Net Income Related to Liabilities Still Held as of March 31, 2008

 

$

(100

)

$

(100

)

 

 

 

 

 

1

Unrealized gains and losses related to investment securities available-for-sale are reported as a component of other comprehensive income.

2

Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the statement of income.

3

Realized and unrealized gains and losses related to forward commitments and interest rate lock commitments are reported as a component of mortgage banking income in the statement of income. Realized and unrealized gains and losses related to foreign exchange contracts and interest rate swap agreements are reported as a component of other noninterest income in the statement of income.

4

Realized and unrealized gains and losses related to long-term debt are reported as a component of other noninterest income in the statement of income.

 

Significant assumptions in the valuation of the Company’s mortgage servicing rights included changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors.  Net derivative assets and liabilities classified as Level 3 were comprised of interest rate lock commitments and interest rate swap agreements, as significant unobservable inputs and management judgment are required.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The following presents the assets that the Company measures at fair value on a nonrecurring basis in accordance with GAAP as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Assets Measured at Fair Value on a Nonrecurring Basis (Unaudited)

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

March 31, 2009

 

 

 

 

 

 

 

 

 

Loans Held for Sale

 

$

 

$

24,121

 

$

 

$

24,121

 

Mortgage Servicing Rights - Amortization Method

 

 

 

5,624

 

5,624

 

Goodwill

 

 

 

34,959

 

34,959

 

Low-Income Housing and Other Equity Investments

 

 

 

29,490

 

29,490

 

Total Assets Measured at Fair Value on a Nonrecurring Basis as of March 31, 2009

 

$

 

$

24,121

 

$

70,073

 

$

94,194

 

 

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Table of Contents

 

Assets Measured at Fair Value on a Nonrecurring Basis (Unaudited) - Continued

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Loans Held for Sale

 

$

 

$

21,540

 

$

 

$

21,540

 

Mortgage Servicing Rights - Amortization Method

 

 

 

1,504

 

1,504

 

Low-Income Housing and Other Equity Investments

 

 

 

30,920

 

30,920

 

Total Assets Measured at Fair Value on a Nonrecurring Basis
as of December 31, 2008

 

$

 

$

21,540

 

$

32,424

 

$

53,964

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

 

 

 

 

 

 

 

 

 

Loans Held for Sale

 

$

 

$

13,096

 

$

 

$

13,096

 

Low-Income Housing and Other Equity Investments

 

 

 

36,133

 

36,133

 

Total Assets Measured at Fair Value on a Nonrecurring Basis
as of March 31, 2008

 

$

 

$

13,096

 

$

36,133

 

$

49,229

 

 

As of March 31, 2009, December 31, 2008, and March 31, 2008, the Company had no liabilities measured at fair value on a nonrecurring basis.

 

As of March 31, 2009 and 2008, there were no adjustments to fair value for the Company’s assets measured at fair value on a nonrecurring basis in accordance with GAAP.  As of December 31, 2008, the Company recorded a $0.3 million adjustment to fair value related to the Company’s mortgage servicing rights recorded under the amortization method.

 

Fair Value Option

 

On January 1, 2008, the Company elected the fair value option for its subordinated notes, a component of long-term debt in the Company’s Consolidated Statements of Condition.  The fair value option was elected for the subordinated notes as it provided the Company with an opportunity to better manage its interest rate risk and to achieve balance sheet management flexibility.  Changes in the estimated fair value of the Company’s subordinated notes subsequent to the initial fair value measurement were recognized in earnings as a component of other noninterest income.  For the three months ended March 31, 2009 and 2008, the Company recorded realized gains of $0.3 million and unrealized gains of $0.1 million, respectively, as a result of the change in fair value of the Company’s subordinated notes.  Interest expense related to the Company’s subordinated notes continued to be measured based on contractual interest rates and was reported as such in the statement of income.  The Company repaid its subordinated notes in March 2009.

 

14



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, 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; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and globally; 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 legislation and changes in the regulatory environment; 6) changes in fiscal and monetary policies of the markets in which we operate; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) unpredicted costs and other consequences of legal or regulatory matters involving the Company; 13) resumption of common stock repurchases; and 14) geopolitical risk, military or terrorist activity, 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, 2008, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange

Commission (the “SEC”).  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  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, American Samoa, and the West Pacific.  References to “we,” “our,” “us,” or the “Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes.

 

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

 

In striving to fulfill our governing objective and vision, we introduced our 2007+ Plan (“Plan”) to our shareholders, customers, and employees in January 2007.  The five themes that resulted from our Plan were:

 

·                  Business Growth

·                  Integration

·                  People Development

·                  Brand Enhancement

·                  Performance Discipline


 

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Table of Contents


Our Plan was balanced between growth and risk management, and included the flexibility to adjust, given our anticipation of a slowing economy.  We did not expect an economic downturn of the magnitude that occurred in 2008 and has continued into 2009.  Accordingly, we adjusted some of the strategies in our original Plan.  The adjustments to our strategies included an increased focus on measures of soundness such as asset quality, reserve and capital levels, liquidity, and confidence.

 

Earnings Summary

 

For the first quarter of 2009, net income was $36.0 million, a decrease of $21.2 million from the first quarter of 2008.  For the first quarter of 2009, diluted earnings per share were $0.75 per share, a decrease of $0.43 per share from the first quarter of 2008.

 

Our lower net income for the first quarter of 2009 was primarily due to the following:

 

·      The provision for credit losses (the “Provision”) increased by $10.5 million from the first quarter of 2008, reflecting increased risk in our commercial and industrial, commercial mortgage, and consumer portfolios due to the continued weakness in the Hawaii and U.S. Mainland economies;

·      Net interest income decreased by $5.1 million and our net interest margin decreased by 41 basis points from the first quarter of 2008, fully reflecting the effects of a decreasing interest rate environment and our decision to maintain high levels of liquidity; and

·      In the first quarter of 2009, we recorded $10.0 million in pre-tax gains from the sale of our equity interest in two watercraft leveraged leases.  By comparison, in the first quarter of 2008, we recorded pre-tax gains from significant items totaling $25.3 million.

 

Our actions during the first quarter of 2009 continue to be influenced by a weakening economy in Hawaii and the U.S. Mainland, as well as the uncertainties regarding the impact of government regulation.  We continued to strengthen our balance sheet in the first quarter of 2009 with increased levels of deposits, reserves for credit losses, liquidity, and capital.

 

·      Total deposits were $9.2 billion as of March 31, 2009, an increase of $920.7 million or 11% from the balance as of December 31, 2008;

·      We increased our reserve for credit losses by $11.2 million or 9% from December 31, 2008; and

·      We continued to increase our capital levels during the first quarter of 2009.  Shareholders’ equity increased by $43.2 million or 5% from December 31, 2008.  Our Tier 1 capital ratio was 12.02% as of March 31, 2009 compared to 11.24% as of December 31, 2008.  Our ratio of tangible common equity to risk-weighted assets was 12.47% as of March 31, 2009 compared to 11.28% as of December 31, 2008.

 

We also reduced our long-term debt by $144.3 million or 71% from December 31, 2008 and reduced our securities sold under agreements to repurchase by $184.6 million or 18% from December 31, 2008 as we had adequate sources of liquidity from growth in our deposit balances.

 

As of March 31, 2009, with $895.6 million in excess reserves invested with the Federal Reserve Bank (“FRB”), we remain very liquid and have substantial resources for lending and investment.


16



Table of Contents

 

Table 1 presents our financial highlights for the three months ended March 31, 2009 and 2008 and as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Financial Highlights (Unaudited)

 

 

 

 

Table 1

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

(dollars in thousands, except per share amounts)

 

 

 

2009

 

2008

 

For the Period:

 

 

 

 

 

 

 

Operating Results

 

 

 

 

 

 

 

Net Interest Income

 

 

 

$

97,062

 

$

102,180

 

Provision for Credit Losses

 

 

 

24,887

 

14,427

 

Total Noninterest Income

 

 

 

70,365

 

86,125

 

Total Noninterest Expense

 

 

 

87,933

 

93,432

 

Net Income

 

 

 

36,040

 

57,215

 

Basic Earnings Per Share

 

 

 

0.76

 

1.19

 

Diluted Earnings Per Share

 

 

 

0.75

 

1.18

 

Dividends Declared Per Share

 

 

 

0.45

 

0.44

 

 

 

 

 

 

 

 

 

Performance Ratios

 

 

 

 

 

 

 

Return on Average Assets

 

 

 

1.32

%

2.16

%

Return on Average Shareholders’ Equity

 

 

 

17.86

 

29.88

 

Efficiency Ratio 1

 

 

 

52.52

 

49.62

 

Operating Leverage 2

 

 

 

2.41

 

40.13

 

Net Interest Margin 3

 

 

 

3.76

 

4.17

 

Dividend Payout Ratio 4

 

 

 

59.21

 

36.97

 

Average Shareholders’ Equity to Average Assets

 

 

 

7.37

 

7.24

 

 

 

 

 

 

 

 

 

Average Balances

 

 

 

 

 

 

 

Average Loans and Leases

 

 

 

$

6,446,513

 

$

6,587,918

 

Average Assets

 

 

 

11,096,322

 

10,643,904

 

Average Deposits

 

 

 

8,751,374

 

7,952,546

 

Average Shareholders’ Equity

 

 

 

818,218

 

770,157

 

 

 

 

 

 

 

 

 

Market Price Per Share of Common Stock

 

 

 

 

 

 

 

Closing

 

 

 

$

32.98

 

$

49.56

 

High

 

 

 

45.24

 

52.93

 

Low

 

 

 

25.33

 

40.95

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2009

 

2008

 

2008

 

As of Period End:

 

 

 

 

 

 

 

Balance Sheet Totals

 

 

 

 

 

 

 

Loans and Leases

 

$

6,338,726

 

$

6,530,233

 

$

6,579,337

 

Total Assets

 

11,448,128

 

10,763,475

 

10,822,801

 

Total Deposits

 

9,212,791

 

8,292,098

 

8,102,855

 

Long-Term Debt

 

59,003

 

203,285

 

239,389

 

Total Shareholders’ Equity

 

833,935

 

790,704

 

766,747

 

 

 

 

 

 

 

 

 

Asset Quality

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

$

134,416

 

$

123,498

 

$

99,998

 

Non-Performing Assets

 

40,329

 

14,949

 

6,045

 

 

 

 

 

 

 

 

 

Financial Ratios

 

 

 

 

 

 

 

Allowance to Loans and Leases Outstanding

 

2.12

%

1.89

%

1.52

%

Tier 1 Capital Ratio 5

 

12.02

 

11.24

 

10.50

 

Total Capital Ratio 5

 

13.28

 

12.49

 

11.76

 

Leverage Ratio 5

 

6.94

 

7.30

 

6.97

 

Tangible Common Equity to Total Assets 6

 

6.97

 

7.01

 

6.75

 

Tangible Common Equity to Risk-Weighted Assets 6

 

12.47

 

11.28

 

10.36

 

 

 

 

 

 

 

 

 

Non-Financial Data

 

 

 

 

 

 

 

Full-Time Equivalent Employees

 

2,587

 

2,581

 

2,538

 

Branches and Offices

 

85

 

85

 

83

 

ATMs

 

463

 

462

 

411

 

 

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

Tier 1 capital, total capital, and leverage ratios as of March 31, 2008 were revised from 10.54%, 11.79%, and 6.99%, respectively.

6

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 (Unaudited).

17



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 (Unaudited)

Table 2

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2009

 

March 31, 2008

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(dollars in millions)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

4.9

 

$

 

0.84

%

$

27.5

 

$

0.2

 

2.82

%

Funds Sold

 

912.9

 

0.6

 

0.25

 

138.2

 

1.0

 

2.84

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

48.8

 

0.6

 

4.87

 

95.7

 

1.2

 

4.85

 

Available-for-Sale

 

2,628.7

 

32.5

 

4.95

 

2,631.6

 

34.5

 

5.24

 

Held-to-Maturity

 

235.0

 

2.6

 

4.37

 

285.6

 

3.2

 

4.54

 

Loans Held for Sale

 

21.8

 

0.2

 

4.41

 

10.5

 

0.1

 

5.43

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

1,031.3

 

10.4

 

4.11

 

1,065.1

 

16.6

 

6.26

 

Commercial Mortgage

 

730.6

 

9.6

 

5.32

 

649.1

 

10.4

 

6.45

 

Construction

 

154.1

 

1.6

 

4.21

 

199.5

 

3.3

 

6.73

 

Commercial Lease Financing

 

462.9

 

3.7

 

3.16

 

477.9

 

4.0

 

3.35

 

Residential Mortgage

 

2,437.4

 

36.3

 

5.96

 

2,496.7

 

38.2

 

6.13

 

Home Equity

 

1,028.7

 

13.0

 

5.13

 

993.4

 

16.4

 

6.60

 

Automobile

 

356.3

 

7.0

 

7.94

 

438.7

 

8.9

 

8.18

 

Other 2

 

245.2

 

4.8

 

7.86

 

267.4

 

6.5

 

9.73

 

Total Loans and Leases

 

6,446.5

 

86.4

 

5.40

 

6,587.8

 

104.3

 

6.35

 

Other

 

79.7

 

0.3

 

1.39

 

79.5

 

0.4

 

2.15

 

Total Earning Assets 3

 

10,378.3

 

123.2

 

4.77

 

9,856.4

 

4.9

 

5.89

 

Cash and Noninterest-Bearing Deposits

 

243.4

 

 

 

 

 

294.1

 

 

 

 

 

Other Assets

 

474.6

 

 

 

 

 

493.4

 

 

 

 

 

Total Assets

 

$

11,096.3

 

 

 

 

 

$

10,643.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

1,888.6

 

0.3

 

0.06

 

$

1,550.9

 

2.3

 

0.59

 

Savings

 

3,533.0

 

8.2

 

0.94

 

2,755.2

 

9.2

 

1.35

 

Time

 

1,500.8

 

8.5

 

2.30

 

1,747.2

 

16.0

 

3.67

 

Total Interest-Bearing Deposits

 

6,922.4

 

17.0

 

1.00

 

6,053.3

 

27.5

 

1.82

 

Short-Term Borrowings

 

18.7

 

 

0.11

 

79.7

 

0.7

 

3.31

 

Securities Sold Under Agreements to Repurchase

 

935.4

 

6.7

 

2.85

 

1,164.2

 

10.6

 

3.63

 

Long-Term Debt

 

148.2

 

2.2

 

5.88

 

239.8

 

3.7

 

6.25

 

Total Interest-Bearing Liabilities

 

8,024.7

 

25.9

 

1.30

 

7,537.0

 

42.5

 

2.26

 

Net Interest Income

 

 

 

$

97.3

 

 

 

 

 

$

102.4

 

 

 

Interest Rate Spread

 

 

 

 

 

3.47

%

 

 

 

 

3.63

%

Net Interest Margin

 

 

 

 

 

3.76

%

 

 

 

 

4.17

%

Noninterest-Bearing Demand Deposits

 

1,829.0

 

 

 

 

 

1,899.2

 

 

 

 

 

Other Liabilities

 

424.4

 

 

 

 

 

437.5

 

 

 

 

 

Shareholders’ Equity

 

818.2

 

 

 

 

 

770.2

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

11,096.3

 

 

 

 

 

$

10,643.9

 

 

 

 

 

 

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 $226,000 and $238,000 for the three months ended March 31, 2009 and 2008, respectively.

 

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Table of Contents

 

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

Table 3

 

 

 

Three Months Ended March 31, 2009

 

 

 

Compared to March 31, 2008

 

(dollars in millions)

 

Volume 1

 

Rate 1

 

Total

 

Change in Interest Income:

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

(0.1

)

$

(0.1

)

$

(0.2

)

Funds Sold

 

1.2

 

(1.6

)

(0.4

)

Investment Securities

 

 

 

 

 

 

 

Trading

 

(0.6

)

 

(0.6

)

Available-for-Sale

 

(0.1

)

(1.9

)

(2.0

)

Held-to-Maturity

 

(0.5

)

(0.1

)

(0.6

)

Loans Held for Sale

 

0.1

 

 

0.1

 

Loans and Leases

 

 

 

 

 

 

 

Commercial and Industrial

 

(0.5

)

(5.7

)

(6.2

)

Commercial Mortgage

 

1.2

 

(2.0

)

(0.8

)

Construction

 

(0.6

)

(1.1

)

(1.7

)

Commercial Lease Financing

 

(0.1

)

(0.2

)

(0.3

)

Residential Mortgage

 

(0.9

)

(1.0

)

(1.9

)

Home Equity

 

0.5

 

(3.9

)

(3.4

)

Automobile

 

(1.7

)

(0.2

)

(1.9

)

Other 2

 

(0.5

)

(1.2

)

(1.7

)

Total Loans and Leases

 

(2.6

)

(15.3

)

(17.9

)

Other

 

 

(0.1

)

(0.1

)

Total Change in Interest Income

 

(2.6

)

(19.1

)

(21.7

)

 

 

 

 

 

 

 

 

Change in Interest Expense:

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

Demand

 

0.4

 

(2.4

)

(2.0

)

Savings

 

2.2

 

(3.2

)

(1.0

)

Time

 

(2.1

)

(5.4

)

(7.5

)

Total Interest-Bearing Deposits

 

0.5

 

(11.0

)

(10.5

)

Short-Term Borrowings

 

(0.3

)

(0.4

)

(0.7

)

Securities Sold Under Agreements to Repurchase

 

(1.9

)

(2.0

)

(3.9

)

Long-Term Debt

 

(1.3

)

(0.2

)

(1.5

)

Total Change in Interest Expense

 

(3.0

)

(13.6

)

(16.6

)

 

 

 

 

 

 

 

 

Change in Net Interest Income

 

$

0.4

 

$

(5.5

)

$

(5.1

)

 

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

 

The amount of 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 income, on a taxable equivalent basis, decreased by $5.1 million or 5% in the first quarter of 2009 compared to the same period in 2008.  Net interest margin decreased by 41 basis points in the first quarter of 2009 compared to the first quarter of 2008.

 

This decrease in net interest income, on a taxable equivalent basis, was primarily due to a 112 basis point decrease in yields earned on our interest earning assets, fully reflecting the effects of a decreasing interest rate environment, and higher levels of funds sold.  The 95 basis point decrease in yields from our loan and lease portfolio was consistent with the decline in benchmark interest rates throughout 2008.  The lower yields from our residential mortgage loans were primarily due to customers refinancing their loans at lower interest rates.  The lower yields from our home equity loans were primarily due to the re-pricing of variable rate loans at lower interest rates.  The decrease in net interest income, on a taxable equivalent basis,

 

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Table of Contents

 

was partially offset by lower funding costs.  Rates paid on our interest-bearing liabilities decreased by 96 basis points, reflecting the effects of a steeper yield curve in 2009.  Rates paid on interest-bearing deposits decreased by 82 basis points in the first quarter of 2009 compared to the same period in 2008, primarily due to lower rates paid on our time deposits.  Also contributing to our lower funding costs was a 78 basis point decrease in rates paid on our securities sold under agreements to repurchase.

 

Average balances of our interest-earning assets increased in the first quarter of 2009 primarily due to a significant increase in funds sold balances which strengthened our liquidity position.  We experienced an $869.1 million or 14% increase in interest-bearing deposit balances.  The increase in savings deposit balances was primarily due to the continued success of our Bonus Rate Savings Plus product and business money market savings product.  The increase in savings deposit balances was partially offset by a decrease in our time deposit balances as some customers moved their deposits to more liquid savings and interest-bearing demand products.  Partially offsetting this increase in interest-bearing deposit balances was a $228.8 million or 20% decline in average balances in securities sold under agreements to repurchase, primarily with government entities, and a $91.6 million or 38% decline in average balances in long-term debt.

 

Provision for Credit Losses

 

The 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, changes in the economic environment, as well as an ongoing assessment of our credit quality.  We recorded a Provision of $24.9 million in the first quarter of 2009 compared to a Provision of $14.4 million in the first quarter of 2008.  The higher Provision, a result of our quarterly evaluation of the adequacy of the Allowance, was primarily due to increased risk

 

in our commercial and industrial, commercial mortgage, and consumer portfolios due to the continued weakness in the Hawaii and U.S. Mainland economies.  For further discussion on the Allowance, see the “Corporate Risk Profile – Reserve for Credit Losses” section in MD&A.

 

Noninterest Income

 

Noninterest income decreased by $15.8 million or 18% in the first quarter of 2009 compared to the first quarter of 2008.

 

Trust and asset management income decreased by $3.5 million or 23% in first quarter of 2009 compared to the first quarter of 2008, primarily due to a $1.7 million decrease in fees from accounts under management, which were adversely affected by the decline in the equity markets over this period.  Also contributing to the decrease in trust and asset management income was a $0.4 million decrease each in agency and employee benefit trust fee income.  Total trust assets under administration were $9.1 billion as of March 31, 2009 and $12.4 billion as of March 31, 2008.  Trust and asset management income is expected to continue to fluctuate based in part on the value of trust assets under administration and customer activity.

 

 

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Table of Contents

 

Table 4 presents the components of mortgage banking income for the first quarter 2009 and 2008.

 

Mortgage Banking (Unaudited)

Table 4

 

 

 

Three Months Ended

 

(dollars in thousands)

 

March 31, 2009

 

March 31, 2008

 

Mortgage Origination and Servicing Activities

 

 

 

 

 

Servicing Income

 

$

1,611

 

$

1,527

 

Net Gains (Losses) on the Sale of Residential Mortgage Loans

 

(274

)

1,018

 

Mortgage Loan Fees

 

1,064

 

745

 

Total Mortgage Origination and Servicing Activities

 

2,401

 

3,290

 

Mortgage Servicing Rights and Derivative Financial Instruments

 

 

 

 

 

Net Change in the Fair Value of Mortgage Servicing Rights Due to Paydowns 1

 

(1,558

)

(383

)

Net Change in the Fair Value of Mortgage Servicing Rights Due to Changes in Valuation Assumptions and the Fair Value of Designated Securities 2

 

77

 

(235

)

Net Gains Related to Mortgage Servicing Rights Under the Amortization Method

 

198

 

 

Net Gains on Derivative Financial Instruments

 

7,560

 

1,625

 

Total Mortgage Servicing Rights and Derivative Financial Instruments

 

6,277

 

1,007

 

Total Mortgage Banking

 

$

8,678

 

$

4,297

 

 

1

Principally represents changes due to the expected realization of cash flows over time.

2

Changes in valuation assumptions principally reflects changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates. Designated Securities were comprised of mortgage-backed securities in our trading portfolio, which had been expected to offset the volatility of the fair value of our mortgage servicing rights. The investment securities trading portfolio was sold during the first quarter of 2009. Realized investment trading gains and losses were not material for the periods presented.

 

Mortgage banking income increased by $4.4 million in the first quarter of 2009 compared to the first quarter of 2008.  This increase was primarily due to a $5.9 million increase in net gains related to our derivative financial instruments, the result of higher refinancing activity due to lower interest rates on mortgage-based products in the first quarter of 2009 compared to the first quarter of 2008.  Residential mortgage loan originations were $489.2 million in the first quarter of 2009, a $197.4 million or 68% increase compared to the first quarter of 2008.  Partially offsetting the increase in net gains related to our derivative financial instruments was a $1.3 million decrease in the net gain on sale of residential mortgage loans and a $1.2 million decrease in the fair value of our mortgage servicing rights as a result of paydowns.  Residential mortgage loan sales were $398.4 million in the first quarter of 2009, a $248.5 million increase compared to the first quarter of 2008.  Paydowns in our mortgage servicing portfolio were the result of higher refinancing activity due to lower interest rates on mortgage-based products.  Servicing income remained stable in the first quarter of 2009, as our portfolio of loans serviced for third parties was $2.9 billion as of March 31, 2009 compared to $2.6 billion as of March 31, 2008.

 

Service charges on deposit accounts increased by $1.3 million or 11% in the first quarter of 2009 compared to the first quarter of 2008.  This increase was primarily due to a $2.0 million increase in account analysis fees on analyzed business checking accounts as a result of lower earnings credit rates on customer accounts, partially offset by a $0.5 million decrease in monthly service fees due to the implementation of free checking in the third quarter of 2008.

 

Insurance income decreased by $1.5 million or 21% in the first quarter of 2009 compared to the first quarter of 2008.  This decrease was primarily due to a $0.8 million decrease in contingent commission income and a $0.4 million decrease in commission and brokerage income.

 

Other noninterest income decreased by $16.0 million or 50% in the first quarter of 2009 compared to the first quarter of 2008.  This decrease was primarily due to a $13.7 million gain from the mandatory redemption of our Visa Inc. (“Visa”) shares and a $11.6 million gain on the sale of our equity interest in an aircraft leveraged lease recorded in the first quarter of 2008.  In the first quarter of 2009, we recorded a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases.

 

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Table of Contents

 

Noninterest Expense

 

Noninterest expense decreased by $5.5 million or 6% in the first quarter of 2009 compared to the first quarter of 2008.

 

Table 5 presents the components of salaries and benefits expense for the first quarter of 2009 and 2008.

 

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

·      $0.3 million increase in our reserve for unfunded commitments.

 

These increases in other noninterest expense in the first quarter of 2009 compared to first quarter of 2008 were partially offset by:

 

·      $2.0 million reduction in contributions to the Bank of Hawaii Charitable Foundation;

·      $1.0 million expense related to a call premium on our Capital Securities recorded in the first quarter of 2008; and

·      $0.4 million reduction in expenses related to legal claims and contingencies.

 

Based on current information available to management, we expect that our FDIC insurance expense will be significantly higher in 2009 compared to 2008.  The increase in our expected FDIC insurance expense is the result of us exhausting our credits from the Federal Deposit Insurance Reform Act of 2005, higher assessment rates, along with our participation in new programs.

 

Provision for Income Taxes

 

 

Salaries and Benefits (Unaudited)

 

Table 5

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

(dollars in thousands)

 

2009

 

2008

 

 

Salaries

 

$   29,845

 

$   28,903

 

 

Incentive Compensation

 

3,292

 

6,267

 

 

Share-Based Compensation and Cash for Stock Grants

 

787

 

6,288

 

 

Commission Expense

 

2,255

 

1,873

 

 

Retirement and Other Benefits

 

4,619

 

5,226

 

 

Payroll Taxes

 

3,500

 

3,414

 

 

Medical, Dental, and Life Insurance

 

2,664

 

2,499

 

 

Separation Expense

 

66

 

1,003

 

 

Total Salaries and Benefits

 

$   47,028

 

$   55,473

 

 

 

Salaries and benefits expense decreased in the first quarter of 2009 compared to the first quarter of 2008 primarily due to a $5.5 million decrease in share-based compensation and cash for stock grants as a result of a $4.6 million accrual recorded in the first quarter of 2008 related to a change in our practice of equity compensation for senior management.  Also contributing to the decrease was a $3.0 million decline in incentive compensation expense, reflecting lower levels of profitability.

 

Other noninterest expense increased by $3.1 million or 15% in the first quarter of 2009 compared to the first quarter of 2008.  The increase in other noninterest expense was primarily due to:

 

·      $5.6 million reversal recorded in the first quarter of 2008 of contingency accruals related to Visa legal matters;

·      $1.6 million increase in our Federal Deposit Insurance Corporation (“FDIC”) insurance expense;

 

 

 

 

 

 

 

 

 

Provision for Income Taxes and
Effective Tax Rates (Unaudited)

 

Table 6

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

(dollars in thousands)

 

2009

 

2008

 

 

Provision for Income Taxes

 

$   18,567

 

$   23,231

 

 

Effective Tax Rates

 

34.00

%

28.88

%

 

 

The lower effective tax rate for the first quarter of 2008 was primarily due to the lessee in an aircraft leveraged lease exercising its early buyout option in March 2008.  The total income tax benefit from this transaction was approximately $6.0 million.  The sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009 did not have a similar impact on the provision for income taxes.

 

 

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Table of Contents

 

Analysis of Statements of Condition

 

Investment Securities

 

Table 7 presents the amortized cost and estimated fair value of our investment securities available-for-sale and held-to-maturity as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Investment Securities (Unaudited)

 

Table 7

 

 

 

Amortized

 

Fair

 

(dollars in thousands)

 

Cost

 

Value

 

March 31, 2009

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

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

 

$

563,704

 

$

565,131

 

Debt Securities Issued by States and Political Subdivisions

 

50,482

 

51,610

 

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

 

148,432

 

148,714

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

2,003,867

 

2,063,972

 

Non-Agencies

 

279,093

 

252,079

 

Total Mortgage-Backed Securities

 

2,282,960

 

2,316,051

 

Other Debt Securities

 

25,088

 

25,102

 

Total

 

$

3,070,666

 

$

3,106,608

 

Held-to-Maturity:

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

$

228,177

 

$

233,633

 

Total

 

$

228,177

 

$

233,633

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

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

 

$

551

 

$

577

 

Debt Securities Issued by States and Political Subdivisions

 

47,033

 

48,000

 

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

 

235,280

 

236,011

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

1,941,569

 

1,978,306

 

Non-Agencies

 

301,453

 

256,313

 

Total Mortgage-Backed Securities

 

2,243,022

 

2,234,619

 

Other Debt Securities

 

34

 

32

 

Total

 

$

2,525,920

 

$

2,519,239

 

Held-to-Maturity:

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

$

239,635

 

$

242,175

 

Total

 

$

239,635

 

$

242,175

 

 

 

 

 

 

 

March 31, 2008

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

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

 

$

1,946

 

$

1,998

 

Debt Securities Issued by States and Political Subdivisions

 

48,840

 

49,586

 

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

 

350,658

 

352,490

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

1,809,715

 

1,837,191

 

Non-Agencies

 

342,457

 

326,245

 

Total Mortgage-Backed Securities

 

2,152,172

 

2,163,436

 

Other Debt Securities

 

104,284

 

104,776

 

Total

 

$

2,657,900

 

$

2,672,286

 

Held-to-Maturity:

 

 

 

 

 

Debt Securities Issued by States and Political Subdivisions

 

$

6

 

$

6

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

277,250

 

277,530

 

Total

 

$

277,256

 

$

277,536

 

 

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Table of Contents

 

The carrying value of our investment securities, excluding trading securities, was $3.3 billion as of March 31, 2009, $2.8 billion as of December 31, 2008, and $2.9 billion as of March 31, 2008.  Investment securities with a carrying value of $2.3 billion as of March 31, 2009, $2.0 billion as of December 31, 2008, and $1.9 billion as of March 31, 2008 were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

 

Investment securities pledged where the secured party has the right to sell or repledge the investment securities were $837.1 million as of March 31, 2009, $825.8 million as of December 31, 2008, and $766.1 million as of March 31, 2008.

 

We sold our investment securities trading portfolio during the first quarter of 2009.  The change in the fair value of the trading portfolio had been expected to offset changes in valuation assumptions related to our mortgage servicing rights accounted for under the fair value measurement method.

 

Table 8 presents the par value, amortized cost, and fair value of our debt and mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as of March 31, 2009.

 

Investment Securities Issued by the Federal National Mortgage Association

 

 

 

and the Federal Home Loan Mortgage Association (Unaudited)

 

Table 8

 

(dollars in thousands)

 

Par Value

 

Amortized
Cost

 

Fair
Value

 

March 31, 2009

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Federal National Mortgage Association

 

$

145,057

 

$

145,031

 

$

145,302

 

Federal Home Loan Mortgage Corporation

 

500

 

499

 

540

 

Subtotal

 

145,557

 

145,530

 

145,842

 

Mortgage-Backed Securities Issued by U.S. Government-Sponsored Enterprises

 

 

 

 

 

 

 

Federal National Mortgage Association

 

812,190

 

813,794

 

840,208

 

Federal Home Loan Mortgage Corporation

 

758,151

 

758,447

 

781,871

 

Subtotal

 

1,570,341

 

1,572,241

 

1,622,079

 

Total

 

$

1,715,898

 

$

1,717,771

 

$

1,767,921

 

 

As of March 31, 2009, 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 March 31, 2009, all of our mortgage-backed securities issued by private issuers (“non-agencies”) were prime jumbo, with an average original loan-to-value ratio of 59%.   As of March 31, 2009, 97% of the fair value of our mortgage-backed

 

securities issued by non-agencies were AAA-rated and were originated prior to 2006.  Loans past due 90 days or more, underlying the mortgage-backed securities issued by non-agencies, represented approximately 133 basis points of the par value outstanding or approximately $3.7 million as of March 31, 2009.  As of March 31, 2009, there were no “sub-prime” or “Alt-A” securities in our mortgage-backed securities portfolio.

 

24



Table of Contents

 

Table 9 presents our temporarily impaired investment securities as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Temporarily Impaired Investment Securities (Unaudited)

 

Table 9

 

 

 

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

 

March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

226,230

 

$

(450

)

$

 

$

 

$

226,230

 

$

(450

)

Debt Securities Issued by States and
Political Subdivisions

 

907

 

(13

)

314

 

(20

)

1,221

 

(33

)

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

 

273

 

(4

)

1,847

 

(47

)

2,120

 

(51

)

Mortgage-Backed Securities Issued by
U.S. Government-Sponsored Enterprises

 

30,254

 

(38

)

 

 

30,254

 

(38

)

Non-Agencies

 

5,360

 

(1,873

)

235,859

 

(25,195

)

241,219

 

(27,068

)

Total Mortgage-Backed Securities

 

35,614

 

(1,911

)

235,859

 

(25,195

)

271,473

 

(27,106

)

Other Debt Securities

 

 

 

34

 

(1

)

34

 

(1

)

Total Temporarily Impaired Investment Securities March 31, 2009

 

$

263,024

 

$

(2,378

)

$

238,054

 

$

(25,263

)

$

501,078

 

$

(27,641

)

December 31, 2008

 

$

366,137

 

$

(18,268

)

$

182,774

 

$

(29,105

)

$

548,911

 

$

(47,373

)

March 31, 2008

 

$

414,845

 

$

(6,098

)

$

288,381

 

$

(13,005

)

$

703,226

 

$

(19,103

)

 

Our temporarily impaired investment securities and related gross unrealized losses as of March 31, 2009 decreased from December 31, 2008 primarily due to maturities and pay-downs on investment securities as well as lower interest rates on mortgage-based products.  Our temporarily impaired investment securities as of March 31, 2009 decreased from March 31, 2008 primarily due to a recovery of our gross unrealized losses related to a significant number of our mortgage-backed securities issued by U.S. government-sponsored enterprises.  Gross unrealized losses related to our temporarily impaired investment securities as of March 31, 2009 increased from March 31, 2008 primarily due to higher gross unrealized losses on our mortgage-backed securities issued by non-agencies as a result of illiquidity.

 

We do not believe that the investment securities that were in an unrealized loss position as of March 31, 2009, which was comprised of 47 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.  We have both the intent and ability to hold the investment securities for a period of time necessary to recover the amortized cost.

 

25



Table of Contents

 

Loans and Leases

 

Table 10 presents the composition of our loan and lease portfolio by major categories.

 

Loan and Lease Portfolio Balances (Unaudited)

 

Table 10

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

1,000,640

 

$

1,053,781

 

$

1,077,314

 

$

1,052,319

 

$

1,079,772

 

Commercial Mortgage

 

726,193

 

740,779

 

708,961

 

680,784

 

650,638

 

Construction

 

153,754

 

153,952

 

153,364

 

168,678

 

190,521

 

Lease Financing

 

454,822

 

468,140

 

467,279

 

471,443

 

465,945

 

Total Commercial

 

2,335,409

 

2,416,652

 

2,406,918

 

2,373,224

 

2,386,876

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

2,402,061

 

2,461,824

 

2,478,925

 

2,485,558

 

2,506,594

 

Home Equity

 

1,016,381

 

1,033,221

 

1,004,437

 

989,683

 

990,759

 

Automobile

 

343,642

 

369,789

 

395,015

 

413,338

 

430,920

 

Other 1

 

241,233

 

248,747

 

254,163

 

256,325

 

264,188

 

Total Consumer

 

4,003,317

 

4,113,581

 

4,132,540

 

4,144,904

 

4,192,461

 

Total Loans and Leases

 

$

6,338,726

 

$

6,530,233

 

$

6,539,458

 

$

6,518,128

 

$

6,579,337

 

 

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

 

Loans and leases represent our largest category of interest earning assets and the largest source of interest income.  Total loans and leases as of March 31, 2009 decreased by $191.5 million or 3% from December 31, 2008 and decreased by $240.6 million or 4% from March 31, 2008.

 

Commercial loans and leases as of March 31, 2009 decreased by $81.2 million or 3% from December 31, 2008.  The decrease across all of our commercial lending portfolios was a result of our continued disciplined underwriting approach and a slowing economy in Hawaii.  While we continue to lend to credit worthy customers, we remain cautious in our lending approach in the current economic environment.  Consumer loans and leases as of March 31, 2009 decreased by $110.3 million or 3% from December 31, 2008.   We experienced a high level of refinancing activity in the first quarter of 2009 as a result of lower interest rates on mortgage-based products.  Balances in other consumer loan categories have decreased as a result of our sound underwriting approach and the slowing economy in Hawaii.

 

Commercial loans and leases as of March 31, 2009 decreased by $51.5 million or 2% from March 31, 2008.  We have experienced run-off in our commercial and industrial portfolio as the economy has slowed in Hawaii.  Our strategy over the past year has been to reduce our construction lending exposure and to grow our commercial secured mortgage portfolio.

 

Consumer loans and leases as of March 31, 2009 decreased by $189.1 million or 5% from March 31, 2008.  The decrease in consumer loans and leases from March 31, 2008 was in all categories except home equity loans.  As noted above, we experienced high levels of refinancing activity in 2008 and into 2009 as interest rates on mortgage-based products have steadily decreased over the past year.  The increase in home equity loans was primarily due to customer utilization of existing home equity lines.  Our automobile portfolio has decreased as a result of decreased consumer demand for new automobiles as well as our continued disciplined underwriting approach to these loans.

 

26



Table of Contents

 

Table 11 presents the composition of our loan and lease portfolio by geographic area and by major categories.

 

Geographic Distribution of Loan and Lease Portfolio (Unaudited)

 

Table 11

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Hawaii

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

660,038

 

$

705,658

 

$

695,570

 

$

710,528

 

$

721,841

 

Commercial Mortgage

 

640,224

 

646,280

 

628,732

 

599,385

 

566,936

 

Construction

 

146,258

 

145,208

 

142,719

 

157,642

 

178,958

 

Lease Financing

 

50,311

 

50,622

 

50,294

 

51,854

 

45,365

 

U.S. Mainland 1

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

234,467

 

229,924

 

244,498

 

207,369

 

212,718

 

Commercial Mortgage

 

14,210

 

14,405

 

4,695

 

4,808

 

4,953

 

Construction

 

6,220

 

6,438

 

8,655

 

9,045

 

10,278

 

Lease Financing

 

372,008

 

385,181

 

387,160

 

389,013

 

391,302

 

Guam

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

73,595

 

77,507

 

78,700

 

71,340

 

75,771

 

Commercial Mortgage

 

70,056

 

78,291

 

73,240

 

74,226

 

76,220

 

Construction

 

1,276

 

2,306

 

1,990

 

1,991

 

1,285

 

Lease Financing

 

14,479

 

13,181

 

10,962

 

11,329

 

10,134

 

Other Pacific Islands

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

9,343

 

12,177

 

14,660

 

15,942

 

16,693

 

Commercial Mortgage

 

1,609

 

1,703

 

2,188

 

2,365

 

2,529

 

Foreign 2

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

23,197

 

28,515

 

43,886

 

47,140

 

52,749

 

Commercial Mortgage

 

94

 

100

 

106

 

 

 

Lease Financing

 

18,024

 

19,156

 

18,863

 

19,247

 

19,144

 

Total Commercial

 

2,335,409

 

2,416,652

 

2,406,918

 

2,373,224

 

2,386,876

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Hawaii

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

2,189,237

 

2,242,637

 

2,255,970

 

2,257,489

 

2,272,345

 

Home Equity

 

967,570

 

982,379

 

953,078

 

936,142

 

934,780

 

Automobile

 

239,960

 

256,131

 

271,568

 

282,843

 

294,410

 

Other 3

 

181,102

 

185,479

 

189,417

 

189,087

 

193,915

 

U.S. Mainland 1

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

25,876

 

28,034

 

29,473

 

31,881

 

35,445

 

Automobile

 

41,785

 

45,559

 

48,631

 

49,792

 

48,667

 

Guam

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

204,902

 

210,987

 

214,748

 

219,857

 

225,606

 

Home Equity

 

19,726

 

19,546

 

18,625

 

18,313

 

17,045

 

Automobile

 

56,665

 

61,907

 

67,600

 

72,428

 

78,403

 

Other 3

 

29,518

 

30,992

 

31,961

 

33,078

 

34,679

 

Other Pacific Islands

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

7,922

 

8,200

 

8,207

 

8,212

 

8,643

 

Home Equity

 

3,209

 

3,262

 

3,261

 

3,347

 

3,489

 

Automobile

 

5,232

 

6,192

 

7,216

 

8,275

 

9,440

 

Other 3

 

30,609

 

32,271

 

32,780

 

34,157

 

35,588

 

Foreign 2

 

 

 

 

 

 

 

 

 

 

 

Other 3

 

4

 

5

 

5

 

3

 

6

 

Total Consumer

 

4,003,317

 

4,113,581

 

4,132,540

 

4,144,904

 

4,192,461

 

Total Loans and Leases

 

$

6,338,726

 

$

6,530,233

 

$

6,539,458

 

$

6,518,128

 

$

6,579,337

 

 

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 and leases classified as Foreign represents those which are recorded in the Company’s international business units.

3

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

 

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Table of Contents

 

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 participation in shared national credits and leveraged lease financing.  Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.

 

Other Assets

 

Table 12 presents the major components of other assets as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Other Assets (Unaudited)

 

Table 12

 

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Bank-Owned Life Insurance

 

$

197,863

 

$

196,043

 

$

190,852

 

Federal and State Tax Deposits

 

82,500

 

82,500

 

61,000

 

Federal Home Loan Bank and Federal Reserve Bank Stock

 

79,705

 

79,705

 

79,494

 

Derivative Financial Instruments

 

34,565

 

38,870

 

13,693

 

Low-Income Housing and Other Equity Investment

 

29,490

 

30,920

 

36,133

 

Accounts Receivable

 

16,530

 

17,607

 

25,265

 

Other

 

33,121

 

28,922

 

37,249

 

Total Other Assets

 

$

473,774

 

$

474,567

 

$

443,686

 

 

Total other assets as of March 31, 2009 remained relatively unchanged from December 31, 2008.  Total other assets as of March 31, 2009 increased by $30.1 million or 7% from March 31, 2008.  The increase in total other assets was primarily due to a $21.5 million increase in federal and state tax deposits.  As of March 31, 2009, we had a total of $82.5 million in tax deposits placed with the Internal Revenue Service and the State of Hawaii Department of Taxation.  These deposits with the respective taxing authorities limit the potential accrual of additional interest based on our current estimate of our tax liabilities.  Also contributing to the increase in total other assets was a $20.3 million increase in the estimated fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities.  This was partially offset by an $8.7 million decrease in accounts receivable, arising in the normal course of business, and a $6.6 million decrease in low-income housing and other equity investments as a result of amortization of these investments recorded over this period.

 

As of March 31, 2009, the carrying value of our Federal Home Loan Bank of Seattle (“FHLB”) stock was $61.3 million.  On March 30, 2009, the FHLB filed its 2008 Form 10-K with the SEC, which included its audited financial statements for the year ended December 31, 2008.  The FHLB reported a net loss of $199.4 million for the year ended December 31, 2008 and

 

reported an accumulated deficit of $78.9 million as of December 31, 2008.  The FHLB noted that its net loss was primarily due to a $304.2 million other-than-temporary impairment charge that was taken related to certain of its private-label mortgage-backed securities as a result of illiquid markets.  The FHLB also noted that it has both the intent and the ability to hold these securities until their maturity, and based on analysis of anticipated cash flows for these securities, estimated principal losses on these securities were approximately $11.9 million as of December 31, 2008.  The FHLB has continued to meet its debt obligations and has the capacity to issue additional debt if necessary to raise cash.  Additionally, if needed, the FHLB has the ability to secure funding available to government-sponsored enterprises through the U.S. Treasury.  Management expects the Company to remain a member institution of the FHLB and believes that there is no impairment related to the carrying amount of the Company’s FHLB stock as of March 31, 2009.  See Note 1 to the Consolidated Financial Statements (Unaudited) for information on our accounting and impairment policy.

 

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Table of Contents

 

Deposits

 

Table 13 presents the composition of our deposits by major customer categories.

 

Deposits (Unaudited)

 

Table 13

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Consumer

 

$

4,702,494

 

$

4,593,248

 

$

4,460,965

 

$

4,463,632

 

$

4,605,743

 

Commercial

 

3,645,842

 

3,221,668

 

2,835,699

 

3,013,234

 

3,174,676

 

Public and Other

 

864,455

 

477,182

 

361,820

 

427,124

 

322,436

 

Total Deposits

 

$

9,212,791

 

$

8,292,098

 

$

7,658,484

 

$

7,903,990

 

$

8,102,855

 

 

The increase in our deposit balances in March 31, 2009 from December 31, 2008 was primarily due to a $423.4 million increase in our business money market savings product and a $192.8 million increase in our Bonus Rate Savings Plus product.  This was partially offset by a $167.4 million decrease in time deposit balances as some customers moved their deposits to more liquid accounts, in light of current economic conditions.

 

The increase in our deposit balances in March 31, 2009 from March 31, 2008 was primarily due to a $482.6 million increase in our business money market savings product and a $489.9 million increase in our Bonus Rate Savings Plus product.  This was partially offset by a $313.6 million decrease in time deposit balances as some customers moved their deposits to more liquid accounts as noted above.

 

Table 14 presents the composition of our savings deposits.

 

Savings Deposits (Unaudited)

 

 

 

 

 

 

 

 

 

Table 14

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Money Market

 

$

1,607,375

 

$

1,173,132

 

$

965,149

 

$

1,045,790

 

$

1,048,154

 

Regular Savings

 

2,298,334

 

1,931,731

 

1,815,648

 

1,770,432

 

1,750,481

 

Total Savings Deposits

 

$

3,905,709

 

$

3,104,863

 

$

2,780,797

 

$

2,816,222

 

$

2,798,635

 

 

Table 15 presents our quarterly average balance of time deposits of $100,000 or more.

 

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

 

Table 15

 

 

 

Three Months Ended

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Average Time Deposits

 

$

851,668

 

$

891,922

 

$

934,845

 

$

948,729

 

$

1,009,007

 

 

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Table of Contents

 

Borrowings and Long-Term Debt

 

Borrowings consisted of funds purchased and short-term borrowings, including commercial paper.  Borrowings were $19.7 million as of March 31, 2009, a $1.0 million or 5% decrease from December 31, 2008, and a $13.9 million or 41% decrease from March 31, 2008.  We manage the level of our borrowings to ensure that we have adequate sources of liquidity.  Due to our high level of deposits and our increased capital levels, we reduced the level of borrowings as a source of funds.

 

Long-term debt was $59.0 million as of March 31, 2009, a $144.3 million or 71% decrease from December 31, 2008, and a $180.4 million or 75% decrease from March 31, 2008.  The

 

decrease in long-term debt from December 31, 2008 was primarily due to our repayment of $119.0 million in subordinated notes and our repayment of $25.0 million in privately placed notes in the first quarter of 2009.  Additionally contributing to the decrease from March 31, 2008 was the redemption of our $26.4 million in Bancorp Hawaii Capital Trust I Capital Securities and $6.0 million in subordinated notes in the second quarter of 2008.

 

Securities Sold Under Agreements to Repurchase

 

Table 16 presents the composition of our securities sold under agreements to repurchase as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Securities Sold Under Agreements to Repurchase (Unaudited)

 

 

 

 

 

Table 16

 

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Government Entities

 

$

169,283

 

$

353,835

 

$

581,962

 

Private Institutions

 

675,000

 

675,000

 

650,000

 

Total Securities Sold Under Agreements to Repurchase

 

$

844,283

 

$

1,028,835

 

$

1,231,962

 

 

As of March 31, 2009, the decrease in securities sold under agreements to repurchase from 2008 was primarily due to the maturity of placements with public institutions that were not replaced.  As of March 31, 2009, the weighted average maturity was 82 days for our securities sold under agreements to repurchase with government entities and 8.04 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 332 days.  As of March 31, 2009, $175.0 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 with private institutions are not terminated by the specified dates, the interest rates on the agreements become fixed, at rates ranging from 2.98% to 5.00%, for the remaining term of the respective agreements.  As of March 31, 2009, the weighted average interest rate for outstanding agreements with private institutions was 3.42%.

 

Shareholders’ Equity

 

As of March 31, 2009, shareholders’ equity was $833.9 million, an increase of $43.2 million or 5% from December 31, 2008 and an increase of $67.2 million or 9% from March 31, 2008.  The increase in shareholders’ equity from December 31, 2008 was primarily due to current period earnings of $36.0 million and gains on our investments securities available-for-sale, net of tax, of $27.2 million.  This was partially offset by cash dividends paid of $21.5 million.  Further discussion on our capital structure is included in the “Corporate Risk Profile – Capital Management” section of MD&A.

 

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Table of Contents

 

Analysis of Business Segments

 

Our business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury.  Our management accounting process measures the performance of the business segments based on the management structure of the Company.  This process uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the Provision, 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 U.S. generally accepted accounting principles (“GAAP”).  We use this management accounting process to assess business segment performance and to allocate resources.

 

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 our overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of our 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.  See Note 3 to the Consolidated Financial Statements (Unaudited) for selected financial information as of and for the three months ended March 31, 2009 and 2008.

 

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, and installment loans.  Deposit products include checking, savings, and time deposit accounts.  Retail Banking also provides merchant services to its small business

 

customers.  Products and services from Retail Banking are delivered to customers through 73 Hawaii branch locations, 463 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.  This segment also offers retail property, casualty, and life insurance products.

 

Net income decreased by $5.7 million or 26% in the first quarter of 2009 compared to the first quarter of 2008 primarily due to a decrease in net interest income, an increase in the Provision, and an increase in noninterest expense.  This was partially offset by an increase in noninterest income.   The $4.3 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 $6.6 million increase in the Provision was primarily due to higher net charge-offs of loans in the segment’s consumer portfolios.  The $1.5 million increase in noninterest expense was primarily due to higher FDIC insurance assessments.  The $3.4 million increase in noninterest income was primarily due to higher mortgage banking income, as we experienced higher refinancing activity.

 

Commercial Banking

 

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, consumer automobile loans and leases, deposit and cash management products, and wholesale property and casualty insurance products.  Commercial lending, deposit, and cash management services are offered to middle-market and large companies in Hawaii.  Commercial real estate mortgages focus on customers that include investors, developers, and builders domiciled in Hawaii.  Commercial Banking also includes syndicated lending activities, international banking, and operations at our 12 branches in the Pacific Islands.

 

Net income decreased by $3.8 million or 18% in the first quarter of 2009 compared to the first quarter of 2008 primarily due to a decrease in net interest income, an increase in the Provision, and a decrease in noninterest income.  The $1.9 million decrease in net interest income was primarily due to

 

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Table of Contents

 

lower average balances in our consumer automobile loan portfolio and lower spreads in our commercial loan portfolio.  The $2.6 million increase in the Provision was primarily due to higher net charge-offs of loans and leases in the segment.  The $1.8 million decrease in noninterest income was primarily due to the pre-tax gain on the sale of our equity interest in an aircraft lease in the first quarter of 2008.

 

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.

 

Net income decreased by $2.6 million or 80% in the first quarter of 2009 compared to the first quarter of 2008 primarily due to a decrease in noninterest income and an increase in the Provision.  The $3.8 million decrease in noninterest income was primarily due to lower fee income as a result of lower asset values under trust administration.  The $0.8 million increase in the Provision was primarily due to higher net charge-offs of loans in this segment.

 

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 this segment, along with eliminations of inter-company transactions.

 

Net income decreased by $9.0 million or 83% in the first quarter of 2009 compared to the first quarter of 2008 primarily due to lower noninterest income, partially offset by lower noninterest expense.  The $13.5 million decrease in noninterest income was primarily due to a $13.7 million gain from the mandatory redemption of our Visa shares in the first quarter of 2008.  The $6.6 million decrease in noninterest expense was primarily due to various accruals recorded in the first quarter of 2008 (cash awards to purchase our stock, earnings-based incentive compensation, legal contingencies, and contributions to the Bank of Hawaii Charitable Foundation and other charitable organizations.)  This was partially offset by a $5.6 million reversal in the first quarter of 2008 of the previously recorded Visa contingency accruals.

 

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.

 

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Table of Contents

 

Corporate Risk Profile

 

Credit Risk

 

Our overall credit risk position is reflective of the weakening economic activity during the first quarter of 2009, with increasing levels of non-performing assets compared to December 31, 2008.  The signs of slowing in the Hawaii economy became more prominent with the continued decline in visitor arrivals.  Trends in the construction and real estate industries are also slowing.  Unemployment levels are trending upward.  The slowing economy in Hawaii is resulting in higher delinquencies and loss rates in our loan and lease portfolio, with the primary impact in our commercial and industrial, commercial mortgage, and consumer portfolios.  We also have elevated risk in our air and other transportation exposures due to a weaker economy in Hawaii and the U.S. Mainland.

 

Table 17 summarizes our air transportation credit exposure.  As of March 31, 2009, included in our commercial lending portfolio are nine leveraged leases on aircraft that were originated in the 1990’s and prior.  Outstanding credit exposure related to these leveraged leases was $67.8 million as of March 31, 2009.  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, and marginal pricing power.  We believe that volatile fuel costs, coupled with a slowing U.S. Mainland economy, will place additional pressure on the financial health of air transportation carriers for the foreseeable future.  In the evaluation of the Reserve for Credit Losses (the “Reserve”), we continue to consider the ongoing financial concerns about the air transportation industry.

 

Air Transportation Credit Exposure 1 (Unaudited)

 

Table 17

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Passenger Carriers Based In the United States

 

$

56,876

 

$

60,189

 

$

60,260

 

$

60,603

 

$

61,190

 

Passenger Carriers Based Outside the United States

 

5,433

 

5,672

 

5,809

 

7,161

 

7,258

 

Cargo Carriers

 

13,994

 

13,831

 

13,689

 

13,568

 

13,472

 

Total Air Transportation Credit Exposure

 

$

76,303

 

$

79,692

 

$

79,758

 

$

81,332

 

$

81,920

 

 

1 Exposure includes loans, leveraged leases, and operating leases.

 

33



Table of Contents

 

Non-Performing Assets

 

Table 18 presents information on non-performing assets (“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 (Unaudited)

 

 

 

Table 18

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

2008

 

2008

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Loans and Leases

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

21,839

 

$

3,869

 

$

574

 

$

1,119

 

$

794

 

Construction

 

5,001

 

5,001

 

 

 

 

Lease Financing

 

910

 

133

 

149

 

329

 

504

 

Total Commercial

 

27,750

 

9,003

 

723

 

1,448

 

1,298

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

9,230

 

3,904

 

3,749

 

3,784

 

3,235

 

Home Equity

 

1,620

 

1,614

 

1,162

 

1,189

 

1,187

 

Other 1

 

1,383

 

 

 

30

 

31

 

Total Consumer

 

12,233

 

5,518

 

4,911

 

5,003

 

4,453

 

Total Non-Accrual Loans and Leases

 

39,983

 

14,521

 

5,634

 

6,451

 

5,751

 

Foreclosed Real Estate

 

346

 

428

 

293

 

229

 

294

 

Total Non-Performing Assets

 

$

40,329

 

$

14,949

 

$

5,927

 

$

6,680

 

$

6,045

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing Loans and Leases Past Due 90 Days or More

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

 

$

6,785

 

$

 

$

 

$

24

 

Lease Financing

 

257

 

268

 

 

 

 

Total Commercial

 

257

 

7,053

 

 

 

24

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

4,794

 

4,192

 

3,455

 

2,601

 

3,892

 

Home Equity

 

1,720

 

1,077

 

296

 

201

 

328

 

Automobile

 

776

 

743

 

758

 

625

 

865

 

Other 1

 

1,100

 

1,134

 

926

 

756

 

725

 

Total Consumer

 

8,390

 

7,146

 

5,435

 

4,183

 

5,810

 

Total Accruing Loans and Leases Past Due 90 Days or More

 

$

8,647

 

$

14,199

 

$

5,435

 

$

4,183

 

$

5,834

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans and Leases

 

$

6,338,726

 

$

6,530,233

 

$

6,539,458

 

$

6,518,128

 

$

6,579,337

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

0.63%

 

0.22%

 

0.09%

 

0.10%

 

0.09%

 

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

 

0.64%

 

0.23%

 

0.09%

 

0.10%

 

0.09%

 

Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases

 

1.19%

 

0.37%

 

0.03%

 

0.06%

 

0.05%

 

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

 

0.31%

 

0.14%

 

0.13%

 

0.13%

 

0.11%

 

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

 

0.77%

 

0.45%

 

0.17%

 

0.17%

 

0.18%

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter-to-Quarter Changes in Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Quarter

 

$

14,949

 

$

5,927

 

$

6,680

 

$

6,045

 

$

5,286

 

Additions

 

29,164

 

15,464

 

1,355

 

2,900

 

2,614

 

Reductions

 

 

 

 

 

 

 

 

 

 

 

Payments

 

(874

)

(2,440

)

(955

)

(630

)

(386

)

Return to Accrual Status

 

(768

)

(1,468

)

(756

)

(943

)

(944

)

Sales of Foreclosed Real Estate

 

(82

)

 

 

 

 

Charge-offs/Write-downs

 

(2,060

)

(2,534

)

(397

)

(692

)

(525

)

Total Reductions

 

(3,784

)

(6,442

)

(2,108

)

(2,265

)

(1,855

)

Balance at End of Quarter

 

$

40,329

 

$

14,949

 

$

5,927

 

$

6,680

 

$

6,045

 

 

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

 

34



 

Table of Contents

 

NPAs are comprised of non-accrual loans and leases and foreclosed real estate. The $25.4 million increase in NPAs from December 31, 2008 was primarily due to additions to non-accrual status of $18.0 million in commercial and industrial loans, $5.3 million in residential mortgage loans, and $1.4 million in other consumer loans. The increase in commercial and industrial NPAs from December 31, 2008 was primarily due to the inclusion of one U.S. Mainland-based borrower with a significant presence in Hawaii which has been negatively impacted by the lack of liquidity in the financial markets. The increase in residential mortgage loans NPAs from December 31, 2008 was due to a large single borrower and four land loans.

 

Credit quality in our mortgage-related consumer lending portfolios performed within expectations during the first quarter of 2009.  Residential mortgage and home equity lending comprise the largest components of our consumer lending portfolio.  As of March 31, 2009, the weighted average credit score for our residential mortgage loan portfolio was 755, with 96% of this portfolio having a loan-to-value ratio of 80% or less.  As of March 31, 2009, the weighted average credit score for our home equity loan portfolio was 744, with the majority of the portfolio having a loan-to-value ratio of 80% or less.

 

Included in NPAs are loans that we consider impaired.  Impaired loans are defined as those which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.   Impaired loans were $26.4 million as of March 31, 2009, $8.3 million as of December 31, 2008, and less than $0.1 million as of March 31, 2008.  Impaired loans had a related Allowance of $4.6 million as of March 31, 2009 and less than $0.1 million as of December 31, 2008.  Impaired loans had no related Allowance as of March 31, 2008.

 

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

 

The changes in loans and leases past due 90 days or more and still accruing interest from December 31, 2008 and March 31, 2008 reflect  normal delinquency and resolution activity consistent with the slowing economy in Hawaii.

 

35



Table of Contents

 

Reserve for Credit Losses

 

Table 19 presents the activity in our reserve for credit losses.

 

Reserve for Credit Losses (Unaudited)

 

 

 

 

 

Table 19

 

 

 

Three Months Ended

 

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Balance at Beginning of Period

 

$

128,667

 

$

120,667

 

$

96,167

 

Loans and Leases Charged-Off

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

(6,464

)

(3,490

)

(1,389

)

Construction

 

 

(1,932

)

 

Lease Financing

 

(20

)

 

(134

)

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

(827

)

(192

)

 

Home Equity

 

(2,316

)

(732

)

(806

)

Automobile

 

(2,982

)

(3,277

)

(2,915

)

Other 1

 

(3,577

)

(2,363

)

(2,803

)

Total Loans and Leases Charged-Off

 

(16,186

)

(11,986

)

(8,047

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and Industrial

 

542

 

227

 

986

 

Lease Financing

 

2

 

3

 

3

 

Consumer

 

 

 

 

 

 

 

Residential Mortgage

 

145

 

13

 

78

 

Home Equity

 

96

 

25

 

21

 

Automobile

 

727

 

622

 

796

 

Other 1

 

705

 

538

 

736

 

Total Recoveries on Loans and Leases Previously Charged-Off

 

2,217

 

1,428

 

2,620

 

Net Loans and Leases Charged-Off

 

(13,969

)

(10,558

)

(5,427

)

Provision for Credit Losses

 

24,887

 

18,558

 

14,427

 

Provision for Unfunded Commitments

 

250

 

 

 

Balance at End of Period 2

 

$

139,835

 

$

128,667

 

$

105,167

 

 

 

 

 

 

 

 

 

Components

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses

 

$

134,416

 

$

123,498

 

$

99,998

 

Reserve for Unfunded Commitments

 

5,419

 

5,169

 

5,169

 

Total Reserve for Credit Losses

 

$

139,835

 

$

128,667

 

$

105,167

 

 

 

 

 

 

 

 

 

Average Loans and Leases Outstanding

 

$

6,446,513

 

$

6,537,134

 

$

6,587,918

 

 

 

 

 

 

 

 

 

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

 

0.88

%

0.64

%

0.33

%

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

 

2.12

%

1.89

%

1.52

%

 

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 (Unaudited).


We maintain a Reserve which 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, 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


36



Table of Contents


other noninterest expense.  The Provision exceeded net charge-offs of loans and leases for the first quarter of 2009 by $10.9.  As of March 31, 2009, the Allowance was $134.4 million or 2.12% of total loans and leases outstanding.  This represents an increase of 23 basis points from December 31, 2008 and an increase of 60 basis points from March 31, 2008.  The increase in the Allowance during the first quarter of 2009 was due to increased risk in our commercial and industrial, commercial mortgage, and other consumer loan portfolios due to the overall weakness in the Hawaii and the U.S. Mainland economies.

 

Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of March 31, 2009, 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

 

We increased the Unfunded Reserve by $0.3 million in the first quarter of 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 the potential of loss arising from adverse changes in interest rates and 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. 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, 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 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 20 presents, as of March 31, 2009 and 2008, 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 March 31, 2009, our Consolidated Statement of Condition is slightly asset sensitive to parallel changes in interest rates.  Net interest income sensitivity to changes in interest rates as of March 31, 2009 was more sensitive to changes in interest rates as compared to the sensitivity profiles as of March 31, 2008, particularly in higher interest rate scenarios.  Late in 2008, market conditions were very uncertain.  Economic conditions led consumers to a flight to safety.  Government intervention caused interest rates to fall to unprecedented levels and introduced significant market volatility.  In addition, credit spreads remained wide relative to historic levels.  These factors have contributed to greater interest rate risk to the Company as of March 31, 2009.


 

Net Interest Income Sensitivity Profile (Unaudited)

 

Table 20

 

 

Change in Net Interest Income Per Quarter

(dollars in thousands)

 

March 31, 2009

 

March 31, 2008

 

Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

+200

 

$

2,952

 

3.0

%

$

1,130

 

1.1

%

+100

 

1,378

 

1.4

 

925

 

0.9

 

-100

 

(886

)

(0.9

)

(2,158

)

(2.1

)

-200

 

(1,673

)

(1.7

)

(3,596

)

(3.5

)

 

38



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 further from its mostly “normal” profile, net interest income may increase.

 

We also use the Market Value of Portfolio Equity (“MVPE”) 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.  The MVPE was approximately $1.6 billion as of March 31, 2009 and 2008.  Table 21 presents, as of March 31, 2009 and 2008, an estimate

of the change in the MVPE that would occur from an instantaneous 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve.  The MVPE sensitivity increased as of March 31, 2009 compared to March 31, 2008 as a result of unusually low interest rates and extremely wide market spreads as of March 31, 2009.  A further significant parallel decline in interest rates effectively creates a 0% interest rate environment which greatly reduces the estimated value of both our loans and deposits.


 

Market Value of Equity Sensitivity Profile (Unaudited)

 

Table 21

 

 

Change in Market Value of Equity

(dollars in thousands)

 

March 31, 2009

 

March 31, 2008

 

Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

+200

 

$

143,892

 

8.8

%

$

(121,625

)

(7.4

)%

+100

 

106,447

 

6.5

 

(41,569

)

(2.5

)

-100

 

(164,815

)

(10.1

)

(53,937

)

(3.3

)

-200

 

(389,170

)

(23.8

)

(140,697

)

(8.5

)


Further enhancing the MVPE sensitivity analysis are:

 

·                  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 MVPE 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 medium-term interest rates decrease on a relative basis more than long-term interest rates.

 

Liquidity Management

 

Liquidity is managed in an effort to ensure that we have 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


 

39



Table of Contents


generated through growth in deposits and long-term debt.

 

We strengthened our liquidity position in the first quarter of 2009, with increased levels of deposits.  Total deposits were $9.2 billion as of March 31, 2009, a $920.7 million or 11% increase from December 31, 2008 and a $1.1 billion or 14% increase from March 31, 2008.  As a result, cash and cash equivalents were $1.2 billion as of March 31, 2009, an increase of $403.5 million from December 31, 2008 and an increase of $589.2 million from March 31, 2008.

 

In February 2009, we repaid $25.0 million in privately placed fixed rate notes.  In March 2009, we repaid $119.0 million of our subordinated notes.

 

During 2009, we expect to contribute $10.2 million to our pension plans and $1.2 million to our postretirement benefit plan.

 

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 March 31, 2009, the Company and the Bank were “well capitalized” under this regulatory framework.  There have been no conditions or events since March 31, 2009 that management believes have changed either the Company’s or the Bank’s capital classifications.

As of March 31, 2009, our shareholders’ equity was $833.9 million, an increase of $43.2 million or 5% from December 31, 2008.

 

In response to a slowing economy and economic uncertainty, we began in the second half of 2008 to increase capital.  As of March 31, 2009, our Tier 1 capital ratio was 12.02%, our total capital ratio was 13.28%, our leverage ratio was 6.94%, and our ratio of tangible common equity to risk-weighted assets was 12.47%.

 

From the beginning of our share repurchase program in July 2001 through October 28, 2008, we repurchased a total of 45.6 million shares of common stock and returned $1.6 billion to our shareholders at an average cost of $35.44 per share.  We have not repurchased shares of our common stock since October 28, 2008, except for purchases from our employees in connection with income tax withholdings related to the vesting of restricted stock and shares purchased for our Rabbi Trust.  Remaining buyback authority under our share repurchase program was $85.4 million as of April 17, 2009.  Total share repurchase authority under our share repurchase program was $1.70 billion as of April 17, 2009.

 

In April 2009, our Board of Directors declared a quarterly cash dividend of $0.45 per share on our outstanding shares.  The dividend will be payable on June 12, 2009 to our shareholders of record at the close of business on May 29, 2009.


 

40



Table of Contents

 

Table 22 presents our regulatory capital and ratios as of March 31, 2009, December 31, 2008, and March 31, 2008.

 

Regulatory Capital and Ratios (Unaudited)

 

 

 

 

 

Table 22

 

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008 1

 

Regulatory Capital

 

 

 

 

 

 

 

Shareholders’ Equity

 

$

833,935

 

$

790,704

 

$

766,747

 

Add:

Capital Securities of Bancorp Hawaii Capital Trust I

 

 

 

26,425

 

Less:

Cumulative Change in Fair Value of Financial Liabilities

 

 

 

 

 

 

 

 

Accounted for Under the Fair Value Option

 

(2,565

)

(683

)

(2,736

)

 

Goodwill

 

34,959

 

34,959

 

34,959

 

 

Postretirement Benefit Liability Adjustments

 

6,969

 

7,079

 

8,522

 

 

Unrealized Valuation and Other Adjustments

 

22,967

 

(4,276

)

9,208

 

 

Other Assets

 

2,353

 

2,106

 

2,715

 

Tier 1 Capital

 

769,252

 

751,519

 

740,504

 

Allowable Reserve for Credit Losses

 

80,758

 

84,163

 

88,352

 

Unrealized Gains on Investment Securities Available-for-Sale

 

 

 

97

 

Total Regulatory Capital

 

$

850,010

 

$

835,682

 

$

828,953

 

 

 

 

 

 

 

 

 

Risk-Weighted Assets

 

$

6,401,527

 

$

6,688,530

 

$

7,051,323

 

 

 

 

 

 

 

 

 

Key Regulatory Capital Ratios

 

 

 

 

 

 

 

Tier 1 Capital Ratio

 

12.02

%

11.24

%

10.50

%

Total Capital Ratio

 

13.28

 

12.49

 

11.76

 

Leverage Ratio

 

6.94

 

7.30

 

6.97

 

 

1

Tier 1 capital, total capital, and leverage ratios as of March 31, 2008 were revised from 10.54%, 11.79%, and 6.99%, respectively.


The revisions to our Regulatory Capital Ratios as of March 31, 2008 did not change our well capitalized position, as defined in the regulatory framework for prompt corrective action, as previously reported.

 

Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations

 

Off-Balance Sheet Arrangements

 

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as variable-interest entities, which would have been established for the

purpose of facilitating off-balance sheet arrangements.

 

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, 2008.

 

Credit Commitments

 

Table 23 presents our credit commitments as of March 31, 2009.


 

Credit Commitments (Unaudited)

 

 

 

 

 

 

 

 

 

Table 23

 

 

 

Less Than

 

 

 

 

 

After 5

 

 

 

(dollars in thousands)

 

One Year

 

1-3 Years

 

4-5 Years

 

Years

 

Total

 

Unfunded Commitments to Extend Credit

 

$

588,407

 

$

409,036

 

$

75,642

 

$

1,151,879

 

$

2,224,964

 

Standby Letters of Credit

 

81,607

 

1,333

 

 

 

82,940

 

Commercial Letters of Credit

 

21,188

 

 

 

 

21,188

 

Total Credit Commitments

 

$

691,202

 

$

410,369

 

$

75,642

 

$

1,151,879

 

$

2,329,092

 

 

41



Table of Contents

 

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 Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2009.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2009.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II - Other Information

 

Item 1A.         Risk Factors

 

There are no material changes from the risk factors set forth under Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

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

 

The Parent’s repurchases of equity securities for the first quarter of 2009 were as follows:

 

Issuer Purchases of Equity Securities (Unaudited)

 

 

 

 

 

 

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

 

January 1 - 31, 2009

 

6,862

 

$

35.88

 

 

$

85,356,214

 

February 1 - 28, 2009

 

8,763

 

35.97

 

 

85,356,214

 

March 1 - 31, 2009

 

5,446

 

30.72

 

 

85,356,214

 

Total

 

21,071

 

$

34.58

 

 

 

 

 

1

The shares purchased in the first quarter of 2009 were from employees in connection with income tax withholdings related to the vesting of restricted stock and shares purchased for our Rabbi Trust. 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

As of April 17, 2009, $85.4 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.

 

42



Table of Contents

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date:    April 22, 2009

Bank of Hawaii Corporation

 

 

 

 

 

By:

      /s/ Allan R. Landon

 

 

      Allan R. Landon

 

 

      Chairman of the Board and

 

 

      Chief Executive Officer

 

 

 

 

 

 

 

By:

      /s/ Kent T. Lucien

 

 

      Kent T. Lucien

 

 

      Chief Financial Officer

 

43



Table of Contents

 

Exhibit Index

 

Exhibit Number

 

 

 

12

 

Computation of Ratio of Earnings to Fixed Charges (Unaudited)

 

 

 

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

 


Exhibit 12

 

Bank of Hawaii Corporation and Subsidiaries

Computation of Ratio of Earnings to Fixed Charges (Unaudited)

 

 

 

Three Months Ended
    March 31,

 

(dollars in thousands)

 

2009 1

 

2008 1

 

Earnings:

 

 

 

 

 

Income Before Provision for Income Taxes

 

$

54,607

 

$

80,446

 

Add:

Fixed Charges Including Interest on Deposits

 

25,855

 

42,496

 

Total Earnings Including Fixed Charges and Interest on Deposits

 

80,462

 

122,942

 

Less:

Interest on Deposits

 

17,025

 

27,465

 

Total Earnings Excluding Interest on Deposits

 

$

63,437

 

$

95,477

 

 

 

 

 

 

 

Fixed Charges:

 

 

 

 

 

Fixed Charges Including Interest on Deposits

 

$

25,855

 

$

42,496

 

Less:

Interest on Deposits

 

17,025

 

27,465

 

Total Fixed Charges Excluding Interest on Deposits

 

$

8,830

 

$

15,031

 

 

 

 

 

 

 

1

The Company recorded no interest expense on its liabilities established in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”

 

 

 

 

 

 

 

Ratio of Earnings to Fixed Charges:

 

 

 

 

 

Including Interest on Deposits

 

3.1

x

2.9

x

Excluding Interest on Deposits

 

7.2

x

6.4

x

 


Exhibit 31.1

 

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

Under the Securities Exchange Act of 1934

 

I, Allan R. Landon, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date:  April 22, 2009

 

 

/s/ Allan R. Landon

 

Allan R. Landon

 

Chairman of the Board and

 

Chief Executive Officer

 


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:  April 22, 2009

/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 March 31, 2009 (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 for the dates and periods covered by the Periodic Report.

 

 

Date:  April 22, 2009

 

 

 

 

 

 

/s/ Allan R. Landon

 

Allan R. Landon

 

Chairman of the Board and

 

Chief Executive Officer

 

 

 

 

 

/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.