Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2011

 

or

 

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

 

Commission File Number: 1-6887

 

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

130 Merchant Street, Honolulu, Hawaii

 

96813

(Address of principal executive offices)

 

(Zip Code)

 

1-888-643-3888

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

 

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

Yes x  No o

 

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

 

Large accelerated filer x

Accelerated filer o

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

Smaller reporting company o

 

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

Yes o  No x

 

As of October 17, 2011, there were 46,453,519 shares of common stock outstanding.

 

 

 



Table of Contents

 

Bank of Hawaii Corporation

Form 10-Q

Index

 

 

 

 

Page

 

 

 

 

Part I - Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Consolidated Statements of Income –
Three and nine months ended September 30, 2011 and 2010

 

2

 

 

 

 

 

Consolidated Statements of Condition –
September 30, 2011 and December 31, 2010

 

3

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2011 and 2010

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended September 30, 2011 and 2010

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

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

 

32

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

58

 

 

 

 

Item 4.

Controls and Procedures

 

58

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

59

 

 

 

 

Item 1A.

Risk Factors

 

59

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

59

 

 

 

 

Item 6.

Exhibits

 

59

 

 

 

 

Signatures

 

60

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

          Three Months Ended

 

          Nine Months Ended

 

          September 30,

 

          September 30,

(dollars in thousands, except per share amounts)

2011

2010

 

2011

2010

Interest Income

 

 

 

 

 

   Interest and Fees on Loans and Leases

$                  65,344

$                  70,198

 

$                197,479

$              219,466

   Income on Investment Securities

 

 

 

 

 

      Available-for-Sale

23,097

40,775

 

84,256

129,605

      Held-to-Maturity

20,344

1,553

 

48,530

5,116

   Deposits

6

5

 

6

21

   Funds Sold

160

211

 

708

916

   Other

279

278

 

837

832

Total Interest Income

109,230

113,020

 

331,816

355,956

Interest Expense

 

 

 

 

 

   Deposits

4,561

7,041

 

14,585

23,278

   Securities Sold Under Agreements to Repurchase

7,400

6,670

 

21,779

19,571

   Funds Purchased

4

10

 

15

23

   Long-Term Debt

499

673

 

1,475

2,877

Total Interest Expense

12,464

14,394

 

37,854

45,749

Net Interest Income

96,766

98,626

 

293,962

310,207

Provision for Credit Losses

2,180

13,359

 

10,471

50,009

Net Interest Income After Provision for Credit Losses

94,586

85,267

 

283,491

260,198

Noninterest Income

 

 

 

 

 

   Trust and Asset Management

10,788

10,534

 

34,021

33,699

   Mortgage Banking

5,480

6,811

 

11,263

14,027

   Service Charges on Deposit Accounts

9,820

12,737

 

29,127

41,407

   Fees, Exchange, and Other Service Charges

16,219

15,500

 

47,826

45,810

   Investment Securities Gains, Net

-

7,877

 

6,084

42,849

   Insurance

2,664

2,646

 

8,645

7,652

   Other

5,892

7,020

 

17,282

18,337

Total Noninterest Income

50,863

63,125

 

154,248

203,781

Noninterest Expense

 

 

 

 

 

   Salaries and Benefits

44,307

46,840

 

137,889

138,904

   Net Occupancy

11,113

10,186

 

31,916

30,484

   Net Equipment

4,662

4,545

 

14,101

13,469

   Professional Fees

2,245

905

 

6,697

4,988

   FDIC Insurance

2,065

3,159

 

7,319

9,366

   Other

19,563

24,255

 

65,889

60,303

Total Noninterest Expense

83,955

89,890

 

263,811

257,514

Income Before Provision for Income Taxes

61,494

58,502

 

173,928

206,465

Provision for Income Taxes

18,188

14,438

 

53,114

63,101

Net Income

$                  43,306

$                  44,064

 

$                120,814

$              143,364

Basic Earnings Per Share

$                      0.93

$                      0.91

 

$                      2.55

$                    2.98

Diluted Earnings Per Share

$                      0.92

$                      0.91

 

$                      2.54

$                    2.96

Dividends Declared Per Share

$                      0.45

$                      0.45

 

$                      1.35

$                    1.35

Basic Weighted Average Shares

46,806,439

48,189,358

 

47,358,049

48,062,385

Diluted Weighted Average Shares

46,934,140

48,462,154

 

47,531,066

48,386,647

 

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

 

2



 

Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

  Consolidated Statements of Condition (Unaudited)

 

 

 

September 30,

December 31,

(dollars in thousands)

2011

2010

Assets

 

 

Interest-Bearing Deposits

$                    3,543

$                    3,472

Funds Sold

242,062

438,327

Investment Securities

 

 

   Available-for-Sale

4,448,898

6,533,874

   Held-to-Maturity (Fair Value of $2,610,081 and $134,028)

2,520,422

127,249

Loans Held for Sale

12,745

17,564

Loans and Leases

5,348,472

5,335,792

   Allowance for Loan and Lease Losses

(143,410)

(147,358)

     Net Loans and Leases

5,205,062

5,188,434

Total Earning Assets

12,432,732

12,308,920

Cash and Noninterest-Bearing Deposits

206,875

165,748

Premises and Equipment

104,509

108,170

Customers' Acceptances

749

437

Accrued Interest Receivable

43,319

41,151

Foreclosed Real Estate

3,341

1,928

Mortgage Servicing Rights

23,990

25,379

Goodwill

31,517

31,517

Other Assets

457,726

443,537

Total Assets

$           13,304,758

$           13,126,787

 

 

 

Liabilities

 

 

Deposits

 

 

   Noninterest-Bearing Demand

$             2,702,296

$             2,447,713

   Interest-Bearing Demand

1,745,812

1,871,718

   Savings

4,449,351

4,526,893

   Time

1,111,554

1,042,671

Total Deposits

10,009,013

9,888,995

Funds Purchased

9,882

9,478

Short-Term Borrowings

6,400

6,200

Securities Sold Under Agreements to Repurchase

1,929,266

1,901,084

Long-Term Debt

30,705

32,652

Banker's Acceptances

749

437

Retirement Benefits Payable

30,704

30,885

Accrued Interest Payable

6,751

5,007

Taxes Payable and Deferred Taxes

114,842

121,517

Other Liabilities

148,671

119,399

Total Liabilities

12,286,983

12,115,654

Shareholders' Equity

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: September 30, 2011 - 57,132,310 / 46,570,413 and
December 31, 2010 - 57,115,287 / 48,097,672)

571

570

Capital Surplus

503,255

500,888

Accumulated Other Comprehensive Income

46,754

26,965

Retained Earnings

986,202

932,629

Treasury Stock, at Cost (Shares: September 30, 2011 - 10,561,897 and
December 31, 2010 - 9,017,615)

(519,007)

(449,919)

Total Shareholders' Equity

1,017,775

1,011,133

Total Liabilities and Shareholders' Equity

$           13,304,758

$           13,126,787

 

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-

 

 

Compre-

 

 

 

 

Common

Capital

hensive

Retained

Treasury

hensive

(dollars in thousands)

Total

Stock

Surplus

Income

Earnings

Stock

Income

   Balance as of December 31, 2010

$ 1,011,133

$       570

$ 500,888

$ 26,965

$ 932,629

$ (449,919)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

120,814

-

-

-

120,814

-

$ 120,814

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Net Unrealized Gains on Investment Securities,

 

 

 

 

 

 

 

           Net of Reclassification Adjustment

18,376

-

-

18,376

-

-

18,376

        Amortization of Net Losses Related to Defined Benefit Plans

1,413

-

-

1,413

-

-

1,413

     Total Comprehensive Income

 

 

 

 

 

 

$ 140,603

Share-Based Compensation

2,001

-

2,001

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

      Compensation Plans and Related Tax Benefits (309,108 shares)

10,477

1

366

-

(3,193)

13,303

 

Common Stock Repurchased (1,836,367 shares)

(82,391)

-

-

-

-

(82,391)

 

Cash Dividends Paid ($1.35 per share)

(64,048)

-

-

-

(64,048)

-

 

Balance as of September 30, 2011

$ 1,017,775

$        571

$ 503,255

$ 46,754

$ 986,202

$ (519,007)

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2009

$   895,973

$        569

$ 494,318

$   6,925

$ 843,521

$ (449,360)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

143,364

-

-

-

143,364

-

$ 143,364

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Net Unrealized Gains on Investment Securities,

 

 

 

 

 

 

 

           Net of Reclassification Adjustment

58,886

-

-

58,886

-

-

58,886

        Amortization of Net Losses Related to Defined Benefit Plans

1,142

-

-

1,142

-

-

1,142

     Total Comprehensive Income

 

 

 

 

 

 

$ 203,392

Share-Based Compensation

2,703

-

2,703

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

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

15,716

1

2,416

-

(6,850)

20,149

 

Common Stock Repurchased (276,471 shares)

(13,089)

-

-

-

-

(13,089)

 

Cash Dividends Paid ($1.35 per share)

(65,134)

-

-

-

(65,134)

-

 

Balance as of September 30, 2010

$ 1,039,561

$        570

$ 499,437

$ 66,953

$ 914,901

$ (442,300)

 

 

 

 

 

 

 

 

 

 

 

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

 

4



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended

 

September 30,

   (dollars in thousands)

2011

2010

Operating Activities

 

 

   Net Income

$            120,814

$            143,364

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

 

 

     Provision for Credit Losses

10,471

50,009

     Depreciation and Amortization

10,918

10,008

     Amortization of Deferred Loan and Lease Fees

(1,986)

(2,019)

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

39,455

31,474

     Share-Based Compensation

2,001

2,703

     Benefit Plan Contributions

(965)

(2,559)

     Deferred Income Taxes

(8,277)

(15,193)

     Net Gain on Sale of Proprietary Mutual Funds

(1,956)

(2,852)

     Gains on Sale of Insurance Business

-

(904)

     Net Gains on Sales of Leases

(795)

(292)

     Net Gains on Investment Securities

(6,084)

(42,849)

     Proceeds from Sales of Loans Held for Sale

334,883

418,650

     Originations of Loans Held for Sale

(321,509)

(412,158)

     Tax Benefits from Share-Based Compensation

(696)

(2,725)

     Net Change in Other Assets and Other Liabilities

6,214

(19,707)

   Net Cash Provided by Operating Activities

182,488

154,950

 

 

 

Investing Activities

 

 

   Investment Securities Available-for-Sale:

 

 

      Proceeds from Prepayments and Maturities

730,294

1,047,571

      Proceeds from Sales

682,283

1,289,679

      Purchases

(1,535,348)

(3,109,587)

   Investment Securities Held-to-Maturity:

 

 

      Proceeds from Prepayments and Maturities

199,844

39,685

      Purchases

(384,785)

-

   Proceeds from Sale of Proprietary Mutual Funds

1,956

4,424

   Proceeds from Sale of Insurance Business

-

904

   Net Change in Loans and Leases

(37,522)

390,512

   Premises and Equipment, Net

(7,257)

(7,887)

   Net Cash Used in Investing Activities

(350,535)

(344,699)

 

 

 

Financing Activities

 

 

   Net Change in Deposits

120,018

192,786

   Net Change in Short-Term Borrowings

28,786

(1,330)

   Repayments of Long-Term Debt

-

(50,000)

   Tax Benefits from Share-Based Compensation

696

2,725

   Proceeds from Issuance of Common Stock

9,919

13,250

   Repurchase of Common Stock

(82,391)

(13,089)

   Cash Dividends Paid

(64,048)

(65,134)

   Net Cash Provided by Financing Activities

12,980

79,208

 

 

 

Net Change in Cash and Cash Equivalents

(155,067)

(110,541)

Cash and Cash Equivalents at Beginning of Period

607,547

555,067

Cash and Cash Equivalents at End of Period

$            452,480

$            444,526

Supplemental Information

 

 

   Cash Paid for Interest

$              35,448

$              45,254

   Cash Paid for Income Taxes

68,613

115,374

   Non-Cash Investing Activities:

 

 

     Transfer from Investment Securities Available-For-Sale to Investment Securities Held-To-Maturity

2,220,814

-

     Transfer from Loans to Foreclosed Real Estate

2,067

3,478

     Transfers from Loans to Loans Held for Sale

8,555

8,713

 

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

 

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

 

Certain prior period information has been reclassified to conform to the current period presentation.

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Investment Securities

 

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer.  The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security.  Premiums or discounts on investment securities are amortized or accreted as an adjustment of yield using the interest method over the estimated life of the security.  Unrealized holding gains or losses that remain in accumulated other comprehensive income are also amortized or accreted over the estimated life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

 

Realized gains and losses are recorded in noninterest income using the specific identification method.

 

Loans Modified in a Troubled Debt Restructuring

 

In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”  The provisions of ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” include the required disclosure of qualitative information about how financing receivables were modified and quantitative information about the extent and financial effects of modifications made during the period.  The Company is also required to disclose qualitative information about how such modifications are factored into the determination of the allowance for loan and lease losses.  Furthermore, the Company is also required to disclose information about troubled debt restructurings that meet the definition of a troubled debt restructuring within the previous 12 months for which there was a payment default in the current period.  The provisions of ASU No. 2010-20 were originally to be effective for the Company’s reporting period ended March 31, 2011.  However, the amendments in ASU No. 2011-01 deferred the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completed their project clarifying the guidance for determining what constitutes a troubled debt restructuring.

 

6



Table of Contents

 

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures related to troubled debt restructurings as required by ASU No. 2010-20.  The Company adopted the provisions of ASU No. 2010-20 retrospectively to all modifications and restructuring activities that have occurred from January 1, 2011.  As of September 30, 2011, the Company identified $0.5 million in loans that were newly considered troubled debt restructurings under the provisions of ASU No. 2011-02.  These loans did not require an Allowance as each was either previously partially charged-off or was adequately secured by collateral.  See Note 3 to the Consolidated Financial Statements for the disclosures required by ASU No. 2010-20.

 

Goodwill

 

In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.”  Under GAAP, the evaluation of goodwill impairment is a two-step test.  In Step 1, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value.  If it does, an entity must perform Step 2 of the goodwill impairment test to determine whether goodwill has been impaired and to calculate the amount of that impairment.  The provisions of this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  The Company adopted the provisions of this ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2011.  As of March 31, 2011, the Company had no reporting units with zero or negative carrying amounts or reporting units where there was a reasonable possibility of failing Step 1 of the goodwill impairment test.  As a result, the adoption of this ASU had no impact on the Company’s statements of income and condition.

 

Fair Value Measurements and Disclosures

 

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers into and out of Levels 1, 2, and 3, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation technique (e.g., market approach, income approach, or cost approach) and inputs used to measure fair value was required for recurring, nonrecurring, and Level 2 and 3 fair value measurements.  The Company adopted these provisions of this ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  This ASU also included a requirement that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as previously permitted.  The Company adopted this provision of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2011.  As this provision amends only the disclosure requirements related to Level 3 activity, the adoption of this provision of the ASU had no impact on the Company’s statements of income and condition.  See Note 12 to the Consolidated Financial Statements for the disclosures required by this ASU.

 

Future Application of Accounting Pronouncements

 

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale.  Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale.  The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee.  The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights.  ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control.  The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012.  As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU is not expected to have a material impact on the Company’s statements of income and condition.

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in

 

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active markets.  ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks.  This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed.  The provisions of ASU No. 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011.  The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s statements of income and condition.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The statement(s) are required to be presented with equal prominence as the other primary financial statements.  ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required.  The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income.  The adoption of ASU No. 2011-05 will have no impact on the Company’s statements of condition.

 

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.”  The provisions of ASU No. 2011-08 permits an entity an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required.  Otherwise, no further impairment testing is required.  ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount.  The provisions of ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill.  The Company performs its annual impairment test for goodwill in the fourth quarter of each year.  The adoption of ASU No. 2011-08 is not expected to have a material impact on the Company’s statements of income and condition.

 

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Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2011 and December 31, 2010 were as follows:

 

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Fair

  (dollars in thousands)

Cost

Gains

Losses

Value

September 30, 2011

 

 

 

 

Available-for-Sale:

 

 

 

 

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

$        1,276,925

$             10,710

$            (1,039)

$          1,286,596

Debt Securities Issued by States and Political Subdivisions

152,762

6,807

(1)

159,568

Debt Securities Issued by Corporations

133,670

481

(1,611)

132,540

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

2,721,303

79,394

(1,065)

2,799,632

    U.S. Government-Sponsored Enterprises

67,147

3,415

-

70,562

Total Mortgage-Backed Securities

2,788,450

82,809

(1,065)

2,870,194

Total

$        4,351,807

$           100,807

$            (3,716)

$          4,448,898

Held-to-Maturity:

 

 

 

 

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

$           179,481

$               6,601

$                     -

$             186,082

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

2,285,502

79,905

(42)

2,365,365

    U.S. Government-Sponsored Enterprises

55,439

3,195

-

58,634

Total Mortgage-Backed Securities

2,340,941

83,100

(42)

2,423,999

Total

$        2,520,422

$             89,701

$                 (42)

$          2,610,081

 

 

 

 

 

December 31, 2010

 

 

 

 

Available-for-Sale:

 

 

 

 

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

$           536,770

$             19,131

$                 (45)

$             555,856

Debt Securities Issued by States and Political Subdivisions

113,715

1,477

(1,583)

113,609

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

500

5

-

505

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

5,696,907

84,008

(30,887)

5,750,028

    U.S. Government-Sponsored Enterprises

109,259

4,617

-

113,876

Total Mortgage-Backed Securities

5,806,166

88,625

(30,887)

5,863,904

Total

$        6,457,151

$           109,238

$          (32,515)

$          6,533,874

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$             47,368

$               2,959

$                     -

$               50,327

    U.S. Government-Sponsored Enterprises

79,881

3,820

-

83,701

Total

$           127,249

$               6,779

$                     -

$             134,028

 

During the three months ended March 31, 2011, the Company reclassified at fair value approximately $2.2 billion in available-for-sale investment securities to the held-to-maturity category.  The related unrealized after-tax gains of approximately $8.2 million remained in accumulated other comprehensive income to be amortized over the estimated remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities.  No gains or losses were recognized at the time of reclassification.  Management considers the held-to-maturity classification of these investment securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity.

 

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Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2011.  Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

 

Amortized

Fair

(dollars in thousands)

Cost

Value

Available-for-Sale:

 

 

Due in One Year or Less

 $             312,101

 $            313,003

Due After One Year Through Five Years

                 761,553

                769,983

Due After Five Years Through Ten Years

                 108,303

                111,747

Due After Ten Years

                 381,400

                383,971

 

              1,563,357

             1,578,704

Mortgage-Backed Securities Issued by

 

 

    Government Agencies

              2,721,303

             2,799,632

    U.S. Government-Sponsored Enterprises

                   67,147

                  70,562

Total Mortgage-Backed Securities

              2,788,450

             2,870,194

Total

 $          4,351,807

 $         4,448,898

 

 

 

Held-to-Maturity:

 

 

Due After One Year Through Five Years

 $             179,481

 $            186,082

Mortgage-Backed Securities Issued by

 

 

    Government Agencies

              2,285,502

             2,365,365

    U.S. Government-Sponsored Enterprises

                   55,439

                  58,634

Total Mortgage-Backed Securities

              2,340,941

             2,423,999

Total

 $          2,520,422

 $         2,610,081

 

 

Investment securities with carrying values of $3.2 billion as of September 30, 2011 and December 31, 2010 were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.  As of September 30, 2011 and December 31, 2010, the Company did not have any investment securities pledged where the secured party had the right to sell or repledge the collateral.

 

There were no sales of investment securities for the three months ended September 30, 2011.  Gross gains on the sales of investment securities were $7.9 million for the three months ended September 30, 2010 and $10.3 million and $42.9 million for the nine months ended September 30, 2011 and 2010, respectively.  Gross losses on the sales of investment securities were $4.2 million for the nine months ended September 30, 2011 and were not material for the three and nine months ended September 30, 2010.  The Company’s sales of available-for-sale investment securities during the nine months ended September 30, 2011 were primarily due to management’s ongoing evaluation of the investment securities portfolio in response to established asset/liability management objectives.

 

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

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

 

Unrealized

 

 

Unrealized

 

 

Unrealized

   (dollars in thousands)

Fair Value

Losses

 

Fair Value

Losses

 

Fair Value

Losses

September 30, 2011

 

 

 

 

 

 

 

 

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

$   258,363

$  (1,033)

 

$         991

$         (6)

 

$   259,354

$   (1,039)

Debt Securities Issued by States and Political Subdivisions

221

(1)

 

-

-

 

221

(1)

Debt Securities Issued by Corporations

59,659

(1,611)

 

-

-

 

59,659

(1,611)

Mortgage-Backed Securities Issued by Government Agencies

149,158

(1,091)

 

943

(16)

 

150,101

(1,107)

Total

$   467,401

$  (3,736)

 

$      1,934

$       (22)

 

$   469,335

$   (3,758)

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

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

$       1,366

$       (36)

 

$      1,204

$         (9)

 

$       2,570

$        (45)

Debt Securities Issued by States and Political Subdivisions

67,754

(1,583)

 

-

-

 

67,754

(1,583)

Mortgage-Backed Securities Issued by Government Agencies

1,662,897

(30,887)

 

-

-

 

1,662,897

(30,887)

Total

$ 1,732,017

$ (32,506)

 

$      1,204

$         (9)

 

$ 1,733,221

$ (32,515)

 

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The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2011, which was comprised of 59 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

 

As of September 30, 2011, the gross unrealized losses reported for mortgage-backed securities related to investment securities issued by the Government National Mortgage Association.

 

As of September 30, 2011, the carrying value of the Company’s Federal Home Loan Bank stock and Federal Reserve Bank stock was $61.3 million and $18.6 million, respectively.  These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities.  These securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution.  The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment.  Management considers these non-marketable equity securities to be long-term investments.  Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

 

 

Note 3.    Loans and Leases and the Allowance for Loan and Lease Losses

 

Loans and Leases

 

The Company’s loan and lease portfolio was comprised of the following as of September 30, 2011 and December 31, 2010:

 

 

 

September 30,  

December 31,

(dollars in thousands)

2011

2010

 

Commercial

 

 

 

 

Commercial and Industrial

$                790,294

$                772,624

 

Commercial Mortgage

922,075

863,385

 

Construction

69,635

80,325

 

Lease Financing

312,159

334,997

Total Commercial

2,094,163

2,051,331

 

Consumer

 

 

 

 

Residential Mortgage

2,130,589

2,094,189

 

Home Equity

775,105

807,479

 

Automobile

191,497

209,008

 

Other 1

157,118

173,785

Total Consumer

3,254,309

3,284,461

 

Total Loans and Leases

$             5,348,472

$             5,335,792

 

 

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

 

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Table of Contents

 

Allowance for Loan and Lease Losses (the “Allowance”)

 

The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2011.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of September 30, 2011.

 

  (dollars in thousands)

Commercial

Consumer

Total

Three Months Ended September 30, 2011

 

 

 

 

Allowance for Loan and Lease Losses: 

 

 

 

 

 

Balance at Beginning of Period

$         88,985

$          55,991

$    144,976

 

 

 

Loans and Leases Charged-Off

(4,215)

(6,556)

(10,771)

 

 

 

Recoveries on Loans and Leases Previously Charged-Off

4,929

2,096

7,025

 

 

 

Net Loans and Leases Charged-Off

714

(4,460)

(3,746)

 

 

 

Provision for Credit Losses

(7,024)

9,204

2,180

 

 

Balance at End of Period

$         82,675

$          60,735

$    143,410

Nine Months Ended September 30, 2011

 

 

 

 

Allowance for Loan and Lease Losses: 

 

 

 

 

 

Balance at Beginning of Period

$         80,977

$          66,381

$    147,358

 

 

 

Loans and Leases Charged-Off

(7,379)

(19,773)

(27,152)

 

 

 

Recoveries on Loans and Leases Previously Charged-Off

5,994

6,739

12,733

 

 

 

Net Loans and Leases Charged-Off

(1,385)

(13,034)

(14,419)

 

 

 

Provision for Credit Losses

3,083

7,388

10,471

 

 

Balance at End of Period

$         82,675

$          60,735

$    143,410

 

 

 

 

As of September 30, 2011

 

 

 

 

Allowance for Loan and Lease Losses: 

 

 

 

 

 

Individually Evaluated for Impairment

$                   -

$            4,179

$        4,179

 

 

Collectively Evaluated for Impairment

82,675

56,556

139,231

 

 

Total

$         82,675

$          60,735

$    143,410

 

Recorded Investment in Loans and Leases:

 

 

 

 

 

Individually Evaluated for Impairment

$           8,602

$          26,400

$      35,002

 

 

Collectively Evaluated for Impairment

2,085,561

3,227,909

5,313,470

 

 

Total

$    2,094,163

$     3,254,309

$ 5,348,472

 

 

Credit Quality Indicators

 

The Company uses several credit quality indicators to manage credit risk in an ongoing manner.  The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories.  Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation.  These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment.  Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively.  These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

 

The following are the definitions of the Company’s credit quality indicators:

 

Pass:                                                                                            Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement.  Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

 

Special Mention:                             Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention.  If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease.  The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment.  Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

 

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Classified:                                                                Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any.  Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest.   Residential mortgage and home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less.  Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of up to six months following a loan modification.  Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status.  Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner.

 

The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2011 and December 31, 2010.

 

 

September 30, 2011

  (dollars in thousands)

Commercial

and Industrial

Commercial Mortgage

Construction

Lease Financing

Total

Commercial

Pass

$           742,444

$           845,563

$             52,570

$           282,123

$        1,922,700

Special Mention

26,170

28,253

579

26,183

81,185

Classified

21,680

48,259

16,486

3,853

90,278

Total

$           790,294

$           922,075

$             69,635

$           312,159

$        2,094,163

 

 

 

 

 

 

(dollars in thousands)

Residential Mortgage

Home

Equity

Automobile

Other 1

Total

Consumer

Pass

$        2,102,296

$           770,603

$           191,359

$           156,370

$        3,220,628

Classified

28,293

4,502

138

748

33,681

Total

$        2,130,589

$           775,105

$           191,497

$           157,118

$        3,254,309

Total Recorded Investment in Loans and Leases

 

 

 

 

$        5,348,472

 

 

 

 

 

 

 

December 31, 2010

(dollars in thousands)

Commercial

and Industrial

Commercial Mortgage

Construction

Lease Financing

Total

Commercial

Pass

$           720,618

$           775,938

$             61,598

$           305,967

$        1,864,121

Special Mention

18,096

32,055

1,975

26,767

78,893

Classified

33,910

55,392

16,752

2,263

108,317

Total

$           772,624

$           863,385

$             80,325

$           334,997

$        2,051,331

 

 

 

 

 

 

(dollars in thousands)

Residential Mortgage

Home

Equity

Automobile

Other 1

Total

Consumer

Pass

$        2,059,012

$           804,158

$           208,598

$           172,762

$        3,244,530

Classified

35,177

3,321

410

1,023

39,931

Total

$        2,094,189

$           807,479

$           209,008

$           173,785

$        3,284,461

Total Recorded Investment in Loans and Leases

 

 

 

 

$        5,335,792

 

 

 

 

 

 

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

 

 

 

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Table of Contents

 

Aging Analysis of Accruing and Non-Accruing Loans and Leases

 

The following presents by class, an aging analysis of the Company’s accruing and non-accruing loans and leases as of September 30, 2011 and December 31, 2010.

 

  (dollars in thousands)

30 - 59
Days
Past Due

60 - 89
Days
Past Due

Past Due
90 Days
or More

Non-
Accrual

Total
Past Due
and Non-
Accrual

Current

Total Loans
and Leases

Non-Accrual
Loans and
Leases that
are Current
2

  As of September 30, 2011

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and Industrial

$         956

$        761

$             -

$       6,593

$         8,310

$    781,984

$       790,294

$           5,912

 

Commercial Mortgage

103

-

-

2,188

2,291

919,784

922,075

1,231

 

Construction

-

-

-

-

-

69,635

69,635

-

 

Lease Financing

13

-

-

6

19

312,140

312,159

6

Total Commercial

1,072

761

-

8,787

10,620

2,083,543

2,094,163

7,149

Consumer

 

 

 

 

 

 

 

 

 

Residential Mortgage

11,735

9,667

7,664

23,779

52,845

2,077,744

2,130,589

3,940

 

Home Equity

6,422

1,545

2,639

1,863

12,469

762,636

775,105

284

 

Automobile

3,640

714

138

-

4,492

187,005

191,497

-

 

Other 1

1,336

1,049

414

-

2,799

154,319

157,118

-

Total Consumer

23,133

12,975

10,855

25,642

72,605

3,181,704

3,254,309

4,224

Total

$    24,205

$   13,736

$   10,855

$     34,429

$        83,225

$ 5,265,247

$    5,348,472

$         11,373

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and Industrial

$      1,807

$     1,341

$             -

$       1,642

$         4,790

$    767,834

$       772,624

$           1,564

 

Commercial Mortgage

2,100

-

-

3,503

5,603

857,782

863,385

2,415

 

Construction

-

-

-

288

288

80,037

80,325

-

 

Lease Financing

82

-

-

19

101

334,896

334,997

19

Total Commercial

3,989

1,341

-

5,452

10,782

2,040,549

2,051,331

3,998

Consumer

 

 

 

 

 

 

 

 

 

Residential Mortgage

8,389

9,045

5,399

28,152

50,985

2,043,204

2,094,189

7,891

 

Home Equity

4,248

2,420

1,067

2,254

9,989

797,490

807,479

1,041

 

Automobile

6,046

1,004

410

-

7,460

201,548

209,008

-

 

Other 1

1,962

1,145

707

-

3,814

169,971

173,785

-

Total Consumer

20,645

13,614

7,583

30,406

72,248

3,212,213

3,284,461

8,932

Total

$    24,634

$   14,955

$     7,583

$     35,858

$       83,030

$ 5,252,762

$    5,335,792

$         12,930

 

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

Represents nonaccrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.

 

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Impaired Loans

 

The following presents by class, information related to the Company’s impaired loans as of September 30, 2011 and December 31, 2010.

 

(dollars in thousands)

Recorded
Investment

Unpaid
Principal Balance

Related Allowance
for Loan Losses

  September 30, 2011

 

 

 

 

Impaired Loans with No Related Allowance Recorded:

 

 

 

 

 

Commercial

 

 

 

 

 

 

Commercial and Industrial

$                6,436

$               13,787

$                        -

 

 

 

Commercial Mortgage

2,166

2,666

-

 

 

Total Commercial

8,602

16,453

-

 

 

Total Impaired Loans with No Related Allowance Recorded

$                8,602

$               16,453

$                        -

 

 

 

 

 

 

 

 

Impaired Loans with an Allowance Recorded:

 

 

 

 

 

Commercial

 

 

 

 

 

 

Commercial and Industrial

$                4,723

$                 4,723

$                    905

 

 

 

Commercial Mortgage

314

617

71

 

 

Total Commercial

5,037

5,340

976

 

 

Consumer

 

 

 

 

 

 

Residential Mortgage

26,400

30,457

4,179

 

 

 

Home Equity

21

21

1

 

 

 

Automobile

5,927

5,927

99

 

 

 

Other 1

569

569

51

 

 

Total Consumer

32,917

36,974

4,330

 

 

Total Impaired Loans with an Allowance Recorded

$              37,954

$               42,314

$                 5,306

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

Commercial

$              13,639

$               21,793

$                    976

 

 

Consumer

32,917

36,974

4,330

 

 

Total Impaired Loans

$              46,556

$               58,767

$                 5,306

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

Impaired Loans with No Related Allowance Recorded:

 

 

 

 

 

Commercial

 

 

 

 

 

 

Commercial and Industrial

$                1,564

$                 5,414

$                        -

 

 

 

Commercial Mortgage

3,377

4,407

-

 

 

Total Commercial

4,941

9,821

-

 

 

Total Impaired Loans with No Related Allowance Recorded

$                4,941

$                 9,821

$                        -

 

 

 

 

 

 

 

 

Impaired Loans with an Allowance Recorded:

 

 

 

 

 

Commercial

 

 

 

 

 

 

Commercial and Industrial

$                5,156

$                 5,156

$                    927

 

 

 

Commercial Mortgage

442

745

99

 

 

 

Construction

288

288

65

 

 

Total Commercial

5,886

6,189

1,091

 

 

Consumer

 

 

 

 

 

 

Residential Mortgage

21,058

24,709

2,919

 

 

 

Home Equity

21

21

1

 

 

 

Automobile

5,845

5,845

137

 

 

 

Other 1

282

282

22

 

 

Total Consumer

27,206

30,857

3,079

 

 

Total Impaired Loans with an Allowance Recorded

$              33,092

$               37,046

$                 4,170

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

Commercial

$              10,827

$               16,010

$                 1,091

 

 

Consumer

27,206

30,857

3,079

 

 

Total Impaired Loans

$              38,033

$               46,867

$                 4,170

 

Comprised of other revolving credit and installment financing.

 

 

 

 

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The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011.

 

 

 

 

Three Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2011

(dollars in thousands)

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Average
Recorded
Investment

 

Interest
Income
Recognized

Impaired Loans with No Related Allowance Recorded:

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and Industrial

$               4,019

 

$                   -

 

$                2,665

 

$                       -

 

 

Commercial Mortgage

2,693

 

-

 

3,022

 

-

 

 

Construction

144

 

-

 

192

 

-

 

Total Commercial

6,856

 

-

 

5,879

 

-

 

Total Impaired Loans with No Related Allowance Recorded

$               6,856

 

$                   -

 

$                5,879

 

$                       -

 

 

 

 

 

 

 

 

 

 

Impaired Loans with an Allowance Recorded:

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and Industrial

$               3,030

 

$                27

 

$                3,873

 

$                  116

 

 

Commercial Mortgage

311

 

1

 

351

 

10

 

 

Construction

-

 

-

 

96

 

-

 

Total Commercial

3,341

 

28

 

4,320

 

126

 

Consumer

 

 

 

 

 

 

 

 

 

Residential Mortgage

25,374

 

78

 

23,662

 

252

 

 

Home Equity

21

 

-

 

21

 

-

 

 

Automobile

5,837

 

150

 

5,841

 

438

 

 

Other 1

601

 

8

 

513

 

22

 

Total Consumer

31,833

 

236

 

30,037

 

712

 

Total Impaired Loans with an Allowance Recorded

$             35,174

 

$              264

 

$              34,357

 

$                  838

 

 

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

 

 

 

Commercial

$             10,197

 

$                28

 

$              10,199

 

$                  126

 

Consumer

31,833

 

236

 

30,037

 

712

 

Total Impaired Loans

$             42,030

 

$              264

 

$              40,236

 

$                  838

 

Comprised of other revolving credit and installment financing.

 

 

For the three and nine months ended September 30, 2011, the amount of interest income recognized by the Company within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status.  For the three and nine months ended September 30, 2011, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.

 

Modifications

 

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company offers various types of concessions when modifying a loan or lease, however, forgiveness of principal is rarely granted.  Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested.  Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Construction loans modified in a TDR may also involve extending the interest-only payment periodLease financing modifications generally involves a short-term forbearance period, usually about three months, after which the missed payments are added to the end of the lease term, thereby extending the maturity date.  Interest continues to accrue on the missed payments and as a result, the effective yield on the lease remains unchanged.  As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally two years.  During that time, the borrower’s entire monthly payment is applied to principal.  After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.  Land loans are also included in the class of residential mortgage loans.  Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity.  Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly

 

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payments from interest-only to principal and interest, while leaving the interest rate unchanged.  Home equity modifications are made infrequently and are not offered if the Company also holds the first mortgage.  Home equity modifications are uniquely designed to meet the specific needs of each borrower.  Occasionally, the terms will be modified to a standalone second lien mortgage, thereby changing their loan class from home equity to residential mortgage.  Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.

 

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific Allowance associated with the loan.  An Allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.

 

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011.

 

 

Loans Modified as a TDR for the

 

Loans Modified as a TDR for the

 

Three Months Ended September 30, 2011

 

Nine Months Ended September 30, 2011

 

 

Recorded  

Increase in 

 

 

Recorded  

Increase in 

 Troubled Debt Restructurings 1

Number of 

Investment  

the Allowance 

 

Number of

Investment  

the Allowance 

 (dollars in thousands)

Contracts 

(as of period end)  

(as of period end)  

 

Contracts

(as of period end)  

(as of period end) 

 Commercial

 

 

 

 

 

 

 

 

Commercial and Industrial

$                 4,106  

$                            - 

 

7

$                 4,419  

$                        - 

 

Commercial Mortgage

292  

 

4

1,249  

 Total Commercial

4,398  

 

11

5,668  

 Consumer

 

 

 

 

 

 

 

 

Residential Mortgage

1,413  

131 

 

13

6,308  

904 

 

Automobile

90 

893  

 

201

2,064  

 

Other 2

-  

 

3

326  

 Total Consumer

93 

2,306  

131 

 

217

8,698  

904 

 Total

98 

$                 6,704  

$                       131 

 

228

$               14,366  

$                    904 

 

 1        The period end balances are inclusive of all partial paydowns and charge-offs since the modification date.  Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

 

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

 

 

The following presents by class, loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three and nine months ended September 30, 2011.

 

 

 

Loans Modified as a TDR

 

Loans Modified as a TDR

 

 

Within the Previous Twelve Months

 

Within the Previous Twelve Months