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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, 2010

 

or

 

 

 

o

 

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

 

 

for the transition period from                  to                 

 

Commission File Number: 1-6887

 

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

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

 

 

 

130 Merchant Street, Honolulu, Hawaii

 

96813

(Address of principal executive offices)

 

(Zip Code)

 

1-888-643-3888

(Registrant’s telephone number, including area code)

 

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

Yes x   No o

 

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

Yes 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

 

As of April 13, 2010, there were 48,041,730 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, 2010 and 2009

 

2

 

 

 

 

 

 

 

 

 

Consolidated Statements of Condition –
March 31, 2010, December 31, 2009, and March 31, 2009

 

3

 

 

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Three months ended March 31, 2010 and 2009

 

4

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –
Three months ended March 31, 2010 and 2009

 

5

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

 

 

Item 2.

 

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

 

21

 

 

 

 

 

 

 

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)

 

2010

 

2009

 

Interest Income

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

77,271

 

$

86,592

 

Income on Investment Securities

 

 

 

 

 

Trading

 

 

594

 

Available-for-Sale

 

43,841

 

32,301

 

Held-to-Maturity

 

1,863

 

2,567

 

Deposits

 

13

 

10

 

Funds Sold

 

309

 

577

 

Other

 

277

 

276

 

Total Interest Income

 

123,574

 

122,917

 

Interest Expense

 

 

 

 

 

Deposits

 

8,307

 

17,025

 

Securities Sold Under Agreements to Repurchase

 

6,429

 

6,652

 

Funds Purchased

 

7

 

5

 

Long-Term Debt

 

1,178

 

2,173

 

Total Interest Expense

 

15,921

 

25,855

 

Net Interest Income

 

107,653

 

97,062

 

Provision for Credit Losses

 

20,711

 

24,887

 

Net Interest Income After Provision for Credit Losses

 

86,942

 

72,175

 

Noninterest Income

 

 

 

 

 

Trust and Asset Management

 

11,708

 

11,632

 

Mortgage Banking

 

3,464

 

8,678

 

Service Charges on Deposit Accounts

 

13,814

 

13,386

 

Fees, Exchange, and Other Service Charges

 

14,504

 

14,976

 

Investment Securities Gains, Net

 

20,021

 

56

 

Insurance

 

2,715

 

5,641

 

Other

 

5,556

 

15,996

 

Total Noninterest Income

 

71,782

 

70,365

 

Noninterest Expense

 

 

 

 

 

Salaries and Benefits

 

44,564

 

47,028

 

Net Occupancy

 

10,144

 

10,328

 

Net Equipment

 

4,558

 

4,316

 

Professional Fees

 

1,992

 

2,549

 

FDIC Insurance

 

3,100

 

1,814

 

Other

 

17,348

 

21,898

 

Total Noninterest Expense

 

81,706

 

87,933

 

Income Before Provision for Income Taxes

 

77,018

 

54,607

 

Provision for Income Taxes

 

24,282

 

18,567

 

Net Income

 

$

52,736

 

$

36,040

 

Basic Earnings Per Share

 

$

1.10

 

$

0.76

 

Diluted Earnings Per Share

 

$

1.09

 

$

0.75

 

Dividends Declared Per Share

 

$

0.45

 

$

0.45

 

Basic Weighted Average Shares

 

47,914,412

 

47,566,005

 

Diluted Weighted Average Shares

 

48,289,427

 

47,802,249

 

 

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)

 

2010

 

2009

 

2009

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

4,910

 

$

8,755

 

$

5,031

 

Funds Sold

 

269,410

 

291,546

 

895,595

 

Investment Securities

 

 

 

 

 

 

 

Available-for-Sale

 

5,447,239

 

5,330,834

 

3,106,608

 

Held-to-Maturity (Fair Value of $173,646; $186,668; and $233,633)

 

167,099

 

181,018

 

228,177

 

Loans Held for Sale

 

11,143

 

16,544

 

24,121

 

Loans and Leases

 

5,610,081

 

5,759,785

 

6,338,726

 

Allowance for Loan and Lease Losses

 

(146,358

)

(143,658

)

(134,416

)

Net Loans and Leases

 

5,463,723

 

5,616,127

 

6,204,310

 

Total Earning Assets

 

11,363,524

 

11,444,824

 

10,463,842

 

Cash and Noninterest-Bearing Deposits

 

355,398

 

254,766

 

299,393

 

Premises and Equipment

 

110,310

 

110,976

 

114,536

 

Customers’ Acceptances

 

677

 

1,386

 

822

 

Accrued Interest Receivable

 

42,180

 

45,334

 

36,928

 

Foreclosed Real Estate

 

3,192

 

3,132

 

346

 

Mortgage Servicing Rights

 

26,082

 

25,970

 

23,528

 

Goodwill

 

31,517

 

31,517

 

34,959

 

Other Assets

 

502,790

 

496,922

 

473,774

 

Total Assets

 

$

12,435,670

 

$

12,414,827

 

$

11,448,128

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

2,194,280

 

$

2,252,083

 

$

1,970,041

 

Interest-Bearing Demand

 

1,669,586

 

1,609,413

 

1,926,576

 

Savings

 

4,515,597

 

4,405,969

 

3,905,709

 

Time

 

1,114,621

 

1,142,211

 

1,410,465

 

Total Deposits

 

9,494,084

 

9,409,676

 

9,212,791

 

Funds Purchased

 

8,888

 

8,888

 

9,665

 

Short-Term Borrowings

 

7,317

 

6,900

 

10,000

 

Securities Sold Under Agreements to Repurchase

 

1,529,047

 

1,618,717

 

844,283

 

Long-Term Debt

 

90,309

 

90,317

 

59,003

 

Banker’s Acceptances

 

677

 

1,386

 

822

 

Retirement Benefits Payable

 

36,895

 

37,435

 

54,450

 

Accrued Interest Payable

 

7,766

 

7,026

 

10,010

 

Taxes Payable and Deferred Taxes

 

224,112

 

229,140

 

258,505

 

Other Liabilities

 

97,203

 

109,369

 

154,664

 

Total Liabilities

 

11,496,298

 

11,518,854

 

10,614,193

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: March 31, 2010 - 57,027,543 / 48,040,830;
December 31, 2009 - 57,028,239 / 48,018,943;
and March 31, 2009 - 57,019,595 / 47,803,544)

 

570

 

569

 

569

 

Capital Surplus

 

494,653

 

494,318

 

491,352

 

Accumulated Other Comprehensive Income (Loss)

 

18,063

 

6,925

 

(1,319

)

Retained Earnings

 

874,305

 

843,521

 

802,195

 

Treasury Stock, at Cost (Shares: March 31, 2010 - 8,986,713;
December 31, 2009 - 9,009,296; and March 31, 2009 - 9,216,051)

 

(448,219

)

(449,360

)

(458,862

)

Total Shareholders’ Equity

 

939,372

 

895,973

 

833,935

 

Total Liabilities and Shareholders’ Equity

 

$

12,435,670

 

$

12,414,827

 

$

11,448,128

 

 

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

 

3



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hensive

 

 

 

 

 

Compre-

 

 

 

 

 

Common

 

Capital

 

Income

 

Retained

 

Treasury

 

hensive

 

(dollars in thousands)

 

Total

 

Stock

 

Surplus

 

(Loss)

 

Earnings

 

Stock

 

Income

 

Balance as of December 31, 2009

 

$

895,973

 

$

569

 

$

494,318

 

$

6,925

 

$

843,521

 

$

(449,360

)

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

52,736

 

 

 

 

52,736

 

 

$

52,736

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

10,757

 

 

 

10,757

 

 

 

10,757

 

Amortization of Net Losses Related to Defined Benefit Plans

 

381

 

 

 

381

 

 

 

381

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

63,874

 

Share-Based Compensation

 

714

 

 

714

 

 

 

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits (52,481 shares)

 

1,785

 

1

 

(379

)

 

(320

)

2,483

 

 

 

Common Stock Repurchased (30,594 shares)

 

(1,342

)

 

 

 

 

(1,342

)

 

 

Cash Dividends Paid

 

(21,632

)

 

 

 

(21,632

)

 

 

 

Balance as of March 31, 2010

 

$

939,372

 

$

570

 

$

494,653

 

$

18,063

 

$

874,305

 

$

(448,219

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Losses Related to Defined Benefit Plans

 

326

 

 

 

326

 

 

 

326

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

63,609

 

Share-Based Compensation

 

235

 

 

235

 

 

 

 

 

 

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

 

1,627

 

1

 

(1,398

)

 

(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

)

 

 

 

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)

 

2010

 

2009

 

Operating Activities

 

 

 

 

 

Net Income

 

$

52,736

 

$

36,040

 

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

 

 

 

 

 

Provision for Credit Losses

 

20,711

 

24,887

 

Depreciation and Amortization

 

3,332

 

3,399

 

Amortization of Deferred Loan and Lease Fees

 

(623

)

(625

)

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

 

10,799

 

1,211

 

Share-Based Compensation

 

714

 

235

 

Benefit Plan Contributions

 

(687

)

(421

)

Deferred Income Taxes

 

(5,780

)

(3,811

)

Net Gains on Investment Securities

 

(20,021

)

(56

)

Net Change in Trading Securities

 

 

91,500

 

Proceeds from Sales of Loans Held for Sale

 

117,261

 

398,376

 

Originations of Loans Held for Sale

 

(111,860

)

(400,957

)

Tax Benefits from Share-Based Compensation

 

(10

)

(17

)

Net Change in Other Assets and Other Liabilities

 

(22,495

)

41,129

 

Net Cash Provided by Operating Activities

 

44,077

 

190,890

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

351,199

 

243,329

 

Proceeds from Sales

 

483,588

 

21,791

 

Purchases

 

(921,953

)

(810,966

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

13,865

 

11,347

 

Net Change in Loans and Leases

 

132,316

 

177,913

 

Premises and Equipment, Net

 

(2,666

)

(1,814

)

Net Cash Provided by (Used in) Investing Activities

 

56,349

 

(358,400

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

84,408

 

920,693

 

Net Change in Short-Term Borrowings

 

(89,253

)

(185,521

)

Repayments of Long-Term Debt

 

 

(143,971

)

Tax Benefits from Share-Based Compensation

 

10

 

17

 

Proceeds from Issuance of Common Stock

 

2,034

 

2,069

 

Repurchase of Common Stock

 

(1,342

)

(729

)

Cash Dividends Paid

 

(21,632

)

(21,511

)

Net Cash Provided by (Used In) Financing Activities

 

(25,775

)

571,047

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

74,651

 

403,537

 

Cash and Cash Equivalents at Beginning of Period

 

555,067

 

796,482

 

Cash and Cash Equivalents at End of Period

 

$

629,718

 

$

1,200,019

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

Cash Paid for Interest

 

$

15,182

 

$

29,682

 

Cash Paid for Income Taxes

 

37,016

 

1,390

 

Non-Cash Investing Activity:

 

 

 

 

 

Transfer from Loans to Foreclosed Real Estate

 

60

 

 

 

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

 

5



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

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

 

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

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Fair Value Measurements and Disclosures

 

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.  See Note 10 to the Consolidated Financial Statements for the disclosures required by this ASU.

 

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

 

6



Table of Contents

 

Note 2.  Investment Securities

 

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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

March 31, 2010

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

746,761

 

$

7,050

 

$

(958

)

$

752,853

 

Debt Securities Issued by States and Political Subdivisions

 

51,940

 

1,402

 

(16

)

53,326

 

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

 

751

 

33

 

 

784

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

4,265,067

 

44,846

 

(6,274

)

4,303,639

 

U.S. Government-Sponsored Enterprises

 

321,681

 

14,956

 

 

336,637

 

Total Mortgage-Backed Securities

 

4,586,748

 

59,802

 

(6,274

)

4,640,276

 

Total

 

$

5,386,200

 

$

68,287

 

$

(7,248

)

$

5,447,239

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

55,834

 

$

2,379

 

$

 

$

58,213

 

U.S. Government-Sponsored Enterprises

 

111,265

 

4,168

 

 

115,433

 

Total

 

$

167,099

 

$

6,547

 

$

 

$

173,646

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

711,223

 

$

11,248

 

$

(1,679

)

$

720,792

 

Debt Securities Issued by States and Political Subdivisions

 

52,742

 

1,391

 

(17

)

54,116

 

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

 

751

 

41

 

 

792

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

4,015,816

 

26,900

 

(20,029

)

4,022,687

 

U.S. Government-Sponsored Enterprises

 

509,225

 

23,276

 

(54

)

532,447

 

Total Mortgage-Backed Securities

 

4,525,041

 

50,176

 

(20,083

)

4,555,134

 

Total

 

$

5,289,757

 

$

62,856

 

$

(21,779

)

$

5,330,834

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

59,542

 

$

1,879

 

$

 

$

61,421

 

U.S. Government-Sponsored Enterprises

 

121,476

 

3,771

 

 

125,247

 

Total

 

$

181,018

 

$

5,650

 

$

 

$

186,668

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

566,606

 

$

1,898

 

$

(501

)

$

568,003

 

Debt Securities Issued by States and Political Subdivisions

 

50,482

 

1,196

 

(68

)

51,610

 

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

 

145,530

 

312

 

 

145,842

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

590,072

 

13,448

 

(1

)

603,519

 

U.S. Government-Sponsored Enterprises

 

1,413,795

 

46,662

 

(4

)

1,460,453

 

Private-Label Mortgage-Backed Securities

 

279,093

 

54

 

(27,068

)

252,079

 

Total Mortgage-Backed Securities

 

2,282,960

 

60,164

 

(27,073

)

2,316,051

 

Other Debt Securities

 

25,088

 

15

 

(1

)

25,102

 

Total

 

$

3,070,666

 

$

63,585

 

$

(27,643

)

$

3,106,608

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

69,731

 

$

2,276

 

$

 

$

72,007

 

U.S. Government-Sponsored Enterprises

 

158,446

 

3,213

 

(33

)

161,626

 

Total

 

$

228,177

 

$

5,489

 

$

(33

)

$

233,633

 

 

7



Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of March 31, 2010.  Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

Due in One Year or Less

 

$

22,304

 

$

87

 

$

 

$

22,391

 

Due After One Year Through Five Years

 

328,177

 

930

 

(283

)

328,824

 

Due After Five Years Through Ten Years

 

93,930

 

992

 

(14

)

94,908

 

Due After Ten Years

 

355,041

 

6,476

 

(677

)

360,840

 

 

 

799,452

 

8,485

 

(974

)

806,963

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

4,265,067

 

44,846

 

(6,274

)

4,303,639

 

U.S. Government-Sponsored Enterprises

 

321,681

 

14,956

 

 

336,637

 

Total Mortgage-Backed Securities

 

4,586,748

 

59,802

 

(6,274

)

4,640,276

 

Total

 

$

5,386,200

 

$

68,287

 

$

(7,248

)

$

5,447,239

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

55,834

 

$

2,379

 

$

 

$

58,213

 

U.S. Government-Sponsored Enterprises

 

111,265

 

4,168

 

 

115,433

 

Total

 

$

167,099

 

$

6,547

 

$

 

$

173,646

 

 

Investment securities pledged where the secured parties have the right to sell or repledge the investment securities had carrying values of $2.7 billion as of March 31, 2010 and December 31, 2009, and $2.3 billion as of March 31, 2009.  These investment securities were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

 

Gross gains on the sales of investment securities were $20.0 million and $0.1 million for the three months ended March 31, 2010 and 2009, respectively.  Gross losses on the sales of investment securities were not material for the three months ended March 31, 2010 and 2009.  Realized gains and losses on investment securities were recorded in noninterest income using the specific identification method.

 

8



Table of Contents

 

The Company’s temporarily impaired investment securities as of March 31, 2010, December 31, 2009, and March 31, 2009 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

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

205,860

 

$

(937

)

$

1,627

 

$

(21

)

$

207,487

 

$

(958

)

Debt Securities Issued by
States and Political Subdivisions

 

875

 

(4

)

322

 

(12

)

1,197

 

(16

)

Mortgage-Backed Securities Issued by
Government Agencies

 

1,079,640

 

(6,274

)

 

 

1,079,640

 

(6,274

)

Total Temporarily Impaired
Investment Securities

 

$

1,286,375

 

$

(7,215

)

$

1,949

 

$

(33

)

$

1,288,324

 

$

(7,248

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

347,324

 

$

(1,656

)

$

1,703

 

$

(23

)

$

349,027

 

$

(1,679

)

Debt Securities Issued by
States and Political Subdivisions

 

878

 

(5

)

322

 

(12

)

1,200

 

(17

)

Mortgage-Backed Securities Issued by
Government Agencies

 

2,171,588

 

(20,029

)

 

 

2,171,588

 

(20,029

)

U.S. Government-Sponsored Enterprises

 

8,982

 

(54

)

 

 

8,982

 

(54

)

Total Mortgage-Backed Securities

 

2,180,570

 

(20,083

)

 

 

2,180,570

 

(20,083

)

Total Temporarily Impaired
Investment Securities

 

$

2,528,772

 

$

(21,744

)

$

2,025

 

$

(35

)

$

2,530,797

 

$

(21,779

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

226,503

 

$

(454

)

$

1,847

 

$

(47

)

$

228,350

 

$

(501

)

Debt Securities Issued by
States and Political Subdivisions

 

3,603

 

(48

)

314

 

(20

)

3,917

 

(68

)

Mortgage-Backed Securities Issued by
Government Agencies

 

7,948

 

(1

)

 

 

7,948

 

(1

)

U.S. Government-Sponsored Enterprises

 

22,306

 

(37

)

 

 

22,306

 

(37

)

Private-Label Mortgage-Backed Securities

 

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

 

$

265,720

 

$

(2,413

)

$

238,054

 

$

(25,263

)

$

503,774

 

$

(27,676

)

 

The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2010, which were comprised of 69 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 March 31, 2010, the gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by the Government National Mortgage Association.

 

9



Table of Contents

 

Note 3.  Mortgage Servicing Rights

 

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.1 billion as of March 31, 2010 and December 31, 2009, and $2.9 billion as of March 31, 2009.  All of the Company’s residential mortgage loans sold to third parties is sold on a non-recourse basis.  The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of the borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $1.8 million and $1.6 million for the three months ended March 31, 2010 and 2009, respectively.  Servicing income is recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income.  The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.

 

For the three months ended March 31, 2010 and 2009, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Balance at Beginning of Period

 

$

15,332

 

$

19,553

 

Changes in Fair Value:

 

 

 

 

 

Due to Change in Valuation Assumptions 1

 

(93

)

(91

)

Due to Paydowns and Other 2

 

(432

)

(1,558

)

Total Changes in Fair Value of Mortgage Servicing Rights

 

(525

)

(1,649

)

Balance at End of Period

 

$

14,807

 

$

17,904

 

 

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

2    Principally represents changes due to loan payoffs.

 

The Company established a new class of mortgage servicing rights, to be accounted for under the amortization method, beginning with servicing rights recognized on or after July 1, 2008.  For the three months ended March 31, 2010 and 2009, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of a valuation allowance, was as follows:

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Balance at Beginning of Period

 

$

10,638

 

$

1,796

 

Servicing Rights that Resulted From Asset Transfers

 

945

 

3,923

 

Amortization

 

(308

)

(95

)

Balance at End of Period

 

$

11,275

 

$

5,624

 

Valuation Allowance:

 

 

 

 

 

Balance at Beginning of Period

 

$

 

$

292

 

Recoveries

 

 

(292

)

Balance at End of Period

 

$

 

$

 

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

 

$

11,275

 

$

5,624

 

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

 

 

 

 

 

Beginning of Period

 

$

14,853

 

$

1,504

 

End of Period

 

$

16,453

 

$

6,158

 

 

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

 

 

 

 

March 31,

 

 

 

2010

 

2009

 

Weighted-Average Constant Prepayment Rate 1

 

13.99%

 

16.85%

 

Weighted-Average Life (in years)

 

5.75   

 

4.55   

 

Weighted-Average Note Rate

 

5.23%

 

5.54%

 

Weighted-Average Discount Rate 2

 

7.24%

 

6.44%

 

 

1    Represents annualized loan repayment rate assumption.

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

 

10



Table of Contents

 

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

 

 

 

 

March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Constant Prepayment Rate

 

 

 

 

 

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

 

$

(385

)

$

(259

)

Decrease in fair value from 50 bps adverse change

 

(709

)

(517

)

Discount Rate

 

 

 

 

 

Decrease in fair value from 25 bps adverse change

 

(402

)

(280

)

Decrease in fair value from 50 bps adverse change

 

(795

)

(558

)

 

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

 

Note 4.  Securities Sold Under Agreements to Repurchase

 

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

 

As of March 31, 2010, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:

 

(dollars in thousands)

 

Amount

 

Overnight

 

$

7,000

 

2 to 30 Days

 

658,247

 

31 to 90 Days

 

148,189

 

Over 90 Days

 

715,611

 

Total

 

$

1,529,047

 

 

Note 5.  Accumulated Other Comprehensive Income (Loss)

 

The following table presents the change in accumulated other comprehensive income (loss) for the three months ended March 31, 2010 and 2009:

 

(dollars in thousands)

 

Before Tax Amount

 

Tax Effect

 

Net of Tax

 

March 31, 2010:

 

 

 

 

 

 

 

Net Unrealized Gains on Investment Securities

 

 

 

 

 

 

 

Available-for-Sale Arising During the Year

 

$

39,983

 

$

18,436

 

$

21,547

 

Reclassification of Net Gains on Investment Securities

 

 

 

 

 

 

 

Available-for-Sale Included in Net Income

 

(20,021

)

(9,231

)

(10,790

)

Change in Unrealized Gains and Losses on

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

19,962

 

9,205

 

10,757

 

Amortization of Net Losses Related to Defined Benefit Plans

 

595

 

214

 

381

 

Change in Accumulated Other Comprehensive Income (Loss)

 

$

20,557

 

$

9,419

 

$

11,138

 

 

 

 

 

 

 

 

 

March 31, 2009:

 

 

 

 

 

 

 

Net Unrealized Gains on Investment Securities

 

 

 

 

 

 

 

Available-for-Sale Arising During the Year

 

$

42,679

 

$

15,399

 

$

27,280

 

Reclassification of Net Gains on Investment Securities

 

 

 

 

 

 

 

Available-for-Sale Included in Net Income

 

(56

)

(19

)

(37

)

Change in Unrealized Gains and Losses on

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

42,623

 

15,380

 

27,243

 

Amortization of Net Losses Related to Defined Benefit Plans

 

509

 

183

 

326

 

Change in Accumulated Other Comprehensive Income (Loss)

 

$

43,132

 

$

15,563

 

$

27,569

 

 

11



Table of Contents

 

Note 6.  Earnings Per Share

 

There were no adjustments to net income, the numerator, for purposes of computing basic earnings per share.  The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share for the three months ended March 31, 2010 and 2009:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

Denominator for Basic Earnings Per Share

 

47,914,412

 

47,566,005

 

Dilutive Effect of Stock Options

 

325,630

 

208,569

 

Dilutive Effect of Restricted Stock

 

49,385

 

27,675

 

Denominator for Diluted Earnings Per Share

 

48,289,427

 

47,802,249

 

 

For the three months ended March 31, 2010 and 2009, 233,924 and 472,572 shares of stock options and restricted stock, respectively, were outstanding but not included in the calculation of diluted earnings per share as they were antidilutive.

 

Note 7.  Business Segments

 

The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury.  The Company’s internal management accounting process measures the performance of the business segments based on the management structure of the Company.  This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for credit losses, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.

 

The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to Treasury.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

 

Retail Banking

 

Retail Banking offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, and installment loans.  Deposit products include checking, savings, and time deposit accounts.  Retail Banking also offers retail life insurance products and provides merchant services to its small business customers.  Products and services from Retail Banking are delivered to customers through 71 Hawaii branch locations, 483 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.

 

Commercial Banking

 

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit and cash management 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 the Bank’s 12 branches in the Pacific Islands.

 

12



Table of Contents

 

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.

 

Treasury

 

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

 

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

 

Selected business segment financial information as of and for the three months ended March 31, 2010 and 2009 were as follows:

 

 

 

Retail

 

Commercial

 

Investment

 

Treasury and

 

Consolidated

 

(dollars in thousands)

 

Banking

 

Banking