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 June 30, 2010
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission File Number: 1-6887
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
99-0148992
(State of incorporation)
(I.R.S. Employer Identification No.)
130 Merchant Street, Honolulu, Hawaii
96813
(Address of principal executive offices)
(Zip Code)
1-888-643-3888
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 July 20, 2010, there were 48,265,874 shares of common stock outstanding.
Bank of Hawaii Corporation
Form 10-Q
Index
Page
Part I - Financial Information
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Income – Three and six months ended June 30, 2010 and 2009
2
Consolidated Statements of Condition – June 30, 2010, December 31, 2009, and June 30, 2009
3
Consolidated Statements of Shareholders’ Equity – Six months ended June 30, 2010 and 2009
4
Consolidated Statements of Cash Flows – Six months ended June 30, 2010 and 2009
5
Notes to Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
46
Item 4.
Controls and Procedures
Part II - Other Information
Item 1A.
Risk Factors
47
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
48
1
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended
Six Months Ended
June 30,
(dollars in thousands, except per share amounts)
2010
2009
Interest Income
Interest and Fees on Loans and Leases
$
71,997
83,342
149,268
169,934
Income on Investment Securities
Trading
—
594
Available-for-Sale
44,989
38,155
88,830
70,456
Held-to-Maturity
1,700
2,369
3,563
4,936
Deposits
16
15
Funds Sold
396
526
705
1,103
Other
277
276
554
552
Total Interest Income
119,362
124,673
242,936
247,590
Interest Expense
7,930
14,481
16,237
31,506
Securities Sold Under Agreements to Repurchase
6,472
6,477
12,901
13,129
Funds Purchased
13
10
Long-Term Debt
1,026
859
2,204
3,032
Total Interest Expense
15,434
21,822
31,355
47,677
Net Interest Income
103,928
102,851
211,581
199,913
Provision for Credit Losses
15,939
28,690
36,650
53,577
Net Interest Income After Provision for Credit Losses
87,989
74,161
174,931
146,336
Noninterest Income
Trust and Asset Management
11,457
11,881
23,165
23,513
Mortgage Banking
3,752
5,443
7,216
14,121
Service Charges on Deposit Accounts
14,856
12,910
28,670
26,296
Fees, Exchange, and Other Service Charges
15,806
15,410
30,310
30,386
Investment Securities Gains, Net
14,951
12
34,972
68
Insurance
2,291
4,744
5,006
10,385
5,761
9,432
11,317
25,428
Total Noninterest Income
68,874
59,832
140,656
130,197
Noninterest Expense
Salaries and Benefits
47,500
44,180
92,064
91,208
Net Occupancy
10,154
10,008
20,298
20,336
Net Equipment
4,366
4,502
8,924
8,818
Professional Fees
2,091
4,005
4,083
6,554
FDIC Insurance
3,107
8,987
6,207
10,801
18,700
17,902
36,048
39,800
Total Noninterest Expense
85,918
89,584
167,624
177,517
Income Before Provision for Income Taxes
70,945
44,409
147,963
99,016
Provision for Income Taxes
24,381
13,403
48,663
31,970
Net Income
46,564
31,006
99,300
67,046
Basic Earnings Per Share
0.97
0.65
2.07
1.41
Diluted Earnings Per Share
0.96
2.05
1.40
Dividends Declared Per Share
0.45
0.90
Basic Weighted Average Shares
48,080,485
47,682,604
47,997,996
47,624,521
Diluted Weighted Average Shares
48,415,602
47,948,531
48,352,082
47,876,509
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Consolidated Statements of Condition (Unaudited)
December 31,
(dollars in thousands)
Assets
Interest-Bearing Deposits
4,062
8,755
4,537
355,891
291,546
656,000
Investment Securities
5,980,759
5,330,834
4,292,911
Held-to-Maturity (Fair Value of $161,441; $186,668; and $214,484)
153,190
181,018
209,807
Loans Held for Sale
13,179
16,544
40,994
Loans and Leases
5,440,911
5,759,785
6,149,911
Allowance for Loan and Lease Losses
(147,358
)
(143,658
(137,416
Net Loans and Leases
5,293,553
5,616,127
6,012,495
Total Earning Assets
11,800,634
11,444,824
11,216,744
Cash and Noninterest-Bearing Deposits
343,514
254,766
294,022
Premises and Equipment
108,394
110,976
112,681
Customers’ Acceptances
412
1,386
2,084
Accrued Interest Receivable
41,420
45,334
43,042
Foreclosed Real Estate
3,192
3,132
438
Mortgage Servicing Rights
25,646
25,970
24,731
Goodwill
31,517
34,959
Other Assets
501,116
496,922
465,994
Total Assets
12,855,845
12,414,827
12,194,695
Liabilities
Noninterest-Bearing Demand
2,214,803
2,252,083
2,109,270
Interest-Bearing Demand
1,615,464
1,609,413
1,589,300
Savings
4,423,473
4,405,969
4,054,039
Time
1,070,919
1,142,211
1,267,052
Total Deposits
9,324,659
9,409,676
9,019,661
9,832
8,888
8,670
Short-Term Borrowings
7,000
6,900
10,000
2,081,393
1,618,717
1,799,794
40,300
90,317
91,432
Banker’s Acceptances
Retirement Benefits Payable
35,669
37,435
54,286
Accrued Interest Payable
5,078
7,026
7,765
Taxes Payable and Deferred Taxes
228,660
229,140
226,936
Other Liabilities
109,831
109,369
128,182
Total Liabilities
11,842,834
11,518,854
11,348,810
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: June 30, 2010 - 57,100,287 / 48,264,157; December 31, 2009 - 57,028,239 / 48,018,943; and June 30, 2009 - 57,028,940 / 47,881,083)
570
569
Capital Surplus
497,082
494,318
491,784
Accumulated Other Comprehensive Income (Loss)
61,220
6,925
(1,870
Retained Earnings
895,565
843,521
811,121
Treasury Stock, at Cost (Shares: June 30, 2010 - 8,836,130; December 31, 2009 - 9,009,296; and June 30, 2009 - 9,147,857)
(441,426
(449,360
(455,719
Total Shareholders’ Equity
1,013,011
895,973
845,885
Total Liabilities and Shareholders’ Equity
Consolidated Statements of Shareholders’ Equity (Unaudited)
Accum.
Compre-
hensive
Common
Capital
Income
Retained
Treasury
Total
Stock
Surplus
(Loss)
Earnings
Balance as of December 31, 2009
Comprehensive Income:
Other Comprehensive Income, Net of Tax:
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale
53,534
Amortization of Net Losses Related to Defined Benefit Plans
761
Total Comprehensive Income
153,595
Share-Based Compensation
1,545
Common Stock Issued under Purchase and EquityCompensation Plans and Related Tax Benefits (312,707 shares)
8,532
1,219
(3,902
11,214
Common Stock Repurchased (67,493 shares)
(3,280
Cash Dividends Paid
(43,354
Balance as of June 30, 2010
Balance as of December 31, 2008
790,704
568
492,515
(28,888
787,924
(461,415
26,302
716
94,064
944
Common Stock Issued under Purchase and EquityCompensation Plans and Related Tax Benefits (152,582 shares)
4,087
(1,675
(791
6,552
Common Stock Repurchased (24,870 shares)
(856
(43,058
Balance as of June 30, 2009
Consolidated Statements of Cash Flows (Unaudited)
Operating Activities
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization
6,702
6,794
Amortization of Deferred Loan and Lease Fees
(1,147
(1,216
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
17,964
1,723
Benefit Plan Contributions
(2,184
(1,453
Deferred Income Taxes
(4,975
(15,978
Gains on Sale of Insurance Business
(852
Net Gains on Sales of Leases
(1,614
(13,204
Net Gains on Investment Securities
(34,972
(68
Net Change in Trading Securities
91,500
Proceeds from Sales of Loans Held for Sale
232,574
670,158
Originations of Loans Held for Sale
(220,497
(672,979
Tax Benefits from Share-Based Compensation
(1,585
(61
Net Change in Other Assets and Other Liabilities
(31,441
(5,862
Net Cash Provided by Operating Activities
96,320
180,069
Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities
846,480
752,929
Proceeds from Sales
618,108
24,258
Purchases
(2,006,953
(2,511,199
Investment Securities Held-to-Maturity:
27,731
29,609
Proceeds from Sale of Insurance Business
1,879
Net Change in Loans and Leases
279,973
370,636
Premises and Equipment, Net
(4,120
(3,355
Net Cash Used in Investing Activities
(238,781
(1,335,243
Financing Activities
Net Change in Deposits
(85,017
727,563
Net Change in Short-Term Borrowings
463,720
768,995
Repayments of Long-Term Debt
(50,000
(143,971
1,585
61
Proceeds from Issuance of Common Stock
7,207
4,517
Repurchase of Common Stock
Net Cash Provided by Financing Activities
290,861
1,313,251
Net Change in Cash and Cash Equivalents
148,400
158,077
Cash and Cash Equivalents at Beginning of Period
555,067
796,482
Cash and Cash Equivalents at End of Period
703,467
954,559
Supplemental Information
Cash Paid for Interest
33,303
53,749
Cash Paid for Income Taxes
89,949
45,565
Non-Cash Investing Activities:
Transfer from Loans to Foreclosed Real Estate
60
92
Transfers from Loans to Loans Held for Sale
8,713
16,634
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii. Bank of Hawaii Corporation and its subsidiaries (the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands. The Parent’s principal subsidiary is Bank of Hawaii (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
Certain prior period information has been reclassified to conform to the current period presentation.
These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.
Fair Value Measurements and Disclosures
In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted certain provisions of this ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition. See Note 11 to the Consolidated Financial Statements for the disclosures required by this ASU.
This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.
Future Application of Accounting Pronouncements
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”). This ASU will also require the Company to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption will have no impact on the Company’s statements of income and condition.
Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s investment securities as of June 30, 2010, December 31, 2009, and June 30, 2009 were as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
June 30, 2010
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies
647,860
25,300
(16
673,144
Debt Securities Issued by States and Political Subdivisions
51,738
1,889
(13
53,614
Debt Securities Issued by U.S. Government-Sponsored Enterprises
750
774
Mortgage-Backed Securities Issued by Government Agencies
4,993,799
102,993
(5,169
5,091,623
U.S. Government-Sponsored Enterprises
155,081
6,523
161,604
Total Mortgage-Backed Securities
5,148,880
109,516
5,253,227
5,849,228
136,729
(5,198
Held-to-Maturity:
53,136
3,612
56,748
100,054
4,639
104,693
8,251
161,441
December 31, 2009
711,223
11,248
(1,679
720,792
52,742
1,391
(17
54,116
751
41
792
4,015,816
26,900
(20,029
4,022,687
509,225
23,276
(54
532,447
4,525,041
50,176
(20,083
4,555,134
5,289,757
62,856
(21,779
59,542
61,421
121,476
3,771
125,247
5,650
186,668
June 30, 2009
792,566
8,549
(2,329
798,786
88,083
951
(184
88,850
57
808
1,858,334
15,729
(11,841
1,862,222
1,257,907
44,481
(7
1,302,381
Private-Label Mortgage-Backed Securities
235,771
79
(21,300
214,550
3,352,012
60,289
(33,148
3,379,153
Other Debt Securities
25,084
231
(1
25,314
4,258,496
70,077
(35,662
Mortgage-Backed Securities Issued byGovernment Agencies
65,986
1,316
67,302
143,821
3,394
(33
147,182
4,710
214,484
7
The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2010. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
Fair Value
Due in One Year or Less
62,368
126
62,494
Due After One Year Through Five Years
289,120
3,831
(9
292,942
Due After Five Years Through Ten Years
92,639
3,885
96,517
Due After Ten Years
256,221
19,371
275,579
700,348
27,213
(29
727,532
Mortgage-Backed Securities issued byGovernment Agencies
Investment securities with carrying values of $3.2 billion as of June 30, 2010, $2.7 billion as of December 31, 2009, and $2.8 billion as of June 30, 2009, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.
Gross gains on the sales of investment securities were $15.0 million and less than $0.1 million for the three months ended June 30, 2010 and 2009, respectively, and were $35.0 million and $0.1 million for the six months ended June 30, 2010 and 2009, respectively. Gross losses on the sales of investment securities were not material for the three and six months ended June 30, 2010 and 2009. Realized gains and losses on investment securities were recorded in noninterest income using the specific identification method.
8
The Company’s temporarily impaired investment securities as of June 30, 2010, December 31, 2009, and June 30, 2009 were as follows:
Less Than 12 Months
12 Months or Longer
1,553
320
643,794
Total Temporarily Impaired Investment Securities
1,873
645,667
347,324
(1,656
1,703
(23
349,027
878
(5
322
(12
1,200
2,171,588
8,982
2,180,570
2,528,772
(21,744
2,025
(35
2,530,797
100,915
(2,287
1,780
(42
102,695
32,453
(170
(14
32,773
897,348
17,969
(40
2,724
(506
187,340
(20,794
190,064
918,041
(12,387
1,105,381
(33,181
34
1,051,409
(14,844
189,474
(20,851
1,240,883
(35,695
The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2010, which were comprised of 41 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 June 30, 2010, the gross unrealized losses reported for mortgage-backed securities related to investment securities issued by the Government National Mortgage Association.
9
Note 3. Mortgage Servicing Rights
The Company’s portfolio of residential mortgage loans serviced for third parties was $3.1 billion as of June 30, 2010 and December 31, 2009, and $3.0 billion as of June 30, 2009. All of the Company’s residential mortgage loans sold to third parties are 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 $2.1 million and $1.9 million for the three months ended June 30, 2010 and 2009, respectively, and $4.1 million and $3.8 million for the six months ended June 30, 2010 and 2009, respectively. Servicing income is recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income. The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.
For the three and six months ended June 30, 2010 and 2009, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:
Balance at Beginning of Period
14,807
17,904
15,332
19,553
Changes in Fair Value:
Due to Change in Valuation Assumptions 1
(554
198
(646
107
Due to Paydowns and Other 2
(413
(1,269
(846
(2,827
Total Changes in Fair Value of Mortgage Servicing Rights
(967
(1,071
(1,492
(2,720
Balance at End of Period
13,840
16,833
1 Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.
2 Principally represents changes due to loan payoffs.
For the three and six months ended June 30, 2010 and 2009, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of a valuation allowance, was as follows:
11,275
5,624
10,638
1,796
Servicing Rights that Resulted From Asset Transfers
896
2,444
1,841
6,367
Amortization
(365
(673
(265
11,806
7,898
Valuation Allowance:
292
Recoveries
(292
Mortgage Servicing Rights Accounted for Underthe Amortization Method, Net of a Valuation Allowance
Fair Value of Mortgage Servicing Rights Accounted for Under the Amortization Method
Beginning of Period
16,453
6,158
14,853
1,504
End of Period
15,044
10,301
The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of June 30, 2010, December 31, 2009, and June 30, 2009 were as follows:
Weighted-Average Constant Prepayment Rate 1
15.11
%
14.45
15.16
Weighted-Average Life (in years)
5.21
5.55
5.19
Weighted-Average Note Rate
5.20
5.27
5.41
Weighted-Average Discount Rate 2
7.04
8.00
7.95
1 Represents annualized loan repayment rate assumption.
2 Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.
A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of June 30, 2010, December 31, 2009, and June 30, 2009 is presented in the following table.
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change
(329
(315
(279
Decrease in fair value from 50 bps adverse change
(653
(624
(551
Discount Rate
Decrease in fair value from 25 bps adverse change
(378
(385
(326
(743
(755
(645
This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear. Also, the effect of changing one key assumption without changing other assumptions is not realistic.
Note 4. Securities Sold Under Agreements to Repurchase
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Statements of Condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.
As of June 30, 2010, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:
Amount
Overnight
240,000
2 to 30 Days
885,097
31 to 90 Days
237,900
Over 90 Days
718,396
11
Note 5. Comprehensive Income
The following table presents the components of comprehensive income for the three and six months ended June 30, 2010 and 2009:
Before Tax Amount
Tax Effect
Net of Tax
Three Months Ended June 30, 2010
Other Comprehensive Income (Loss):
Net Unrealized Gains on Investment SecuritiesAvailable-for-Sale
85,443
33,596
51,847
Reclassification of Net Gains on Investment SecuritiesAvailable-for-Sale Included in Net Income
(14,951
(5,881
(9,070
Change in Unrealized Gains and Losses onInvestment Securities Available-for-Sale
70,492
27,715
42,777
595
215
380
Change in Accumulated Other Comprehensive Income (Loss)
71,087
27,930
43,157
142,032
52,311
89,721
Three Months Ended June 30, 2009
Net Unrealized Losses on Investment SecuritiesAvailable-for-Sale
(1,515
(581
(934
(1,527
(586
(941
611
221
390
(916
43,493
13,038
30,455
Six Months Ended June 30, 2010
125,426
51,199
74,227
(14,279
(20,693
90,454
36,920
1,189
428
91,643
37,348
54,295
239,606
86,011
Six Months Ended June 30, 2009
41,164
14,819
26,345
(25
(43
41,096
14,794
1,119
403
42,215
15,197
27,018
141,231
47,167
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 and six months ended June 30, 2010 and 2009:
Denominator for Basic Earnings Per Share
Dilutive Effect of Stock Options
326,553
248,550
327,528
231,537
Dilutive Effect of Restricted Stock
8,564
17,377
26,558
20,451
Denominator for Diluted Earnings Per Share
For the three months ended June 30, 2010 and 2009, 256,702 and 486,365 shares, respectively, of stock options and restricted stock were outstanding but not included in the calculation of diluted earnings per share as they were antidilutive. For the six months ended June 30, 2010 and 2009, 279,472 and 484,029 shares, respectively, of stock options and restricted stock 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. Previously reported results have been reclassified to conform to the current organizational reporting structure.
The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions. Funds transfer pricing also serves to transfer interest rate risk to Treasury. However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.
Retail Banking
Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, and installment loans. Deposit products include checking, savings, and time deposit accounts. Retail Banking also offers retail life insurance products and provides merchant services to its small business customers. Products and services from Retail Banking are delivered to customers through 71 Hawaii branch locations, 487 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.
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 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.
14
Selected business segment financial information as of and for the three and six months ended June 30, 2010 and 2009 were as follows:
Retail
Commercial
Investment
Consolidated
Banking
Services
and Other
48,253
36,336
4,215
15,124
9,871
6,206
(127
(11
38,382
30,130
4,342
15,135
25,806
11,697
14,310
17,061
(43,436
(24,977
(15,553
(1,952
(85,918
20,752
16,850
3,099
30,244
(7,678
(5,866
(9,690
(24,381
13,074
10,984
1,952
20,554
Total Assets as of June 30, 2010
3,155,472
2,328,378
312,676
7,059,319
55,843
41,425
4,326
1,257
12,753
15,192
746
43,090
26,233
3,580
1,258
25,252
16,538
14,615
3,427
(43,937
(27,596
(15,797
(2,254
(89,584
24,405
15,175
2,398
2,431
(9,047
(5,436
(887
1,967
(13,403
15,358
9,739
1,511
4,398
Total Assets as of June 30, 2009
3,554,288
2,659,944
267,546
5,712,917
97,565
77,485
8,538
27,993
25,227
11,347
88
72,338
66,138
8,450
28,005
49,273
21,715
29,337
40,331
(85,769
(48,839
(29,598
(3,418
(167,624
35,842
39,014
8,189
64,918
(13,261
(13,874
(3,031
(18,497
(48,663
22,581
25,140
5,158
46,421
Net Interest Income (Loss)
111,093
81,166
8,318
(664
29,322
22,950
1,550
(245
Net Interest Income (Loss) After Provision for Credit Losses
81,771
58,216
6,768
(419
53,666
40,364
29,060
7,107
(87,786
(53,381
(32,357
(3,993
(177,517
47,651
45,199
3,471
2,695
(17,651
(16,522
(1,282
3,485
(31,970
30,000
28,677
2,189
6,180
Note 8. Pension Plans and Postretirement Benefit Plan
The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three and six months ended June 30, 2010 and 2009 were as follows:
Pension Benefits
Postretirement Benefits
Three Months Ended June 30,
Service Cost
117
109
Interest Cost
1,294
1,285
440
419
Expected Return on Plan Assets
(1,642
(1,332
Amortization of:
Prior Service Credit
(53
Net Actuarial Losses (Gains)
724
732
(76
(119
Net Periodic Benefit Cost
376
685
356
Six Months Ended June 30,
234
219
2,588
2,569
879
839
(3,284
(2,664
Amortization of :
(106
(107
1,448
1,464
(152
(238
752
1,369
855
713
The net periodic benefit cost for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the Consolidated Statements of Income. For the three and six months ended June 30, 2010, the Company contributed $0.6 million and $1.2 million, respectively, to the pension plans. For the three and six months ended June 30, 2010, the Company contributed $0.8 million and $1.0 million, respectively, to the postretirement benefit plan. The Company expects to contribute $3.0 million to the pension plans and $1.4 million to the postretirement benefit plan for the year ending December 31, 2010.
Note 9. Derivative Financial Instruments
The following table presents the Company’s derivative financial instruments, their estimated fair values, and balance sheet location as of June 30, 2010, December 31, 2009, and June 30, 2009:
As of June 30, 2010
As of December 31, 2009
As of June 30, 2009
Derivative Financial Instruments Not Designatedas Hedging Instruments1 (dollars in thousands)
AssetDerivatives
LiabilityDerivatives
Interest Rate Lock Commitments
2,471
199
564
580
1,261
340
Forward Commitments
251
902
1,123
1,007
374
Interest Rate Swap Agreements
30,079
30,344
18,834
18,998
19,911
20,091
Foreign Exchange Contracts
504
621
175
402
247
381
33,305
32,066
20,696
19,985
22,426
21,186
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the Consolidated Statements of Condition.
The following table presents the Company’s derivative financial instruments and the amount and location of the net gains and losses recognized in the statements of income for the three and six months ended June 30, 2010 and 2009:
Location of Net Gains
Derivative Financial Instruments Not Designated
(Losses) Recognized in the
as Hedging Instruments (dollars in thousands)
Statements of Income
4,886
97
7,245
7,022
(1,689
1,306
(2,008
1,893
Other Noninterest Income
(41
635
113
777
667
1,413
1,311
3,823
2,751
6,763
11,003
Management has received authorization from the Bank’s Board of Directors to use derivative financial instruments as an end-user in connection with its risk management activities and to accommodate the needs of its customers. As with any financial instrument, derivative financial instruments have inherent risks. Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices. Market risks associated with derivative financial instruments are balanced with the expected returns to enhance earnings performance and shareholder value, while limiting the volatility of each. The Company uses various processes to monitor its overall market risk exposure, including sensitivity analysis, value-at-risk calculations, and other methodologies.
Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in accordance with the underlying contractual terms. Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional on-balance sheet financial instruments. The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty, adhering to the same credit approval process used for commercial lending activities.
Derivative financial instruments are required to be carried at their estimated fair value on the Company’s Consolidated Statements of Condition. As of June 30, 2010, December 31, 2009, and June 30, 2009, the Company did not designate any derivative financial instruments as accounting hedges. The Bank’s free-standing derivative financial instruments have been recorded at fair value on the Company’s Consolidated Statements of Condition. These financial instruments have been limited to interest rate lock commitments, forward commitments, interest rate swap agreements, and foreign exchange contracts.
The Company enters into interest rate lock commitments for residential mortgage loans that the Company intends to sell in the secondary market. Interest rate exposure from interest rate lock commitments is hedged with forward commitments for the future sale of residential mortgage loans. The interest rate lock commitments and forward commitments are free-standing derivatives which are carried at estimated fair value with changes recorded in the mortgage banking component of noninterest income. Changes in the estimated fair value of interest rate lock commitments and forward commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.
The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. The Company mitigates this risk by entering into equal and offsetting interest rate swap agreements with highly rated third parties. The interest rate swap agreements are free-standing derivatives which are carried at estimated fair value with changes included in other noninterest income in the Company’s Consolidated Statements of Income.
The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers. The foreign exchange contracts are free-standing derivatives which are carried at estimated fair value with changes included in other noninterest income in the Company’s Consolidated Statements of Income.
17
Note 10. Credit Commitments
The Company’s credit commitments as of June 30, 2010 December 31, 2009, and June 30, 2009 were as follows:
June 30,2009
Unfunded Commitments to Extend Credit
$ 1,960,602
$ 2,039,056
$ 2,137,914
Standby Letters of Credit
92,958
84,012
89,742
Commercial Letters of Credit
24,386
23,163
21,109
Total Credit Commitments
$ 2,077,946
$ 2,146,231
$ 2,248,765
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
Standby and Commercial Letters of Credit
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit, and holds cash and deposits as collateral on those standby letters of credit for which collateral is deemed necessary.
18
Note 11. Fair Value of Assets and Liabilities
Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment Securities Available-for-Sale
Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. If quoted prices were available in an active market, investment securities were classified as Level 1 measurements. Level 1 investment securities included debt securities issued by the U.S. Treasury. If quoted prices in active markets were not available, fair values were estimated primarily by the use of pricing models. Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases where there were limited or less transparent information provided by the Company’s third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
On a quarterly basis, management reviews the pricing information received from the Company’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Company’s third-party pricing service.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of June 30, 2010, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
19
Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. Significant assumptions in the valuation of mortgage servicing rights include changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs and management judgment and estimation.
Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements. Quoted prices for these investments, primarily in mutual funds, are available in active markets. Thus, the Company’s investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.
Derivative Financial Instruments
Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate lock commitments, forward commitments, interest rate swap agreements, and foreign exchange contracts. The fair values of interest rate lock commitments are calculated using a discounted cash flow approach utilizing inputs such as the fall-out ratio. The fall-out ratio is derived from the Bank’s internal data and is adjusted using significant management judgment as to the percentage of loans which are currently in a lock position which will ultimately not close. Interest rate lock commitments are deemed Level 3 measurements as significant unobservable inputs and management judgment are required. The fair values of forward commitments are deemed Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period. The fair values of interest rate swap agreements are also calculated using a discounted cash flow approach and utilize inputs such as the London Inter Bank Offered Rate swap curve, effective date, maturity date, notional amount, and stated interest rate. Interest rate swap agreements are deemed Level 3 measurements as significant unobservable inputs and management judgment are required. The fair values of foreign exchange contracts are calculated using the Bank’s multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with market data information such as spot rates of the specific currency and yield curves. Foreign exchange contracts are deemed Level 2 measurements because while they are valued using the Bank’s multi-currency accounting system, significant management judgment or estimation is not required.
The Company is exposed to credit risk if borrowers or counterparties fail to perform. The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements. The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings. Credit risk associated with borrowers or counterparties as well as the Company’s non-performance risk is factored into the determination of the estimated fair value of the derivative financial instruments.
20
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2010, December 31, 2009, and June 30, 2009:
Quoted Prices inActive Markets forIdentical Assetsor Liabilities
SignificantOtherObservableInputs
SignificantUnobservableInputs
(Level 1)
(Level 2)
(Level 3)
670,957
2,187
Total Investment Securities Available-for-Sale
5,309,802
9,697
Net Derivative Assets and Liabilities
(768
2,007
1,239
Total Assets Measured at Fair Value on a Recurring Basisas of June 30, 2010
680,654
5,309,034
15,847
6,005,535
718,388
2,404
4,612,446
8,979
891
(180
711
Total Assets Measured at Fair Value on a Recurring Basisas of December 31, 2009
727,367
4,613,337
15,152
5,355,856
796,021
2,765
3,496,890
7,767
499
741
1,240
Total Assets Measured at Fair Value on a Recurring Basisas of June 30, 2009
803,788
3,497,389
17,574
4,318,751
21
For the three and six months ended June 30, 2010 and 2009, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
Assets (dollars in thousands)
MortgageServicing Rights 1
Net DerivativeAssets and Liabilities 2
Balance as of April 1, 2010
337
15,144
Realized and Unrealized Net Gains (Losses):
Included in Net Income
4,845
3,878
Purchases, Sales, Issuances, and Settlements, Net
-
(3,175
Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of June 30, 2010
1,453
Net Derivative Assets and Liabilities 2
Balance as of April 1, 2009
2,745
20,649
(339
(2,736
Total Unrealized Net Gains Included in Net Income Related to Assets Still Held as of June 30, 2009
939
Mortgage Servicing Rights 1
Balance as of January 1, 2010
7,358
5,866
(5,171
1,361
Investment Securities Available-for-Sale 3
Balance as of January 1, 2009
55,715
3,051
78,319
7,799
5,079
(55,715
(10,109
(65,824
848
Liabilities(dollars in thousands)
Long-Term Debt 4
119,275
Unrealized Net Gains Included in Net Income
(304
(118,971
1 Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s Consolidated Statements of Income.
2 Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Company’s Consolidated Statements of Income. Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Company’s Consolidated Statements of Income.
3 Unrealized gains and losses related to investment securities available-for-sale are reported as a component of other comprehensive income in the Company’s Consolidated Statements of Condition.
4 Realized and unrealized gains and losses related to long-term debt were reported as a component of other noninterest income in the Company’s Consolidated Statements of Income.
22
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or impairment write-downs of individual assets. As of June 30, 2010, the Company’s residential mortgage loans held for sale with a carrying amount of $13.5 million were written down to their estimated fair value of $13.2 million, resulting in an unrealized loss of $0.3 million. The estimated fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets, and therefore, were classified as Level 2 measurements. As of June 30, 2010, December 31, 2009, and June 30, 2009, there were no other adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.
Disclosures about Fair Value of Financial Instruments
These disclosures exclude financial instruments that are recorded at fair value on a recurring basis on the Company’s Consolidated Statements of Condition as well as short-term financial assets such as cash and cash equivalents, and liabilities such as short-term borrowings, for which the carrying amounts approximate fair value. The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Investment Securities Held-to-Maturity
The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. Quoted prices in active markets were used whenever available. If quoted prices were not available, estimated fair values were measured using pricing models or other valuation techniques such as the present value of future cash flows, adjusted for credit loss assumptions.
The estimated fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets. The estimated fair value of the Company’s commercial loans held for sale was determined based on agreed upon sales prices.
Loans
The estimated fair value of the Company’s loans was determined by discounting the expected future cash flows of pools of loans with similar characteristics. Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Deposit Liabilities
The estimated fair values of the Company’s noninterest-bearing and interest-bearing demand deposits and savings deposits were equal to the amount payable on demand (i.e., their carrying amounts) because these products have no stated maturity. The estimated fair values of the Company’s time deposits were estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The estimated fair values of the Company’s deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
The estimated fair values of the Company’s long-term debt were calculated using a discounted cash flow approach and applying discount rates currently offered for new notes with similar remaining maturities and considering the Company’s non-performance risk.
The following presents the carrying amount and fair values of the Company’s financial instruments as of June 30, 2010, December 31, 2009, and June 30, 2009:
CarryingAmount
Financial Instruments - Assets
16,552
41,054
Loans 1
4,902,804
5,183,981
5,217,472
5,443,649
5,565,816
5,606,390
Financial Instruments - Liabilities
9,338,284
9,421,423
9,033,246
Long-Term Debt 2
31,338
33,517
81,338
83,265
82,437
83,171
1 Comprised of loans, net of unearned income and the allowance for loan losses.
2 Excludes capitalized lease obligations.
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements concerning, among other things, the economic and business environment in our service area and elsewhere, credit quality, our contributions to the Company’s pension plans and the postretirement benefit plan, and other financial and business matters in future periods. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) the effect of the increase in government intervention in the U.S. financial system; 4) competitive pressure among financial services and products; 5) the impact of recent legislative initiatives; 6) changes in financial services industry regulation, and particularly, the anticipated comprehensive overhaul of the regulatory system for the financial services industry; 7) changes in fiscal and monetary policies of the markets in which we operate; 8) actual or alleged conduct which could harm our reputation; 9) changes in accounting standards; 10) changes in tax laws or regulations or the interpretation of such laws and regulations; 11) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 12) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 13) unpredicted costs and other consequences of legal or regulatory matters involving the Company; 14) resumption of the Parent’s common stock repurchase program; and 15) natural disasters, or adverse weather, public health, and other conditions impacting us and our customers’ operations. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, refer to the section entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2009, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission (the “SEC”). Words such as “appears,” “may,” “believes,” “anticipates,” “expects,” “intends,” “targeted,” “plans,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. We do not undertake an obligation to update forward-looking statements to reflect later events or circumstances.
Reclassifications
Certain prior period information in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been reclassified to conform to current period classifications.
Overview
Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii. The Parent’s principal and only operating subsidiary is Bank of Hawaii (the “Bank”).
The Bank, directly and through its subsidiaries, provides a broad range of financial services to businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands. References to “we,” “our,” “us,” or the “Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes.
Our vision is “exceptional people building exceptional value for our customers, our island communities, our shareholders, and each other.” “Maximizing shareholder value over time” remains our governing objective.
In striving to achieve our vision and governing objective, our business plan is balanced between growth and risk management, including the flexibility to adjust, given the uncertainties in the current economy. We remain concerned about the economy, continued market volatility, and the unintended consequences of increased government intervention. For the remainder of 2010, we intend to continue to focus on asset quality, reserve and capital levels, and liquidity, as well as opportunities to further serve our customers.
Hawaii Economy
Hawaii’s economy was slightly improved during the second quarter of 2010. Visitor arrivals have improved and spending appears to be stable. Job growth remains weak across most business sectors and unemployment, although significantly better than the national average, is expected to remain high. The State’s seasonally-adjusted unemployment rate as of June 30, 2010 was 6.3% compared with a national rate of 9.5%. Home sales volume statewide continues to improve and prices on Oahu have stabilized, although sales prices on Hawaiian islands other than Oahu continue to lag. Private construction activity remains low; however, increased activity is anticipated due to Federal and State stimulus plans.
Financial Highlights
For the second quarter of 2010, net income was $46.6 million, an increase of $15.6 million or 50% compared to the second quarter of 2009. Diluted earnings per share were $0.96 per share, an increase of $0.31 per share from the second quarter of 2009. Our higher net income for the second quarter of 2010 was primarily due to the following:
· Net interest income increased by $1.1 million in the second quarter of 2010. The increase was primarily due to lower funding costs and an increase in interest income from our larger investment securities portfolio. This increase was largely offset by lower yields earned on our investment securities and a
decrease in our loan balances as a result of pay downs and reduced customer demand.
· The provision for credit losses (the “Provision”) decreased by $12.8 million in the second quarter of 2010, reflective of lower levels of net charge-offs.
· Net gains from the sale of investment securities increased by $14.9 million in the second quarter of 2010.
· Federal Deposit Insurance Corporation (“FDIC”) insurance expense decreased by $5.9 million in the second quarter of 2010. This decrease was primarily due to the Company’s $5.7 million share of an industry-wide FDIC assessment recorded in the second quarter of 2009.
The impact of these items was partially offset by an increase in salaries and benefits expense in the second quarter of 2010, primarily due to a $3.3 million accrual for cash grants to purchase company stock.
For the first six months of 2010, net income was $99.3 million, an increase of $32.3 million or 48% compared to the first six months of 2009. Diluted earnings per share were $2.05 per share, an increase of $0.65 per share from the first six months of 2009. Our higher net income for the first six months of 2010 was primarily due to the following:
· Net interest income increased by $11.7 million for the first six months of 2010. The increase was primarily due to lower funding costs and an increase in interest income from our larger investment securities portfolio. This increase was largely offset by lower yields earned on our investment securities and a decrease in our loan balances as a result of pay downs and reduced customer demand.
· The Provision decreased by $16.9 million for the first six months of 2010, reflective of lower levels of net charge-offs.
· Net gains from the sale of investment securities increased by $34.9 million for the first six months of 2010.
· Our FDIC insurance expense decreased by $4.6 million for the first six months of 2010, primarily due to the Company’s $5.7 million share of an industry-wide FDIC assessment recorded in the second quarter of 2009.
The impact of these items was partially offset by a $6.9 million decrease in mortgage banking income as a result of lower loan origination volume. We also recorded a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009.
A more detailed discussion of the changes in the various components of net income is presented in the following sections of MD&A.
We also continued to strengthen our balance sheet during the first six months of 2010, with higher reserves for credit losses, liquidity, and capital.
· Our Allowance for Loan and Lease Losses (the “Allowance”) was $147.4 million as of June 30, 2010, an increase of $3.7 million or 3% from December 31, 2009. The ratio of our Allowance to total loans and leases outstanding increased to 2.71% as of June 30, 2010, compared to 2.49% as of December 31, 2009. Based on the net charge-offs of loans and leases for the last several quarters, our current loss projections, as well as economic and risk indicators, we believe that further increases to the Allowance may not be necessary. However, this determination will be dependent on future events and therefore there can be no assurance that additional reserves will not be necessary.
· Non-performing assets were $43.2 million as of June 30, 2010, a decrease of $5.1 million or 11% from December 31, 2009.
· As of June 30, 2010, we continued to maintain a significant balance of excess reserves with the Federal Reserve Bank (“FRB”). We maintained $355.9 million in excess reserves invested with the FRB as of June 30, 2010, an increase of $64.3 million or 22% from December 31, 2009.
· We continued to conservatively invest excess liquidity in mortgage-backed securities issued by the Government National Mortgage Association, as well as in U.S. Treasury securities.
· We continued to increase our capital levels during the first six months of 2010. Shareholders’ equity was $1.0 billion as of June 30, 2010, an increase of $117.0 million or 13% from December 31, 2009. We have not repurchased shares of our common stock under our share repurchase program since October 2008. We plan to resume our share repurchases in the third quarter of 2010 in an orderly and disciplined manner, but the amount and timing will depend on market conditions and various other factors.
· Our Tier 1 capital ratio was 16.92% as of June 30, 2010 compared to 14.84% as of December 31, 2009. Our ratio of tangible common equity to risk-weighted assets was 18.57% as of June 30, 2010, compared to 15.45% as of December 31, 2009.
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Table 1 presents our financial highlights for the three and six months ended June 30, 2010 and 2009 and as of June 30, 2010, December 31, 2009, and June 30, 2009.
Table 1
For the Period:
Operating Results
Performance Ratios
Return on Average Assets
1.48
1.06
1.60
1.18
Return on Average Shareholders’ Equity
19.01
14.49
20.73
16.13
Efficiency Ratio 1
49.72
55.07
47.59
53.78
Operating Leverage 2
(11.10
(8.04
20.98
(14.62
Net Interest Margin 3
3.51
3.73
3.61
3.75
Dividend Payout Ratio 4
46.39
69.23
43.48
63.83
Average Shareholders’ Equity to Average Assets
7.79
7.30
7.73
7.34
Average Balances
Average Loans and Leases
5,522,423
6,258,403
5,604,218
6,351,938
Average Assets
12,603,233
11,753,580
12,491,132
11,426,766
Average Deposits
9,387,621
9,222,130
9,389,110
8,988,053
Average Shareholders’ Equity
982,233
858,139
965,745
838,288
Market Price Per Share of Common Stock
Closing
48.35
35.83
High
54.10
41.42
45.24
Low
45.00
31.35
41.60
25.33
As of Period End:
Balance Sheet Totals
Asset Quality
147,358
143,658
137,416
Non-Performing Assets 5
43,241
48,331
39,054
Financial Ratios
Allowance to Loans and Leases Outstanding
2.71
2.49
2.23
Tier 1 Capital Ratio 6
16.92
14.84
12.52
Total Capital Ratio 7
18.19
16.11
13.78
Leverage Ratio 8
7.09
6.76
6.64
Tangible Common Equity to Total Assets 9
7.63
6.96
6.65
Tangible Common Equity to Risk-Weighted Assets 9
18.57
15.45
13.02
Non-Financial Data
Full-Time Equivalent Employees
2,427
2,418
2,533
Branches and Offices
83
85
ATMs
487
485
486
1 Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).
2 Operating leverage is defined as the percentage change in income before the provision for credit losses and the provision for income taxes. Measures are presented on a linked quarter basis.
3 Net interest margin is defined as net interest income, on a taxable equivalent basis, as a percentage of average earning assets.
4 Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.
5 Excluded from non-performing assets are contractually binding non-accrual loans held for sale of $4.2 million and $5.2 million as of December 31, 2009 and June 30, 2009, respectively.
6 Tier 1 Capital Ratio as of December 31, 2009 and June 30, 2009 was revised from 14.88% and 12.56%, respectively.
7 Total Capital Ratio as of December 31, 2009 and June 30, 2009 was revised from 16.15% and 13.82%, respectively.
8 Leverage Ratio as of December 31, 2009 and June 30, 2009 was revised from 6.78% and 6.66%, respectively.
9 Tangible common equity, a non-GAAP financial measure, is defined by the Company as shareholders’ equity minus goodwill and intangible assets. Intangible assets are included as a component of other assets in the Consolidated Statements of Condition.
26
Analysis of Statements of Income
Average balances, related income and expenses, and resulting yields and rates are presented in Table 2. An analysis of the change in net interest income, on a taxable equivalent basis, is presented in Table 3.
Average Balances and Interest Rates - Taxable Equivalent Basis
Table 2
Average
Income/
Yield/
(dollars in millions)
Balance
Expense
Rate
Earning Assets
5.3
0.17
5.2
0.36
5.6
0.56
5.0
0.59
586.8
0.4
0.27
833.2
0.5
0.25
525.2
0.7
872.8
1.1
24.3
0.6
4.90
5,531.2
45.2
3.27
3,662.1
38.5
4.21
5,386.9
89.3
3.32
3,148.3
71.0
4.51
160.2
1.7
4.25
219.9
2.4
4.31
167.1
3.6
4.26
227.4
4.9
4.34
8.5
0.1
4.46
24.1
0.2
8.7
14.27
23.0
4.30
Loans and Leases 1
Commercial and Industrial
765.5
7.9
4.12
984.1
9.9
4.02
776.9
18.1
4.69
1,007.6
20.3
4.06
Commercial Mortgage
826.2
10.5
5.10
763.8
5.22
832.1
21.0
747.3
19.5
Construction
100.3
1.3
5.28
144.5
1.5
4.03
104.1
2.7
5.13
149.3
3.1
Commercial Lease Financing
400.8
3.0
2.95
450.2
3.5
3.13
404.1
6.3
3.14
456.5
7.2
Residential Mortgage
2,109.1
29.9
5.66
2,359.0
34.6
5.88
2,134.7
60.8
5.70
2,398.0
5.92
Home Equity
875.8
10.9
5.01
999.3
12.6
5.07
892.5
22.2
1,013.9
25.6
Automobile
249.4
4.7
325.5
6.5
7.96
260.9
7.68
340.8
13.4
Other 2
195.3
3.7
232.0
4.6
7.89
198.9
7.6
7.70
238.5
9.3
7.88
Total Loans and Leases
5,522.4
71.9
6,258.4
83.1
5.32
5,604.2
148.6
5.33
6,351.9
169.4
5.36
79.8
0.3
1.39
79.7
Total Earning Assets 3
11,894.2
119.6
11,082.6
125.0
4.52
11,777.5
243.4
4.15
10,732.4
248.1
4.64
221.0
203.9
225.4
223.6
488.0
467.1
488.2
470.8
12,603.2
11,753.6
12,491.1
11,426.8
Interest-Bearing Liabilities
Demand
1,659.8
0.06
1,907.7
0.07
1,660.8
1,898.2
4,477.8
4.2
0.38
4,036.9
7.8
0.77
4,456.1
0.39
3,786.4
16.0
0.85
1,093.0
3.4
1.24
1,330.6
6.4
1.92
1,114.7
7.0
1.27
1,415.2
14.9
2.12
Total Interest-Bearing Deposits
7,230.6
0.44
7,275.2
14.5
0.80
7,231.6
16.2
7,099.8
31.5
0.89
17.7
0.13
16.4
0.12
23.2
0.11
17.6
1,785.2
1.44
1,168.2
2.20
1,659.2
12.9
1.55
1,052.4
13.1
2.48
74.4
1.0
5.52
71.1
0.8
4.84
82.3
2.2
5.37
109.4
5.56
Total Interest-Bearing Liabilities
9,107.9
15.4
0.68
8,530.9
21.8
1.02
8,996.3
31.3
0.70
8,279.2
47.6
1.16
104.2
103.2
212.1
200.5
Interest Rate Spread
3.35
3.50
3.45
3.48
Net Interest Margin
Noninterest-Bearing Demand Deposits
2,157.0
1,946.9
2,157.5
1,888.3
356.1
417.7
371.6
421.0
982.2
858.1
965.7
838.3
1 Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis.
2 Comprised of other consumer revolving credit, installment, and consumer lease financing.
3 Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $237,000 and $331,000 for the three months ended June 30, 2010 and 2009, respectively, and $476,000 and $557,000 for the six months ended June 30, 2010 and 2009, respectively.
27
Analysis of Change in Net Interest Income - Taxable Equivalent Basis
Table 3
Compared to June 30, 2009
Volume 1
Rate 1
Change in Interest Income:
(0.5
(0.4
(0.3
(0.6
40.6
(22.3
18.3
(1.3
(5.1
2.9
(2.2
(0.7
(1.0
(0.9
(7.6
(2.6
(10.2
(3.0
(3.4
(3.5
(1.5
(0.2
(1.7
(19.9
(20.8
Total Change in Interest Income
(22.8
(4.7
Change in Interest Expense:
(0.1
(9.7
(7.3
(2.7
(5.2
(7.9
(14.9
(15.3
5.8
(6.0
(0.8
Total Change in Interest Expense
(21.0
(16.3
Change in Net Interest Income
(1.8
11.6
1 The changes for each category of interest income and expense are allocated between the portion of changes attributable to the variance in volume and rate for that category.
Net interest income is affected by both changes in interest rates (rate) and the amount and composition of earning assets and interest-bearing liabilities (volume). Net interest margin is calculated as the yield on average earning assets minus the interest rate paid on average interest-bearing liabilities.
As demand for new lending opportunities remained soft in 2009 and 2010, we invested some of our liquidity into investment securities.
Net interest income, on a taxable equivalent basis, increased by $1.0 million or 1% in the second quarter of 2010 and by $11.6 million or 6% for the first six months of 2010 compared to the same periods in 2009 primarily due to lower funding costs on our interest-bearing liabilities. Our net interest margin decreased by 22 basis points in the second quarter of 2010 and by 14 basis points for the first six months compared to the same periods in 2009.
Rates paid on our interest-bearing liabilities decreased by 34 basis points in the second quarter of 2010 and by 46 basis points for the first six months of 2010 compared to the same periods in 2009, reflective of the re-pricing of our liabilities at lower interest rates. Rates paid on our interest-bearing deposits decreased by 36 basis points in the second quarter of 2010 and by 44 basis points for the first six months of 2010 compared to the same periods in 2009. Rates paid on our securities sold under agreement to repurchase decreased by 76 basis points in the second quarter of 2010 and by 93 basis points for the first six months of 2010 compared to the same periods in 2009 primarily due to lower rates paid on placements with government entities. Partially offsetting our lower funding costs in 2010 were lower yields earned on our interest-earning assets. Yields on our interest-earning assets decreased by 49 basis points in both the second quarter and first six months of 2010 compared to the same periods in 2009 primarily due to the lower yields in our investment securities available-for-sale portfolio. Although average balances of our investment securities available-for-sale portfolio increased
28
from 2009, yields decreased by 94 basis points in the second quarter of 2010 and by 119 basis points for the first six months of 2010 compared to the same periods in 2009 as a result of our lower risk investment strategy. Also contributing to the lower yields on our interest-earning assets was a 22 basis point decrease in our yields earned on our residential mortgage loan portfolio in both the second quarter and first six months of 2010 compared to the same periods in 2009, primarily due to customers refinancing their loans at lower interest rates. Partially offsetting the lower yields on these interest-earning assets was a 125 basis point increase in our yields on construction loans in the second quarter of 2010 and a 101 basis point increase in our yields on construction loans for the first six months of 2010 compared to the same periods in 2009, primarily due to interest income received on a loan payoff that was previously on non-accrual status.
Average balances of our interest-earning assets increased by $811.6 million or 7% in the second quarter of 2010 and by $1.0 billion or 10% for the first six months of 2010 compared to the same periods in 2009. Average balances in our investment securities available-for-sale portfolio increased by $1.9 billion in the second quarter of 2010 and by $2.2 billion for the first six months of 2010 compared to the same periods in 2009, primarily due to the deployment of funds made in mortgage-backed securities issued by government agencies. Partially offsetting the increase in our investment securities available-for-sale portfolio was a $736.0 million or 12% decrease in our average loan and lease balances in the second quarter of 2010 and a $747.7 million or 12% decrease in our average loan and lease balances for the first six months of 2010 compared to the same periods in 2009. These decreases were due to continued pay downs in loan and lease balances, along with weak demand for new lending opportunities. Average balances of our interest-bearing liabilities increased by $577.0 million or 7% in the second quarter of 2010 and by $717.1 million or 9% for the first six months of 2010 compared to the same periods in 2009, primarily due to an increase in average balances in our savings deposits and securities sold under agreements to repurchase. The increase in average balances in our savings deposits from 2009 was primarily due to the continued success of our bonus rate savings and business money market savings products. This was partially offset by a decrease in our average time deposit balances as some customers moved their deposits to more liquid savings products and to investments offering higher yields and in our average interest-bearing demand deposit balances as some customers sought higher yielding deposit products. The increase in our securities sold under agreements to repurchase from 2009 was primarily due to new placements to accommodate local government entities.
The Provision reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance. We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period. The Allowance is determined through detailed
quarterly analyses of the loan and lease portfolio. The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of credit quality. We recorded a Provision of $15.9 million in the second quarter of 2010 and $36.7 million for the first six months of 2010 compared to a Provision of $28.7 million in the second quarter of 2009 and $53.6 million for the first six months of 2009. The lower Provision recorded in the second quarter of 2010 and for the first six months of 2010 was reflective of slightly improving economic conditions. For further discussion on the Allowance, see the “Corporate Risk Profile — Reserve for Credit Losses” section in MD&A.
Noninterest income increased by $9.0 million or 15% in the second quarter of 2010 and by $10.5 million or 8% for the first six months of 2010 compared to the same periods in 2009.
Mortgage banking income decreased by $1.7 million or 31% in the second quarter of 2010 compared to the same period in 2009. This decrease was primarily due to lower loan origination volume for the quarter, the result of lower refinancing activity in the second quarter of 2010 compared to the same period in 2009. Residential mortgage loan originations were $144.9 million in the second quarter of 2010, a $164.6 million or 53% decrease compared to the same period in 2009. Residential mortgage loan sales were $106.5 million in the second quarter of 2010, a $160.4 million or 60% decrease compared to the same period in 2009.
Mortgage banking income decreased by $6.9 million or 49% for the first six months of 2010 compared to the same period in 2009. This decrease was primarily due to lower loan origination volume for the first six months of 2010 compared to the same period in 2009. Residential mortgage loan originations were $295.0 million for the first six months of 2010, a $503.4 million or 63% decrease compared to the same period in 2009. Residential mortgage loan sales were $216.5 million for the first six months of 2010, a $448.8 million or 67% decrease compared to the same period in 2009.
Service charges on deposit accounts increased by $1.9 million or 15% in the second quarter of 2010 compared to the same period in 2009. This increase was primarily due to an increase in overdraft fees resulting from higher transaction volume and account growth. Service charges on deposit accounts increased by $2.4 million or 9% for the first six months of 2010 compared to the same period in 2009. This increase was primarily due to a $3.0 million increase in overdraft fees, partially offset by a $0.5 million decrease in account analysis fees due to fewer accounts on analysis and an increase in fee waivers. Beginning on July 1, 2010 for new customers and August 15, 2010 for existing customers, federal rules will prohibit a financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the customer consents in advance (“opts-in”). We charged customers approximately $7.7 million in the second quarter of 2010 and approximately
29
$13.9 million for the first six months of 2010 in overdraft fees for ATM and one-time debit card transactions.
Fees, exchange, and other service charges were $15.8 million in the second quarter of 2010 and $30.3 million for the first six months of 2010 and remained relatively flat compared to the same periods in 2009. Under the newly passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, debit card interchange fees will be regulated by the FRB. Included in fees, exchange, and other service charges were approximately $5.7 million in the second quarter of 2010 and approximately $10.9 million for the first six months of 2010 in debit card interchange fees.
Net gains from the sales of investment securities were $15.0 million in the second quarter of 2010 and $35.0 million for the first six months of 2010. We primarily sold available-for-sale investment securities to preserve capital levels while managing our duration and extension risk in a volatile interest rate environment. Net gains from the sales of investment securities in the second quarter of 2009 and for the first six months of 2009 were each less than $0.1 million.
Insurance income decreased by $2.5 million or 52% in the second quarter of 2010 and by $5.4 million or 52% for the first six months of 2010 compared to the same periods in 2009. These decreases were largely due to the sale of assets of our retail insurance brokerage operation, Bank of Hawaii Insurance Services, Inc. in the second quarter of 2009, and our wholesale insurance business, BOH Wholesale Insurance Agency, Inc. (formerly known as Triad Insurance Agency, Inc.) in the fourth quarter of 2009.
Other noninterest income decreased by $3.7 million or 39% in the second quarter of 2010 compared to the same period in 2009. This decrease was primarily due to a $2.8 million gain resulting from the sale of our equity interest in a cargo aircraft
leveraged lease in the second quarter of 2009, as well as a $0.9 million gain related to the aforementioned sale of our retail insurance brokerage operation. Also contributing to the decrease was a $0.6 million decrease in fees from our customer related interest rate swap program and a $0.4 million decrease in income from bank-owned life insurance. Partially offsetting the decrease in other noninterest income was a $1.2 million gain resulting from the sale of our interest in a single investor railcar lease in the second quarter of 2010.
Other noninterest income decreased by $14.1 million or 55% for the first six months of 2010 compared to the same period in 2009. This decrease was primarily due to a $10.0 million gain from the sale of our equity interest in two watercraft leveraged leases in the first quarter of 2009, as well as the gains resulting from the aforementioned sale of our equity interest in a cargo aircraft leveraged lease and the sale of our retail insurance brokerage operation in the second quarter of 2009. Also contributing to the decrease was the aforementioned decrease in fees from our customer related interest rate swap program and a $0.5 million decrease in income from bank-owned life insurance. Partially offsetting the decrease in other noninterest income was the previously mentioned $1.2 million gain resulting from the sale of our interest in a single investor railcar lease in the second quarter of 2010.
Noninterest expense decreased by $3.7 million or 4% in the second quarter of 2010 and by $9.9 million or 6% for the first six months of 2010 compared to the same periods in 2009.
Table 4 presents the components of salaries and benefits expense for the second quarter of 2010 and 2009 and for the first six months of 2010 and 2009.
Table 4
Salaries
29,942
30,732
59,085
60,577
Incentive Compensation
3,447
3,407
6,893
6,699
Share-Based Compensation and Cash Grants for the Purchase of Company Stock
3,984
604
4,540
Commission Expense
1,259
1,750
2,605
Retirement and Other Benefits
3,857
3,804
7,966
8,423
Payroll Taxes
2,331
2,344
5,764
5,844
Medical, Dental, and Life Insurance
2,481
1,236
4,961
3,900
Separation Expense
303
250
369
Total Salaries and Benefits
Salaries and benefits expense increased by $3.3 million or 8% in the second quarter of 2010 compared to the same period in 2009. This increase was primarily due to a $3.3 million accrual for cash grants for the purchase of company stock recorded in the second quarter of 2010, as well as a $1.5 million reduction in reserves for medical and dental expenses recorded in the second quarter of 2009. The increase in
salaries and benefits expense was partially offset by a $0.8 million decrease in salaries primarily due to fewer full-time equivalent employees and a $0.5 million decrease in commission expense, primarily in our mortgage banking business.
30
Salaries and benefits expense increased by $0.9 million or 1% for the first six months of 2010 compared to the same period in 2009. This increase was primarily due to a $3.1 million increase in share-based compensation and cash grants for the purchase of company stock, as well as the previously noted $1.5 million reduction in reserves for medical and dental expenses recorded in the second quarter of 2009. The increase in salaries and benefits expense was partially offset by a $1.5 million decrease in salaries primarily due to fewer full-time equivalent employees, a $1.4 million decrease in commission expense, and a $0.6 million decrease in retirement plan expense.
Professional fees decreased by $1.9 million or 48% in the second quarter of 2010 and by $2.5 million or 38% for the first six months of 2010 compared to the same periods in 2009. The decreases were primarily due to higher legal fees and other professional services expenses recorded in 2009.
FDIC insurance expense decreased by $5.9 million or 65% in the second quarter of 2010 and by $4.6 million or 43% for the first six months of 2010 compared to the same periods in 2009. The decreases were primarily due to the Company’s $5.7 million share of an industry-wide assessment by the FDIC recorded in the second quarter of 2009. The decrease for the first six months of 2010 was partially offset by the Company utilizing its credits from the Federal Deposit Insurance Reform Act of 2005, which were available to offset our deposit insurance assessments. These credits were fully utilized by the end of the first quarter of 2009.
Other noninterest expense increased by $0.8 million or 4% in the second quarter of 2010 compared to the same period in 2009. This increase was primarily due to:
· $0.6 million increase in unrealized losses related to deferred compensation arrangements;
· $0.5 million increase in mileage program travel expense due to the increase in cost per mile; and
· $0.4 million increase in insurance expense.
This increase was partially offset by a $1.0 million decrease in operational losses.
Other noninterest expense decreased by $3.8 million or 9% for the first six months of 2010 compared to the same period in 2009. This decrease was primarily due to:
· $2.2 million decrease in operational losses;
· $1.5 million increase of the general legal reserve recorded in 2009; and
· $0.9 million premium related to the early repayment of our privately placed notes recorded in 2009.
This decrease was partially offset by a $1.0 million increase in mileage program travel expense due to the increase in cost per mile.
Table 5 presents our provision for income taxes and effective tax rates for the second quarter of 2010 and 2009 and the first six months of 2010 and 2009.
Provision for Income Taxes and Effective Tax Rates
Table 5
Effective Tax Rates
34.37
30.18
32.89
32.29
The higher effective tax rate for the second quarter of 2010 compared to the same period in 2009 was primarily due to a benefit recorded in 2009 on the termination of a leveraged lease transaction.
The higher effective tax rate for the first six months of 2010 compared to the same period in 2009 was primarily due to the benefit recorded in 2009 noted above being greater than the benefit on the expected utilization of capital losses on the sale of a low-income housing investment recorded in the first quarter of 2010.
31
Analysis of Statements of Condition
The carrying value of our investment securities was $6.1 billion as of June 30, 2010, $5.5 billion as of December 31, 2009, and $4.5 billion as of June 30, 2009. The increase in the carrying value of our investment securities from December 31, 2009 and June 30, 2009 was primarily due to additional investments made in mortgage-backed securities issued by government agencies. These investments in high grade securities with base durations of less than three years, allow us to maintain flexibility to redeploy funds as opportunities may arise. Gross unrealized gains in our investment securities portfolio were $145.0 million as of June 30, 2010, $68.5 million as of December 31, 2009, and $74.8 million as of June 30, 2009.
Gross unrealized losses on our temporarily impaired investment securities were $5.2 million as of June 30, 2010, $21.8 million as of December 31, 2009, and $35.7 million as of June 30, 2009. As of June 30, 2010, the gross unrealized losses were primarily related to mortgage-backed securities issued by government agencies attributable to changes in interest rates, relative to when the investment securities were purchased.
As of June 30, 2010, we did not own any subordinated debt, or preferred or common stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. As of June 30, 2010, we also did not own any private-label mortgage backed securities. See Note 2 to the Consolidated Financial Statements for more information.
Table 6 presents the composition of our loan and lease portfolio by major categories.
Loan and Lease Portfolio Balances
Table 6
$ 758,851
$ 795,167
$ 932,444
816,165
841,431
788,226
88,823
108,395
140,455
Lease Financing
399,744
412,933
468,030
Total Commercial
2,063,583
2,157,926
2,329,155
Consumer
2,087,380
2,190,677
2,309,971
861,196
921,571
977,632
238,671
283,937
309,877
Other 1
190,081
205,674
223,276
Total Consumer
3,377,328
3,601,859
3,820,756
$ 5,440,911
$ 5,759,785
$ 6,149,911
1 Comprised of other revolving credit, installment, and lease financing.
Total loans and leases as of June 30, 2010 decreased by $318.9 million or 6% from December 31, 2009 and decreased by $709.0 million or 12% from June 30, 2009.
Commercial loans and leases as of June 30, 2010 decreased by $94.3 million or 4% from December 31, 2009, with balances decreasing in all commercial lending categories. Demand for commercial lending opportunities continues to remain soft as a result of current economic conditions. Commercial loans and leases as of June 30, 2010 decreased by $265.6 million or 11% from June 30, 2009. Commercial loans and leases decreased in all lending categories, except for commercial mortgage, which was consistent with the slow economy in Hawaii and our efforts to reduce risk in our
positions in Shared National Credits and leveraged leases. The increase in our commercial mortgage portfolio from June 30, 2009 was primarily due to our purchase of a $47.5 million portfolio of seasoned loans, secured by real estate in Hawaii, in the fourth quarter of 2009.
Consumer loans and leases as of June 30, 2010 decreased by $224.5 million or 6% from December 31, 2009 and decreased by $443.4 million or 12% from June 30, 2009. Balances in all consumer lending categories decreased over the past 12 months due to reduced customer demand in a slow economy as well as our disciplined underwriting approach.
32
Table 7 presents the composition of our loan and lease portfolio by geographic area and by major categories.
Geographic Distribution of Loan and Lease Portfolio
Table 7
December 30,
Hawaii
$ 625,127
$ 632,415
$ 685,333
752,353
769,303
701,135
134,638
44,680
39,664
45,507
U.S. Mainland 1
66,837
90,345
171,062
2,296
2,570
14,086
5,817
319,285
335,507
385,064
Guam
57,653
62,197
64,151
59,379
66,113
69,667
16,639
18,600
18,293
Other Pacific Islands
6,204
7,047
8,470
35
1,330
1,510
Foreign 2
3,030
3,163
3,428
2,102
2,115
1,828
19,140
19,162
19,166
1,904,932
1,996,713
2,103,104
822,934
879,903
931,010
178,068
208,130
219,346
Other 3
150,780
159,010
167,695
17,284
19,659
23,222
22,895
29,645
36,302
175,542
186,374
198,941
18,556
19,043
20,223
34,982
42,482
49,799
20,140
23,630
27,475
6,906
7,590
7,926
2,422
2,966
3,177
2,726
3,680
4,430
19,144
23,027
28,096
1 For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower’s business operations are conducted.
2 Loans classified as Foreign represent those which are recorded in the Company’s international business units. Lease financing classified as Foreign represent those with air transportation carriers based outside the United States.
3 Comprised of other revolving credit, installment, and lease financing.
Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands. Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes participation in Shared National
Credits and leveraged lease financing. Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.
33
Table 8 presents the major components of other assets as of June 30, 2010, December 31, 2009, and June 30, 2009.
Table 8
Bank-Owned Life Insurance
$ 205,881
$ 202,649
$ 199,241
Federal and State Tax Deposits
83,400
82,500
Federal Home Loan Bank and Federal Reserve Bank Stock
79,817
79,758
79,723
Prepaid Expenses
45,114
49,789
11,991
Low-Income Housing and Other Equity Investments
26,869
27,814
28,185
Accounts Receivable
11,626
13,821
17,919
15,104
19,895
24,009
Total Other Assets
$ 501,116
$ 496,922
$ 465,994
Other assets as of June 30, 2010 increased by $4.2 million or 1% from December 31, 2009. The increase in other assets from December 31, 2009 was primarily due to an $11.2 million increase in the estimated fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities. Also contributing to the increase in other assets was a $3.2 million increase in the value of our bank-owned life insurance. This was partially offset by a $4.7 million decrease in prepaid expenses, primarily due to the amortization of prepaid FDIC assessments, as well as a $4.6 million decrease in credit card charges in the process of settlement.
Other assets as of June 30, 2010 increased by $35.1 million or 8% from June 30, 2009. The increase in other assets from June 30, 2009 was primarily due to a $42.3 million prepayment of our FDIC quarterly risk-based assessments for 2010, 2011, and 2012 which was made in December 2009. The remaining balance of this prepayment to the FDIC was $36.9 million as of June 30, 2010. Also contributing to the increase in other assets was a $10.2 million increase in the estimated fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities, as well as a $6.6 million increase in the value of our bank-owned life insurance. This was partially offset by a $6.5 million decrease in accounts receivable, primarily due to the sale of BOH Wholesale Insurance Agency, Inc., a $5.8 million decrease in credit card charges in the process of settlement, and a $3.0 million decrease in payments made on capital projects in the process of completion.
As of June 30, 2010, the carrying value of our Federal Home Loan Bank of Seattle (“FHLB”) stock was $61.3 million. Our investment in the FHLB is a condition of membership and, as such, is required to obtain credit and other services from the FHLB. As of March 31, 2010, the FHLB met all of its regulatory capital requirements, but remained classified as “undercapitalized” by its primary regulator, the Federal Housing Finance Agency, due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements. Due to this determination, the FHLB remains unable to repurchase or redeem capital stock or to pay dividends. The Bank continues to use and has access to the services of the FHLB. Management considers several factors in evaluating impairment including the commitment of the issuer to perform its obligations and to provide services to the Bank. Based upon the foregoing, management has not recorded an impairment of the carrying value of our FHLB stock as of June 30, 2010.
Table 9 presents the composition of our deposits by major customer categories.
Table 9
$ 4,925,579
$ 4,926,567
$ 4,747,612
4,036,679
4,115,286
3,829,035
Public and Other
362,401
367,823
443,014
$ 9,324,659
$ 9,409,676
$ 9,019,661
Deposit balances as of June 30, 2010 decreased by $85.0 million or 1% from December 31, 2009. The decrease was primarily due to a $102.3 million decrease in consumer and business time deposits, a $68.2 million decrease in our business money market savings accounts, and a $16.3 million decrease in consumer interest bearing demand accounts. This was partially offset by a $107.9 million increase in our consumer bonus rate savings products.
Deposit balances as of June 30, 2010 increased by $305.0 million or 3% from June 30, 2009. The increase was primarily due to a $314.6 million increase in our consumer bonus rate savings products, a $165.1 million increase in our personal and business non-interest bearing demand accounts, and a $146.8 million increase in our business money market savings accounts. This was partially offset by a $196.1 million decrease in our time deposits and a $94.6 million decrease in our public savings products.
Table 10 presents the composition of our savings deposits.
Savings Deposits
Table 10
Money Market
$ 1,892,920
$ 1,967,554
$ 1,769,023
Regular Savings
2,530,553
2,438,415
2,285,016
Total Savings Deposits
$ 4,423,473
$ 4,405,969
$ 4,054,039
Table 11 presents our quarterly average balance of time deposits of $100,000 or more.
Average Time Deposits of $100,000 or More
Table 11
Average Time Deposits
$ 631,204
$ 670,985
$ 738,488
Borrowings and Long-Term Debt
Borrowings consisted of funds purchased and short-term borrowings, including commercial paper. Borrowings were $16.8 million as of June 30, 2010, a $1.0 million or 7% increase from December 31, 2009, and a $1.8 million or 10% decrease from June 30, 2009. We manage the level of our borrowings to provide adequate sources of liquidity. Due to our high level of deposits and increased capital levels, we have minimized the level of borrowings as a source of funds.
Long-term debt was $40.3 million as of June 30, 2010, a $50.0 million or 55% decrease from December 31, 2009, and a $51.1 million or 56% decrease from June 30, 2009. The decrease in long-term debt from December 31, 2009 and June 30, 2009 was primarily due to a $50.0 million FHLB advance that we repaid in the second quarter of 2010.
Table 12 presents the composition of our securities sold under agreements to repurchase as of June 30, 2010, December 31, 2009, and June 30, 2009.
Table 12
Government Entities
$ 1,406,393
$ 943,717
$ 1,124,794
Private Institutions
675,000
Total Securities Sold Under Agreements to Repurchase
$ 2,081,393
$ 1,618,717
$ 1,799,794
Securities sold under agreements to repurchase as of June 30, 2010 increased by $462.7 million or 29% from December 31, 2009 and by $281.6 million or 16% from June 30, 2009. The increase in balances from December 31, 2009 and June 30, 2009 was primarily due to new placements to accommodate local government entities. As of June 30, 2010, the weighted average maturity was 29 days for our securities sold under agreements to repurchase with government entities and 6.8 years for securities sold under agreements to repurchase with private institutions, subject to the private institutions’ right to terminate agreements at earlier specified dates which could decrease the weighted average maturity to 1.3 years. As of June 30, 2010, $100.0 million of our securities sold under agreements to repurchase placed with private institutions were indexed to the London Inter Bank Offered Rate (“LIBOR”) with the remaining $575.0 million at fixed interest rates. If the agreements indexed to LIBOR with private institutions are not terminated by specified dates, the interest rates on the agreements become fixed, at rates ranging from 4.25% to 4.50%, for the remaining term of the respective agreements. As of June 30, 2010, the weighted average interest rate for outstanding agreements with government entities and private institutions was 0.07% and 3.83%, respectively. We have not entered into agreements in which the securities sold and the related liability was not recorded in the Consolidated Statements of Condition.
As of June 30, 2010, shareholders’ equity was $1.0 billion, an increase of $117.0 million or 13% from December 31, 2009, and an increase of $167.1 million or 20% from June 30, 2009. The increase in shareholders’ equity from December 31, 2009 was primarily due to earnings for the first six months of 2010 of $99.3 million and changes in the fair value of our investment securities available-for-sale, net of tax, of $53.5 million. The change in fair value of our investment securities available-for-sale, net of tax, was primarily due to a lower interest rate environment and the larger investment securities portfolio as of June 30, 2010. This was partially offset by cash dividends paid of $43.4 million. Consistent with our strategy to build capital levels, we have not repurchased shares of our common stock under our share repurchase program since October 2008. We plan to resume the purchase of common stock in the third quarter of 2010 in an orderly and disciplined manner, but the amount and timing will depend on market conditions and various other factors. Further discussion on our capital structure is included in the “Corporate Risk Profile — Capital Management” section of MD&A.
36
Analysis of Business Segments
Our business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury.
Table 13 summarizes net income from our business segments for the three and six months ended June 30, 2010 and 2009. Additional information about segment performance is presented in Note 7 to the Consolidated Financial Statements.
Business Segment Net Income
Table 13
$ 13,074
$ 15,358
$ 22,581
$ 30,000
26,010
26,608
52,879
60,866
Treasury and Other
Consolidated Total
$ 46,564
$ 31,006
$ 99,300
$ 67,046
Net income decreased by $2.3 million or 15% in the second quarter of 2010 compared to the same period in 2009 primarily due to a decrease in net interest income. This was partially offset by a decrease in the Provision. The $7.6 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, and lower loan and lease balances, partially offset by higher average deposit balances. The $2.9 million decrease in the Provision was primarily due to a reduction in the allocation to the segment’s home equity portfolio.
Net income decreased by $7.4 million or 25% for the first six months of 2010 compared to the same period in 2009 primarily due to a decrease in net interest income and noninterest income. This was partially offset by a decrease in the Provision and noninterest expense. The $13.5 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances. The $4.4 million decrease in noninterest income was primarily due to lower mortgage banking income, partially offset by higher overdraft fees. As previously noted, beginning July 1, 2010 for new customers and August 15, 2010 for existing customers, federal rules will prohibit a financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the customer consents in advance (“opt-in”). The $4.1 million decrease in the Provision was primarily due to a lower allocation to the segment’s home equity portfolio. The $2.0 million decrease in noninterest expense was primarily due to a decrease in FDIC insurance expense and lower commissions expense, primarily in our mortgage banking business.
Net income increased by $1.2 million or 13% in the second quarter of 2010 compared to the same period in 2009 primarily due to decreases in the Provision and noninterest expense. This was partially offset by decreases in net interest income and noninterest income. The $9.0 million decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment. The $2.6 million decrease in noninterest expense was primarily due to the sale of assets of our wholesale and retail insurance businesses in 2009. The $5.1 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio. The $4.8 million decrease in noninterest income was primarily due to the sale of assets of our wholesale and retail insurance businesses in 2009, as well as a $2.8 million gain resulting from the sale of our equity interest in a cargo aircraft leveraged lease in the second quarter of 2009.
Net income decreased $3.5 million or 12% for the first six months of 2010 compared to the same period in 2009 primarily due to lower noninterest income and net interest income. This was partially offset by decreases in the Provision and noninterest expense. The $18.6 million decrease in noninterest income was primarily due to a $10.0 million gain on the sale of our equity interest in two watercraft leveraged leases and the sale of assets of our wholesale and retail insurance businesses in 2009. The $3.7 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances. The $11.6 million decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment. The $4.5 million decrease in noninterest expense was primarily due to the sale of assets of our wholesale and retail insurance businesses in 2009.
37
Net income increased by $0.4 million or 29% in the second quarter of 2010 compared to the same period in 2009 primarily due to a decrease in the Provision. The $0.9 million decrease in the Provision was due to lower net charge-offs of loans in the segment.
Net income increased by $3.0 million for the first six months of 2010 compared to the same period in 2009 primarily due to decreases in noninterest expense and the Provision. The $2.8 million decrease in noninterest expense was primarily due to lower legal fees and operational losses. The $1.5 million decrease in the Provision was due to lower net charge-offs of loans in the segment.
Net income increased by $16.2 million in the second quarter of 2010 compared to the same period in 2009, primarily due to an increase in noninterest income and net interest income. The $13.6 million increase in noninterest income was primarily due to higher gains on the sales of investment securities. The $13.9 million increase in net interest income was primarily due to lower funding costs of the segment’s deposit balances.
Net income increased by $40.2 million for the first six months of 2010 compared to the same period in 2009 primarily due to an increase in net interest income and noninterest income. The $28.7 million increase in net interest income was primarily due to lower funding costs of the segment’s deposit balances, and our larger investment securities portfolio. The $33.2 million increase in noninterest income was primarily due to higher gains on the sales of investment securities.
Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury provide a wide-range of support to our other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
38
Corporate Risk Profile
Credit Risk
As of June 30, 2010, our overall credit risk position is reflective of a slightly improving economy, while non-performing assets (“NPAs”) remain at elevated levels.
The downward risk migration we have experienced in our loan portfolio appears to have moderated based on current asset quality measures but we remain vigilant in light of an uncertain macroeconomic environment. As of June 30, 2010, the higher risk segments within our loan portfolio continue to be concentrated in residential home building, residential land loans, and home equity loans.
We also continue to have higher risk in our air transportation leasing portfolio. Relative to our total loan and lease portfolio, domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, consumer demand, and marginal pricing power. We believe that volatile fuel costs, coupled with a weak economy, could place additional pressure on the financial health of air transportation carriers for the foreseeable future.
Since the start of the downturn, we have increased monitoring of the loan and lease portfolio to identify higher risk segments. We have also actively managed exposures with deteriorating asset quality to reduce levels of potential loss exposure and have systematically built our reserves and capital base to deal with both anticipated and unforeseen issues. Risk management activities have included making policy changes to tighten underwriting and curtailing activities in higher risk segments. We have also conducted detailed analysis of portfolio segments and stress tested those segments to ensure that reserve and capital levels are appropriate. We are also performing frequent loan and lease-level risk monitoring and risk rating which provides opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.
As noted in Table 14, balances in our loan and lease portfolio which demonstrate a higher risk profile have decreased from December 31, 2009.
Higher Risk Loans and Leases Outstanding
Table 14
Residential Home Building 1
$ 18,993
$ 31,067
$ 22,850
Residential Land Loans 2
30,262
37,873
47,871
Home Equity Loans 3
25,055
28,076
21,832
Air Transportation Leases 4
39,165
50,426
62,148
1 Residential home building loans were $41.4 million as of June 30, 2010, $60.3 million as of December 31, 2009, and $89.3 million as of June 30, 2009. Higher risk loans within this segment are defined as those loans with a well-defined weakness or weaknesses that jeopardize the orderly repayment of the loan.
2 We consider all of our residential land loans, which are consumer loans secured by unimproved lots, to be of higher risk due to the volatility in the value of the underlying collateral.
3 Higher risk home equity loans are defined as those loans originated in 2005 or later, with current monitoring credit scores below 600, and with original loan-to-value (“LTV”) ratios greater than 70%.
4 We consider all of our air transportation leases to be of higher risk due to the weak financial profile of the industry.
Higher risk exposure in our residential home building portfolio was $19.0 million as of June 30 2010, of which $3.3 million was included in NPAs. As of June 30, 2010, $5.9 million of this higher risk exposure relates to residential development projects on Hawaiian islands other than Oahu. The decrease in this higher risk segment from December 31, 2009 was primarily due to the sale of a $10.0 million exposure to a regional home builder with operations on Oahu in the second quarter of 2010.
Our Hawaii residential land loan portfolio was $ 30.3 million as of June 30, 2010, of which $25.6 million related to properties on Hawaiian islands other than Oahu. The decrease in this higher risk segment from December 31, 2009 was primarily due to loan pay downs.
The higher risk segment within our Hawaii home equity lending portfolio was $25.1 million or 3% of our total home equity loans outstanding as of June 30, 2010. The decrease in this higher risk segment from December 31, 2009 was primarily due to loan charge-offs and pay downs.
As of June 30, 2010, air transportation leases totaled $39.2 million, of which $27.9 million was comprised of four leveraged leases on aircraft that were originated in the 1990’s and prior. The decrease in this higher risk segment from December 31, 2009 was primarily due to the sale of our equity interest in an aircraft leveraged lease in the first quarter of 2010.
All of these higher risk loans and leases have been considered in our quarterly evaluation of the adequacy of the Allowance.
39
Non-Performing Assets
Table 15 presents information on NPAs and accruing loans and leases past due 90 days or more.
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More
Table 15
Non-Performing Assets 1
Non-Accrual Loans and Leases
6,646
10,511
3,476
1,167
5,640
8,154
6,548
63
631
956
9,920
16,598
19,234
27,491
19,893
16,265
2,638
5,153
2,567
550
30,129
25,596
19,382
Total Non-Accrual Loans and Leases
40,049
42,194
38,616
Non-Accrual Loans Held for Sale
3,005
Total Non-Performing Assets
Accruing Loans and Leases Past Due 90 Days or More
623
120
743
9,019
4,657
2,256
2,210
2,879
464
875
769
1,161
886
1,270
12,900
12,950
9,575
Total Accruing Loans and Leases Past Due 90 Days or More
13,693
9,588
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases
0.74
0.73
0.63
Ratio of Non-Performing Assets to Total Loans and Leases,Loans Held for Sale, and Foreclosed Real Estate
0.79
0.84
Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases,Commercial Loans Held for Sale, and Commercial Foreclosed Real Estate
0.62
1.03
0.82
Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leasesand Consumer Foreclosed Real Estate
0.72
0.52
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or Moreto Total Loans and Leases, Loans Held for Sale, and Foreclosed Real Estate
1.07
Quarter to Quarter Changes in Non-Performing Assets 1
Balance at Beginning of Quarter
41,624
48,536
40,329
Additions
10,761
14,874
22,459
Reductions
Payments
(4,414
(4,128
(15,593
Return to Accrual Status
(1,818
(230
Sales of Foreclosed Real Estate
(38
Charge-offs/Write-downs
(4,730
(9,095
(7,911
Total Reductions
(9,144
(15,079
(23,734
Balance at End of Quarter
1 Excluded from non-performing assets were contractually binding non-accrual loans held for sale of $4.2 million and $5.2 million as of December 31, 2009 and June 30, 2009, respectively.
2 Comprised of other revolving credit, installment, and lease financing.
40
NPAs consist of non-accrual loans and leases, including those held for sale and foreclosed real estate. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they return to accrual status.
Impaired loans are defined as loans which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement. As of June 30, 2010, impaired loans were $29.4 million and were comprised of $19.5 million in commercial and consumer loans whose terms had been modified in a troubled debt restructuring (“TDR”) and $9.9 million in non-accrual commercial loans. Impaired loans were $24.7 million as of December 31, 2009 and $33.8 million as of June 30, 2009. Impaired loans had a related Allowance of $3.5 million as of June 30, 2010, $2.3 million as of December 31, 2009, and $7.9 million as of June 30, 2009. We have previously recorded charge-offs of $15.7 million related to our impaired loans as of June 30, 2010.
Table 16 presents information on loans whose terms had been modified in a TDR.
Total NPAs were $43.2 million as of June 30, 2010, a decrease of $5.1 million from December 31, 2009. The ratio of our NPAs to total loans and leases, loans held for sale, and foreclosed real estate was 0.79% as of June 30, 2010, compared to 0.84% as of December 31, 2009. Although NPAs are at lower levels compared to December 31, 2009, NPAs are expected to increase in the near-term due to an often lengthy legal resolution process associated with real estate-secured loans in Hawaii.
Loans Modified in a Troubled Debt Restructuring
Table 16
Commercial and industrial NPAs decreased by $5.9 million from December 31, 2009, primarily due to $4.1 million in net charge-offs and $1.8 million in resolutions.
Commercial mortgage NPAs increased by $2.3 million from December 31, 2009 due to the addition of three loans. Each of these loans was evaluated for impairment and we have taken partial charge-offs on all three.
Construction NPAs decreased by $5.5 million from December 31, 2009, primarily due to the payoff of two loans totaling $4.3 million. Non-accrual loan exposure in this portfolio is comprised of three construction loans. We have evaluated each of these loans for impairment, have taken partial charge-offs on two of these loans, and believe that we are well-secured on the third loan.
Residential mortgage NPAs increased by $7.7 million from December 31, 2009, primarily due to slower dispositions of loans in this category. Additions to residential mortgage NPAs declined during the second quarter of 2010. As of June 30, 2010, our residential mortgage loan NPAs were comprised of 96 loans with a weighted average current LTV ratio of 73.6%.
Home equity NPAs decreased by $2.5 million from December 31, 2009, primarily due to increased charge-offs during the first quarter of 2010 due to a change in our charge-off policy requiring a full balance charge-off when the borrower becomes 90 days past due and we do not hold the first mortgage.
Restructured Loans on Accrual Status
$ 13,558
$ 7,274
$ 2,307
Restructured Loans Included inNon-Accrual Loans or Accruing LoansPast Due 90 Days or More
5,915
1,911
645
Total Restructured Loans
$ 19,473
$ 9,185
$ 2,952
As of June 30, 2010, our loans whose terms had been modified in a TDR were primarily in our commercial and industrial, residential mortgage, and consumer automobile loan portfolios. Loans modified in a TDR were primarily the result of the modification of interest rates to below market rates and extensions of maturity dates.
Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Loans and leases in this category are 90 days or more past due, as to principal or interest, and still accruing interest because they are well secured and in the process of collection. Loans and leases past due 90 days or more and still accruing interest were $12.9 million as of June 30, 2010, a $0.8 million decrease from December 31, 2009, and a $3.3 million increase from June 30, 2009. The decrease in loans and leases past due 90 days or more and still accruing interest from December 31, 2009 was primarily due to the repayment of a commercial loan. The increase in loans and leases past due 90 days or more and still accruing interest from June 30, 2009 was primarily due to increased delinquency activity in our residential mortgage loans.
Reserve for Credit Losses
Table 17 presents the activity in our reserve for credit losses.
Table 17
151,777
139,835
149,077
128,667
Loans and Leases Charged-Off
(3,056
(12,249
(6,962
(18,713
(1,000
(1,303
(1,417
(2,274
(4,473
(297
(4,493
(4,377
(1,814
(7,632
(2,641
(2,886
(3,303
(10,322
(5,619
(1,752
(2,121
(3,779
(5,103
(2,530
(3,643
(5,352
(7,220
Total Loans and Leases Charged-Off
(17,125
(27,603
(37,921
(43,789
Recoveries on Loans and Leases Previously Charged-Off
367
228
1,225
770
236
658
271
197
76
297
172
826
735
1,579
1,462
549
718
1,176
1,423
Total Recoveries on Loans and Leases Previously Charged-Off
2,186
1,913
4,971
4,130
Net Loans and Leases Charged-Off
(14,939
(25,690
(32,950
(39,659
Provision for Unfunded Commitments
Balance at End of Period 2
152,777
142,835
Components
Reserve for Unfunded Commitments
5,419
Total Reserve for Credit Losses
Average Loans and Leases Outstanding
Ratio of Net Loans and Leases Charged-Off toAverage Loans and Leases Outstanding (annualized)
1.09
1.65
1.19
1.26
Ratio of Allowance for Loan and Lease Losses toLoans and Leases Outstanding
2 Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition.
We maintain a Reserve that consists of two components, the Allowance and a Reserve for Unfunded Commitments (“Unfunded Reserve”). The Reserve provides for the risk of credit losses inherent in the loan and lease portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation. The evaluation reflects analyses of individual
borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.
42
The level of the Allowance is adjusted by recording an expense or recovery through the Provision. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The Provision exceeded net charge-offs of loans and leases for the second quarter of 2010 by $1.0 million and by $3.7 million for the first six months of 2010.
Net charge-off activity in our commercial lending portfolios decreased by $11.3 million in the second quarter of 2010 and by $12.8 million for the first six months of 2010 compared to the same periods in 2009. This decrease was primarily due to several large charge-offs recorded in 2009 related to loan sales in our commercial and industrial portfolio. The charge-offs in our commercial lending portfolios for the first six months of 2010 was primarily due to Hawaii small to middle-market borrowers that have been adversely impacted by the slow economy in Hawaii.
Net charge-off activity in our consumer lending portfolios increased by $6.1 million for the first six months of 2010 compared to the same period in 2009, with $5.6 million of that increase occurring in the first quarter of 2010. The increase in consumer lending charge-offs in the first quarter of 2010 was primarily due to increased losses in our home equity and residential mortgage portfolios. The increase in net charge-offs in these portfolios was primarily due to the prolonged effects of a weak economy in Hawaii.
As of June 30, 2010, the Allowance was $147.4 million or 2.71% of total loans and leases outstanding. This represents an increase of 22 basis points from December 31, 2009 and an increase of 48 basis points from June 30, 2009.
Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of June 30, 2010, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.
The Reserve for Unfunded Commitments
Unfunded Reserve was $5.4 million as of June 30, 2010, unchanged from December 31, 2009 and June 30, 2009. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors.
Market Risk
Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices. We are exposed to market risk as a consequence of the normal course of conducting our business activities. Our market risk management process involves measuring, monitoring, controlling, and managing risks that can significantly impact our statements of income and condition. In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility. The activities associated with these market risks are categorized into “trading” and “other than trading.”
Our trading activities include foreign currency and foreign exchange contracts that expose us to a small degree of foreign currency risk. These transactions are primarily executed on behalf of customers. Our other than trading activities include normal business transactions that expose our balance sheet profile to varying degrees of market risk.
Our primary market risk exposure is interest rate risk.
Interest Rate Risk
The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.
Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. government and its agencies, particularly the FRB. The monetary policies of the FRB influence, to a significant extent, the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future changes in monetary policies are generally not predictable.
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In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates. The ALCO utilizes several techniques to manage interest rate risk, which include:
· adjusting balance sheet mix or altering the interest rate characteristics of assets and liabilities;
· changing product pricing strategies;
· modifying characteristics of the investment securities portfolio; or
· using derivative financial instruments.
The use of derivative financial instruments has generally been limited. This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities, with deposits and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO. Natural and offsetting hedges reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.
A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model.
The model is used to estimate and measure the balance sheet sensitivity to changes in interest rates. These estimates are based on assumptions on the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments. The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits. While such assumptions are inherently uncertain, we believe that these assumptions are reasonable. As a result, the simulation model attempts to capture the dynamic nature of the balance sheet.
We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates. Table 18 presents, as of June 30, 2010 and 2009, an estimate of the change in net interest income during a quarterly time frame that would result from a gradual change in interest rates, moving in a parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario. The base case scenario assumes the balance sheet and interest rates are generally unchanged. Based on the net interest income simulation as of June 30, 2010, net interest income sensitivity to changes in interest rates as of June 30, 2010 was more sensitive to changes in interest rates compared to the sensitivity profile as of June 30, 2009. As a result of our strategy to shorten the investment portfolio’s duration, net interest income is now asset sensitive. Economic conditions and government intervention continue to cause interest rates to remain relatively low.
Net Interest Income Sensitivity Profile
Table 18
Change in Net Interest Income Per Quarter
Change in Interest Rates (basis points)
+200
960
0.9
(605
)%
+100
747
(403
-100
(1,600
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time. Conversely, if the yield curve should steepen further from its mostly “normal” profile, net interest income may increase. We also use the Market Value of Equity (“MVE”) sensitivity analysis to estimate the net present value change in our net assets (i.e., assets, liabilities, and off-balance sheet instruments) from changes in interest rates. The MVE was approximately $1.9 billion as of June 30, 2010 and 2009.
Table 19 presents, as of June 30, 2010 and 2009, an estimate of the change in the MVE that would occur from an instantaneous 100 and 200 basis point increase or a 100 basis point decrease in interest rates, moving in a parallel fashion over the entire yield curve. The MVE sensitivity increased as of June 30, 2010 compared to June 30, 2009, as a result of changes in the composition of the balance sheet, particularly from a decrease in the investment portfolio duration. Significantly higher interest rates could reduce the value of our investment portfolio while a significant decline in interest rates effectively creates a 0% interest rate environment which could reduce the estimated value of our deposits and increase runoff in our mortgage assets.
44
Market Value of Equity Sensitivity Profile
Table 19
Change in Market Value of Equity
(79,205
(4.1
(27,465
(13,830
13,945
(95,580
(4.9
(48,606
Further enhancing the MVE sensitivity analysis is:
· value-at-risk metrics;
· key rate analysis;
· duration of equity analysis; and
· exposure to basis risk and non-parallel yield curve shifts.
There are inherent limitations to these measures; however, used along with the MVE sensitivity analysis, we obtain better overall insight for managing our exposures to changes in interest rates. Based on the additional analyses, we estimate that our greatest exposure is in scenarios where interest rates fall significantly from current levels.
Liquidity Management
Liquidity is managed in an effort to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancings, liability issuances and settlements, and off-balance sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.
In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including investment securities available-for-sale. Assets generate long-term liquidity through cash flows from investment securities and loans. With respect to liabilities, short-term liquidity is generated from securities sold under agreements to repurchase and other short-term funding sources such as federal funds while long-term liquidity is generated through growth in deposits and long-term debt.
We continued to maintain a strong liquidity position during the second quarter of 2010. Total deposits were $9.3 billion as of June 30, 2010, an $85.0 million or 1% decrease from December 31, 2009, and a $305.0 million or 3% increase from June 30, 2009. During 2010, we continued to invest excess liquidity conservatively in mortgage-backed securities issued by the Government National Mortgage Association, as well as in
U.S. Treasury securities. These investments in high grade securities with relatively short duration, allows us to maintain flexibility to redeploy funds as opportunities arise.
Capital Management
The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of June 30, 2010, the Company and the Bank were “well capitalized” under this regulatory framework. There have been no conditions or events since June 30, 2010 that management believes have changed either the Company’s or the Bank’s capital classifications.
As of June 30, 2010, our shareholders’ equity was $1.0 billion, a $117.0 million or 13% increase from December 31, 2009, and a $167.1 million or 20% increase from June 30, 2009. In response to a slowing economy and economic uncertainty, we began in the second half of 2008 to increase capital. As of June 30, 2010, our Tier 1 capital ratio was 16.92%, our total capital ratio was 18.19%, our leverage ratio was 7.09%, and our ratio of tangible common equity to risk-weighted assets was 18.57%.
The Parent has not repurchased shares of common stock since October 2008, except for purchases from employees in connection with income tax withholdings related to the vesting of restricted stock and shares purchased for our Rabbi Trust. As of June 30, 2010, remaining buyback authority under the Parent’s share repurchase program was $85.4 million of the total $1.70 billion repurchase amount authorized by the Parent’s Board of Directors. We plan to resume our share repurchases in the third quarter of 2010 in an orderly and disciplined manner, but the amount and timing will depend on market conditions and various other factors.
In July 2010, the Parent’s Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parent’s outstanding shares. The dividend will be payable on September 15, 2010 to shareholders of record at the close of business on August 31, 2010.
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Table 20 presents our regulatory capital and ratios as of June 30, 2010, December 31, 2009, and June 30, 2009.
Regulatory Capital and Ratios
Table 20
Regulatory Capital
Less:
Postretirement Benefit Liability Adjustments
5,479
5,644
6,858
Net Unrealized Gains on Investment Securities
79,824
26,290
22,025
2,367
2,275
Tier 1 Capital
893,824
830,124
779,768
Allowable Reserve for Credit Losses
67,121
70,909
78,643
Total Regulatory Capital
960,945
901,033
858,411
Risk-Weighted Assets
5,283,996
5,594,532
6,227,230
Key Regulatory Capital Ratios
Tier 1 Capital Ratio 1
Total Capital Ratio 2
Leverage Ratio 3
1 Tier 1 Capital Ratio as of December 31, 2009 and June 30, 2009 was revised from 14.88% and 12.56%, respectively.
2 Total Capital Ratio as of December 31, 2009 and June 30, 2009 was revised from 16.15% and 13.82%, respectively.
3 Leverage Ratio as of December 31, 2009 and June 30, 2009 was revised from 6.78% and 6.66%, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
Contractual Obligations
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships. Such entities are often referred to as Variable Interest Entities (“VIEs”). We routinely sell residential mortgage loans to investors, with servicing rights retained. All of our residential mortgage loans sold to third parties are sold on a non-recourse basis.
Our contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the “Market Risk” section of MD&A.
Item 4. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2010. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2010. There were no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the second quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1A. Risk Factors
A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact the Company’s business. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company’s results of operations, financial condition or liquidity, any of which may impact the market price of the Parent’s common stock.
Other than the additional risk factor mentioned above, there are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Parent’s repurchases of equity securities for the second quarter of 2010 were as follows:
Issuer Purchases of Equity Securities
Total Number of Shares
Approximate Dollar Value
Purchased as Part of
of Shares that May Yet Be
Total Number of
Average Price
Publicly Announced Plans
Purchased Under the
Period
Shares Purchased 1
Paid Per Share
or Programs
Plans or Programs 2
April 1 - 30, 2010
36,148
52.64
85,356,214
May 1 - 31, 2010
121
52.52
June 1 - 30, 2010
630
46.91
36,899
52.54
1 The shares purchased in the second quarter of 2010 were shares purchased from employees in connection with option exercises paid with the Parent’s common stock, income tax withholdings related to stock option exercises, and shares purchased for a Rabbi Trust. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.
2 The share repurchase program was first announced in July 2001. As of June 30, 2010, $85.4 million remained of the total $1.70 billion total repurchase amount authorized by the Parent’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.
Item 6. Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 26, 2010
By:
/s/ Allan R. Landon
Allan R. Landon
Chairman of the Board and
Chief Executive Officer
/s/ Kent T. Lucien
Kent T. Lucien
Chief Financial Officer
Exhibit Index
Exhibit Number
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive Data File