UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2008

 

 

 

 

 

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

 

Large accelerated filer

x

 

Accelerated filer

o

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

 

Smaller reporting company

o

 

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

Yes  o

 

No  x

 

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

 

As of April 18, 2008, there were 47,931,531 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 months ended March 31, 2008 and 2007

 

2

 

 

 

 

 

Consolidated Statements of Condition –March 31, 2008, December 31, 2007, and March 31, 2007

 

3

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity –Three months ended March 31, 2008 and 2007

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows –Three months ended March 31, 2008 and 2007

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

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

 

14

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

Item 4.

Controls and Procedures

 

41

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

Item 1A.

Risk Factors

 

41

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

Item 5.

Other Information

 

41

 

 

 

 

Item 6.

Exhibits

 

41

 

 

 

 

Signatures

 

42

 

1



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

Three Months Ended
March 31,

 

(dollars in thousands, except per share amounts)

 

2008

 

2007

 

Interest Income

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

104,413

 

$

110,298

 

Income on Investment Securities

 

 

 

 

 

Trading

 

1,160

 

1,618

 

Available-for-Sale

 

34,251

 

30,961

 

Held-to-Maturity

 

3,239

 

4,052

 

Deposits

 

195

 

58

 

Funds Sold

 

992

 

1,058

 

Other

 

426

 

333

 

Total Interest Income

 

144,676

 

148,378

 

Interest Expense

 

 

 

 

 

Deposits

 

27,465

 

33,375

 

Securities Sold Under Agreements to Repurchase

 

10,617

 

11,886

 

Funds Purchased

 

633

 

923

 

Short-Term Borrowings

 

34

 

87

 

Long-Term Debt

 

3,747

 

3,970

 

Total Interest Expense

 

42,496

 

50,241

 

Net Interest Income

 

102,180

 

98,137

 

Provision for Credit Losses

 

14,427

 

2,631

 

Net Interest Income After Provision for Credit Losses

 

87,753

 

95,506

 

Noninterest Income

 

 

 

 

 

Trust and Asset Management

 

15,086

 

15,833

 

Mortgage Banking

 

4,297

 

3,371

 

Service Charges on Deposit Accounts

 

12,083

 

10,967

 

Fees, Exchange, and Other Service Charges

 

16,101

 

16,061

 

Investment Securities Gains, Net

 

130

 

16

 

Insurance

 

7,130

 

6,215

 

Other

 

31,298

 

8,497

 

Total Noninterest Income

 

86,125

 

60,960

 

Noninterest Expense

 

 

 

 

 

Salaries and Benefits

 

55,473

 

45,406

 

Net Occupancy

 

10,443

 

9,811

 

Net Equipment

 

4,321

 

4,787

 

Professional Fees

 

2,613

 

2,543

 

Other

 

20,582

 

19,576

 

Total Noninterest Expense

 

93,432

 

82,123

 

Income Before Provision for Income Taxes

 

80,446

 

74,343

 

Provision for Income Taxes

 

23,231

 

27,008

 

Net Income

 

$

57,215

 

$

47,335

 

Basic Earnings Per Share

 

$

1.19

 

$

0.96

 

Diluted Earnings Per Share

 

$

1.18

 

$

0.94

 

Dividends Declared Per Share

 

$

0.44

 

$

0.41

 

Basic Weighted Average Shares

 

47,965,722

 

49,427,933

 

Diluted Weighted Average Shares

 

48,628,427

 

50,263,419

 

 

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

 

2



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2008

 

2007

 

2007

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

55,916

 

$

4,870

 

$

5,594

 

Funds Sold

 

240,000

 

15,000

 

97,000

 

Investment Securities

 

 

 

 

 

 

 

Trading

 

99,966

 

67,286

 

158,469

 

Available-for-Sale

 

2,672,286

 

2,563,190

 

2,438,532

 

Held-to-Maturity (Fair Value of $277,536; $287,644; and $340,636)

 

277,256

 

292,577

 

349,663

 

Loans Held for Sale

 

13,096

 

12,341

 

19,238

 

Loans and Leases

 

6,579,337

 

6,580,861

 

6,507,152

 

Allowance for Loan and Lease Losses

 

(99,998

)

(90,998

)

(90,998

)

Net Loans and Leases

 

6,479,339

 

6,489,863

 

6,416,154

 

Total Earning Assets

 

9,837,859

 

9,445,127

 

9,484,650

 

Cash and Noninterest-Bearing Deposits

 

314,863

 

368,402

 

365,517

 

Premises and Equipment

 

116,683

 

117,177

 

123,309

 

Customers’ Acceptances

 

992

 

1,112

 

839

 

Accrued Interest Receivable

 

46,316

 

45,261

 

49,477

 

Foreclosed Real Estate

 

294

 

184

 

462

 

Mortgage Servicing Rights

 

27,149

 

27,588

 

27,005

 

Goodwill

 

34,959

 

34,959

 

34,959

 

Other Assets

 

443,686

 

433,132

 

405,739

 

Total Assets

 

$

10,822,801

 

$

10,472,942

 

$

10,491,957

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

2,000,226

 

$

1,935,639

 

$

1,973,631

 

Interest-Bearing Demand

 

1,649,705

 

1,634,675

 

1,618,615

 

Savings

 

2,728,873

 

2,630,471

 

2,648,495

 

Time

 

1,724,051

 

1,741,587

 

1,712,196

 

Total Deposits

 

8,102,855

 

7,942,372

 

7,952,937

 

Funds Purchased

 

23,800

 

75,400

 

72,400

 

Short-Term Borrowings

 

9,726

 

10,427

 

3,462

 

Securities Sold Under Agreements to Repurchase

 

1,231,962

 

1,029,340

 

1,050,393

 

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

 

239,389

 

235,371

 

260,308

 

Banker’s Acceptances

 

992

 

1,112

 

839

 

Retirement Benefits Payable

 

29,755

 

29,984

 

48,363

 

Accrued Interest Payable

 

18,322

 

20,476

 

17,893

 

Taxes Payable and Deferred Taxes

 

300,188

 

278,218

 

293,326

 

Other Liabilities

 

99,065

 

99,987

 

81,005

 

Total Liabilities

 

10,056,054

 

9,722,687

 

9,780,926

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: March 2008 - 56,995,352 / 47,990,432; December 2007 - 56,995,447 / 48,589,645; and March 2007 - 56,930,753 / 49,638,731)

 

568

 

567

 

566

 

Capital Surplus

 

487,139

 

484,790

 

478,123

 

Accumulated Other Comprehensive Income (Loss)

 

5,553

 

(5,091

)

(27,356

)

Retained Earnings

 

720,540

 

688,638

 

620,034

 

Treasury Stock, at Cost (Shares: March 2008 - 9,004,920;
December 2007 - 8,405,802; and March 2007 - 7,292,022)

 

(447,053

)

(418,649

)

(360,336

)

Total Shareholders’ Equity

 

766,747

 

750,255

 

711,031

 

Total Liabilities and Shareholders’ Equity

 

$

10,822,801

 

$

10,472,942

 

$

10,491,957

 

 

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

 

3



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

(dollars in thousands)

 

Total

 

Common
Stock

 

Capital
Surplus

 

Accum.
Other
Compre-
hensive
Income
(Loss)

 

Retained
Earnings

 

Treasury
Stock

 

Compre-
hensive
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2007

 

$

750,255

 

$

567

 

$

484,790

 

$

(5,091

)

$

688,638

 

$

(418,649

)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(2,736

)

 

 

 

(2,736

)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

57,215

 

 

 

 

57,215

 

 

$

57,215

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

10,595

 

 

 

10,595

 

 

 

10,595

 

Amortization of Net Loss for Pension and Postretirement Plans

 

49

 

 

 

49

 

 

 

49

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

67,859

 

Share-Based Compensation

 

1,751

 

 

1,751

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

583

 

 

583

 

 

 

 

 

 

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

 

3,182

 

1

 

15

 

 

(1,378

)

4,544

 

 

 

Common Stock Repurchased (686,313 shares)

 

(32,948

)

 

 

 

 

(32,948

)

 

 

Cash Dividends Paid

 

(21,199

)

 

 

 

(21,199

)

 

 

 

Balance as of March 31, 2008

 

$

766,747

 

$

568

 

$

487,139

 

$

5,553

 

$

720,540

 

$

(447,053

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2006

 

$

719,420

 

$

566

 

$

475,178

 

$

(39,084

)

$

630,660

 

$

(347,900

)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140”

 

5,126

 

 

 

5,279

 

(153

)

 

 

 

FSP No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction”

 

(27,106

)

 

 

 

(27,106

)

 

 

 

FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”

 

(7,247

)

 

 

 

(7,247

)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

47,335

 

 

 

 

47,335

 

 

$

47,335

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

6,241

 

 

 

6,241

 

 

 

6,241

 

Amortization of Net Loss for Pension and Postretirement Plans

 

208

 

 

 

208

 

 

 

208

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

53,784

 

Share-Based Compensation

 

1,317

 

 

1,317

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

1,491

 

 

1,491

 

 

 

 

 

 

Common Stock Issued under Purchase and Equity Compensation Plans (255,918 shares)

 

5,352

 

 

137

 

 

(3,044

)

8,259

 

 

 

Common Stock Repurchased (394,247 shares)

 

(20,695

)

 

 

 

 

(20,695

)

 

 

Cash Dividends Paid

 

(20,411

)

 

 

 

(20,411

)

 

 

 

Balance as of March 31, 2007

 

$

711,031

 

$

566

 

$

478,123

 

$

(27,356

)

$

620,034

 

$

(360,336

)

 

 

 

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

 

4



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

Three Months Ended
March 31,

 

(dollars in thousands)

 

2008

 

2007

 

Operating Activities

 

 

 

 

 

Net Income

 

$

57,215

 

$

47,335

 

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

 

 

 

 

 

Provision for Credit Losses

 

14,427

 

2,631

 

Depreciation and Amortization

 

3,504

 

3,695

 

Amortization of Deferred Loan and Lease Fees

 

(448

)

(384

)

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

 

578

 

806

 

Share-Based Compensation

 

1,751

 

1,317

 

Benefit Plan Contributions

 

(515

)

(346

)

Deferred Income Taxes

 

(40,610

)

(34,226

)

Net Gain on Investment Securities

 

(130

)

(16

)

Net Change in Trading Securities

 

(32,680

)

5,711

 

Proceeds from Sales of Loans Held for Sale

 

144,837

 

72,793

 

Originations of Loans Held for Sale

 

(145,592

)

(80,089

)

Tax Benefits from Share-Based Compensation

 

(669

)

(1,512

)

Net Change in Other Assets and Other Liabilities

 

44,304

 

(9,513

)

Net Cash Provided by Operating Activities

 

45,972

 

8,202

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

252,970

 

157,784

 

Proceeds from Sales

 

125,000

 

 

Purchases

 

(470,716

)

(145,196

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

15,207

 

21,485

 

Net Change in Loans and Leases

 

(3,456

)

71,049

 

Premises and Equipment, Net

 

(3,010

)

(1,079

)

Net Cash (Used in) Provided by Investing Activities

 

(84,005

)

104,043

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

160,483

 

(70,457

)

Net Change in Short-Term Borrowings

 

150,321

 

7,233

 

Tax Benefits from Share-Based Compensation

 

669

 

1,512

 

Proceeds from Issuance of Common Stock

 

3,214

 

5,352

 

Repurchase of Common Stock

 

(32,948

)

(20,695

)

Cash Dividends Paid

 

(21,199

)

(20,411

)

Net Cash Provided by (Used in) Financing Activities

 

260,540

 

(97,466

)

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

222,507

 

14,779

 

Cash and Cash Equivalents at Beginning of Period

 

388,272

 

453,332

 

Cash and Cash Equivalents at End of Period

 

$

610,779

 

$

468,111

 

Supplemental Information

 

 

 

 

 

Cash Paid for:

 

 

 

 

 

Interest

 

$

44,650

 

$

55,066

 

Income Taxes

 

2,289

 

3,489

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

Transfers from Investment Securities-Available-for-Sale to Trading

 

 

164,180

 

Transfers from Loans to Foreclosed Real Estate

 

110

 

462

 

 

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

 

5



 

Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

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

 

Certain prior period amounts have been reclassified to conform to current period classifications.

 

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, 2007.  Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

 

Fair Value Measurements

 

Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which became effective for the Company on January 1, 2008, established a framework for measuring fair value, while expanding fair value measurement disclosures.  SFAS No. 157 established a fair value hierarchy that distinguishes between independent observable inputs and unobservable inputs based on the best information available.  SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities, the effect of these measurements on earnings for the period, and the inputs used to measure fair value.  In February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) FAS 157-1 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, from the scope of SFAS No. 157.  In February 2008, the FASB also issued FSP FAS 157-2 to allow entities to electively defer the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009.  The Company will apply the fair value measurement provisions of SFAS No. 157 to its nonfinancial assets and liabilities effective January 1, 2009.  The adoption of SFAS No. 157 had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.

 

6



 

Fair Value Option

 

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,” which became effective for the Company on January 1, 2008, provides entities with an option to report selected financial assets and financial liabilities, on an instrument by instrument basis, at fair value.  On January 1, 2008, the Company elected the fair value option for its subordinated notes, which are included in long-term debt on the Company’s Consolidated Statements of Condition.  In adopting the provisions of SFAS No. 159 on January 1, 2008, the Company adjusted the carrying value of the subordinated notes to fair value and recorded an after-tax cumulative-effect adjustment to reduce retained earnings by $2.7 million.  Prospectively, the accounting for the Company’s subordinated notes at fair value is not expected to have a material impact on the Company’s statements of income and condition.

 

Loan Commitments

 

U.S. Securities and Exchange Commission (the “SEC”) Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings,” which became effective for the Company on January 1, 2008, requires entities to include the expected net future cash flows related to the servicing of the loan in the measurement of written loan commitments that are accounted for at fair value through earnings.  The expected net future cash flows from servicing the loan that are to be included in measuring the fair value of the written loan commitment is to be determined in the same manner that the fair value of a recognized servicing asset is measured under SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”  However, a separate and distinct servicing asset is not recognized for accounting purposes until the servicing rights have been contractually separated from the underlying loan by sale or securitization of the loan with servicing rights retained.  The impact of SAB No. 109 was to accelerate the recognition of the estimated fair value of the servicing rights related to the loan from the loan sale date to the loan commitment date.  The implementation of SAB No. 109 did not have a material impact on the Company’s statements of income and condition.

 

Future Application of Accounting Pronouncements

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133.”  SFAS No. 161 expands disclosure requirements regarding an entity’s derivative instruments and hedging activities.  Expanded qualitative disclosures that will be required under SFAS No. 161 include: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also requires several added quantitative disclosures in financial statements.  SFAS No. 161 will be effective for the Company on January 1, 2009.  Management is currently evaluating the effect that the provisions of SFAS No. 161 will have on the Company’s financial statements.

 

7



 

Note 2.  Pension Plans and Postretirement Benefit Plan

 

The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three months ended March 31, 2008 and 2007 are presented in the following table:

 

Pension Plans and Postretirement Benefit Plan (Unaudited)

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

Three Months Ended March 31,

 

(dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

Service Cost

 

$

 

$

 

$

89

 

$

155

 

Interest Cost

 

1,298

 

1,223

 

420

 

395

 

Expected Return on Plan Assets

 

(1,522

)

(1,373

)

 

 

Amortization of Prior Service Credit

 

 

 

(53

)

(50

)

Recognized Net Actuarial Losses (Gains)

 

270

 

450

 

(140

)

(75

)

Net Periodic Benefit Cost

 

$

46

 

$

300

 

$

316

 

$

425

 

 

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 statements of income.  There were no significant changes from the previously reported $0.7 million that the Company expects to contribute to the pension plans and the $1.1 million that it expects to contribute to the postretirement benefit plan for the year ending December 31, 2008.  For the three months ended March 31, 2008, the Company contributed $0.1 million to its pension plans and $0.4 million to its postretirement benefit plan.

 

Note 3.  Business Segments

 

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

 

8



 

Selected financial information for each business segment is presented below for the three months ended March 31, 2008 and 2007.

 

Business Segment Selected Financial Information (Unaudited)

 

 

Retail

 

Commercial

 

Investment

 

 

 

Consolidated

 

(dollars in thousands)

 

Banking

 

Banking

 

Services

 

Treasury

 

Total

 

Three Months Ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

58,423

 

$

42,835

 

$

3,870

 

$

(2,948

)

$

102,180

 

Provision for Credit Losses

 

2,922

 

3,256

 

 

8,249

 

14,427

 

Net Interest Income (Loss) After Provision for Credit Losses

 

55,501

 

39,579

 

3,870

 

(11,197

)

87,753

 

Noninterest Income

 

28,546

 

22,249

 

18,261

 

17,069

 

86,125

 

Noninterest Expense

 

(43,769

)

(24,721

)

(16,863

)

(8,079

)

(93,432

)

Income Before Provision for Income Taxes

 

40,278

 

37,107

 

5,268

 

(2,207

)

80,446

 

Provision for Income Taxes

 

(14,903

)

(13,736

)

(1,949

)

7,357

 

(23,231

)

Allocated Net Income

 

$

25,375

 

$

23,371

 

$

3,319

 

$

5,150

 

$

57,215

 

Total Assets as of March 31, 2008

 

$

3,681,693

 

$

3,066,272

 

$

232,882

 

$

3,841,954

 

$

10,822,801

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2007 1

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

54,401

 

$

39,171

 

$

3,525

 

$

1,040

 

$

98,137

 

Provision for Credit Losses

 

1,545

 

1,098

 

 

(12

)

2,631

 

Net Interest Income After Provision for Credit Losses

 

52,856

 

38,073

 

3,525

 

1,052

 

95,506

 

Noninterest Income

 

25,580

 

12,213

 

19,147

 

4,020

 

60,960

 

Noninterest Expense

 

(41,334

)

(22,920

)

(15,683

)

(2,186

)

(82,123

)

Income Before Provision for Income Taxes

 

37,102

 

27,366

 

6,989

 

2,886

 

74,343

 

Provision for Income Taxes

 

(13,727

)

(9,873

)

(2,586

)

(822

)

(27,008

)

Allocated Net Income

 

$

23,375

 

$

17,493

 

$

4,403

 

$

2,064

 

$

47,335

 

Total Assets as of March 31, 2007 1

 

$

3,597,814

 

$

3,039,943

 

$

211,239

 

$

3,642,961

 

$

10,491,957

 

 

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

 

Note 4.  Fair Value of Financial Assets and Liabilities

 

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  SFAS No. 157 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

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

 

Level 2:                               Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

 

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

 

9



 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

 

 

Quoted Prices in

 

 

 

Significant

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

 

(Unaudited)

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Investment Securities Trading

 

$

 

$

99,966

 

$

 

$

99,966

 

Investment Securities Available-for-Sale

 

1,998

 

2,575,069

 

95,219

 

2,672,286

 

Mortgage Servicing Rights

 

 

 

27,149

 

27,149

 

Other Assets

 

5,971

 

 

 

5,971

 

Net Derivative Assets and Liabilities

 

(202

)

1,596

 

810

 

2,204

 

Total Assets at Fair Value

 

$

7,767

 

$

2,676,631

 

$

123,178

 

$

2,807,576

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

 

$

 

$

128,932

 

$

128,932

 

Total Liabilities at Fair Value

 

$

 

$

 

$

128,932

 

$

128,932

 

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

 

 

Investment

 

Mortgage

 

Net Derivative

 

 

 

 

 

Securities

 

Servicing

 

Assets and

 

 

 

(Unaudited) 

(dollars in thousands)

 

Available-for-Sale 1

 

Rights 2

 

Liabilities 3

 

Total

 

Assets as of January 1, 2008

 

$

218,980

 

$

27,588

 

$

113

 

$

246,681

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(2,358

)

(1,076

)

(3,434

)

Included in Other Comprehensive Income

 

1,228

 

 

 

1,228

 

Purchases, Sales, Issuances, and Settlements, Net

 

(124,989

)

1,919

 

1,773

 

(121,297

)

Assets as of March 31, 2008

 

$

95,219

 

$

27,149

 

$

810

 

$

123,178

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

$

(1,548

)

$

810

 

$

(738

)

 

 

 

Long-Term

 

 

 

(Unaudited) 

(dollars in thousands)

 

Debt 4

 

Total

 

Liabilities as of January 1, 2008

 

$

129,032

 

$

129,032

 

Unrealized Net Gains Included in Net Income

 

(100

)

(100

)

Liabilities as of March 31, 2008

 

$

128,932

 

$

128,932

 

 

 

 

 

 

 

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

 

$

(100

)

$

(100

)

 

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

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

3         Realized and unrealized gains and losses related to written loan commitments are reported as a component of mortgage banking income in the statement of income.

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

 

There were no transfers in or out of the Company’s Level 3 financial assets and liabilities for the three months ended March 31, 2008.

 

10



 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

The Company also measures certain financial assets at fair value on a nonrecurring basis in accordance with GAAP.  For the three months ended March 31, 2008, there were no adjustments to fair value for the Company’s loans held for sale in accordance with GAAP.

 

Fair Value Option

 

On January 1, 2008, the Company elected the fair value option for its subordinated notes, which are included in long-term debt on the Company’s Consolidated Statements of Condition.  The table below reconciles the balance of the Company’s subordinated notes as of December 31, 2007 and January 1, 2008.

 

 

 

Balance as of

 

Net Loss

 

Balance as of

 

(Unaudited)

(dollars in thousands)

 

December 31, 2007 1

 

Upon Adoption

 

January 1, 2008

 

Long-Term Debt

 

$

124,822

 

$

4,210

 

$

129,032

 

Pre-Tax Cumulative-Effect of Adopting the Fair Value Option

 

 

 

4,210

 

 

 

Increase in Deferred Tax Asset

 

 

 

(1,474

)

 

 

After-Tax Cumulative-Effect of Adopting the Fair Value Option

 

 

 

$

2,736

 

 

 

 

1          Includes unamortized discount and deferred costs, which were removed from the statement of condition with the cumulative-effect adjustment to implement the provisions of SFAS No. 159 on January 1, 2008.

 

The fair value option was elected for the subordinated notes as it provided the Company with an opportunity to better manage its interest rate risk and to achieve balance sheet management flexibility.  As of March 31, 2008, the subordinated notes no longer qualified as a component of Total Capital for regulatory capital purposes, due to the maturity being within 12 months from March 31, 2008.

 

Gains and losses on the subordinated notes subsequent to the initial fair value measurement are recognized in earnings as a component of other noninterest income.  For the three months ended March 31, 2008, the Company recorded a gain of $0.1 million as a result of the change in fair value of the Company’s subordinated notes.  Interest expense related to the Company’s subordinated notes continues to be measured based on contractual interest rates and reported as such in the statement of income.

 

The following reflects the difference between the fair value carrying amount of the Company’s subordinated notes and the aggregate unpaid principal amount the Company is contractually obligated to pay until maturity as of March 31, 2008.

 

 

 

 

 

 

 

Excess of Fair Value

 

 

 

Fair Value

 

Aggregate Unpaid

 

Carrying Amount

 

 

 

Carrying Amount as of

 

Principal Amount as of

 

Over Aggregate Unpaid

 

(Unaudited)

(dollars in thousands)

 

March 31, 2008

 

March 31, 2008

 

Principal Amount

 

Long-Term Debt Reported at Fair Value

 

$

128,932

 

$

124,971

 

$

3,961

 

 

11



 

Note 5.  Lease Transaction

 

In March 2008, the lessee in an aircraft leveraged lease exercised its early buyout option resulting in an $11.6 million pre-tax gain for the Company.  This gain on the sale of the Company’s equity interest in the lease was recorded as a component of other noninterest income in the statement of income.  This sale also resulted in a benefit for income taxes of $1.4 million from the adjustment of previously recognized tax liabilities.  After-tax gains from this transaction were $13.0 million.

 

Note 6.  Income Taxes

 

The following is a reconciliation of the statutory federal income tax rate to the effective tax rate for the three months ended March 31, 2008 and 2007.

 

Effective Tax Rate (Unaudited)

 

 

Three Months Ended
March 31,

 

 

 

2008

 

2007

 

Statutory Federal Income Tax Rate

 

35.00

%

35.00

%

Increase (Decrease) in Income Tax Rate Resulting From:

 

 

 

 

 

State Income Tax, Net of Federal Income Tax

 

4.42

 

3.83

 

Foreign Tax Credits

 

 

(1.43

)

Low Income Housing Investments

 

(0.32

)

(0.17

)

Bank-Owned Life Insurance

 

(0.85

)

(0.85

)

Leveraged Leases

 

(8.51

)

0.14

 

Other

 

(0.86

)

(0.19

)

Effective Tax Rate

 

28.88

%

36.33

%

 

The lower effective tax rate for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 was primarily due to the sale of the Company’s equity interest in an aircraft leveraged lease.  The pre-tax gain from this sale would have resulted in an income tax expense of approximately $4.6 million, based on statutory income tax rates.  However, due to the timing of the sale of the Company’s equity interest and the adjustment of previously recognized income tax liabilities, this transaction resulted in a $1.4 million income tax benefit to the Company.  As a result, total income tax benefit from this transaction was approximately $6.0 million and is reflected in the leveraged lease line item in the table above.

 

12



 

Note 7.  Contingencies

 

In October 2007, Visa, Inc. (“Visa”) announced that it had completed a series of restructuring transactions in preparation for its initial public offering (“IPO”) planned for the first quarter of 2008.  As part of this restructuring, the Company received approximately 0.9 million shares of restricted Class USA stock in Visa in exchange for the Company’s membership interests.  The Company did not recognize a gain or loss upon the receipt of Class USA shares in October 2007.  Visa completed its IPO in March 2008, resulting in the conversion of the Company’s Class USA shares to approximately 0.8 million shares of Class B common stock in Visa.  Visa exercised its option to mandatorily redeem approximately 0.3 million shares of the Company’s Class B common stock in Visa in exchange for cash, which resulted in the Company recording a $13.7 million gain in other noninterest income.  The Company’s remaining Class B shares (approximately 0.5 million) in Visa are restricted for a period of three years after the IPO or upon settlement of litigation claims, whichever is later.  The Company has not recognized a gain or loss on the remaining Class B shares in Visa.  Concurrent with its IPO, Visa contributed $3.0 billion into an escrow account to cover litigation claims and settlements as discussed below.

 

In November 2007, Visa announced that it had reached an agreement with American Express, related to its claim that Visa and its member banks had illegally blocked American Express from the bank-issued card business in the United States.  The Company was not a named defendant in the lawsuit and, therefore, was not directly liable for any amount of the settlement.  However, according to an interpretation of Visa’s by-laws, the Company and other Visa U.S.A., Inc. (a wholly-owned subsidiary of Visa) members are obligated to indemnify Visa for certain losses, including the settlement of the American Express matter.  The Company’s indemnification obligation is limited to its proportionate interest in Visa U.S.A., Inc.  In December 2007, as a result of Visa’s agreement with American Express, the Company established a liability of $4.3 million for this indemnification obligation.  However, as a result of Visa’s IPO and funding of the escrow account, the Company reversed the $4.3 million liability previously established and recorded a credit to other noninterest expense in March 2008.

 

Other litigation covered by the Company’s indemnification of Visa and expected to be settled from the escrow account include: 1) a lawsuit filed by Discover Financial Services, Inc. (“Discover”) claiming that Visa prevented banks from issuing payment cards on the Discover network; 2) class action lawsuits filed on behalf of merchants who accept payment cards against Visa U.S.A., Inc. claiming that the setting of interchange is unlawful, among other claims; and 3) a consumer class action lawsuit against Visa U.S.A., Inc., Visa International, and MasterCard alleging unfair competition.  In December 2007, the Company established a liability of $1.3 million related to the indemnification of Visa in the Discover lawsuit.  However, as a result of Visa’s IPO and funding of the escrow account, the Company reversed the $1.3 million liability previously established and recorded a credit to other noninterest expense in March 2008.  Management cannot reasonably estimate the liability to Visa, if any, for the costs of the class action lawsuits as of March 31, 2008.

 

In addition to the Visa litigation, the Company is subject to various other pending and threatened legal proceedings arising out of the normal course of business or operations.  Management believes that current legal reserves are adequate and the amount of an incremental liability, if any, arising from these matters is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

13




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

 

Forward-Looking Statements

 

This report contains, and other written or oral statements made by the Company may contain, forward-looking statements concerning, among other things, the economic and business environment in our service area and elsewhere, credit quality, and other financial and business matters in future periods.  Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions are less favorable than expected; 2) competitive pressure among financial services and products; 3) the impact of legislation and the regulatory environment; 4) fiscal and monetary policies of the markets in which we operate; 5) actual or alleged conduct which could harm our reputation; 6) changes in accounting standards; 7) changes in tax laws or regulations or the interpretation of such laws and regulations; 8) changes in our credit quality or risk profile that may increase or

decrease the required level of our reserve for credit losses; 9) changes in market interest rates that may affect our credit markets and ability to maintain our net interest margin; 10) unpredicted costs and other consequences of legal or regulatory matters involving the Company; 11) changes to the amount and timing of proposed common stock repurchases; and 12) geopolitical risk, military or terrorist activity, natural disaster, 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission (the “SEC”).  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements.  We do not undertake an obligation to update forward-looking statements to reflect later events or circumstances.


 

14




Overview

 

General

 

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 and products primarily to customers in Hawaii and the Pacific Islands (Guam, nearby islands, and American Samoa).  References to “we,” “our,” “us,” or “the Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes.

 

2007+ Plan

 

Our governing objective is to maximize shareholder value over time.

 

In January 2007, we introduced our 2007+ Plan (“Plan”) to our shareholders, customers, and employees.  Our Plan, which we continue to follow in 2008, focuses on five strategic themes:

 

·

 

Growth

·

Integration

·

People

·

 

Brand

·

Discipline

 

Plan Financial Objectives and Financial Results

 

Our Plan was prepared with the expectation that economic growth could slow in 2007 and beyond.  Our Plan was based on assumptions of moderate growth in revenues and consistent, positive operating leverage.  The following summarizes our Plan financial objectives compared with our financial results for the first quarter of 2008:

 

Plan Financial Objectives and Financial Results

 

 

 

 

Three Months

 

Performance

 

Plan Financial

 

Ended

 

Ratios

 

Objectives

 

March 31, 2008

 

Average ROA

 

Above 1.70%

 

2.16%

 

Average ROE

 

Above 25.00%

 

29.88%

 

Efficiency Ratio

 

Approaching 50.00%

 

49.62%

 

Operating Leverage

 

Positive

 

40.13%

 

 

For the first quarter of 2008, net income was $57.2 million, an increase of $9.9 million or 21% from the first quarter of 2007. 

For the first quarter of 2008, diluted earnings per share were $1.18, an increase of $0.24 or 26% from the first quarter of 2007.

 

Our strong financial performance for the first quarter of 2008 was enhanced by two transactions:

 

·                  Pre-tax gains of $13.7 million resulting from the mandatory redemption of our Visa, Inc. (“Visa”) shares as well as a $5.6 million reversal of previously recorded contingency accruals related to Visa legal matters; and

 

·                  Pre-tax gains of $11.6 million resulting from the sale of our equity interest in an aircraft lease.  This sale also resulted in a net benefit for income taxes from the adjustment of previously recognized tax liabilities.  After-tax gains from this transaction were $13.0 million.

 

Partially offsetting these gains, we accrued for the following transactions in the first quarter of 2008:

 

·                  $9.0 million related to cash awards to purchase our stock and earnings-based incentive compensation;

 

·                  $2.3 million contribution to the Bank of Hawaii Charitable Foundation and other charitable organizations; and

 

·                  $1.0 million related to the call premium on our Bancorp Hawaii Capital Trust I Capital Securities (“Capital Securities”).

 

In addition, we increased our Allowance for Loan and Lease Losses (the “Allowance”) by recording a Provision for Loan and Lease Losses (the “Provision”) of $14.4 million in the first quarter of 2008.  The increase in the Allowance, a result of our quarterly evaluation of the adequacy of the Allowance, reflects increased risk in our commercial aircraft leasing, small business, and unsecured consumer lending portfolios.  The Provision exceeded our net charge-offs of loans and leases for the first quarter of 2008 by $9.0 million.

 

Reserves for legal contingencies were increased by $3.0 million in the first quarter of 2008.  This increase was due to management’s on-going evaluation of potential losses related to pending litigation, claims, and assessments against us.


 

15



 

Table 1 presents our financial highlights and performance ratios for the three months ended March 31, 2008 and 2007 and as of March 31, 2008, December 31, 2007, and March 31, 2007.

 

Financial Highlights (Unaudited)

 

Table 1

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands, except per share amounts)

 

2008

 

2007

 

For the Period:

 

 

 

 

 

Net Interest Income

 

$

102,180

 

$

98,137

 

Total Noninterest Income

 

86,125

 

60,960

 

Total Noninterest Expense

 

93,432

 

82,123

 

Net Income

 

57,215

 

47,335

 

Basic Earnings Per Share

 

1.19

 

0.96

 

Diluted Earnings Per Share

 

1.18

 

0.94

 

Dividends Declared Per Share

 

0.44

 

0.41

 

 

 

 

 

 

 

Net Income to Average Total Assets

 

2.16

%

1.83

%

Net Income to Average Shareholders’ Equity

 

29.88

 

27.00

 

Efficiency Ratio 1

 

49.62

 

51.62

 

Operating Leverage 2

 

40.13

 

6.72

 

Net Interest Margin 3

 

4.17

 

4.07

 

Dividend Payout Ratio 4

 

36.97

 

42.71

 

Leverage Ratio 5

 

6.99

 

6.80

 

 

 

 

 

 

 

Average Loans and Leases

 

$

6,587,918

 

$

6,561,848

 

Average Assets

 

10,643,904

 

10,481,773

 

Average Deposits

 

7,952,546

 

7,921,463

 

Average Shareholders’ Equity

 

770,157

 

711,118

 

Average Shareholders’ Equity to Average Assets

 

7.24

%

6.78

%

 

 

 

 

 

 

Market Price Per Share of Common Stock:

 

 

 

 

 

Closing

 

$

49.56

 

$

53.03

 

High

 

52.93

 

54.81

 

Low

 

40.95

 

50.11

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2008

 

2007

 

2007

 

As of Period End:

 

 

 

 

 

 

 

Loans and Leases

 

$

6,579,337

 

$

6,580,861

 

$

6,507,152

 

Total Assets

 

10,822,801

 

10,472,942

 

10,491,957

 

Total Deposits

 

8,102,855

 

7,942,372

 

7,952,937

 

Long-Term Debt

 

239,389

 

235,371

 

260,308

 

Total Shareholders’ Equity

 

766,747

 

750,255

 

711,031

 

 

 

 

 

 

 

 

 

Non-Performing Assets

 

$

6,045

 

$

5,286

 

$

5,836

 

 

 

 

 

 

 

 

 

Allowance to Loans and Leases Outstanding

 

1.52

%

1.38

%

1.40

%

 

 

 

 

 

 

 

 

Book Value Per Common Share

 

$

15.98

 

$

15.44

 

$

14.32

 

 

 

 

 

 

 

 

 

Full-Time Equivalent Employees

 

2,538

 

2,594

 

2,578

 

Branches and Offices

 

83

 

83

 

83

 

 

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 provision for credit losses and 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 for the quarter.

5         Tier 1 Capital includes $26.4 million in Capital Securities of which the call option was exercised, but the liability was not extinguished as of March 31, 2008.

 

16




Recent Accounting Changes

 

We began applying the provisions of the following new accounting pronouncements on January 1, 2008:

 

·                  Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements;”

 

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

 

·                  SEC Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.”

 

SFAS No. 157 had no impact on retained earnings and is not expected to have a material impact on our statements of income and condition.  We have not made material changes to our valuation methodologies as previously disclosed in our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.  Our financial assets and liabilities do not require use of a significant amount of unobservable (Level 3) inputs to estimate fair value.

 

SFAS No. 159 had the effect of reducing retained earnings by $2.7 million, as we elected the fair value option for our subordinated notes.  See Notes 1 and 4 to our Consolidated Financial Statements (Unaudited) for more information on our application of SFAS No. 157 and 159.

 

SAB No. 109 had the effect of accelerating gain recognition of the estimated fair value of the servicing rights related to the loan from the loan sale date to the loan commitment date.  The implementation of SAB No. 109 did not have a material impact on the Company’s statements of income and condition.

 

 

 

 

 

 

Analysis of Statements of Income

 

Net Interest Income

 

Net interest income, on a taxable equivalent basis, increased by $4.0 million or 4% in the first quarter of 2008 compared to the first quarter of 2007.

 

The increase in net interest income, on a taxable equivalent basis, in the first quarter of 2008 was primarily due to decreased funding costs.  Rates paid on interest-bearing deposits decreased by 45 basis points in the first quarter of 2008 compared to the first quarter of 2007.  Also contributing to the lower funding costs was the 84 basis point decrease in rates paid on securities sold under agreements to repurchase for the first quarter of 2008 compared to the first quarter of 2007.  Partially offsetting the decrease in funding costs was a similar decrease in yields on our loans and leases, which declined by 42 basis points for the first quarter of 2008 compared to the first quarter of 2007.  Lower yields in our commercial and industrial loans and home equity loans were primarily driven by the decline in benchmark interest rates from December 31, 2007.  Yields on available-for-sale investment securities increased by 16 basis points in the first quarter of 2008 compared to the first quarter of 2007, reflecting our reinvestment in higher yielding securities.

 

Our net interest margin increased by 10 basis points to 4.17% in the first quarter of 2008, as a result of lower funding costs and the effects of a steeper yield curve.

 

Despite the decrease in funding costs in the first quarter of 2008, average interest-bearing demand and savings deposit balances collectively increased by $63.7 million or 2% in the first quarter of 2008 compared to the first quarter of 2007.  Increases in these categories were the result of customers moving their deposits to more liquid accounts.  A contributing market factor for this increase was the volatility in the financial markets and a decline in the equity markets in the first quarter of 2008.  The increase in savings deposit balances was also partially due to a successful bonus-rate savings campaign in the first quarter of 2008 which resulted in the opening of new accounts.


 

17




Average balances in securities sold under agreements to repurchase increased by $94.5 million or 9% in the first quarter of 2008 compared to the first quarter of 2007.  Securities sold under agreements to repurchase serves as one source of short- to medium-term financing for us.  The increase in interest-bearing liabilities by $152.8 million or 2% from the first quarter of 2007 funded the growth in our average earning assets.  Although average loans and leases remained relatively stable from the first quarter of 2007,

average investment securities, excluding trading securities, increased by $103.0 million or 4%.

 

Average balances, related income and expenses, and resulting yields and rates, on a taxable equivalent basis, are presented in Table 2 for the first quarter of 2008 and 2007.  An analysis of the change in net interest income, on a taxable equivalent basis, for the first quarter of 2008 from the first quarter of 2007, is presented in Table 3.


 

Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)

 

Table 2

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2008

 

March 31, 2007 1

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(dollars in millions)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

27.5

 

$

0.2

 

2.82

%

$

4.7

 

$

0.1

 

4.99

%

Funds Sold

 

138.2

 

1.0

 

2.84

 

81.2

 

1.1

 

5.21

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading

 

95.7

 

1.2

 

4.85

 

161.9

 

1.6

 

4.00

 

Available-for-Sale

 

2,631.6

 

34.5

 

5.24

 

2,453.2

 

31.2

 

5.08

 

Held-to-Maturity

 

285.6

 

3.2

 

4.54

 

361.0

 

4.0

 

4.49

 

Loans Held for Sale

 

10.5

 

0.1

 

5.43

 

7.3

 

0.1

 

6.17

 

Loans and Leases 2

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

1,065.1

 

16.6

 

6.26

 

1,076.0

 

19.8

 

7.45

 

Commercial Mortgage

 

649.1

 

10.4

 

6.45

 

616.5

 

10.3

 

6.78

 

Construction

 

199.5

 

3.3

 

6.73

 

245.7

 

4.8

 

7.97

 

Commercial Lease Financing

 

477.9

 

4.0

 

3.35

 

462.1

 

3.1

 

2.69

 

Residential Mortgage

 

2,519.3

 

38.6

 

6.13

 

2,496.3

 

38.2

 

6.12

 

Home Equity

 

970.8

 

16.0

 

6.61

 

942.2

 

17.7

 

7.62

 

Automobile

 

438.7

 

8.9

 

8.18

 

426.5

 

8.5

 

8.08

 

Other 3

 

267.4

 

6.5

 

9.73

 

296.5

 

7.8

 

10.67

 

Total Loans and Leases

 

6,587.8

 

104.3

 

6.35

 

6,561.8

 

110.2

 

6.77

 

Other

 

79.5

 

0.4

 

2.15

 

79.4

 

0.3

 

1.68

 

Total Earning Assets 4

 

9,856.4

 

144.9

 

5.89

 

9,710.5

 

148.6

 

6.16

 

Cash and Noninterest-Bearing Deposits

 

294.1

 

 

 

 

 

310.5

 

 

 

 

 

Other Assets

 

493.4

 

 

 

 

 

460.7

 

 

 

 

 

Total Assets

 

$

10,643.9

 

 

 

 

 

$

10,481.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

1,614.3

 

2.3

 

0.57

 

$

1,602.4

 

4.3

 

1.08

 

Savings

 

2,691.8

 

9.2

 

1.38

 

2,640.0

 

12.5

 

1.91

 

Time

 

1,747.2

 

16.0

 

3.67

 

1,732.1

 

16.6

 

3.90

 

Total Interest-Bearing Deposits

 

6,053.3

 

27.5

 

1.82

 

5,974.5

 

33.4

 

2.27

 

Short-Term Borrowings

 

79.7

 

0.7

 

3.31

 

79.7

 

1.0

 

5.08

 

Securities Sold Under Agreements to Repurchase

 

1,164.2

 

10.6

 

3.63

 

1,069.7

 

11.9

 

4.47

 

Long-Term Debt

 

239.8

 

3.7

 

6.26

 

260.3

 

3.9

 

6.12

 

Total Interest-Bearing Liabilities

 

7,537.0

 

42.5

 

2.26

 

7,384.2

 

50.2

 

2.75

 

Net Interest Income

 

 

 

$

102.4

 

 

 

 

 

$

98.4

 

 

 

Interest Rate Spread

 

 

 

 

 

3.63

%

 

 

 

 

3.41

%

Net Interest Margin

 

 

 

 

 

4.17

%

 

 

 

 

4.07

%

Noninterest-Bearing Demand Deposits

 

1,899.2

 

 

 

 

 

1,947.0

 

 

 

 

 

Other Liabilities

 

437.5

 

 

 

 

 

439.4

 

 

 

 

 

Shareholders’ Equity

 

770.2

 

 

 

 

 

711.1

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

10,643.9

 

 

 

 

 

$

10,481.7