UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
x |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2008 |
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or |
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o |
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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 |
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99-0148992 |
(State of incorporation) |
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(I.R.S. Employer Identification No.) |
130 Merchant Street, Honolulu, Hawaii |
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96813 |
(Address of principal executive offices) |
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(Zip Code) |
1-888-643-3888
(Registrants 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 |
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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 |
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Accelerated filer |
o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company |
o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o |
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No x |
Indicate the number of shares outstanding of each of the issuers 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
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Page |
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Part I - Financial Information |
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Item 1. |
Financial Statements (Unaudited) |
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Consolidated Statements of Income Three months ended March 31, 2008 and 2007 |
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2 |
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Consolidated Statements of Condition March 31, 2008, December 31, 2007, and March 31, 2007 |
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3 |
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Consolidated Statements of Shareholders Equity Three months ended March 31, 2008 and 2007 |
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4 |
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Consolidated Statements of Cash Flows Three months ended March 31, 2008 and 2007 |
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5 |
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6 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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14 |
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41 |
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41 |
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Part II - Other Information |
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41 |
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41 |
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41 |
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41 |
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Signatures |
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42 |
1
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
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Three Months Ended |
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(dollars in thousands, except per share amounts) |
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2008 |
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2007 |
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Interest Income |
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Interest and Fees on Loans and Leases |
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$ |
104,413 |
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$ |
110,298 |
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Income on Investment Securities |
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Trading |
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1,160 |
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1,618 |
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Available-for-Sale |
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34,251 |
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30,961 |
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Held-to-Maturity |
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3,239 |
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4,052 |
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Deposits |
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195 |
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58 |
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Funds Sold |
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992 |
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1,058 |
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Other |
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426 |
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333 |
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Total Interest Income |
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144,676 |
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148,378 |
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Interest Expense |
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Deposits |
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27,465 |
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33,375 |
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Securities Sold Under Agreements to Repurchase |
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10,617 |
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11,886 |
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Funds Purchased |
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633 |
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923 |
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Short-Term Borrowings |
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34 |
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87 |
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Long-Term Debt |
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3,747 |
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3,970 |
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Total Interest Expense |
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42,496 |
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50,241 |
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Net Interest Income |
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102,180 |
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98,137 |
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Provision for Credit Losses |
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14,427 |
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2,631 |
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Net Interest Income After Provision for Credit Losses |
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87,753 |
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95,506 |
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Noninterest Income |
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Trust and Asset Management |
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15,086 |
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15,833 |
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Mortgage Banking |
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4,297 |
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3,371 |
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Service Charges on Deposit Accounts |
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12,083 |
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10,967 |
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Fees, Exchange, and Other Service Charges |
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16,101 |
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16,061 |
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Investment Securities Gains, Net |
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130 |
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16 |
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Insurance |
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7,130 |
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6,215 |
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Other |
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31,298 |
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8,497 |
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Total Noninterest Income |
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86,125 |
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60,960 |
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Noninterest Expense |
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Salaries and Benefits |
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55,473 |
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45,406 |
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Net Occupancy |
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10,443 |
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9,811 |
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Net Equipment |
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4,321 |
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4,787 |
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Professional Fees |
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2,613 |
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2,543 |
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Other |
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20,582 |
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19,576 |
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Total Noninterest Expense |
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93,432 |
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82,123 |
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Income Before Provision for Income Taxes |
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80,446 |
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74,343 |
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Provision for Income Taxes |
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23,231 |
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27,008 |
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Net Income |
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$ |
57,215 |
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$ |
47,335 |
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Basic Earnings Per Share |
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$ |
1.19 |
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$ |
0.96 |
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Diluted Earnings Per Share |
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$ |
1.18 |
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$ |
0.94 |
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Dividends Declared Per Share |
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$ |
0.44 |
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$ |
0.41 |
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Basic Weighted Average Shares |
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47,965,722 |
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49,427,933 |
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Diluted Weighted Average Shares |
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48,628,427 |
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50,263,419 |
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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)
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March 31, |
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December 31, |
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March 31, |
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(dollars in thousands) |
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2008 |
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2007 |
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2007 |
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Assets |
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Interest-Bearing Deposits |
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$ |
55,916 |
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$ |
4,870 |
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$ |
5,594 |
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Funds Sold |
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240,000 |
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15,000 |
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97,000 |
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Investment Securities |
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Trading |
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99,966 |
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67,286 |
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158,469 |
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Available-for-Sale |
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2,672,286 |
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2,563,190 |
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2,438,532 |
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Held-to-Maturity (Fair Value of $277,536; $287,644; and $340,636) |
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277,256 |
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292,577 |
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349,663 |
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Loans Held for Sale |
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13,096 |
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12,341 |
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19,238 |
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Loans and Leases |
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6,579,337 |
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6,580,861 |
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6,507,152 |
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Allowance for Loan and Lease Losses |
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(99,998 |
) |
(90,998 |
) |
(90,998 |
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Net Loans and Leases |
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6,479,339 |
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6,489,863 |
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6,416,154 |
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Total Earning Assets |
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9,837,859 |
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9,445,127 |
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9,484,650 |
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Cash and Noninterest-Bearing Deposits |
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314,863 |
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368,402 |
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365,517 |
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Premises and Equipment |
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116,683 |
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117,177 |
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123,309 |
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Customers Acceptances |
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992 |
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1,112 |
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839 |
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Accrued Interest Receivable |
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46,316 |
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45,261 |
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49,477 |
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Foreclosed Real Estate |
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294 |
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184 |
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462 |
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Mortgage Servicing Rights |
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27,149 |
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27,588 |
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27,005 |
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Goodwill |
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34,959 |
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34,959 |
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34,959 |
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Other Assets |
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443,686 |
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433,132 |
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405,739 |
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Total Assets |
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$ |
10,822,801 |
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$ |
10,472,942 |
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$ |
10,491,957 |
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Liabilities |
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Deposits |
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Noninterest-Bearing Demand |
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$ |
2,000,226 |
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$ |
1,935,639 |
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$ |
1,973,631 |
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Interest-Bearing Demand |
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1,649,705 |
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1,634,675 |
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1,618,615 |
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Savings |
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2,728,873 |
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2,630,471 |
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2,648,495 |
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Time |
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1,724,051 |
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1,741,587 |
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1,712,196 |
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Total Deposits |
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8,102,855 |
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7,942,372 |
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7,952,937 |
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Funds Purchased |
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23,800 |
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75,400 |
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72,400 |
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Short-Term Borrowings |
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9,726 |
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10,427 |
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3,462 |
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Securities Sold Under Agreements to Repurchase |
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1,231,962 |
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1,029,340 |
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1,050,393 |
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Long-Term Debt (includes $128,932 carried at fair value as of March 31, 2008) |
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239,389 |
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235,371 |
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260,308 |
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Bankers Acceptances |
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992 |
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1,112 |
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839 |
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Retirement Benefits Payable |
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29,755 |
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29,984 |
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48,363 |
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Accrued Interest Payable |
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18,322 |
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20,476 |
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17,893 |
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Taxes Payable and Deferred Taxes |
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300,188 |
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278,218 |
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293,326 |
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Other Liabilities |
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99,065 |
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99,987 |
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81,005 |
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Total Liabilities |
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10,056,054 |
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9,722,687 |
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9,780,926 |
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Shareholders Equity |
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Common Stock ($.01 par value; authorized
500,000,000 shares; |
|
568 |
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567 |
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566 |
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Capital Surplus |
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487,139 |
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484,790 |
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478,123 |
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Accumulated Other Comprehensive Income (Loss) |
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5,553 |
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(5,091 |
) |
(27,356 |
) |
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Retained Earnings |
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720,540 |
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688,638 |
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620,034 |
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Treasury Stock, at Cost (Shares:
March 2008 - 9,004,920; |
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(447,053 |
) |
(418,649 |
) |
(360,336 |
) |
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Total Shareholders Equity |
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766,747 |
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750,255 |
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711,031 |
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Total Liabilities and Shareholders Equity |
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$ |
10,822,801 |
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$ |
10,472,942 |
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$ |
10,491,957 |
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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) |
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Total |
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Common |
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Capital |
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Accum. |
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Retained |
|
Treasury |
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Compre- |
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Balance as of December 31, 2007 |
|
$ |
750,255 |
|
$ |
567 |
|
$ |
484,790 |
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$ |
(5,091 |
) |
$ |
688,638 |
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$ |
(418,649 |
) |
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Cumulative-Effect Adjustment of a Change in Accounting Principle, Net of Tax: |
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|||||||
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 |
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(2,736 |
) |
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(2,736 |
) |
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|||||||
Comprehensive Income: |
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Net Income |
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57,215 |
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|
|
|
|
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|
57,215 |
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|
|
$ |
57,215 |
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||||||
Other Comprehensive Income, Net of Tax: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|||||||
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale |
|
10,595 |
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|
|
|
10,595 |
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|
|
|
|
10,595 |
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|||||||
Amortization of Net Loss for Pension and Postretirement Plans |
|
49 |
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|
|
|
|
49 |
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|
|
|
|
49 |
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|||||||
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,859 |
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||||||
Share-Based Compensation |
|
1,751 |
|
|
|
1,751 |
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|
|
|
|
|
|
|
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|||||||
Net Tax Benefits related to Share-Based Compensation |
|
583 |
|
|
|
583 |
|
|
|
|
|
|
|
|
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|||||||
Common Stock Issued under Purchase and Equity Compensation Plans (95,360 shares) |
|
3,182 |
|
1 |
|
15 |
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|
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(1,378 |
) |
4,544 |
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Common Stock Repurchased (686,313 shares) |
|
(32,948 |
) |
|
|
|
|
|
|
|
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(32,948 |
) |
|
|
|||||||
Cash Dividends Paid |
|
(21,199 |
) |
|
|
|
|
|
|
(21,199 |
) |
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|
|
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|||||||
Balance as of March 31, 2008 |
|
$ |
766,747 |
|
$ |
568 |
|
$ |
487,139 |
|
$ |
5,553 |
|
$ |
720,540 |
|
$ |
(447,053 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|||||||
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 |
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|
|
|
|
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 |
) |
|
|
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|
|||||||
FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 |
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(7,247 |
) |
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|
|
|
|
|
(7,247 |
) |
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|
|
|
|||||||
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 |
|
||||
(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 Parents 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 Companys 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 Companys 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 Companys 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 Companys subordinated notes at fair value is not expected to have a material impact on the Companys 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 Companys 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 entitys 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 entitys 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 Companys financial statements.
7
Note 2. Pension Plans and Postretirement Benefit Plan
The components of net periodic benefit cost for the Companys 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 Companys 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 Companys business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury. The Companys 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 Companys 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 Companys 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 Companys Consolidated Statements of Condition. The table below reconciles the balance of the Companys 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 Companys subordinated notes. Interest expense related to the Companys 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 Companys 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 Companys 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 |
|
||
|
|
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Visas 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 Companys indemnification obligation is limited to its proportionate interest in Visa U.S.A., Inc. In December 2007, as a result of Visas agreement with American Express, the Company established a liability of $4.3 million for this indemnification obligation. However, as a result of Visas 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 Companys 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 Visas 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 Companys financial condition or results of operations.
13
Item 2. Managements 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 Companys 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 Parents 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 managements 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 |
|
||||
(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 Companys 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 |
|