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Bank of Hawaii 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-99.1
  7. Ex-99.1

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý                                 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2005

 

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)

 

(IRS 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  ý       No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý       No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act).

 

Yes  o       No  ý

 

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

 

Common Stock, $.01 Par Value; outstanding at October 21, 2005 – 51,316,630 shares

 

 



 

Bank of Hawaii Corporation

Form 10-Q

INDEX

 

 

Page

Part I. - Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Statements of Income - Three and nine months
ended September 30, 2005 and 2004

3

 

 

 

 

Consolidated Statements of Condition – September 30, 2005,
December 31, 2004 and September 30, 2004

4

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Nine months ended
September 30, 2005 and 2004

5

 

 

 

 

Consolidated Statements of Cash Flows – Nine months ended
September 30, 2005 and 2004

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

Part II. - Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 6.

Exhibits

35

 

 

 

Signatures

36

 



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

94,381

 

$

82,079

 

$

270,967

 

$

243,853

 

Income on Investment Securities - Available for Sale

 

28,482

 

24,543

 

83,788

 

67,134

 

Income on Investment Securities - Held to Maturity

 

5,109

 

6,370

 

16,461

 

20,057

 

Deposits

 

57

 

496

 

116

 

3,373

 

Funds Sold

 

935

 

108

 

1,175

 

702

 

Other

 

270

 

801

 

990

 

2,524

 

Total Interest Income

 

129,234

 

114,397

 

373,497

 

337,643

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

15,766

 

8,990

 

40,947

 

26,750

 

Securities Sold Under Agreements to Repurchase

 

6,796

 

2,085

 

14,683

 

6,233

 

Funds Purchased

 

901

 

683

 

2,785

 

1,420

 

Short-Term Borrowings

 

50

 

15

 

127

 

43

 

Long-Term Debt

 

3,761

 

3,845

 

11,298

 

12,538

 

Total Interest Expense

 

27,274

 

15,618

 

69,840

 

46,984

 

Net Interest Income

 

101,960

 

98,779

 

303,657

 

290,659

 

Provision for Credit Losses

 

3,000

 

 

3,000

 

(3,500

)

Net Interest Income After Provision for Credit Losses

 

98,960

 

98,779

 

300,657

 

294,159

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

14,052

 

12,672

 

42,732

 

39,531

 

Mortgage Banking

 

2,618

 

1,711

 

7,802

 

6,496

 

Service Charges on Deposit Accounts

 

10,046

 

9,472

 

29,794

 

28,962

 

Fees, Exchange, and Other Service Charges

 

15,394

 

13,741

 

44,441

 

41,223

 

Investment Securities Gains (Losses)

 

8

 

 

345

 

(37

)

Insurance

 

5,324

 

5,423

 

15,442

 

15,007

 

Other

 

8,074

 

10,035

 

17,949

 

25,562

 

Total Non-Interest Income

 

55,516

 

53,054

 

158,505

 

156,744

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

44,366

 

46,566

 

132,991

 

139,256

 

Net Occupancy

 

9,896

 

9,812

 

28,630

 

28,741

 

Net Equipment

 

5,335

 

5,847

 

16,183

 

17,610

 

Professional Fees

 

5,689

 

3,428

 

11,645

 

10,632

 

Other

 

19,310

 

18,537

 

55,014

 

56,098

 

Total Non-Interest Expense

 

84,596

 

84,190

 

244,463

 

252,337

 

Income Before Income Taxes

 

69,880

 

67,643

 

214,699

 

198,566

 

Provision for Income Taxes

 

25,051

 

24,576

 

77,919

 

71,468

 

Net Income

 

$

44,829

 

$

43,067

 

$

136,780

 

$

127,098

 

Basic Earnings Per Share

 

$

0.87

 

$

0.82

 

$

2.62

 

$

2.40

 

Diluted Earnings Per Share

 

$

0.85

 

$

0.78

 

$

2.55

 

$

2.26

 

Dividends Declared Per Share

 

$

0.33

 

$

0.30

 

$

0.99

 

$

0.90

 

Basic Weighted Average Shares

 

51,385,840

 

52,390,081

 

52,221,345

 

53,053,770

 

Diluted Weighted Average Shares

 

52,844,961

 

55,472,868

 

53,745,612

 

56,297,277

 

 

3



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2005

 

2004

 

2004

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

10,119

 

$

4,592

 

$

29,976

 

Investment Securities - Available for Sale

 

 

 

 

 

 

 

Held in Portfolio

 

2,381,462

 

2,483,719

 

2,328,327

 

Pledged as Collateral

 

172,500

 

 

 

Investment Securities - Held to Maturity
(Fair Value of $475,884, $585,836, and $624,587)

 

485,041

 

589,908

 

630,276

 

Funds Sold

 

10,000

 

21,000

 

25,000

 

Loans Held for Sale

 

18,095

 

17,642

 

18,595

 

Loans and Leases

 

6,202,546

 

5,986,930

 

5,815,575

 

Allowance for Loan and Lease Losses

 

(91,654

)

(106,796

)

(124,651

)

Net Loans

 

6,110,892

 

5,880,134

 

5,690,924

 

Total Earning Assets

 

9,188,109

 

8,996,995

 

8,723,098

 

Cash and Non-Interest-Bearing Deposits

 

296,152

 

225,359

 

290,974

 

Premises and Equipment

 

135,952

 

146,095

 

149,698

 

Customers’ Acceptance Liability

 

1,081

 

1,406

 

920

 

Accrued Interest Receivable

 

40,898

 

36,044

 

36,074

 

Foreclosed Real Estate

 

413

 

191

 

208

 

Mortgage Servicing Rights

 

18,049

 

18,769

 

19,995

 

Goodwill

 

34,959

 

36,216

 

36,216

 

Other Assets

 

369,622

 

305,116

 

337,626

 

Total Assets

 

$

10,085,235

 

$

9,766,191

 

$

9,594,809

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-Interest-Bearing Demand

 

$

1,890,904

 

$

1,977,703

 

$

1,898,602

 

Interest-Bearing Demand

 

1,716,306

 

1,536,323

 

1,471,836

 

Savings

 

2,880,066

 

2,960,351

 

2,991,386

 

Time

 

1,269,310

 

1,090,290

 

1,051,416

 

Total Deposits

 

7,756,586

 

7,564,667

 

7,413,240

 

Securities Sold Under Agreements to Repurchase

 

756,407

 

568,981

 

682,630

 

Funds Purchased

 

172,365

 

149,635

 

69,755

 

Short-Term Borrowings

 

8,537

 

15,000

 

11,939

 

Banker’s Acceptances Outstanding

 

1,081

 

1,406

 

920

 

Retirement Benefits Payable

 

67,136

 

65,708

 

62,976

 

Accrued Interest Payable

 

9,416

 

7,021

 

6,162

 

Taxes Payable and Deferred Taxes

 

276,678

 

229,928

 

249,265

 

Other Liabilities

 

98,026

 

96,373

 

88,596

 

Long-Term Debt

 

242,692

 

252,638

 

252,619

 

Total Liabilities

 

9,388,924

 

8,951,357

 

8,838,102

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value); authorized 500,000,000 shares; issued / outstanding: September 2005 - 81,722,233 / 51,282,537,
December 2004 - 81,711,752 / 54,960,857,
September 2004 - 81,710,695 / 53,021,591

 

815

 

813

 

813

 

Capital Surplus

 

463,084

 

450,998

 

413,696

 

Accumulated Other Comprehensive Income (Loss)

 

(34,697

)

(12,917

)

(5,698

)

Retained Earnings

 

1,366,058

 

1,282,425

 

1,277,615

 

Deferred Stock Grants

 

(5,974

)

(8,433

)

(9,490

)

Treasury Stock, at Cost (Shares: September 2005 - 30,439,696,
December 2004 - 26,750,895, September 2004 - 28,689,104)

 

(1,092,975

)

(898,052

)

(920,229

)

Total Shareholders’ Equity

 

696,311

 

814,834

 

756,707

 

Total Liabilities and Shareholders’ Equity

 

$

10,085,235

 

$

9,766,191

 

$

9,594,809

 

 

4



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hensive

 

 

 

Deferred

 

 

 

Compre-

 

 

 

 

 

Common

 

Capital

 

Income

 

Retained

 

Stock

 

Treasury

 

hensive

 

(dollars in thousands)

 

Total

 

Stock

 

Surplus

 

(Loss)

 

Earnings

 

Grants

 

Stock

 

Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

$

814,834

 

$

813

 

$

450,998

 

$

(12,917

)

$

1,282,425

 

$

(8,433

)

$

(898,052

)

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

136,780

 

 

 

 

136,780

 

 

 

$

136,780

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on Investment Securities

 

(21,780

)

 

 

(21,780

)

 

 

 

(21,780

)

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

115,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans and Related Tax Benefits (803,278 shares)

 

33,268

 

2

 

12,086

 

 

(1,353

)

2,459

 

20,074

 

 

 

Treasury Stock Purchased (4,478,932 shares)

 

(214,997

)

 

 

 

 

 

(214,997

)

 

 

Cash Dividends Paid

 

(51,794

)

 

 

 

(51,794

)

 

 

 

 

Balance at September 30, 2005

 

$

696,311

 

$

815

 

$

463,084

 

$

(34,697

)

$

1,366,058

 

$

(5,974

)

$

(1,092,975

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

793,132

 

$

807

 

$

391,701

 

$

(5,711

)

$

1,199,077

 

$

(8,309

)

$

(784,433

)

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

127,098

 

 

 

 

127,098

 

 

 

$

127,098

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on Investment Securities

 

13

 

 

 

13

 

 

 

 

13

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

127,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans and Related Tax Benefits (2,305,545 shares)

 

71,984

 

6

 

21,995

 

 

(434

)

(1,181

)

51,598

 

 

 

Treasury Stock Purchased (4,209,363 shares)

 

(187,394

)

 

 

 

 

 

(187,394

)

 

 

Cash Dividends Paid

 

(48,126

)

 

 

 

(48,126

)

 

 

 

 

Balance at September 30, 2004

 

$

756,707

 

$

813

 

$

413,696

 

$

(5,698

)

$

1,277,615

 

$

(9,490

)

$

(920,229

)

 

 

 

5



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net Income

 

$

136,780

 

$

127,098

 

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

 

 

 

 

 

Provision for Credit Losses

 

3,000

 

(3,500

)

Goodwill Impairment

 

1,257

 

 

Depreciation and Amortization

 

14,056

 

15,688

 

Amortization of Deferred Loan and Lease Fees and Premium, Net

 

(496

)

(1,794

)

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

 

7,139

 

9,803

 

Deferred Stock Grants

 

3,892

 

3,767

 

Deferred Income Taxes

 

8,911

 

14,001

 

Net (Gain) Loss on Investment Securities

 

(345

)

37

 

Proceeds from Sales of Loans Held for Sale

 

346,950

 

308,485

 

Originations of Loans Held for Sale

 

(347,403

)

(317,869

)

Net Change in Other Assets and Other Liabilities

 

(6,342

)

(14,079

)

Net Cash Provided by Operating Activities

 

167,399

 

141,637

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Proceeds from Sales and Redemptions of Investment Securities-Available for Sale

 

503,818

 

473,386

 

Purchases of Investment Securities-Available for Sale

 

(613,559

)

(818,969

)

Proceeds from Redemptions of Investment Securities-Held to Maturity

 

103,534

 

165,749

 

Purchases of Investment Securities-Held to Maturity

 

 

(70,238

)

Net Increase in Loans and Leases

 

(230,975

)

(57,535

)

Net Increase in Premises and Equipment

 

(3,913

)

(1,382

)

Net Cash Used by Investing Activities

 

(241,095

)

(308,989

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Increase in Demand Deposits

 

93,184

 

80,180

 

Net (Decrease) Increase in Savings Deposits

 

(80,285

)

158,007

 

Net Increase (Decrease) in Time Deposits

 

179,020

 

(157,726

)

Net Increase in Short-Term Borrowings

 

203,693

 

169,787

 

Proceeds from Long-Term Debt

 

 

25,000

 

Repayments of Long-Term Debt

 

(10,000

)

(96,449

)

Proceeds from Issuance of Common Stock

 

20,195

 

51,793

 

Repurchase of Common Stock

 

(214,997

)

(187,394

)

Cash Dividends Paid

 

(51,794

)

(48,126

)

Net Cash Provided (Used) by Financing Activities

 

139,016

 

(4,928

)

 

 

 

 

 

 

Increase (Decrease) in Cash and Cash Equivalents

 

65,320

 

(172,280

)

Cash and Cash Equivalents at Beginning of Period

 

250,951

 

518,230

 

Cash and Cash Equivalents at End of Period

 

$

316,271

 

$

345,950

 

 

Non-Cash Investing Activity:

In September 2004, the Company transferred a $4.0 million foreclosed real estate property to premises and equipment.

 

6



 

Bank of Hawaii Corporation

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.           Summary of Significant Accounting Policies

 

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

 

Basis of Presentation

 

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 footnotes required by GAAP for complete financial statements.  In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

 

Certain prior period 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 2004 Annual Report on Form 10-K.  Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

Securities Sold Under Agreements to Repurchase

 

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities (“repos”).  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, repurchase agreements are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Consolidated Statements of Condition while the securities underlying the agreements remain in the respective asset accounts.  If the secured party can re-sell or re-pledge the securities, they are classified as pledged securities in the Consolidated Statements of Condition.  If the secured party cannot resell or re-pledge the securities, they are not separately identified.

 

Stock-Based Compensation

 

As permitted by the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company currently accounts for share-based payments using the intrinsic value method permitted by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations.  Accordingly, the Company recognizes no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.

 

7



 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(dollars in thousands except per share and option data)

 

2005

 

2004 1

 

2005

 

2004 1

 

 

 

 

 

 

 

 

 

 

 

Net Income, as reported

 

$

44,829

 

$

43,067

 

$

136,780

 

$

127,098

 

Less:

Total Stock-Based Employee Compensation Expense Associated with Stock Options Determined Under Fair Value Method for All Option Awards, Net of Related Tax Effects 2

 

(482

)

(813

)

(1,682

)

(3,482

)

Pro Forma Net Income

 

$

44,347

 

$

42,254

 

$

135,098

 

$

123,616

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic-as reported

 

$

0.87

 

$

0.82

 

$

2.62

 

$

2.40

 

Basic-pro forma

 

0.86

 

0.81

 

2.59

 

2.33

 

Diluted-as reported

 

0.85

 

0.78

 

2.55

 

2.26

 

Diluted-pro forma

 

0.84

 

0.76

 

2.51

 

2.20

 

 


1       Prior period amounts restated to account for forfeitures and adjustment to dividend yield calculation.

2       A Black-Scholes option pricing model was used to determine the fair values of the options granted.

 

Recently Issued and Proposed Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123SFAS No. 123(R) supersedes APB No. 25 and amends FASB Statement No. 95, Statement of Cash Flows.  SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense through the income statement based on estimated fair value at issue date.  Pro forma disclosure will no longer be an alternative.  On April 14, 2005, the Securities and Exchange Commission announced that it would provide for a phased-in-implementation process for SFAS No. 123(R).  Under this process, the Company will be required to adopt SFAS No. 123(R) no later than the beginning of the first fiscal year that begins after June 15, 2005.  The Company plans to adopt SFAS No. 123(R) on January 1, 2006.

 

The Company plans to adopt SFAS No. 123(R) using the “modified prospective” method.  Under this method, awards that are granted, modified, or settled after January 1, 2006, will be measured and accounted for in accordance with SFAS No. 123(R).  Also under this method, expense will be recognized in the income statement for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123.

 

The adoption of SFAS No. 123(R) will have an impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.  Had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share shown in the table above.

 

8



 

In July 2005, the FASB issued an exposure draft, FASB Staff Position (“FSP”) No. FAS 13-a “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (“FSP 13-a”).  Under FSP 13-a, a revision in the timing of expected cash flows of a leveraged lease may require a recalculation of the original lease assumptions.  A material change in the net investment in a leveraged lease using different cash flow assumptions would be recognized as a gain or loss in the period in which the assumptions are revised.  The Company has entered into leveraged lease transactions that are currently under various stages of review by the Internal Revenue Service (“IRS”).  The outcome of these reviews may change the timing of cash flows from these leases which may result in gain or loss recognition.  Management is currently evaluating the potential effect of the proposed recognition provisions of FSP 13-a.

 

Note 2.           Business Segments

 

The information under the caption “Business Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

 

Note 3.           Pension Plans and Postretirement Benefit Plan

 

The components of net periodic cost for the aggregated pension plans and the postretirement benefit plan for the three and nine months ended September 30, 2005 and 2004 are presented in the following table:

 

 

 

Pension Benefits

 

Postretirement Benefits

 

(dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

270

 

$

247

 

Interest Cost

 

1,126

 

1,092

 

475

 

443

 

Expected Return on Plan Assets

 

(1,183

)

(1,182

)

 

 

Amortization of Unrecognized Net Transition Obligation

 

 

 

147

 

147

 

Recognized Net Actuarial Loss (Gain)

 

427

 

328

 

(42

)

(156

)

Total Net Periodic Cost

 

$

370

 

$

238

 

$

850

 

$

681

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

810

 

$

741

 

Interest Cost

 

3,376

 

3,275

 

1,425

 

1,329

 

Expected Return on Plan Assets

 

(3,553

)

(3,546

)

 

 

Amortization of Unrecognized Net Transition Obligation

 

 

 

440

 

441

 

Recognized Net Actuarial Loss (Gain)

 

1,268

 

984

 

(125

)

(468

)

Total Net Periodic Cost

 

$

1,091

 

$

713

 

$

2,550

 

$

2,043

 

 

There were no significant changes from the previously reported $1.8 million in total annual contributions expected to be paid during 2005.

 

9



 

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

 

FORWARD-LOOKING STATEMENTS

 

This report, including the statements under the caption “Financial Outlook,” contains, and other statements made by the Company may contain, forward-looking statements concerning, among other things, the economic and business environment in the Company’s service area and elsewhere, growth in the lending portfolio, credit quality, anticipated net income and other financial and business matters in future periods.  The Company’s 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 for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, fiscal and monetary policies, taxing authority interpretations, legislation in Hawaii and the other markets the Company serves, or the timing and interpretation of accounting standards; 2) changes in the Company’s credit quality or risk profile which may increase or decrease the required level of reserve for credit losses; 3) changes in market interest rates that may affect the Company’s credit markets and ability to maintain the Company’s net interest margin; 4) unpredictable costs and other consequences of legal or regulatory matters involving the Company, including those identified in Exhibit 99.1; 5) changes to the amount and timing of the Company’s proposed equity repurchases; 6) real or threatened acts of war or terrorist activity affecting business conditions; and 7) adverse weather, public health and other natural conditions impacting the Company and its customers’ operations.  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.  The Company does not undertake any obligation to update forward-looking statements to reflect later events or circumstances.

 

10



 

OVERVIEW

 

The Company is in the second year of its 2004-2006 plan (the “Plan”), which continues to build on the governing objective of maximizing shareholder value over time.  This objective was established in the previous three-year strategic plan.

 

The Plan consists of five key elements:

                  Accelerate revenue growth in our island markets

                  Better integrate our business segments

                  Continue to develop our management teams

                  Improve operating efficiency

                  Maintain a culture of dependable risk and capital management

 

During the first nine months of 2005, the Company continued to meet the key financial objectives of the Plan.  Results for the first nine months of 2005 compared to the same period in 2004 were as follows:

 

                  Diluted earnings per share were $2.55, an increase of 12.8%

                  The net interest margin was 4.36%, an increase of seven basis points

                  Return on average assets increased to 1.83% from 1.74%

                  Return on average equity increased to 24.72% from 22.48%

 

As of September 30, 2005, loans and leases outstanding increased 7% and deposits increased 5% compared to September 30, 2004.  Total revenue, consisting of net interest income and non-interest income, for the first nine months of 2005, increased 3% from the same prior year period resulting in growth in operating income, defined as revenue less non-interest expense, of 12%.  The Company’s net income for the first nine months of 2005 was $136.8 million, an increase of 7.6% from $127.1 million reported in the same prior year period.

 

The Company continues to better integrate its three primary business segments – Retail Banking, Commercial Banking and the Investment Services Group – through improved processes, training and communications.  As a result, customer’s needs are better addressed and relationships continue to strengthen.

 

Operating efficiency improved in the first nine months of 2005 compared to the same period in 2004, as the Company continues to improve processes.  The efficiency ratio for the first nine months of 2005 was 52.90% compared to 56.40% in the same period in 2004.

 

Risk and capital continue to be managed in a dependable and disciplined manner.  As of September 30, 2005, the ratio of non-accrual loans to total loans was 0.12% and the leverage ratio was 6.98%.

 

The Company’s overall financial results are more fully discussed in the following sections of this report.

 

Table 1 presents the Company’s financial highlights for the three and nine months ended September 30, 2005 and 2004.

 

11



 

Highlights (Unaudited)

 

Table 1

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

For the Period:

 

 

 

 

 

 

 

 

 

Interest Income

 

$

129,234

 

$

114,397

 

$

373,497

 

$

337,643

 

Net Interest Income

 

101,960

 

98,779

 

303,657

 

290,659

 

Net Income

 

44,829

 

43,067

 

136,780

 

127,098

 

Basic Earnings Per Share

 

0.87

 

0.82

 

2.62

 

2.40

 

Diluted Earnings Per Share

 

0.85

 

0.78

 

2.55

 

2.26

 

Dividends Declared Per Share

 

0.33

 

0.30

 

0.99

 

0.90

 

 

 

 

 

 

 

 

 

 

 

Net Income to Average Total Assets (ROA)

 

1.74

%

1.77

%

1.83

%

1.74

%

Net Income to Average Shareholders’ Equity (ROE)

 

24.61

 

23.42

 

24.72

 

22.48

 

Net Interest Margin 1

 

4.30

 

4.39

 

4.36

 

4.29

 

Efficiency Ratio 2

 

53.72

 

55.45

 

52.90

 

56.40

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

10,196,047

 

$

9,668,495

 

$

10,004,968

 

$

9,746,283

 

Average Loans and Leases

 

6,170,302

 

5,796,350

 

6,087,629

 

5,770,642

 

Average Deposits

 

7,833,638

 

7,479,776

 

7,756,789

 

7,390,682

 

Average Shareholders’ Equity

 

722,758

 

731,583

 

739,721

 

755,075

 

Average Equity to Average Assets

 

7.09

%

7.57

%

7.39

%

7.75

%

 

 

 

September 30,

 

 

 

2005

 

2004

 

At Period End:

 

 

 

 

 

Net Loans

 

$

6,110,892

 

$

5,690,924

 

Total Assets

 

10,085,235

 

9,594,809

 

Deposits

 

7,756,586

 

7,413,240

 

Long-Term Debt

 

242,692

 

252,619

 

Shareholders’ Equity

 

696,311

 

756,707

 

 

 

 

 

 

 

Allowance to Loans and Leases Outstanding

 

1.48

%

2.14

%

Dividend Payout Ratio

 

37.80

 

37.57

 

Leverage Ratio

 

6.98

 

7.69

 

 

 

 

 

 

 

Book Value Per Common Share

 

$

13.58

 

$

14.27

 

 

 

 

 

 

 

Employees (FTE)

 

2,591

 

2,655

 

Branches and Offices

 

85

 

88

 

 

 

 

 

 

 

Market Price Per Share of Common Stock for the Quarter Ended:

 

 

 

 

 

Closing

 

$

49.22

 

$

47.25

 

High

 

54.44

 

48.07

 

Low

 

47.44

 

43.55

 

 


1     The net interest margin is defined as net interest income, on a fully-taxable equivalent basis, as a percentage of average earning assets.

2       The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income).

 

12



 

ANALYSIS OF STATEMENT OF INCOME

 

Net Interest Income

 

Net interest income on a taxable equivalent basis for the three and nine month periods ended September 30, 2005 increased $3.2 million or 3% and $13.0 million or 4%, respectively, from the comparable periods in 2004.

 

The net interest margin for the three months ended September 30, 2005 was 4.30%, a nine basis point decrease from the same prior year period due to increases in short term borrowing rates.  The net interest margin for the first nine months of 2005 was 4.36%, a seven basis point increase from the same period in 2004 due to higher yield on investment securities and loans.

 

The increase in net interest income was primarily a result of higher income earned on the investment securities and loan portfolios. The increase in interest income on the investment securities portfolio was due to an increase in yields and average balances.

 

Interest income on commercial and industrial and home equity loans increased primarily due to higher average yields earned, which was consistent with increases in benchmark interest rates (e.g., prime), and an increase in average balances due to growth in the Hawaii economy as well as successful home equity loan promotions.

 

Partially offsetting these positive increases in interest income was an increase in interest expense resulting from selective increases in rates paid on interest-bearing deposits.  The Company’s average interest-bearing deposit rates increased by 30 basis points for the nine months ended September 30, 2005 compared to the same prior year period.

 

Average balances, related interest income and expenses and resulting yields and rates are presented in Table 2.  An analysis of change in net interest income is presented in Table 3.

 

13



 

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

 

Table 2

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2005

 

September 30, 2004

 

September 30, 2005

 

September 30, 2004

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(dollars in millions)

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

6.4

 

$

0.1

 

3.55

%

$

82.6

 

$

0.5

 

2.39

%

$

5.8

 

$

0.1

 

2.69

%

$

246.4

 

$

3.4

 

1.83

%

Funds Sold

 

105.7

 

0.9

 

3.54

 

28.6

 

0.1

 

1.51

 

47.5

 

1.2

 

3.30

 

89.4

 

0.7

 

1.05

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

2,574.2

 

28.5

 

4.43

 

2,325.5

 

24.6

 

4.23

 

2,536.3

 

83.9

 

4.41

 

2,154.9

 

67.2

 

4.16

 

Held to Maturity

 

507.5

 

5.1

 

4.03

 

659.0

 

6.3

 

3.87

 

541.8

 

16.5

 

4.05

 

696.1

 

20.1

 

3.84

 

Loans Held for Sale

 

17.0

 

0.3

 

5.82

 

11.3

 

0.2

 

5.74

 

15.1

 

0.6

 

5.66

 

15.8

 

0.7

 

5.53

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

984.2

 

15.8

 

6.38

 

815.1

 

10.7

 

5.27

 

946.6

 

43.3

 

6.12

 

835.5

 

31.2

 

5.00

 

Construction

 

186.4

 

3.0

 

6.35

 

81.1

 

1.0

 

5.01

 

150.7

 

6.7

 

5.97

 

93.9

 

3.0

 

4.33

 

Commercial Mortgage

 

560.2

 

8.4

 

5.95

 

658.9

 

8.8

 

5.29

 

588.3

 

25.8

 

5.85

 

644.0

 

25.9

 

5.38

 

Residential Mortgage

 

2,352.3

 

33.7

 

5.73

 

2,280.8

 

32.1

 

5.62

 

2,341.0

 

99.3

 

5.65

 

2,292.7

 

97.6

 

5.67

 

Other Revolving Credit and Installment

 

742.6

 

15.9

 

8.52

 

705.6

 

15.1

 

8.53

 

739.7

 

46.4

 

8.39

 

680.0

 

43.9

 

8.62

 

Home Equity

 

758.2

 

12.2

 

6.40

 

583.7

 

7.1

 

4.83

 

718.9

 

32.5

 

6.04

 

536.0

 

19.0

 

4.74

 

Purchased Home Equity

 

88.7

 

0.6

 

2.71

 

155.2

 

1.7

 

4.29

 

102.8

 

2.4

 

3.15

 

179.5

 

6.2

 

4.59

 

Lease Financing

 

497.7

 

4.5

 

3.55

 

516.0

 

5.4

 

4.17

 

499.6

 

13.9

 

3.72

 

509.0

 

16.4

 

4.29

 

Total Loans and Leases

 

6,170.3

 

94.1

 

6.07

 

5,796.4

 

81.9

 

5.63

 

6,087.6

 

270.3

 

5.93

 

5,770.6

 

243.2

 

5.63

 

Other

 

79.4

 

0.3

 

1.35

 

78.7

 

0.8

 

4.05

 

66.6

 

1.0

 

1.99

 

78.1

 

2.5

 

4.32

 

Total Earning Assets 2

 

9,460.5

 

129.3

 

5.44

 

8,982.1

 

114.4

 

5.08

 

9,300.7

 

373.6

 

5.36

 

9,051.3

 

337.8

 

4.98

 

Cash and Non-Interest-Bearing Deposits

 

316.1

 

 

 

 

 

316.9