Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 23, 2017)
  • 10-Q (Jul 24, 2017)
  • 10-Q (Apr 24, 2017)
  • 10-Q (Oct 24, 2016)
  • 10-Q (Jul 25, 2016)
  • 10-Q (Apr 25, 2016)

 
8-K

 
Other

Bank of Hawaii 10-Q 2005

 

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 June 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

 

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

 

Yes  ý  No

 

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 July 22, 2005 – 51,846,908 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 six months ended June 30, 2005 and 2004

3

 

 

 

 

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

4

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Six months ended  June 30, 2005 and 2004

5

 

 

 

 

Consolidated Statements of Cash Flows – Six months ended  June 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 4.

Submission of Matters to a Vote of Security Holders

35

 

 

 

Item 6.

Exhibits

36

 

 

 

Signatures

 

37

 



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

90,119

 

$

80,346

 

$

176,586

 

$

161,774

 

Income on Investment Securities - Available for Sale

 

27,987

 

21,745

 

55,306

 

42,591

 

Income on Investment Securities - Held to Maturity

 

5,527

 

6,711

 

11,352

 

13,687

 

Deposits

 

36

 

1,646

 

59

 

2,877

 

Funds Sold

 

165

 

177

 

240

 

594

 

Other

 

271

 

865

 

720

 

1,723

 

Total Interest Income

 

124,105

 

111,490

 

244,263

 

223,246

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

13,577

 

8,560

 

25,181

 

17,760

 

Securities Sold Under Agreements to Repurchase

 

4,562

 

2,222

 

7,887

 

4,148

 

Funds Purchased

 

1,151

 

506

 

1,884

 

737

 

Short-Term Borrowings

 

45

 

13

 

77

 

28

 

Long-Term Debt

 

3,731

 

4,340

 

7,537

 

8,693

 

Total Interest Expense

 

23,066

 

15,641

 

42,566

 

31,366

 

Net Interest Income

 

101,039

 

95,849

 

201,697

 

191,880

 

Provision for Loan and Lease Losses

 

 

(3,500)

 

 

(3,500)

 

Net Interest Income After Provision for Loan and Lease Losses

 

101,039

 

99,349

 

201,697

 

195,380

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

14,058

 

12,995

 

28,680

 

26,859

 

Mortgage Banking

 

2,594

 

2,808

 

5,184

 

4,785

 

Service Charges on Deposit Accounts

 

9,569

 

9,540

 

19,748

 

19,490

 

Fees, Exchange, and Other Service Charges

 

15,211

 

14,243

 

29,047

 

27,482

 

Investment Securities Gains (Losses)

 

337

 

(37)

 

337

 

(37)

 

Insurance

 

4,330

 

4,926

 

10,118

 

9,584

 

Other

 

4,575

 

10,373

 

9,875

 

15,527

 

Total Non-Interest Income

 

50,674

 

54,848

 

102,989

 

103,690

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

43,856

 

46,689

 

88,625

 

92,690

 

Net Occupancy Expense

 

9,189

 

9,543

 

18,734

 

18,929

 

Net Equipment Expense

 

5,377

 

5,799

 

10,848

 

11,763

 

Other

 

20,582

 

23,094

 

41,660

 

44,765

 

Total Non-Interest Expense

 

79,004

 

85,125

 

159,867

 

168,147

 

Income Before Income Taxes

 

72,709

 

69,072

 

144,819

 

130,923

 

Provision for Income Taxes

 

26,280

 

24,840

 

52,868

 

46,892

 

Net Income

 

$

46,429

 

$

44,232

 

$

91,951

 

$

84,031

 

Basic Earnings Per Share

 

$

0.90

 

$

0.84

 

$

1.75

 

$

1.57

 

Diluted Earnings Per Share

 

$

0.87

 

$

0.79

 

$

1.69

 

$

1.48

 

Dividends Declared Per Share

 

$

0.33

 

$

0.30

 

$

0.66

 

$

0.60

 

Basic Weighted Average Shares

 

51,873,772

 

52,491,874

 

52,646,022

 

53,389,261

 

Diluted Weighted Average Shares

 

53,403,781

 

55,662,415

 

54,250,018

 

56,710,653

 

 

3



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

 

 

June 30,

 

December 31,

 

June 30,

 

(dollars in thousands)

 

2005

 

2004

 

2004

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

4,825

 

$

4,592

 

$

179,680

 

Investment Securities - Available for Sale

 

 

 

 

 

 

 

Held in Portfolio

 

2,396,204

 

2,483,719

 

2,275,272

 

Pledged as Collateral

 

117,947

 

 

 

Investment Securities - Held to Maturity

 

 

 

 

 

 

 

(Fair Value of $522,993, $585,836, and $663,534)

 

526,767

 

589,908

 

679,382

 

Funds Sold

 

50,000

 

21,000

 

 

Loans Held for Sale

 

17,435

 

17,642

 

9,565

 

Loans and Leases

 

6,151,418

 

5,986,930

 

5,787,314

 

Allowance for Loan and Lease Losses

 

(101,587)

 

(106,796)

 

(124,904)

 

Net Loans

 

6,049,831

 

5,880,134

 

5,662,410

 

Total Earning Assets

 

9,163,009

 

8,996,995

 

8,806,309

 

Cash and Non-Interest-Bearing Deposits

 

293,115

 

225,359

 

339,486

 

Premises and Equipment

 

137,907

 

146,095

 

149,128

 

Customers’ Acceptance Liability

 

1,598

 

1,406

 

1,213

 

Accrued Interest Receivable

 

38,540

 

36,044

 

36,378

 

Foreclosed Real Estate

 

292

 

191

 

4,889

 

Mortgage Servicing Rights

 

18,239

 

18,769

 

20,819

 

Goodwill

 

34,959

 

36,216

 

36,216

 

Other Assets

 

372,031

 

305,116

 

294,331

 

Total Assets

 

$

10,059,690

 

$

9,766,191

 

$

9,688,769

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-Interest-Bearing Demand

 

$

1,918,749

 

$

1,977,703

 

$

1,939,580

 

Interest-Bearing Demand

 

1,641,873

 

1,536,323

 

1,464,207

 

Savings

 

2,967,993

 

2,960,351

 

2,976,108

 

Time

 

1,198,143

 

1,090,290

 

1,089,393

 

Total Deposits

 

7,726,758

 

7,564,667

 

7,469,288

 

Securities Sold Under Agreements to Repurchase

 

861,233

 

568,981

 

687,816

 

Funds Purchased

 

63,565

 

149,635

 

139,055

 

Short-Term Borrowings

 

9,894

 

15,000

 

11,055

 

Banker’s Acceptances Outstanding

 

1,598

 

1,406

 

1,213

 

Retirement Benefits Payable

 

66,638

 

65,708

 

62,821

 

Accrued Interest Payable

 

8,617

 

7,021

 

7,169

 

Taxes Payable and Deferred Taxes

 

283,082

 

229,928

 

225,989

 

Other Liabilities

 

83,462

 

96,373

 

87,325

 

Long-Term Debt

 

242,674

 

252,638

 

297,600

 

Total Liabilities

 

9,347,521

 

8,951,357

 

8,989,331

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value); authorized 500,000,000 shares;
issued / outstanding: June 2005 - 81,721,733 / 51,853,734,
December 2004 - 81,711,752 / 54,960,857,
June 2004 - 81,711,599 / 52,426,010

 

815

 

813

 

813

 

Capital Surplus

 

457,280

 

450,998

 

403,150

 

Accumulated Other Comprehensive Income (Loss)

 

(18,471)

 

(12,917)

 

(27,258)

 

Retained Earnings

 

1,339,119

 

1,282,425

 

1,251,689

 

Deferred Stock Grants

 

(7,166)

 

(8,433)

 

(9,391)

 

Treasury Stock, at Cost (Shares: June 2005 - 29,867,999,
December 2004 - 26,750,895, June 2004 - 29,285,589)

 

(1,059,408)

 

(898,052)

 

(919,565)

 

Total Shareholders’ Equity

 

712,169

 

814,834

 

699,438

 

Total Liabilities and Shareholders’ Equity

 

$

10,059,690

 

$

9,766,191

 

$

9,688,769

 

 

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

 

91,951

 

 

 

 

91,951

 

 

 

$

91,951

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on
Investment Securities

 

(5,554)

 

 

 

(5,554)

 

 

 

 

(5,554)

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

86,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans and
Related Tax Benefits (605,364 shares)

 

21,499

 

2

 

6,282

 

 

(610)

 

1,267

 

14,558

 

 

 

Treasury Stock Purchased (3,710,379 shares)

 

(175,914)

 

 

 

 

 

 

(175,914)

 

 

 

Cash Dividends Paid

 

(34,647)

 

 

 

 

(34,647)

 

 

 

 

 

Balance at June 30, 2005

 

$

712,169

 

$

815

 

$

457,280

 

$

(18,471)

 

$

1,339,119

 

$

(7,166)

 

$

 (1,059,408)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

793,132

 

$

807

 

$

391,701

 

$

(5,711)

 

$

1,199,077

 

$

(8,309)

 

$

 (784,433)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

84,031

 

 

 

 

84,031

 

 

 

$

84,031

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on
Investment Securities

 

(21,547)

 

 

 

(21,547)

 

 

 

 

(21,547)

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

62,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued under Stock Plans and
Related Tax Benefits (908,502 shares)

 

32,028

 

6

 

11,449

 

 

803

 

(1,082)

 

20,852

 

 

 

Treasury Stock Purchased (3,527,779 shares)

 

(155,984)

 

 

 

 

 

 

(155,984)

 

 

 

Cash Dividends Paid

 

(32,222)

 

 

 

 

(32,222)

 

 

 

 

 

Balance at June 30, 2004

 

$

699,438

 

$

813

 

$

403,150

 

$

(27,258)

 

$

1,251,689

 

$

(9,391)

 

$

 (919,565)

 

 

 

 

5



 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(dollars in thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net Income

 

$

91,951

 

$

84,031

 

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

 

 

 

 

 

Provision for Loan and Lease Losses

 

 

(3,500)

 

Goodwill Impairment

 

1,257

 

 

Depreciation and Amortization

 

9,673

 

10,523

 

Amortization of Deferred Loan and Lease Fees, Net

 

(382)

 

(1,248)

 

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

 

4,692

 

6,830

 

Deferred Stock Grants

 

2,572

 

2,444

 

Deferred Income Taxes

 

5,908

 

8,296

 

Net (Gain) Loss on Investment Securities

 

(337)

 

37

 

Proceeds from Sales of Loans Held for Sale

 

219,688

 

250,449

 

Originations of Loans Held for Sale

 

(219,481)

 

(250,803)

 

Net Change in Other Assets and Other Liabilities

 

(28,070)

 

11,323

 

Net Cash Provided by Operating Activities

 

87,471

 

118,382

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

324,008

 

347,709

 

Purchases of Investment Securities - Available for Sale

 

(366,619)

 

(671,520)

 

Proceeds from Redemptions of Investment Securities - Held to Maturity

 

62,291

 

117,212

 

Purchases of Investment Securities - Held to Maturity

 

 

(70,238)

 

Net Increase in Loans and Leases

 

(167,091)

 

(29,567)

 

Premises and Equipment, Net

 

(1,485)

 

354

 

Net Cash Used by Investing Activities

 

(148,896)

 

(306,050)

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Increase in Demand Deposits

 

46,596

 

113,529

 

Net Increase in Savings Deposits

 

7,642

 

142,729

 

Net Increase (Decrease) in Time Deposits

 

107,853

 

(119,749)

 

Net Increase in Short-Term Borrowings

 

201,076

 

243,389

 

Repayments of Long-Term Debt

 

(9,964)

 

(26,468)

 

Proceeds from Issuance of Common Stock

 

15,772

 

23,380

 

Repurchase of Common Stock

 

(175,914)

 

(155,984)

 

Cash Dividends Paid

 

(34,647)

 

(32,222)

 

Net Cash Provided by Financing Activities

 

158,414

 

188,604

 

 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

96,989

 

936

 

Cash and Cash Equivalents at Beginning of Period

 

250,951

 

518,230

 

Cash and Cash Equivalents at End of Period

 

$

347,940

 

$

519,166

 

 

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 six months ended June 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(dollars in thousands except per share and option data)

 

2005

 

2004 1

 

2005

 

2004 1

 

Net Income, as reported

 

$

46,429

 

$

44,232

 

$

91,951

 

$

84,031

 

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

 

(500

)

(1,161

)

(1,204

)

(2,672

)

Pro Forma Net Income

 

$

45,929

 

$

43,071

 

$

90,747

 

$

81,359

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic-as reported

 

$

0.90

 

$

0.84

 

$

1.75

 

$

1.57

 

Basic-pro forma

 

0.89

 

0.82

 

1.72

 

1.52

 

Diluted-as reported

 

0.87

 

0.79

 

1.69

 

1.48

 

Diluted-pro forma

 

0.86

 

0.77

 

1.67

 

1.43

 

 


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 their fair values 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 six months ended June 30, 2005 and 2004 are presented in the following table:

 

 

 

Pension Benefits

 

Postretirement Benefits

 

(dollars in thousands)

 

2005

 

2004

 

2005

 

2004

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

285

 

$

247

 

Interest Cost

 

1,125

 

1,091

 

500

 

443

 

Expected Return on Plan Assets

 

(1,185

)

(1,182

)

 

 

Amortization of Unrecognized Net Transition Obligation

 

 

 

146

 

147

 

Recognized Net Actuarial Loss (Gain)

 

421

 

328

 

(41

)

(156

)

Total Net Periodic Cost

 

$

361

 

$

237

 

$

890

 

$

681

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

540

 

$

494

 

Interest Cost

 

2,250

 

2,183

 

950

 

886

 

Expected Return on Plan Assets

 

(2,370

)

(2,364

)

 

 

Amortization of Unrecognized Net Transition Obligation

 

 

 

293

 

294

 

Recognized Net Actuarial Loss (Gain)

 

841

 

656

 

(83

)

(312

)

Total Net Periodic Cost

 

$

721

 

$

475

 

$

1,700

 

$

1,362

 

 

There were no significant changes from the previously reported $1.8 million in 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 forward-looking statements concerning, among other things, the economic and business environment in the Company’s service area and elsewhere, credit quality, the expected level of loan and lease loss provisioning, 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, 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 the 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) changes to the amount and timing of the Company’s proposed equity repurchases and repayment of maturing debt; 5) real or threatened acts of war or terrorist activity affecting business conditions; and 6) adverse weather 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 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 six months of 2005, the Company continued to meet the key financial objectives of the Plan.  Total revenue, consisting of net interest income and non-interest income, for the first six months of 2005, increased 3% from the same prior year period.  As of June 30, 2005, loans and leases outstanding increased 6% and deposits increased 3% compared to June 30, 2004.

 

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

 

The Company utilizes various financial measures to evaluate its performance against the objectives of the Plan, many of which are discussed below.

 

Operating efficiency improved in the first six months of 2005 compared to the same period in 2004, as the Company continues to improve processes.  The efficiency ratio for the first six months of 2005 was 52.47% compared to 56.89% in the same period in 2004.  Operating income, which is defined as the income before the provision for loan and lease losses and income taxes increased 13.7% in the first six months of 2005 compared to the same period in 2004.

 

The management of both risk and capital continues to be dependable and disciplined in 2005.  As of June 30, 2005, the ratio of non-accrual loans to total loans was 0.16% and the leverage ratio was 7.18%.

 

The Company’s net income for the first six months of 2005 was $92.0 million, an increase of 9% from $84.0 million reported in the same prior year period.  Additional results for the first six months of 2005 compared to the same period in 2004 were as follows:

 

                  Diluted earnings per share were $1.69, an increase of 14%

                  The net interest margin was 4.39%, an increase of 16 basis points

                  Return on average assets increased to 1.87% from 1.73%

                  Return on average equity increased to 24.78% from 22.03%

 

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 six months ended June 30, 2005 and 2004.

 

11



 

Highlights (Unaudited)

 

Table 1

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(dollars in thousands except per share amounts)

 

2005

 

2004

 

2005

 

2004

 

For the Period:

 

 

 

 

 

 

 

 

 

Interest Income

 

$

124,105

 

$

111,490

 

$

244,263

 

$

223,246

 

Net Interest Income

 

101,039

 

95,849

 

201,697

 

191,880

 

Net Income

 

46,429

 

44,232

 

91,951

 

84,031

 

Basic Earnings Per Share

 

0.90

 

0.84

 

1.75

 

1.57

 

Diluted Earnings Per Share

 

0.87

 

0.79

 

1.69

 

1.48

 

Dividends Declared Per Share

 

0.33

 

0.30

 

0.66

 

0.60

 

 

 

 

 

 

 

 

 

 

 

Net Income to Average Total Assets (ROA)

 

1.87

%

1.80

%

1.87

%

1.73

%

Net Income to Average Shareholders’ Equity (ROE)

 

25.98

 

24.28

 

24.78

 

22.03

 

Net Interest Margin 1

 

4.36

 

4.17

 

4.39

 

4.23

 

Efficiency Ratio 2

 

52.07

 

56.49

 

52.47

 

56.89

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

9,969,243

 

$

9,893,303

 

$

9,907,845

 

$

9,785,603

 

Average Loans and Leases

 

6,090,149

 

5,772,926

 

6,045,609

 

5,757,647

 

Average Deposits

 

7,747,331

 

7,371,388

 

7,717,729

 

7,345,645

 

Average Shareholders’ Equity

 

716,767

 

732,652

 

748,344

 

766,950

 

Average Equity to Average Assets

 

7.19

%

7.41

%

7.55

%

7.84

%

 

 

 

June 30,

 

 

 

2005

 

2004

 

At Period End:

 

 

 

 

 

Net Loans

 

$

6,049,831

 

$

5,662,410

 

Total Assets

 

10,059,690

 

9,688,769

 

Deposits

 

7,726,758

 

7,469,288

 

Long-Term Debt

 

242,674

 

297,600

 

Shareholders’ Equity

 

712,169

 

699,438

 

 

 

 

 

 

 

Allowance to Loans and Leases Outstanding

 

1.65

%

2.16

%

Dividend Payout Ratio

 

37.71

 

38.22

 

Leverage Ratio

 

7.18

 

7.16

 

 

 

 

 

 

 

Book Value Per Common Share

 

$

13.73

 

$

13.34

 

 

 

 

 

 

 

Employees (FTE)

 

2,561

 

2,683

 

Branches and offices

 

86

 

89

 

 

 

 

 

 

 

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

 

 

 

 

 

Closing

 

$

50.75

 

$

45.22

 

High

 

51.30

 

46.84

 

Low

 

43.82

 

40.97

 

 


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 six month periods ended June 30, 2005 increased $5.2 million and $9.8 million, respectively, or a 5% change for both periods compared to the same periods in 2004.  The net interest margin for the three months ended June 30, 2005 was 4.36%, a 19 basis point increase from the same prior year period.  The net interest margin for the first six months of 2005 was 4.39%, a 16 basis point increase from the same period in 2004.  The increase in net interest income was primarily a result of higher income earned on the investment securities and loans portfolio.  The increase in interest income on the investment securities portfolio was due to an increase in average balances resulting from better utilization of the Company’s liquidity and reduction in prepayments on mortgage-backed securities.  Interest income on commercial and industrial loans increased primarily due to higher average yields earned, which was consistent with increases in benchmark interest rates, and an increase in average balances.  Home equity loans experienced higher interest income due to re-pricing of initial introductory rates to fully indexed rates and increases in the average balance outstanding resulting from promotions.  Partially offsetting these positive increases in interest income was an increase in interest expense due mainly to the increase in short-term interest rates.  As a result of the Federal Reserve increasing short-term interest rates, the average federal funds rate was 172 basis points higher for the six months ended June 30, 2005 compared to the same prior year period.  In comparison, the Company’s average interest-bearing deposits rates increased by 22 basis points.

 

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

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2005

 

June 30, 2004

 

June 30, 2005

 

June 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

 

$

6.0

 

$

 

2.36

%

$

408.8

 

$

1.6

 

1.62

%

$

5.4

 

$

0.1

 

2.17

%

$

329.2

 

$

2.8

 

1.76

%

Funds Sold

 

23.1

 

0.2

 

2.86

 

71.3

 

0.2

 

0.99

 

17.9

 

0.2

 

2.68

 

120.1

 

0.6

 

0.99

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

2,542.5

 

28.0

 

4.41

 

2,148.9

 

21.8

 

4.06

 

2,517.0

 

55.4

 

4.41

 

2,068.7

 

42.6

 

4.13

 

Held to Maturity

 

544.1

 

5.5

 

4.06

 

709.8

 

6.7

 

3.78

 

559.3

 

11.4

 

4.06

 

714.8

 

13.7

 

3.83

 

Loans Held for Sale

 

15.1

 

0.2

 

5.72

 

20.7

 

0.3

 

5.54

 

14.1

 

0.4

 

5.57

 

18.1

 

0.5

 

5.45

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

945.0

 

14.3

 

6.07

 

845.2

 

10.3

 

4.90

 

924.8

 

27.5

 

5.99

 

844.8

 

20.4

 

4.86

 

Construction

 

140.9

 

2.1

 

5.91

 

100.4

 

0.9

 

3.80

 

132.5

 

3.7

 

5.69

 

100.4

 

2.0

 

4.05

 

Commercial Mortgage

 

599.3

 

8.8

 

5.89

 

638.9

 

8.6

 

5.39

 

602.6

 

17.4

 

5.81

 

636.5

 

17.2

 

5.42

 

Residential Mortgage

 

2,343.9

 

33.1

 

5.64

 

2,281.8

 

32.2

 

5.65

 

2,338.0

 

65.7

 

5.62

 

2,299.6

 

65.5

 

5.70

 

Other Revolving Credit and Installment

 

739.6

 

15.4

 

8.37

 

683.2

 

14.4

 

8.51

 

738.2

 

30.5

 

8.32

 

667.1

 

28.7

 

8.67

 

Home Equity

 

719.0

 

10.8

 

6.01

 

534.6

 

6.1

 

4.63

 

699.0

 

20.2

 

5.83

 

511.9

 

11.9

 

4.68

 

Purchased Home Equity

 

103.3

 

0.8

 

3.06

 

178.8

 

1.9

 

4.16

 

110.0

 

1.8

 

3.32

 

191.8

 

4.6

 

4.70

 

Lease Financing

 

499.2

 

4.7

 

3.74

 

510.1

 

5.6

 

4.38

 

500.5

 

9.4

 

3.81

 

505.5

 

11.0

 

4.35

 

Total Loans and Leases

 

6,090.2

 

90.0

 

5.91

 

5,773.0

 

80.0

 

5.56

 

6,045.6

 

176.2

 

5.86

 

5,757.6

 

161.3

 

5.62

 

Other

 

66.3

 

0.3

 

1.64

 

78.1

 

0.9

 

4.45

 

60.1

 

0.7

 

2.42

 

77.8

 

1.8

 

4.45

 

Total Earning Assets 2

 

9,287.3

 

124.2

 

5.35

 

9,210.6

 

111.5

 

4.86

 

9,219.4

 

244.4

 

5.32

 

9,086.3

 

223.3

 

4.93

 

Cash and Non-Interest-Bearing Deposits

 

305.8

 

 

 

 

 

306.3