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Bank of Hawaii 10-Q 2008

Documents found in this filing:

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

Table of Contents

 

U N I T E D    S T A T E S

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

[ X ]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2008

 

or

 

[     ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________

 

Commission File Number: 1-6887

 

BANK OF HAWAII CORPORATION

----------------------------------------------------------------------------------

(Exact name of registrant as specified in its charter)

 

      Delaware

 

    99-0148992

--------------------------

 

-----------------------------------------

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

130 Merchant Street, Honolulu, Hawaii

96813

-------------------------------------------------------

-------------

(Address of principal executive offices)

(Zip Code)

 

1-888-643-3888

----------------------------------------------------------------

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X       No ___

 

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                                                                                      Accelerated filer    ___

Non-accelerated filer __  (Do not check if a smaller reporting company)           Smaller reporting company  ___

 

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

Yes __      No X

 

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

 

As of July 25, 2008, there were 47,766,792 shares of common stock outstanding.

 



Table of Contents

 

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, 2008 and 2007

 

2

 

 

 

 

 

Consolidated Statements of Condition – June 30, 2008,

 

 

 

December 31, 2007, and June 30, 2007

 

3

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Six months ended

 

 

 

June 30, 2008 and 2007

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows – Six months ended

 

 

 

June 30, 2008 and 2007

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

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

 

15

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

45

 

 

 

 

Item 4.

Controls and Procedures

 

45

 

 

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

Item 1A.

Risk Factors

 

45

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

46

 

 

 

 

Item 5.

Other Information

 

47

 

 

 

 

Item 6.

Exhibits

 

47

 

 

 

 

Signatures

 

48

 

1



Table of Contents

 

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)

 

2008

 

2007

 

2008

 

2007

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

97,959

 

$

112,026

 

$

202,372

 

$

222,324

 

Income on Investment Securities

 

 

 

 

 

 

 

 

 

Trading

 

1,209

 

1,357

 

2,369

 

2,975

 

Available-for-Sale

 

35,321

 

31,563

 

69,572

 

62,524

 

Held-to-Maturity

 

3,033

 

3,827

 

6,272

 

7,879

 

Deposits

 

204

 

96

 

399

 

154

 

Funds Sold

 

420

 

533

 

1,412

 

1,591

 

Other

 

489

 

364

 

915

 

697

 

Total Interest Income

 

138,635

 

149,766

 

283,311

 

298,144

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

20,238

 

33,701

 

47,703

 

67,076

 

Securities Sold Under Agreements to Repurchase

 

7,488

 

11,665

 

18,105

 

23,551

 

Funds Purchased

 

270

 

1,452

 

903

 

2,375

 

Short-Term Borrowings

 

12

 

91

 

46

 

178

 

Long-Term Debt

 

3,459

 

3,979

 

7,206

 

7,949

 

Total Interest Expense

 

31,467

 

50,888

 

73,963

 

101,129

 

Net Interest Income

 

107,168

 

98,878

 

209,348

 

197,015

 

Provision for Credit Losses

 

7,172

 

3,363

 

21,599

 

5,994

 

Net Interest Income After Provision for Credit Losses

 

99,996

 

95,515

 

187,749

 

191,021

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

15,460

 

16,135

 

30,546

 

31,968

 

Mortgage Banking

 

2,738

 

2,479

 

7,035

 

5,850

 

Service Charges on Deposit Accounts

 

12,411

 

11,072

 

24,494

 

22,039

 

Fees, Exchange, and Other Service Charges

 

17,176

 

16,556

 

33,277

 

32,617

 

Investment Securities Gains, Net

 

157

 

575

 

287

 

591

 

Insurance

 

5,590

 

4,887

 

12,720

 

11,102

 

Other

 

7,007

 

6,324

 

38,305

 

14,821

 

Total Noninterest Income

 

60,539

 

58,028

 

146,664

 

118,988

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

45,984

 

44,587

 

101,457

 

89,993

 

Net Occupancy

 

11,343

 

9,695

 

21,786

 

19,506

 

Net Equipment

 

4,474

 

4,871

 

8,795

 

9,658

 

Professional Fees

 

2,588

 

2,599

 

5,201

 

5,142

 

Other

 

19,473

 

18,080

 

40,055

 

37,656

 

Total Noninterest Expense

 

83,862

 

79,832

 

177,294

 

161,955

 

Income Before Provision for Income Taxes

 

76,673

 

73,711

 

157,119

 

148,054

 

Provision for Income Taxes

 

28,391

 

25,982

 

51,622

 

52,990

 

Net Income

 

$

48,282

 

$

47,729

 

$

105,497

 

$

95,064

 

Basic Earnings Per Share

 

$

1.01

 

$

0.97

 

$

2.20

 

$

1.93

 

Diluted Earnings Per Share

 

$

1.00

 

$

0.95

 

$

2.18

 

$

1.89

 

Dividends Declared Per Share

 

$

0.44

 

$

0.41

 

$

0.88

 

$

0.82

 

Basic Weighted Average Shares

 

47,733,278

 

49,276,820

 

47,849,945

 

49,351,959

 

Diluted Weighted Average Shares

 

48,300,049

 

50,077,219

 

48,423,619

 

50,173,856

 

 

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

 

2



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

 

 

 

 

 

Consolidated Statements of Condition (Unaudited)

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

(dollars in thousands)

 

2008

 

2007

 

2007

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

6,056

 

$

4,870

 

$

130,732

 

Funds Sold

 

-

 

15,000

 

200,000

 

Investment Securities

 

 

 

 

 

 

 

Trading

 

94,347

 

67,286

 

123,591

 

Available-for-Sale

 

2,646,506

 

2,563,190

 

2,455,668

 

Held-to-Maturity (Fair Value of $255,905; $287,644; and $313,589)

 

260,592

 

292,577

 

327,118

 

Loans Held for Sale

 

11,183

 

12,341

 

13,527

 

Loans and Leases

 

6,518,128

 

6,580,861

 

6,566,126

 

Allowance for Loan and Lease Losses

 

(102,498

)

(90,998

)

(90,998

)

Net Loans and Leases

 

6,415,630

 

6,489,863

 

6,475,128

 

Total Earning Assets

 

9,434,314

 

9,445,127

 

9,725,764

 

Cash and Noninterest-Bearing Deposits

 

280,635

 

368,402

 

345,226

 

Premises and Equipment

 

117,323

 

117,177

 

122,929

 

Customers’ Acceptances

 

1,856

 

1,112

 

2,234

 

Accrued Interest Receivable

 

42,295

 

45,261

 

49,121

 

Foreclosed Real Estate

 

229

 

184

 

48

 

Mortgage Servicing Rights

 

30,272

 

27,588

 

29,112

 

Goodwill

 

34,959

 

34,959

 

34,959

 

Other Assets

 

429,266

 

433,132

 

413,175

 

Total Assets

 

$

10,371,149

 

$

10,472,942

 

$

10,722,568

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

1,876,782

 

$

1,935,639

 

$

1,896,335

 

Interest-Bearing Demand

 

1,666,726

 

1,634,675

 

1,755,646

 

Savings

 

2,781,082

 

2,630,471

 

2,923,168

 

Time

 

1,579,400

 

1,741,587

 

1,739,255

 

Total Deposits

 

7,903,990

 

7,942,372

 

8,314,404

 

Funds Purchased

 

69,400

 

75,400

 

90,650

 

Short-Term Borrowings

 

10,180

 

10,427

 

15,644

 

Securities Sold Under Agreements to Repurchase

 

1,028,518

 

1,029,340

 

910,302

 

Long-Term Debt (includes $121,326 carried at fair value as of June 30, 2008)

 

205,351

 

235,371

 

260,329

 

Banker’s Acceptances

 

1,856

 

1,112

 

2,234

 

Retirement Benefits Payable

 

29,478

 

29,984

 

43,892

 

Accrued Interest Payable

 

13,588

 

20,476

 

18,292

 

Taxes Payable and Deferred Taxes

 

250,125

 

278,218

 

277,516

 

Other Liabilities

 

91,105

 

99,987

 

80,499

 

Total Liabilities

 

9,603,591

 

9,722,687

 

10,013,762

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;

 

 

 

 

 

 

 

issued / outstanding: June 2008 - 57,016,182 / 47,941,409;

 

 

 

 

 

 

 

December 2007 - 56,995,447 / 48,589,645;

 

 

 

 

 

 

 

and June 2007 - 56,927,022 / 49,440,204)

 

568

 

567

 

566

 

Capital Surplus

 

489,335

 

484,790

 

480,389

 

Accumulated Other Comprehensive Loss

 

(15,813

)

(5,091

)

(45,705

)

Retained Earnings

 

745,244

 

688,638

 

645,149

 

Treasury Stock, at Cost (Shares: June 2008 - 9,074,773;

 

 

 

 

 

 

 

December 2007 - 8,405,802; and June 2007 - 7,486,818)

 

(451,776

)

(418,649

)

(371,593

)

Total Shareholders’ Equity

 

767,558

 

750,255

 

708,806

 

Total Liabilities and Shareholders’ Equity

 

$

10,371,149

 

$

10,472,942

 

$

10,722,568

 

 

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

 

3



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

Compre-

 

 

 

 

 

Common

 

Capital

 

hensive

 

Retained

 

Treasury

 

hensive

 

(dollars in thousands)

 

Total

 

Stock

 

Surplus

 

Loss

 

Earnings

 

Stock

 

Income

 

Balance as of December 31, 2007

 

$

750,255

 

$

567

 

$

484,790

 

$

(5,091

)

$

688,638

 

$

(418,649

)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(2,736

)

-

 

-

 

-

 

(2,736

)

-

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

105,497

 

-

 

-

 

-

 

105,497

 

-

 

$

105,497

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains and Losses on Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

(10,820

)

-

 

-

 

(10,820

)

-

 

-

 

(10,820

)

Amortization of Net Loss for Pension Plans and Postretirement Benefit Plan

 

98

 

-

 

-

 

98

 

-

 

-

 

98

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

94,775

 

Share-Based Compensation

 

3,072

 

-

 

3,072

 

-

 

-

 

-

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

1,304

 

-

 

1,304

 

-

 

-

 

-

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans (276,946 shares)

 

8,478

 

1

 

169

 

-

 

(3,812

)

12,120

 

 

 

Common Stock Repurchased (923,330 shares)

 

(45,247

)

-

 

-

 

-

 

-

 

(45,247

)

 

 

Cash Dividends Paid

 

(42,343

)

-

 

-

 

-

 

(42,343

)

-

 

 

 

Balance as of June 30, 2008

 

$

767,558

 

$

568

 

$

489,335

 

$

(15,813

)

$

745,244

 

$

(451,776

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2006

 

$

719,420

 

$

566

 

$

475,178

 

$

(39,084

)

$

630,660

 

$

(347,900

)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

5,126

 

-

 

-

 

5,279

 

(153

)

-

 

 

 

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

 

(27,106

)

-

 

-

 

-

 

(27,106

)

-

 

 

 

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

 

(7,247

)

-

 

-

 

-

 

(7,247

)

-

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

95,064

 

-

 

-

 

-

 

95,064

 

-

 

$

95,064

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(12,316

)

-

 

-

 

(12,316

)

-

 

-

 

(12,316

)

Amortization of Net Loss for Pension Plans and Postretirement Benefit Plan

 

416

 

-

 

-

 

416

 

-

 

-

 

416

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

83,164

 

Share-Based Compensation

 

2,748

 

-

 

2,748

 

-

 

-

 

-

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

2,208

 

-

 

2,208

 

-

 

-

 

-

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans (444,008 shares)

 

12,407

 

-

 

255

 

-

 

(5,312

)

17,464

 

 

 

Common Stock Repurchased (779,689 shares)

 

(41,157

)

-

 

-

 

-

 

-

 

(41,157

)

 

 

Cash Dividends Paid

 

(40,757

)

-

 

-

 

-

 

(40,757

)

-

 

 

 

Balance as of June 30, 2007

 

$

708,806

 

$

566

 

$

480,389

 

$

(45,705

)

$

645,149

 

$

(371,593

)

 

 

 

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

 

4



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

(dollars in thousands)

 

2008

 

2007

 

Operating Activities

 

 

 

 

 

Net Income

 

$

105,497

 

$

95,064

 

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

 

 

 

 

 

Provision for Credit Losses

 

21,599

 

5,994

 

Depreciation and Amortization

 

7,047

 

7,376

 

Amortization of Deferred Loan and Lease Fees

 

(1,058

)

(911

)

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

 

741

 

1,603

 

Share-Based Compensation

 

3,072

 

2,748

 

Benefit Plan Contributions

 

(1,078

)

(5,217

)

Deferred Income Taxes

 

(58,991

)

(35,400

)

Net Gain on Investment Securities

 

(287

)

(591

)

Net Change in Trading Securities

 

(27,061

)

40,589

 

Proceeds from Sales of Loans Held for Sale

 

261,820

 

179,139

 

Originations of Loans Held for Sale

 

(260,662

)

(180,724

)

Tax Benefits from Share-Based Compensation

 

(1,389

)

(2,229

)

Net Change in Other Assets and Other Liabilities

 

26,870

 

(21,360

)

Net Cash Provided by Operating Activities

 

76,120

 

86,081

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

494,209

 

301,327

 

Proceeds from Sales

 

195,000

 

-

 

Purchases

 

(789,666

)

(334,901

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

31,765

 

43,861

 

Net Change in Loans and Leases

 

53,692

 

9,239

 

Premises and Equipment, Net

 

(7,193

)

(4,380

)

Net Cash (Used in) Provided by Investing Activities

 

(22,193

)

15,146

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

(38,382

)

291,010

 

Net Change in Short-Term Borrowings

 

(7,069

)

(102,426

)

Repayments of Long-Term Debt

 

(32,425

)

-

 

Tax Benefits from Share-Based Compensation

 

1,389

 

2,229

 

Proceeds from Issuance of Common Stock

 

8,569

 

12,500

 

Repurchase of Common Stock

 

(45,247

)

(41,157

)

Cash Dividends Paid

 

(42,343

)

(40,757

)

Net Cash (Used in) Provided by Financing Activities

 

(155,508

)

121,399

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

(101,581

)

222,626

 

Cash and Cash Equivalents at Beginning of Period

 

388,272

 

453,332

 

Cash and Cash Equivalents at End of Period

 

$

286,691

 

$

675,958

 

Supplemental Information

 

 

 

 

 

Cash Paid for:

 

 

 

 

 

Interest

 

$

80,852

 

$

105,555

 

Income Taxes

 

63,604

 

33,076

 

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

 

138

 

 

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

 

5



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

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

 

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

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  Operating results for the six months ended June 30, 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 plans to apply the fair value measurement provisions of SFAS No. 157 to its nonfinancial assets and liabilities measured at fair value effective January 1, 2009.  The adoption of SFAS No. 157 had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.

 

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Table of Contents

 

Fair Value Option

 

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

 

Loan Commitments

 

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

 

Future Application of Accounting Pronouncements

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133.”  SFAS No. 161 expands disclosure requirements regarding an entity’s derivative instruments and hedging activities.  Expanded qualitative disclosures that will be required under SFAS No. 161 include: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also requires several added quantitative disclosures in financial statements.  SFAS No. 161 will be effective for the Company on January 1, 2009 and its adoption is not expected to impact the Company’s statements of income and condition.

 

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Table of Contents

 

Note 2.  Pension Plans and Postretirement Benefit Plan

 

The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three and six months ended June 30, 2008 and 2007 are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

Pension Plans and Postretirement Benefit Plan (Unaudited)

 

 

 

 

Pension Benefits

 

 

 

Postretirement Benefits

 

(dollars in thousands)

 

2008

 

2007

 

 

2008

 

2007

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Service Cost

 

$

-

 

$

-

 

 

$

179

 

$

310

 

Interest Cost

 

2,596

 

2,446

 

 

840

 

790

 

Expected Return on Plan Assets

 

(3,044

)

(2,746

)

 

-

 

-

 

Amortization of Prior Service Credit

 

-

 

-

 

 

(107

)

(100

)

Recognized Net Actuarial Losses (Gains)

 

540

 

900

 

 

(280

)

(150

)

Net Periodic Benefit Cost

 

$

92

 

$

600

 

 

$

632

 

$

850

 

 

The net periodic benefit cost for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the statements of income.  There were no significant changes from the previously reported $0.7 million that the Company expects to contribute to the pension plans and the $1.1 million that it expects to contribute to the postretirement benefit plan for the year ending December 31, 2008.  For the three and six months ended June 30, 2008, the Company contributed $0.3 million and $0.4 million, respectively, to its pension plans.  For the three and six months ended June 30, 2008, the Company contributed $0.3 million and $0.7 million, respectively, to its postretirement benefit plan.

 

Note 3.  Business Segments

 

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

 

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Table of Contents

 

Selected financial information for each business segment is presented below for the three and six months ended June 30, 2008 and 2007.

 

Business Segments Selected Financial Information (Unaudited)

 

 

Retail

 

Commercial

 

Investment

 

 

 

Consolidated

 

(dollars in thousands)

 

Banking

 

Banking

 

Services

 

Treasury

 

Total

 

Three Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

59,555

 

$

43,264

 

$

3,938

 

$

411

 

$

107,168

 

Provision for Credit Losses

 

2,571

 

4,652

 

(1

)

(50

)

7,172

 

Net Interest Income After Provision for Credit Losses

 

56,984

 

38,612

 

3,939

 

461

 

99,996

 

Noninterest Income

 

27,270

 

9,997

 

19,019

 

4,253

 

60,539

 

Noninterest Expense

 

(43,335

)

(23,544

)

(16,363

)

(620

)

(83,862

)

Income Before Provision for Income Taxes

 

40,919

 

25,065

 

6,595

 

4,094

 

76,673

 

Provision for Income Taxes

 

(15,140

)

(9,286

)

(2,440

)

(1,525

)

(28,391

)

Allocated Net Income

 

$

25,779

 

$

15,779

 

$

4,155

 

$

2,569

 

$

48,282

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets as of June 30, 2008

 

$

3,649,376

 

$

2,998,013

 

$

242,443

 

$

3,481,317

 

$

10,371,149

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2007 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

55,606

 

$

40,668

 

$

3,466

 

$

(862

)

$

98,878

 

Provision for Credit Losses

 

1,258

 

2,115

 

-

 

(10

)

3,363

 

Net Interest Income (Loss) After Provision for Credit Losses

 

54,348

 

38,553

 

3,466

 

(852

)

95,515

 

Noninterest Income

 

26,790

 

8,033

 

19,454

 

3,751

 

58,028

 

Noninterest Expense

 

(41,109

)

(22,318

)

(15,519

)

(886

)

(79,832

)

Income Before Provision for Income Taxes

 

40,029

 

24,268

 

7,401

 

2,013

 

73,711

 

Provision for Income Taxes

 

(14,812

)

(9,061

)

(2,738

)

629

 

(25,982

)

Allocated Net Income

 

$

25,217

 

$

15,207

 

$

4,663

 

$

2,642

 

$

47,729

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets as of June 30, 2007 1

 

$

3,638,207

 

$

3,108,240

 

$

230,134

 

$

3,745,987

 

$

10,722,568

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

117,979

 

$

86,099

 

$

7,808

 

$

(2,538

)

$

209,348

 

Provision for Credit Losses

 

10,523

 

11,878

 

(1

)

(801

)

21,599

 

Net Interest Income (Loss) After Provision for Credit Losses

 

107,456

 

74,221

 

7,809

 

(1,737

)

187,749

 

Noninterest Income

 

55,817

 

32,246

 

37,280

 

21,321

 

146,664

 

Noninterest Expense

 

(87,104

)

(48,265

)

(33,226

)

(8,699

)

(177,294

)

Income Before Provision for Income Taxes

 

76,169

 

58,202

 

11,863

 

10,885

 

157,119

 

Provision for Income Taxes

 

(28,182

)

(21,587

)

(4,389

)

2,536

 

(51,622

)

Allocated Net Income

 

$

47,987

 

$

36,615

 

$

7,474

 

$

13,421

 

$

105,497

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets as of June 30, 2008

 

$

3,649,376

 

$

2,998,013

 

$

242,443

 

$

3,481,317

 

$

10,371,149

 

Six Months Ended June 30, 2007 1

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

110,025

 

$

79,698

 

$

6,991

 

$

301

 

$

197,015

 

Provision for Credit Losses

 

2,803

 

3,213

 

-

 

(22

)

5,994

 

Net Interest Income After Provision for Credit Losses

 

107,222

 

76,485

 

6,991

 

323

 

191,021

 

Noninterest Income

 

52,370

 

20,246

 

38,601

 

7,771

 

118,988

 

Noninterest Expense

 

(82,443

)

(45,238

)

(31,202

)

(3,072

)

(161,955

)

Income Before Provision for Income Taxes

 

77,149

 

51,493

 

14,390

 

5,022

 

148,054

 

Provision for Income Taxes

 

(28,539

)

(18,935

)

(5,324

)

(192

)

(52,990

)

Allocated Net Income

 

$

48,610

 

$

32,558

 

$

9,066

 

$

4,830

 

$

95,064

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets as of June 30, 2007 1

 

$

3,638,207

 

$

3,108,240

 

$

230,134

 

$

3,745,987

 

$

10,722,568

 

 

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

 

9



Table of Contents

 

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.

 

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 June 30, 2008:

 

Assets and Liabilities Measured at Fair Value on Recurring Basis (Unaudited)

 

 

Quoted Prices in

 

 

 

Significant

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Investment Securities Trading

 

$

-

 

$