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Bank of Hawaii 10-Q 2009

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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2009

 

 

 

 

 

or

 

 

 

 

 

o

 

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

 

Commission File Number: 1-6887

 

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

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

 

 

 

130 Merchant Street, Honolulu, Hawaii

 

96813

(Address of principal executive offices)

 

(Zip Code)

 

1-888-643-3888

 (Registrant’s telephone number, including area code)

 

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

Yes   x     No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   o     No  o

 

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

 

  Large accelerated filer     x

 

Accelerated filer     o

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

 

Smaller reporting company    o

 

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

Yes   o     No  x

 

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

 

As of April 17, 2009, there were 47,811,853 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 months ended
March 31, 2009 and 2008

2

 

 

 

 

Consolidated Statements of Condition – March 31, 2009,
December 31, 2008, and March 31, 2008

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Three months ended
March 31, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Cash Flows – Three months ended
March 31, 2009 and 2008

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

42

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 6.

Exhibits

42

 

 

 

Signatures

43

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands, except per share amounts)

 

2009

 

2008

 

Interest Income

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

86,592

 

$

104,413

 

Income on Investment Securities

 

 

 

 

 

Trading

 

594

 

1,160

 

Available-for-Sale

 

32,301

 

34,251

 

Held-to-Maturity

 

2,567

 

3,239

 

Deposits

 

10

 

195

 

Funds Sold

 

577

 

992

 

Other

 

276

 

426

 

Total Interest Income

 

122,917

 

144,676

 

Interest Expense

 

 

 

 

 

Deposits

 

17,025

 

27,465

 

Securities Sold Under Agreements to Repurchase

 

6,652

 

10,617

 

Funds Purchased

 

5

 

633

 

Short-Term Borrowings

 

 

34

 

Long-Term Debt

 

2,173

 

3,747

 

Total Interest Expense

 

25,855

 

42,496

 

Net Interest Income

 

97,062

 

102,180

 

Provision for Credit Losses

 

24,887

 

14,427

 

Net Interest Income After Provision for Credit Losses

 

72,175

 

87,753

 

Noninterest Income

 

 

 

 

 

Trust and Asset Management

 

11,632

 

15,086

 

Mortgage Banking

 

8,678

 

4,297

 

Service Charges on Deposit Accounts

 

13,386

 

12,083

 

Fees, Exchange, and Other Service Charges

 

14,976

 

15,391

 

Investment Securities Gains, Net

 

56

 

130

 

Insurance

 

5,641

 

7,130

 

Other

 

15,996

 

32,008

 

Total Noninterest Income

 

70,365

 

86,125

 

Noninterest Expense

 

 

 

 

 

Salaries and Benefits

 

47,028

 

55,473

 

Net Occupancy

 

10,328

 

10,443

 

Net Equipment

 

4,316

 

4,321

 

Professional Fees

 

2,549

 

2,613

 

Other

 

23,712

 

20,582

 

Total Noninterest Expense

 

87,933

 

93,432

 

Income Before Provision for Income Taxes

 

54,607

 

80,446

 

Provision for Income Taxes

 

18,567

 

23,231

 

Net Income

 

$

36,040

 

$

57,215

 

Basic Earnings Per Share

 

$

0.76

 

$

1.19

 

Diluted Earnings Per Share

 

$

0.75

 

$

1.18

 

Dividends Declared Per Share

 

$

0.45

 

$

0.44

 

Basic Weighted Average Shares

 

47,566,005

 

47,965,722

 

Diluted Weighted Average Shares

 

47,802,249

 

48,628,427

 

 

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)

 

 

March 31,

 

December 31,

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

5,031

 

$

5,094

 

$

55,916

 

Funds Sold

 

895,595

 

405,789

 

240,000

 

Investment Securities

 

 

 

 

 

 

 

Trading

 

 

91,500

 

99,966

 

Available-for-Sale

 

3,106,608

 

2,519,239

 

2,672,286

 

Held-to-Maturity (Fair Value of $233,633; $242,175; and $277,536)

 

228,177

 

239,635

 

277,256

 

Loans Held for Sale

 

24,121

 

21,540

 

13,096

 

Loans and Leases

 

6,338,726

 

6,530,233

 

6,579,337

 

Allowance for Loan and Lease Losses

 

(134,416

)

(123,498

)

(99,998

)

Net Loans and Leases

 

6,204,310

 

6,406,735

 

6,479,339

 

Total Earning Assets

 

10,463,842

 

9,689,532

 

9,837,859

 

Cash and Noninterest-Bearing Deposits

 

299,393

 

385,599

 

314,863

 

Premises and Equipment

 

114,536

 

116,120

 

116,683

 

Customers’ Acceptances

 

822

 

1,308

 

992

 

Accrued Interest Receivable

 

36,928

 

39,905

 

46,316

 

Foreclosed Real Estate

 

346

 

428

 

294

 

Mortgage Servicing Rights

 

23,528

 

21,057

 

27,149

 

Goodwill

 

34,959

 

34,959

 

34,959

 

Other Assets

 

473,774

 

474,567

 

443,686

 

Total Assets

 

$

11,448,128

 

$

10,763,475

 

$

10,822,801

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

1,970,041

 

$

1,754,724

 

$

2,000,226

 

Interest-Bearing Demand

 

1,926,576

 

1,854,611

 

1,579,943

 

Savings

 

3,905,709

 

3,104,863

 

2,798,635

 

Time

 

1,410,465

 

1,577,900

 

1,724,051

 

Total Deposits

 

9,212,791

 

8,292,098

 

8,102,855

 

Funds Purchased

 

9,665

 

15,734

 

23,800

 

Short-Term Borrowings

 

10,000

 

4,900

 

9,726

 

Securities Sold Under Agreements to Repurchase

 

844,283

 

1,028,835

 

1,231,962

 

Long-Term Debt (includes $119,275 and $128,932 carried at fair value
as of December 31, 2008 and March 31, 2008, respectively)

 

59,003

 

203,285

 

239,389

 

Banker’s Acceptances

 

822

 

1,308

 

992

 

Retirement Benefits Payable

 

54,450

 

54,776

 

29,755

 

Accrued Interest Payable

 

10,010

 

13,837

 

18,322

 

Taxes Payable and Deferred Taxes

 

258,505

 

229,699

 

300,188

 

Other Liabilities

 

154,664

 

128,299

 

99,065

 

Total Liabilities

 

10,614,193

 

9,972,771

 

10,056,054

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding:
March 31, 2009 - 57,019,595 / 47,803,544; December 31, 2008 - 57,019,887 / 47,753,371;
and March 31, 2008 - 56,995,352 / 47,990,432)

 

569

 

568

 

568

 

Capital Surplus

 

491,352

 

492,515

 

487,139

 

Accumulated Other Comprehensive Income (Loss)

 

(1,319

)

(28,888

)

5,553

 

Retained Earnings

 

802,195

 

787,924

 

720,540

 

Treasury Stock, at Cost (Shares: March 31, 2009 - 9,216,051;
December 31, 2008 - 9,266,516; and March 31, 2008 - 9,004,920)

 

(458,862

)

(461,415

)

(447,053

)

Total Shareholders’ Equity

 

833,935

 

790,704

 

766,747

 

Total Liabilities and Shareholders’ Equity

 

$

11,448,128

 

$

10,763,475

 

$

10,822,801

 

 

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-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hensive

 

 

 

 

 

Compre-

 

 

 

 

 

Common

 

Capital

 

Income

 

Retained

 

Treasury

 

hensive

 

(dollars in thousands)

 

Total

 

Stock

 

Surplus

 

(Loss)

 

Earnings

 

Stock

 

Income

 

Balance as of December 31, 2008

 

$

790,704

 

$

568

 

$

492,515

 

$

(28,888

)

$

787,924

 

$

(461,415

)

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

36,040

 

 

 

 

36,040

 

 

$

36,040

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

27,243

 

 

 

27,243

 

 

 

27,243

 

Amortization of Net Loss Related to Pension and
Postretirement Benefit Plans

 

326

 

 

 

326

 

 

 

326

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

63,609

 

Share-Based Compensation

 

235

 

 

235

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

(442

)

 

(442

)

 

 

 

 

 

Common Stock Issued under Purchase and Equity
Compensation Plans (71,244 shares)

 

2,069

 

1

 

(956

)

 

(258

)

3,282

 

 

 

Common Stock Repurchased (21,071 shares)

 

(729

)

 

 

 

 

(729

)

 

 

Cash Dividends Paid

 

(21,511

)

 

 

 

(21,511

)

 

 

 

Balance as of March 31, 2009

 

$

833,935

 

$

569

 

$

491,352

 

$

(1,319

)

$

802,195

 

$

(458,862

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2007

 

$

750,255

 

$

567

 

$

484,790

 

$

(5,091

)

$

688,638

 

$

(418,649

)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(2,736

)

 

 

 

(2,736

)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

57,215

 

 

 

 

57,215

 

 

$

57,215

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

10,595

 

 

 

10,595

 

 

 

10,595

 

Amortization of Net Loss Related to Pension and
Postretirement Benefit Plans

 

49

 

 

 

49

 

 

 

49

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

67,859

 

Share-Based Compensation

 

1,751

 

 

1,751

 

 

 

 

 

 

Net Tax Benefits related to Share-Based Compensation

 

583

 

 

583

 

 

 

 

 

 

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

 

3,182

 

1

 

15

 

 

(1,378

)

4,544

 

 

 

Common Stock Repurchased (686,313 shares)

 

(32,948

)

 

 

 

 

(32,948

)

 

 

Cash Dividends Paid

 

(21,199

)

 

 

 

(21,199

)

 

 

 

Balance as of March 31, 2008

 

$

766,747

 

$

568

 

$

487,139

 

$

5,553

 

$

720,540

 

$

(447,053

)

 

 

 

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)

 

 

Three Months Ended

 

 

 

March 31,

 

(dollars in thousands)

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net Income

 

$

36,040

 

$

57,215

 

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

 

 

 

 

 

Provision for Credit Losses

 

24,887

 

14,427

 

Depreciation and Amortization

 

3,399

 

3,504

 

Amortization of Deferred Loan and Lease Fees

 

(625

)

(448

)

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

 

1,211

 

578

 

Share-Based Compensation

 

235

 

1,751

 

Benefit Plan Contributions

 

(421

)

(515

)

Deferred Income Taxes

 

(3,811

)

(17,379

)

Net Gains on Investment Securities

 

(56

)

(130

)

Net Change in Trading Securities

 

91,500

 

(32,680

)

Proceeds from Sales of Loans Held for Sale

 

392,876

 

144,837

 

Originations of Loans Held for Sale

 

(395,457

)

(145,592

)

Tax Benefits from Share-Based Compensation

 

(17

)

(669

)

Net Change in Other Assets and Other Liabilities

 

41,129

 

21,073

 

Net Cash Provided by Operating Activities

 

190,890

 

45,972

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

243,329

 

252,970

 

Proceeds from Sales

 

21,791

 

125,000

 

Purchases

 

(810,966

)

(470,716

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

11,347

 

15,207

 

Net Change in Loans and Leases

 

177,913

 

(3,456

)

Premises and Equipment, Net

 

(1,814

)

(3,010

)

Net Cash Used in Investing Activities

 

(358,400

)

(84,005

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

920,693

 

160,483

 

Net Change in Short-Term Borrowings

 

(185,521

)

150,321

 

Repayments of Long-Term Debt

 

(143,971

)

 

Tax Benefits from Share-Based Compensation

 

17

 

669

 

Proceeds from Issuance of Common Stock

 

2,069

 

3,214

 

Repurchase of Common Stock

 

(729

)

(32,948

)

Cash Dividends Paid

 

(21,511

)

(21,199

)

Net Cash Provided by Financing Activities

 

571,047

 

260,540

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

403,537

 

222,507

 

Cash and Cash Equivalents at Beginning of Period

 

796,482

 

388,272

 

Cash and Cash Equivalents at End of Period

 

$

1,200,019

 

$

610,779

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

Cash Paid for:

 

 

 

 

 

Interest

 

$

29,682

 

$

44,650

 

Income Taxes

 

1,390

 

2,289

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

Transfers from Loans to Foreclosed Real Estate

 

 

110

 

 

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 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 information has been reclassified to conform to the current period presentation.

 

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, 2008.  Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 

Non-Marketable Equity Securities

 

The Company is required to hold non-marketable equity securities, comprised of Federal Home Loan Bank of Seattle (“FHLB”) and Federal Reserve Bank stock, as a condition of membership.  These securities are accounted for at cost which equals par or redemption value.  Ownership is restricted and there is no market for these securities.  These securities are redeemable at par by the issuing government supported institutions.  These securities, recorded as a component of other assets, are periodically evaluated for impairment, considering the ultimate recoverability of the par value.  The primary factor supporting the carrying value is the ability of the issuer to redeem the securities at par.

 

Fair Value Measurements

 

On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for the Company’s financial assets and financial liabilities.  In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” the Company deferred the effective date of SFAS No. 157 for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009.  The adoption of the fair value measurement provisions of SFAS No. 157 for the Company’s nonfinancial assets and nonfinancial liabilities had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.

 

6



Table of Contents

 

Derivative Financial Instruments

 

On January 1, 2009, the Company adopted the provisions of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.”  SFAS No. 161 amended the disclosure requirements for derivative financial instruments and hedging activities.  Expanded qualitative disclosures required under SFAS No. 161 include: (1) how and why an entity uses derivative financial instruments; (2) how derivative financial 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 financial 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.  As SFAS No. 161 amended only the disclosure requirements for derivative financial instruments and hedged items, the adoption had no impact on the Company’s statements of income and condition.  See Note 5 for the disclosures required under the provisions of SFAS No. 161.

 

Future Application of Accounting Pronouncements

 

In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

 

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly.  FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly.  The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009.  Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s statements of income and condition.

 

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements.  The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009.  As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s statements of income and condition.

 

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009.  Management is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Company’s statements of income and condition.

 

Note 2.  Lease Transactions

 

In March 2009, the Company sold its equity interest in two watercraft leveraged leases resulting in a $10.0 million pre-tax gain for the Company.  This pre-tax gain was recorded as a component of other noninterest income in the statement of income.  After-tax gains from these transactions were $6.2 million.

 

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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, 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.

 

Selected financial information for each business segment is presented below as of and for the three months ended March 31, 2009 and 2008.

 

Business Segments Selected Financial Information (Unaudited)

 

 

Retail

 

Commercial

 

Investment

 

Treasury

 

Consolidated

 

(dollars in thousands)

 

Banking

 

Banking

 

Services

 

and Other

 

Total

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

54,081

 

$

40,906

 

$

3,992

 

$

(1,917

)

$

97,062

 

Provision for Credit Losses

 

14,516

 

9,809

 

804

 

(242

)

24,887

 

Net Interest Income (Loss) After
Provision for Credit Losses

 

39,565

 

31,097

 

3,188

 

(1,675

)

72,175

 

Noninterest Income

 

31,982

 

20,414

 

14,443

 

3,526

 

70,365

 

Noninterest Expense

 

(45,297

)

(24,549

)

(16,559

)

(1,528

)

(87,933

)

Income Before Provision for Income Taxes

 

26,250

 

26,962

 

1,072

 

323

 

54,607

 

Provision for Income Taxes

 

(9,727

)

(9,935

)

(396

)

1,491

 

(18,567

)

Net Income

 

$

16,523

 

$

17,027

 

$

676

 

$

1,814

 

$

36,040

 

Total Assets as of March 31, 2009

 

$

3,582,200

 

$

2,887,927

 

$

256,962

 

$

4,721,039

 

$

11,448,128

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (Loss)

 

$

58,426

 

$

42,835

 

$

3,870

 

$

(2,951

)

$

102,180

 

Provision for Credit Losses

 

7,952

 

7,226

 

 

(751

)

14,427

 

Net Interest Income (Loss) After
Provision for Credit Losses

 

50,474

 

35,609

 

3,870

 

(2,200

)

87,753

 

Noninterest Income

 

28,547

 

22,249

 

18,261

 

17,068

 

86,125

 

Noninterest Expense

 

(43,769

)

(24,721

)

(16,863

)

(8,079

)

(93,432

)

Income Before Provision for Income Taxes

 

35,252

 

33,137

 

5,268

 

6,789

 

80,446

 

Provision for Income Taxes

 

(13,043

)

(12,301

)

(1,949

)

4,062

 

(23,231

)

Net Income

 

$

22,209

 

$

20,836

 

$

3,319

 

$

10,851

 

$

57,215

 

Total Assets as of March 31, 2008

 

$

3,681,581

 

$

3,066,272

 

$

232,882

 

$

3,842,066

 

$

10,822,801

 

 

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Note 4.  Pension Plans and Postretirement Benefit Plan

 

The components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan for the three months ended March 31, 2009 and 2008 are presented in the following table:

 

Pension Plans and Postretirement Benefit Plan (Unaudited)

 

 

Pension Benefits

 

Postretirement Benefits

 

 

 

Three Months Ended March 31,

 

(dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Service Cost

 

$

 

$

 

$

109

 

$

89

 

Interest Cost

 

1,285

 

1,298

 

419

 

420

 

Expected Return on Plan Assets

 

(1,332

)

(1,522

)

 

 

Amortization of Prior Service Credit

 

 

 

(53

)

(53

)

Recognized Net Actuarial Losses (Gains)

 

732

 

270

 

(119

)

(140

)

Net Periodic Benefit Cost

 

$

685

 

$

46

 

$

356

 

$

316

 

 

The net periodic benefit cost for the Company’s pension plans and the 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 $10.2 million that the Company expects to contribute to the pension plans and the $1.2 million that it expects to contribute to the postretirement benefit plan for the year ending December 31, 2009.  For the three months ended March 31, 2009, the Company contributed $0.1 million to its pension plans and $0.3 million to its postretirement benefit plan.

 

Note 5.  Derivative Financial Instruments

 

The following table presents the Company’s derivative financial instruments, their estimated fair values, and balance sheet location as of March 31, 2009:

 

Fair Values of Derivative Financial Instruments (Unaudited)

 

As of March 31, 2009

 

(dollars in thousands)

 

Asset Derivatives

 

Liability Derivatives

 

Derivative Financial Instruments Not Designated as

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

Hedging Instruments under SFAS No. 133

 

Location

 

Fair Value

 

Location

 

Fair Value

 

Forward Commitments

 

Other Assets

 

$

96

 

Other Liabilities

 

$

770

 

Interest Rate Lock Commitments

 

Other Assets

 

2,978

 

Other Liabilities

 

13

 

Interest Rate Swap Agreements

 

Other Assets

 

31,152

 

Other Liabilities

 

31,372

 

Foreign Exchange Contracts

 

Other Assets

 

339

 

Other Liabilities

 

1,468

 

Total Derivative Financial Instruments Not Designated as Hedging Instruments under SFAS No. 133

 

 

 

$

34,565

 

 

 

$

33,623

 

 

The following table presents the Company’s derivative financial instruments and the amount and location of the net gain recognized in the statement of income for the three months ended March 31, 2009:

 

The Effect of Derivative Financial Instruments on the Statement of Income (Unaudited)

 

 

 

Three Months Ended March 31, 2009

 

(dollars in thousands)

 

Location of Net Gain

 

Amount of Net Gain

 

Derivative Financial Instruments Not Designated as

 

Recognized in the

 

Recognized in the

 

Hedging Instruments under SFAS No. 133

 

Statement of Income

 

Statement of Income

 

Forward Commitments

 

Mortgage Banking

 

$

587

 

Interest Rate Lock Commitments

 

Mortgage Banking

 

6,925

 

Interest Rate Swap Agreements

 

Other Noninterest Income

 

142

 

Foreign Exchange Contracts

 

Other Noninterest Income

 

598

 

Total Derivative Financial Instruments Not Designated as
Hedging Instruments under SFAS No. 133

 

 

 

$

8,252

 

 

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Management has received authorization from the Parent’s Board of Directors to use derivative financial instruments as an end-user in connection with its risk management activities and to accommodate the needs of its customers.  The Company has elected not to qualify for hedge accounting methods addressed under current provisions of GAAP.  All risk management derivative instruments are stated at fair value in the Consolidated Statements of Condition with changes in fair value reported in current period earnings.

 

The Company is a party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest and foreign exchange rates.  Where derivative financial instruments have been entered into to facilitate the risk management activities of our customers, the Company generally enters into transactions with dealers to offset its risk exposure.  These financial instruments have been limited to forward commitments, interest rate lock commitments, interest rate swap agreements, and foreign exchange contracts.

 

The Company enters into forward commitments for the future delivery of residential mortgage loans to reduce interest rate risk associated with loans held for sale and interest rate lock commitments to fund loans at a specified interest rate.  Changes in the estimated fair value of forward commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.  At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments.

 

The Company’s interest rate swap agreements are to facilitate the risk management strategies of a small number of commercial banking customers.  The Company mitigates this risk by entering into equal and offsetting interest rate swap agreements.

 

The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers.  Changes in the estimated fair value of the Company’s foreign exchange contracts are included in other noninterest income in the Company’s Consolidated Statements of Income.

 

As with any financial instrument, derivative financial instruments have inherent risks.  Adverse changes in interest rates, foreign exchange rates, and equity prices affect the Company’s market risks.  The market risks are balanced with the expected returns to enhance earnings performance and shareholder value, while limiting the volatility of each.  The Company uses various processes to monitor its overall market risk exposure, including sensitivity analysis, value-at-risk calculations, and other methodologies.

 

The Company’s exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract.  Credit risk associated with derivative financial instruments is similar to those relating to traditional on-balance sheet financial instruments.  The Company manages derivative credit risk with the same standards and procedures applied to its commercial lending activities.

 

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Note 6.  Fair Value of Financial Assets and Liabilities

 

Fair Value Hierarchy

 

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or 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.

 

A financial asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  Management reviews and updates the fair value hierarchy classifications of the Company’s financial assets and liabilities on a quarterly basis.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2009, December 31, 2008, and March 31, 2008:

 

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

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

Identical Assets

 

Significant Other

 

Significant

 

 

 

 

 

or Liabilities

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

March 31, 2009

 

 

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

$

425,037

 

$

2,681,571

 

$

 

$

3,106,608

 

Mortgage Servicing Rights

 

 

 

17,904

 

17,904

 

Other Assets

 

6,343

 

 

 

6,343

 

Net Derivative Assets and Liabilities

 

 

(1,803

)

2,745

 

942

 

Total Assets Measured at Fair Value on a Recurring Basis as of March 31, 2009

 

$

431,380

 

$

2,679,768

 

$

20,649

 

$

3,131,797

 

 

The Company sold its investment securities trading portfolio during the three months ended March 31, 2009.  The change in fair value of the trading portfolio had been expected by the Company to offset changes in valuation assumptions related to the Company’s mortgage servicing rights accounted for under the fair value measurement method. 

 

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

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

Identical Assets

 

Significant Other

 

Significant

 

 

 

 

 

or Liabilities

 

Observable Inputs

 

Unobservable Inputs

 

 

 

(dollars in thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Investment Securities Trading

 

$

 

$

91,500

 

$

 

$

91,500

 

Investment Securities Available-for-Sale

 

577

 

2,462,947

 

55,715

 

2,519,239

 

Mortgage Servicing Rights

 

 

 

19,553

 

19,553

 

Other Assets

 

6,674

 

 

 

6,674

 

Net Derivative Assets and Liabilities

 

 

(951

)

3,051

 

2,100

 

Total Assets Measured at Fair Value on a Recurring Basis as of December 31, 2008

 

$

7,251

 

$

2,553,496

 

$

78,319

 

$

2,639,066

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

 

$

 

$

119,275

 

$

119,275

 

Total Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008

 

$

 

$

 

$

119,275

 

$

119,275

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

 

 

 

 

 

 

 

 

 

Investment Securities Trading

 

$

 

$

99,966

 

$

 

$

99,966

 

Investment Securities Available-for-Sale

 

1,998

 

2,575,069

 

95,219

 

2,672,286

 

Mortgage Servicing Rights

 

 

 

27,149

 

27,149

 

Other Assets

 

5,971

 

 

 

5,971

 

Net Derivative Assets and Liabilities

 

(202

)

1,596

 

810

 

2,204

 

Total Assets Measured at Fair Value on a Recurring Basis
as of March 31, 2008

 

$

7,767

 

$

2,676,631

 

$

123,178

 

$

2,807,576

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

 

$

 

$

128,932

 

$

128,932

 

Total Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2008

 

$

 

$

 

$

128,932

 

$

128,932

 

 

For the three months ended March 31, 2009 and March 31, 2008, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

 

 

Investment

 

 

 

 

 

 

 

 

 

Securities

 

Mortgage

 

Net Derivative

 

 

 

 

 

Available-

 

Servicing

 

Assets and

 

 

 

Assets (Unaudited)   (dollars in thousands)

 

-for-Sale 1

 

Rights 2

 

Liabilities 3

 

Total

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2009

 

$

55,715

 

$

19,553

 

$

3,051

 

$

78,319

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(1,649

)

7,067

 

5,418

 

Purchases, Sales, Issuances, and Settlements, Net

 

 

 

(7,373

)

(7,373

)

Transfers out of Level 3

 

(55,715

)

 

 

(55,715

)

Balance as of March 31, 2009

 

$

 

$

17,904

 

$

2,745

 

$

20,649

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of March 31, 2009

 

$

 

$

(92

)

$

2,745

 

$

2,653

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term

 

 

 

 

 

 

 

Liabilities (Unaudited)   (dollars in thousands)

 

Debt 4

 

Total

 

 

 

 

 

Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2009

 

$

119,275

 

$

119,275

 

 

 

 

 

Realized Gains Included in Net Income

 

(304

)

(304

)

 

 

 

 

Purchases, Sales, Issuances, and Settlements, Net

 

(118,971

)

(118,971

)

 

 

 

 

Balance as of March 31, 2009

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Unrealized Net Gains Included in Net Income Related to Liabilities Still Held as of March 31, 2009

 

$

 

$

 

 

 

 

 

 

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Investment