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Bank of Hawaii 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. 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 September 30, 2010

 

 

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 x  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

 

As of October 19, 2010, there were 48,217,442 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 nine months ended September 30, 2010 and 2009

2

 

 

 

 

Consolidated Statements of Condition –
September 30, 2010, December 31, 2009, and September 30, 2009

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2010 and 2009

4

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended September 30, 2010 and 2009

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

47

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

 

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(dollars in thousands, except per share amounts)

2010

2009

 

2010

2009

Interest Income

 

 

 

 

 

   Interest and Fees on Loans and Leases

$            70,198

$            79,530

 

$          219,466

$          249,464

   Income on Investment Securities

 

 

 

 

 

      Trading

-

-

 

-

594

      Available-for-Sale

40,775

46,419

 

129,605

116,875

      Held-to-Maturity

1,553

2,179

 

5,116

7,115

   Deposits

5

3

 

21

18

   Funds Sold

211

320

 

916

1,423

   Other

278

277

 

832

829

Total Interest Income

113,020

128,728

 

355,956

376,318

Interest Expense

 

 

 

 

 

   Deposits

7,041

12,235

 

23,278

43,741

   Securities Sold Under Agreements to Repurchase

6,670

6,394

 

19,571

19,523

   Funds Purchased

10

5

 

23

15

   Long-Term Debt

673

1,207

 

2,877

4,239

Total Interest Expense

14,394

19,841

 

45,749

67,518

Net Interest Income

98,626

108,887

 

310,207

308,800

Provision for Credit Losses

13,359

27,500

 

50,009

81,077

Net Interest Income After Provision for Credit Losses

85,267

81,387

 

260,198

227,723

Noninterest Income

 

 

 

 

 

   Trust and Asset Management

10,534

10,915

 

33,699

34,428

   Mortgage Banking

6,811

4,656

 

14,027

18,777

   Service Charges on Deposit Accounts

12,737

14,014

 

41,407

40,310

   Fees, Exchange, and Other Service Charges

15,500

14,801

 

45,810

45,187

   Investment Securities Gains (Losses), Net

7,877

(5)

 

42,849

63

   Insurance

2,646

7,304

 

7,652

17,689

   Other

7,020

5,115

 

18,337

30,543

Total Noninterest Income

63,125

56,800

 

203,781

186,997

Noninterest Expense

 

 

 

 

 

   Salaries and Benefits

46,840

46,387

 

138,904

137,595

   Net Occupancy

10,186

10,350

 

30,484

30,686

   Net Equipment

4,545

4,502

 

13,469

13,320

   Professional Fees

905

2,642

 

4,988

9,196

   FDIC Insurance

3,159

3,290

 

9,366

14,091

   Other

24,255

16,816

 

60,303

56,616

Total Noninterest Expense

89,890

83,987

 

257,514

261,504

Income Before Provision for Income Taxes

58,502

54,200

 

206,465

153,216

Provision for Income Taxes

14,438

17,729

 

63,101

49,699

Net Income

$            44,064

$            36,471

 

$          143,364

$          103,517

Basic Earnings Per Share

$                0.91

$                0.76

 

$                2.98

$                2.17

Diluted Earnings Per Share

$                0.91

$                0.76

 

$                2.96

$                2.16

Dividends Declared Per Share

$                0.45

$                0.45

 

$                1.35

$                1.35

Basic Weighted Average Shares

48,189,358

47,745,375

 

48,062,385

47,665,146

Diluted Weighted Average Shares

48,462,154

48,045,873

 

48,386,647

47,930,271

 

 

 

 

 

 

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)

 

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

2010

 

2009

 

2009

 

Assets

 

 

 

 

 

 

Interest-Bearing Deposits

$                    2,641

 

$                    8,755

 

$                    5,863

 

Funds Sold

174,288

 

291,546

 

401,200

 

Investment Securities

 

 

 

 

 

 

   Available-for-Sale

6,213,949

 

5,330,834

 

4,827,588

 

   Held-to-Maturity (Fair Value of $148,631; $186,668; and $201,118)

141,192

 

181,018

 

194,444

 

Loans Held for Sale

18,765

 

16,544

 

19,346

 

Loans and Leases

5,312,054

 

5,759,785

 

5,931,358

 

   Allowance for Loan and Lease Losses

(147,358)

)

(143,658)

)

(142,658

)

     Net Loans and Leases

5,164,696

 

5,616,127

 

5,788,700

 

Total Earning Assets

11,715,531

 

11,444,824

 

11,237,141

 

Cash and Noninterest-Bearing Deposits

267,597

 

254,766

 

291,480

 

Premises and Equipment

108,855

 

110,976

 

110,173

 

Customers' Acceptances

1,087

 

1,386

 

950

 

Accrued Interest Receivable

40,606

 

45,334

 

43,047

 

Foreclosed Real Estate

5,910

 

3,132

 

201

 

Mortgage Servicing Rights

24,316

 

25,970

 

25,437

 

Goodwill

31,517

 

31,517

 

34,959

 

Other Assets

521,184

 

496,922

 

464,637

 

Total Assets

$           12,716,603

 

$           12,414,827

 

$           12,208,025

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

   Noninterest-Bearing Demand

$             2,290,033

 

$             2,252,083

 

$             2,055,872

 

   Interest-Bearing Demand

1,814,934

 

1,609,413

 

1,588,705

 

   Savings

4,423,095

 

4,405,969

 

4,365,257

 

   Time

1,074,400

 

1,142,211

 

1,240,266

 

Total Deposits

9,602,462

 

9,409,676

 

9,250,100

 

Funds Purchased

9,832

 

8,888

 

8,670

 

Short-Term Borrowings

7,100

 

6,900

 

7,200

 

Securities Sold Under Agreements to Repurchase

1,616,243

 

1,618,717

 

1,524,755

 

Long-Term Debt

40,292

 

90,317

 

91,424

 

Banker's Acceptances

1,087

 

1,386

 

950

 

Retirement Benefits Payable

35,461

 

37,435

 

43,918

 

Accrued Interest Payable

6,492

 

7,026

 

9,740

 

Taxes Payable and Deferred Taxes

219,525

 

229,140

 

254,375

 

Other Liabilities

138,548

 

109,369

 

114,094

 

Total Liabilities

11,677,042

 

11,518,854

 

11,305,226

 

Shareholders' Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

   issued / outstanding: September 30, 2010 - 57,115,287 / 48,265,014;

 

 

 

 

 

 

   December 31, 2009 - 57,028,239 / 48,018,943;

 

 

 

 

 

 

   and September 30, 2009 - 57,028,554 / 47,937,543)

570

 

569

 

569

 

Capital Surplus

499,437

 

494,318

 

492,346

 

Accumulated Other Comprehensive Income

66,953

 

6,925

 

37,307

 

Retained Earnings

914,901

 

843,521

 

825,709

 

Treasury Stock, at Cost (Shares: September 30, 2010 - 8,850,273;

 

 

 

 

 

 

   December 31, 2009 - 9,009,296; and September 30, 2009 - 9,091,011)

(442,300)

)

(449,360)

)

(453,132

)

Total Shareholders' Equity

1,039,561

 

895,973

 

902,799

 

Total Liabilities and Shareholders' Equity

$           12,716,603

 

$           12,414,827

 

$           12,208,025

 

 

 

 

 

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, 2009

$   895,973

$        569

$   494,318

$      6,925

$   843,521

$ (449,360)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

143,364

-

-

-

143,364

-

$  143,364

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Change in Unrealized Gains and Losses

 

 

 

 

 

 

 

           on Investment Securities Available-for-Sale

58,886

-

-

58,886

-

-

58,886

        Amortization of Net Losses Related to Defined Benefit Plans

1,142

-

-

1,142

-

-

1,142

     Total Comprehensive Income

 

 

 

 

 

 

$  203,392

Share-Based Compensation

2,703

-

2,703

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

      Compensation Plans and Related Tax Benefits (522,542 shares)

15,716

1

2,416

-

(6,850)

20,149

 

Common Stock Repurchased (276,471 shares)

(13,089)

-

-

-

-

(13,089)

 

Cash Dividends Paid

(65,134)

-

-

-

(65,134)

-

 

Balance as of September 30, 2010

$ 1,039,561

$        570

$   499,437

$   66,953

$   914,901

$ (442,300)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

$   790,704

$        568

$   492,515

$  (28,888)

$   787,924

$ (461,415)

 

Comprehensive Income:

 

 

 

 

 

 

 

     Net Income

103,517

-

-

-

103,517

-

$  103,517

     Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

        Change in Unrealized Gains and Losses

 

 

 

 

 

 

 

           on Investment Securities Available-for-Sale

65,121

-

-

65,121

-

-

65,121

        Amortization of Net Losses Related to Defined Benefit Plans

1,074

-

-

1,074

-

-

1,074

     Total Comprehensive Income

 

 

 

 

 

 

$  169,712

Share-Based Compensation

1,700

-

1,700

-

-

-

 

Common Stock Issued under Purchase and Equity

 

 

 

 

 

 

 

      Compensation Plans and Related Tax Benefits (209,847 shares)

6,202

1

(1,869)

-

(1,101)

9,171

 

Common Stock Repurchased (25,675 shares)

(888)

-

-

-

-

(888)

 

Cash Dividends Paid

(64,631)

-

-

-

(64,631)

-

 

Balance as of September 30, 2009

$   902,799

$        569

$   492,346

$   37,307

$   825,709

$ (453,132)

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

Nine Months Ended

 

 

September 30,

 

(dollars in thousands)

2010

2009

Operating Activities

 

 

   Net Income

$          143,364

$          103,517

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

 

 

     Provision for Credit Losses

50,009

81,077

     Depreciation and Amortization

10,008

10,130

     Amortization of Deferred Loan and Lease Fees

(2,019)

(1,754)

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

31,474

4,920

     Share-Based Compensation

2,703

1,700

     Benefit Plan Contributions

(2,559)

(12,302)

     Deferred Income Taxes

(15,193)

(21,235)

     Net Gain on Sale of Proprietary Mutual Funds

(2,852)

-

     Gains on Sale of Insurance Business

(904)

(742)

     Net Gains on Sales of Leases

(292)

(13,332)

     Net Gains on Investment Securities

(42,849)

(63)

     Net Change in Trading Securities

-

91,500

     Proceeds from Sales of Loans Held for Sale

418,650

902,169

     Originations of Loans Held for Sale

(412,158)

(863,849)

     Tax Benefits from Share-Based Compensation

(2,725)

(122)

     Net Change in Other Assets and Other Liabilities

(24,215)

(5,589)

   Net Cash Provided by Operating Activities

150,442

276,025

 

 

 

Investing Activities

 

 

   Investment Securities Available-for-Sale:

 

 

      Proceeds from Prepayments and Maturities

1,047,571

1,341,645

      Proceeds from Sales

1,289,679

169,952

      Purchases

(3,109,587)

(3,722,753)

   Investment Securities Held-to-Maturity:

 

 

      Proceeds from Prepayments and Maturities

39,685

44,892

   Proceeds from Sale of Proprietary Mutual Funds

4,424

-

   Proceeds from Sale of Insurance Business

904

1,769

   Net Change in Loans and Leases

395,020

548,355

   Premises and Equipment, Net

(7,887)

(4,183)

   Net Cash Used in Investing Activities

(340,191)

(1,620,323)

 

 

 

Financing Activities

 

 

   Net Change in Deposits

192,786

958,002

   Net Change in Short-Term Borrowings

(1,330)

491,156

   Repayments of Long-Term Debt

(50,000)

(143,971)

   Tax Benefits from Share-Based Compensation

2,725

122

   Proceeds from Issuance of Common Stock

13,250

6,569

   Repurchase of Common Stock

(13,089)

(888)

   Cash Dividends Paid

(65,134)

(64,631)

   Net Cash Provided by Financing Activities

79,208

1,246,359

 

 

 

Net Change in Cash and Cash Equivalents

(110,541)

(97,939)

Cash and Cash Equivalents at Beginning of Period

555,067

796,482

Cash and Cash Equivalents at End of Period

$          444,526

$          698,543

Supplemental Information

 

 

   Cash Paid for Interest

$            46,284

$            71,615

   Cash Paid for Income Taxes

115,374

56,347

   Non-Cash Investing Activities:

 

 

     Transfer from Loans to Foreclosed Real Estate

3,478

92

     Transfers from Loans to Loans Held for Sale

8,713

36,126

     Replacement of a Leveraged Lease with a Direct Financing Lease

-

32,437

 

 

 

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, Guam, and other Pacific Islands.  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.

 

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, 2009.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

 

Use of Estimates in the Preparation of Financial Statements

 

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.

 

Fair Value Measurements and Disclosures

 

In January 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions of this ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  The adoption of these provisions, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.  See Note 11 to the Consolidated Financial Statements for the disclosures required by this ASU.

 

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis, rather than as a net number as currently permitted.  This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011.  As this provision amends only the disclosure requirements for Level 3 fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.

 

Future Application of Accounting Pronouncements

 

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).  This ASU will also require the Company to disclose additional information related to credit quality indicators, nonaccrual and past due information, and information related to impaired loans and loans modified in a troubled debt restructuring.  The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010.  As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption will have no impact on the Company’s statements of income and condition.

 

6



Table of Contents

 

Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2010, December 31, 2009, and September 30, 2009 were as follows:

 

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

September 30, 2010

 

 

 

 

Available-for-Sale:

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

$                 536,690

$                   26,903

$                       (11)

$                 563,582

Debt Securities Issued by States and Political Subdivisions

54,563

2,911

(10)

57,464

Debt Securities Issued by U.S. Government-Sponsored Enterprises

750

14

-

764

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

5,346,832

106,984

(2,265)

5,451,551

    U.S. Government-Sponsored Enterprises

134,774

5,814

-

140,588

Total Mortgage-Backed Securities

5,481,606

112,798

(2,265)

5,592,139

Total

$              6,073,609

$                 142,626

$                  (2,286)

$              6,213,949

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   50,480

$                     3,329

$                           -

$                   53,809

    U.S. Government-Sponsored Enterprises

90,712

4,110

-

94,822

Total

$                 141,192

$                     7,439

$                           -

$                 148,631

 

 

 

 

 

December 31, 2009

 

 

 

 

Available-for-Sale:

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

$                 711,223

$                   11,248

$                  (1,679)

$                 720,792

Debt Securities Issued by States and Political Subdivisions

52,742

1,391

(17)

54,116

Debt Securities Issued by U.S. Government-Sponsored Enterprises

751

41

-

792

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

4,015,816

26,900

(20,029)

4,022,687

    U.S. Government-Sponsored Enterprises

509,225

23,276

(54)

532,447

Total Mortgage-Backed Securities

4,525,041

50,176

(20,083)

4,555,134

Total

$              5,289,757

$                   62,856

$                (21,779)

$              5,330,834

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   59,542

$                     1,879

$                           -

$                   61,421

    U.S. Government-Sponsored Enterprises

121,476

3,771

-

125,247

Total

$                 181,018

$                     5,650

$                           -

$                 186,668

 

 

 

 

 

September 30, 2009

 

 

 

 

Available-for-Sale:

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

$                 537,636

$                   14,937

$                     (462)

$                 552,111

Debt Securities Issued by States and Political Subdivisions

61,968

2,343

(12)

64,299

Debt Securities Issued by U.S. Government-Sponsored Enterprises

751

51

-

802

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

2,869,636

39,826

(4,331)

2,905,131

    U.S. Government-Sponsored Enterprises

1,145,778

52,845

-

1,198,623

Private-Label Mortgage-Backed Securities

91,668

50

(10,292)

81,426

Total Mortgage-Backed Securities

4,107,082

92,721

(14,623)

4,185,180

Other Debt Securities

25,081

116

(1)

25,196

Total

$              4,732,518

$                 110,168

$                (15,098)

$              4,827,588

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

    Government Agencies

$                   62,502

$                     2,314

$                           -

$                   64,816

    U.S. Government-Sponsored Enterprises

131,942

4,360

-

136,302

Total

$                 194,444

$                     6,674

$                           -

$                 201,118

 

7



Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2010. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

 

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

 

(dollars in thousands)

Cost

Gains

Losses

Fair Value

Available-for-Sale:

 

 

 

 

Due in One Year or Less

$             92,145

$                  429

$                  -

$             92,574

Due After One Year Through Five Years

248,224

4,776

(6)

252,994

Due After Five Years Through Ten Years

107,438

6,818

(15)

114,241

Due After Ten Years

144,196

17,805

-

162,001

 

592,003

29,828

(21)

621,810

Mortgage-Backed Securities issued by

 

 

 

 

  Government Agencies

5,346,832

106,984

(2,265)

5,451,551

  U.S. Government-Sponsored Enterprises

134,774

5,814

-

140,588

Total Mortgage-Backed Securities

5,481,606

112,798

(2,265)

5,592,139

Total

$        6,073,609

$           142,626

$            (2,286)

$        6,213,949

 

 

 

 

 

Held-to-Maturity:

 

 

 

 

Mortgage-Backed Securities issued by

 

 

 

 

  Government Agencies

$             50,480

$               3,329

$                     -

$             53,809

  U.S. Government-Sponsored Enterprises

90,712

4,110

-

94,822

Total

$           141,192

$               7,439

$                     -

$           148,631

 

 

Investment securities with carrying values of $3.0 billion, $2.7 billion, and $2.9 billion as of September 30, 2010, December 31, 2009, and September 30, 2009, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.  As of September 30, 2010, December 31, 2009, and September 30, 2009, the Company did not pledge any investment securities where the secured party had the right to sell or repledge the collateral.

 

Gross gains on the sales of investment securities were $7.9 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively, and were $42.9 million and $0.6 million for the nine months ended September 30, 2010 and 2009, respectively.  Gross losses on the sales of investment securities were not material for the three months and nine months ended September 30, 2010 and were $0.6 million for the three months and nine months ended September 30, 2009.  Realized gains and losses on investment securities were recorded in noninterest income using the specific identification method.

 

8



Table of Contents

 

The Company’s investment securities in an unrealized loss position, segregated by continuous length of impairment, were as follows:

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Gross

 

 

Gross

 

 

Gross

 

 

 

Unrealized

 

 

Unrealized

 

 

Unrealized

(dollars in thousands)

Fair Value

Losses

 

Fair Value

Losses

 

Fair Value

Losses

September 30, 2010

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$                -

$             -

 

$          1,479

$           (11)

 

$       1,479

$          (11)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

4,992

(10)

 

-

-

 

4,992

(10)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

465,433

(2,265)

 

-

-

 

465,433

(2,265)

Total

$     470,425

$    (2,275)

 

$          1,479

$           (11)

 

$   471,904

$     (2,286)

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$     347,324

$    (1,656)

 

$          1,703

$           (23)

 

$   349,027

$     (1,679)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

878

(5)

 

322

(12)

 

1,200

(17)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

2,171,588

(20,029)

 

-

-

 

2,171,588

(20,029)

 

U.S. Government-Sponsored Enterprises

8,982

(54)

 

-

-

 

8,982

(54)

Total Mortgage-Backed Securities

2,180,570

(20,083)

 

-

-

 

2,180,570

(20,083)

Total

$  2,528,772

$  (21,744)

 

$          2,025

$           (35)

 

$ 2,530,797

$   (21,779)

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

$       86,656

$       (427)

 

$          1,831

$           (35)

 

$     88,487

$        (462)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

559

(1)

 

323

(11)

 

882

(12)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

393,823

(4,331)

 

-

-

 

393,823

(4,331)

Private-Label Mortgage-Backed Securities

-

-

 

71,152

(10,292)

 

71,152

(10,292)

Total Mortgage-Backed Securities

393,823

(4,331)

 

71,152

(10,292)

 

464,975

(14,623)

Other Debt Securities

-

-

 

34

(1)

 

34

(1)

Total

$     481,038

$    (4,759)

 

$        73,340

$    (10,339)

 

$   554,378

$   (15,098)

 

 

The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2010, which were comprised of 24 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

 

As of September 30, 2010, the gross unrealized losses reported for mortgage-backed securities related to investment securities issued by the Government National Mortgage Association.

 

9



Table of Contents

 

Note 3.  Mortgage Servicing Rights

 

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.2 billion as of September 30, 2010, $3.1 billion as of December 31, 2009, and $3.0 billion as of September 30, 2009.  The Company’s residential mortgage loans sold to third parties are generally sold on a non-recourse basis.  The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $2.2 million and $2.1 million for the three months ended September 30, 2010 and 2009, respectively, and $6.2 million and $5.7 million for the nine months ended September 30, 2010 and 2009, respectively.  Servicing income is recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income.  The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.

 

For the three and nine months ended September 30, 2010 and 2009, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Balance at Beginning of Period

 

$

13,840

 

$

16,833

 

 

 

$

15,332

 

$

19,553

 

Changes in Fair Value:

 

 

 

 

 

 

 

 

 

 

 

Due to Change in Valuation Assumptions 1

 

(1,954

)

(78

)

 

 

(2,600

)

29

 

Due to Paydowns and Other 2

 

(642

)

(783

)

 

 

(1,488

)

(3,610

)

Total Changes in Fair Value of Mortgage Servicing Rights

 

(2,596

)

(861

)

 

 

(4,088

)

(3,581

)

Balance at End of Period

 

$

11,244

 

$

15,972

 

 

 

$

11,244

 

$

15,972

 

 

1        Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.

2        Principally represents changes due to loan payoffs.

 

For the three and nine months ended September 30, 2010 and 2009, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of a valuation allowance, was as follows:

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

September 30,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

2010

 

2009

 

Balance at Beginning of Period

 

$

11,806

 

$

7,898

 

 

 

$

10,638

 

$

1,796

 

Servicing Rights that Resulted From Asset Transfers

 

1,711

 

1,802

 

 

 

3,552

 

8,169

 

Amortization

 

(445

)

(235

)

 

 

(1,118

)

(500

)

Balance at End of Period

 

$

13,072

 

$

9,465

 

 

 

$

13,072

 

$

9,465

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation Allowance:

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

 

$

 

 

 

$

 

$

292

 

Recoveries

 

 

 

 

 

 

(292

)

Balance at End of Period

 

$

 

$

 

 

 

$

 

$

 

Mortgage Servicing Rights Accounted for Under
the Amortization Method, Net of a Valuation Allowance

 

$

13,072

 

$

9,465

 

 

 

$

13,072

 

$

9,465

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Mortgage Servicing Rights Accounted for  
Under the Amortization Method

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

$

15,044

 

$

10,301

 

 

 

$

14,853

 

$

1,504

 

End of Period

 

$

14,159

 

$

12,156

 

 

 

$

14,159

 

$

12,156

 

 

10



Table of Contents

 

The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2010, December 31, 2009, and September 30, 2009 were as follows:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2010

 

2009

 

2009

 

Weighted-Average Constant Prepayment Rate 1

 

16.68

%

14.45

%

15.12

%

Weighted-Average Life (in years)

 

4.79

 

5.55

 

5.17

 

Weighted-Average Note Rate

 

5.13

%

5.27

%

5.34

%

Weighted-Average Discount Rate 2

 

6.76

%

8.00

%

7.80

%

 

1        Represents annualized loan repayment rate assumption.

2        Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.

 

A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of September 30, 2010, December 31, 2009, and September 30, 2009 is presented in the following table.

 

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2010