Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 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 July 22, 2009, there were 47,883,484 shares of common stock outstanding.
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 endedJune 30, 2009 and 2008
2
Consolidated Statements of Condition – June 30, 2009,December 31, 2008, and June 30, 2008
3
Consolidated Statements of Shareholders’ Equity – Six months endedJune 30, 2009 and 2008
4
Consolidated Statements of Cash Flows – Six months endedJune 30, 2009 and 2008
5
Notes to Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition andResults of Operations
25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
55
Item 4.
Controls and Procedures
Part II - Other Information
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Submission of Matters to a Vote of Security Holders
56
Item 6.
Exhibits
57
1
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended
Six Months Ended
June 30,
(dollars in thousands, except per share amounts)
2009
2008
Interest Income
Interest and Fees on Loans and Leases
$
83,342
97,959
169,934
202,372
Income on Investment Securities
Trading
—
1,209
594
2,369
Available-for-Sale
38,155
35,321
70,456
69,572
Held-to-Maturity
3,033
4,936
6,272
Deposits
204
15
399
Funds Sold
526
420
1,103
1,412
Other
276
489
552
915
Total Interest Income
124,673
138,635
247,590
283,311
Interest Expense
14,481
20,238
31,506
47,703
Securities Sold Under Agreements to Repurchase
6,477
7,488
13,129
18,105
Funds Purchased
270
10
903
Short-Term Borrowings
12
46
Long-Term Debt
859
3,459
3,032
7,206
Total Interest Expense
21,822
31,467
47,677
73,963
Net Interest Income
102,851
107,168
199,913
209,348
Provision for Credit Losses
28,690
7,172
53,577
21,599
Net Interest Income After Provision for Credit Losses
74,161
99,996
146,336
187,749
Noninterest Income
Trust and Asset Management
11,881
15,460
23,513
30,546
Mortgage Banking
5,443
2,738
14,121
7,035
Service Charges on Deposit Accounts
12,910
12,411
26,296
24,494
Fees, Exchange, and Other Service Charges
15,410
16,103
30,386
31,494
Investment Securities Gains, Net
157
68
287
Insurance
4,744
5,590
10,385
12,720
9,432
8,080
25,428
40,088
Total Noninterest Income
59,832
60,539
130,197
146,664
Noninterest Expense
Salaries and Benefits
44,180
45,984
91,208
101,457
Net Occupancy
10,008
11,343
20,336
21,786
Net Equipment
4,502
4,474
8,818
8,795
Professional Fees
4,005
2,588
6,554
5,201
FDIC Insurance
8,987
247
10,801
496
17,902
19,226
39,800
39,559
Total Noninterest Expense
89,584
83,862
177,517
177,294
Income Before Provision for Income Taxes
44,409
76,673
99,016
157,119
Provision for Income Taxes
13,403
28,391
31,970
51,622
Net Income
31,006
48,282
67,046
105,497
Basic Earnings Per Share
0.65
1.01
1.41
2.20
Diluted Earnings Per Share
1.00
1.40
2.18
Dividends Declared Per Share
0.45
0.44
0.90
0.88
Basic Weighted Average Shares
47,682,604
47,733,278
47,624,521
47,849,945
Diluted Weighted Average Shares
47,948,531
48,300,049
47,876,509
48,423,619
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Consolidated Statements of Condition (Unaudited)
December 31,
(dollars in thousands)
Assets
Interest-Bearing Deposits
4,537
5,094
6,056
656,000
405,789
Investment Securities
91,500
94,347
4,292,911
2,519,239
2,646,506
Held-to-Maturity (Fair Value of $214,484; $242,175; and $255,905)
209,807
239,635
260,592
Loans Held for Sale
40,994
21,540
11,183
Loans and Leases
6,149,911
6,530,233
6,518,128
Allowance for Loan and Lease Losses
(137,416
)
(123,498
(102,498
Net Loans and Leases
6,012,495
6,406,735
6,415,630
Total Earning Assets
11,216,744
9,689,532
9,434,314
Cash and Noninterest-Bearing Deposits
294,022
385,599
280,635
Premises and Equipment
112,681
116,120
117,323
Customers’ Acceptances
2,084
1,308
1,856
Accrued Interest Receivable
43,042
39,905
42,295
Foreclosed Real Estate
438
428
229
Mortgage Servicing Rights
24,731
21,057
30,272
Goodwill
34,959
Other Assets
465,994
474,567
429,266
Total Assets
12,194,695
10,763,475
10,371,149
Liabilities
Noninterest-Bearing Demand
2,109,270
1,754,724
1,876,782
Interest-Bearing Demand
1,589,300
1,854,611
1,631,586
Savings
4,054,039
3,104,863
2,816,222
Time
1,267,052
1,577,900
1,579,400
Total Deposits
9,019,661
8,292,098
7,903,990
8,670
15,734
69,400
10,000
4,900
10,180
1,799,794
1,028,835
1,028,518
Long-Term Debt (includes $119,275 and $121,326 carried at fair value as of December 31, 2008 and June 30, 2008, respectively)
91,432
203,285
205,351
Banker’s Acceptances
Retirement Benefits Payable
54,286
54,776
29,478
Accrued Interest Payable
7,765
13,837
13,588
Taxes Payable and Deferred Taxes
226,936
229,699
250,125
Other Liabilities
128,182
128,299
91,105
Total Liabilities
11,348,810
9,972,771
9,603,591
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares;issued / outstanding: June 30, 2009 - 57,028,940 / 47,881,083;December 31, 2008 - 57,019,887 / 47,753,371;and June 30, 2008 - 57,016,182 / 47,941,409)
569
568
Capital Surplus
491,784
492,515
489,335
Accumulated Other Comprehensive Loss
(1,870
(28,888
(15,813
Retained Earnings
811,121
787,924
745,244
Treasury Stock, at Cost (Shares: June 30, 2009 - 9,147,857;December 31, 2008 - 9,266,516; and June 30, 2008 - 9,074,773)
(455,719
(461,415
(451,776
Total Shareholders’ Equity
845,885
790,704
767,558
Total Liabilities and Shareholders’ Equity
Consolidated Statements of Shareholders’ Equity (Unaudited)
Accum.
Compre-
Common
Capital
hensive
Retained
Treasury
Total
Stock
Surplus
Loss
Earnings
Income
Balance as of December 31, 2008
Comprehensive Income:
Other Comprehensive Income, Net of Tax:
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale
26,302
Amortization of Net Loss Related to Pension and Postretirement Benefit Plans
716
Total Comprehensive Income
94,064
Share-Based Compensation
944
Net Tax Benefits related to Share-Based Compensation
(430
Common Stock Issued under Purchase and Equity Compensation Plans (152,582 shares)
4,517
(1,245
(791
6,552
Common Stock Repurchased (24,870 shares)
(856
Cash Dividends Paid
(43,058
Balance as of June 30, 2009
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
(10,820
98
94,775
3,072
1,304
Common Stock Issued under Purchase and Equity Compensation Plans (276,946 shares)
8,478
169
(3,812
12,120
Common Stock Repurchased (923,330 shares)
(45,247
(42,343
Balance as of June 30, 2008
Consolidated Statements of Cash Flows (Unaudited)
Operating Activities
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization
6,794
7,047
Amortization of Deferred Loan and Lease Fees
(1,216
(1,058
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
1,723
741
Benefit Plan Contributions
(1,453
(1,078
Deferred Income Taxes
(15,978
(15,738
Gain on Sale of Insurance Business
(852
Net Gains on Investment Securities
(68
(287
Net Change in Trading Securities
(27,061
Proceeds from Sales of Loans Held for Sale
670,158
261,820
Originations of Loans Held for Sale
(672,979
(260,662
Tax Benefits from Share-Based Compensation
(61
(1,389
Net Change in Other Assets and Other Liabilities
(5,862
(16,383
Net Cash Provided by Operating Activities
193,273
76,120
Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities
752,929
494,209
Proceeds from Sales
24,258
195,000
Purchases
(2,511,199
(789,666
Investment Securities Held-to-Maturity:
29,609
31,765
Proceeds from Sale of Insurance Business
1,879
Net Change in Loans and Leases
357,432
53,692
Premises and Equipment, Net
(3,355
(7,193
Net Cash Used in Investing Activities
(1,348,447
(22,193
Financing Activities
Net Change in Deposits
727,563
(38,382
Net Change in Short-Term Borrowings
768,995
(7,069
Repayments of Long-Term Debt
(143,971
(32,425
61
1,389
Proceeds from Issuance of Common Stock
8,569
Repurchase of Common Stock
Net Cash Provided by (Used In) Financing Activities
1,313,251
(155,508
Net Change in Cash and Cash Equivalents
158,077
(101,581
Cash and Cash Equivalents at Beginning of Period
796,482
388,272
Cash and Cash Equivalents at End of Period
954,559
286,691
Supplemental Information
Cash Paid for:
Interest
53,749
80,852
Income Taxes
45,565
63,604
Non-Cash Investing and Financing Activities:
Transfers from Loans and Leases to Foreclosed Real Estate
92
110
Transfers from Loans and Leases to Loans Held for Sale
16,634
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”) provides 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 six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
Realized gains and losses on investment securities are recorded in noninterest income using the specific identification method.
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 value.
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.
On April 1, 2009, the Company adopted the provisions of 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.” This FSP 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 and in identifying circumstances that indicate a transaction is not orderly. In such instances, management may determine that further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157. The provisions of FSP FAS 157-4 were applied prospectively and did not result in significant changes to the Company’s valuation techniques. Furthermore, the adoption of FSP FAS 157-4 is not expected to have a material impact on the Company’s statements of income and condition.
On April 1, 2009, the Company adopted the provisions of FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP 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. As FSP FAS 107-1 and APB 28-1 amended only the disclosure requirements about fair value of financial instruments in interim periods, the adoption had no impact on the Company’s statements of income and condition. See Note 8 for the disclosures required under the provisions of FSP FAS 107-1 and APB 28-1.
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 7 for the disclosures required under the provisions of SFAS No. 161.
Other-Than-Temporary-Impairments for Debt Securities
On April 1, 2009, the Company adopted the provisions of FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends current other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated
7
into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This FSP also extends disclosure requirements about debt and equity securities to interim reporting periods. See Note 2 for the disclosures required under the provisions of FSP FAS 115-2 and FAS 124-2. The adoption of FSP FAS 115-2 and FAS 124-2 had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.
Future Application of Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 166 makes several significant amendments to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”including the removal of the concept of a qualifying special-purpose entity from SFAS No. 140. SFAS No. 166 also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. The provisions of SFAS No. 166 are effective for financial asset transfers occurring after December 31, 2009. The adoption of the provisions of SFAS No. 166 will have no impact on the Company’s statements of income and condition.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The provisions of SFAS No. 167 are effective for the Company on January 1, 2010. The adoption of the provisions of SFAS No. 167 will have no impact on the Company’s statements of income and condition.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” SFAS No. 168 established the FASB Accounting Standards Codification (the “Codification”) to become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff. All guidance contained in the Codification carries an equal level of authority. The provisions of SFAS No. 168 are effective for interim and annual periods ending after September 15, 2009. As the Codification is not intended to change GAAP, the adoption of the provisions of SFAS No. 168 will have no impact on the Company’s statements of income and condition.
Subsequent Events
Management has considered subsequent events through July 27, 2009 in preparing the June 30, 2009 Consolidated Financial Statements (Unaudited).
8
Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s investment securities as of June 30, 2009, December 31, 2008, and June 30, 2008 were as follows:
Investment Securities (Unaudited)
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
As of June 30, 2009
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies
789,777
8,528
(2,284
796,021
Debt Securities Issued by States and Political Subdivisions
88,083
951
(184
88,850
Debt Securities Issued by U.S. Government-Sponsored Enterprises
3,540
78
(45
3,573
Mortgage-Backed Securities Issued by
U.S. Government-Sponsored Enterprises
3,116,241
60,210
(11,848
3,164,603
Non-Agencies
235,771
79
(21,300
214,550
Total Mortgage-Backed Securities
3,352,012
60,289
(33,148
3,379,153
Other Debt Securities
25,084
231
(1
25,314
4,258,496
70,077
(35,662
Held-to-Maturity:
Mortgage-Backed Securities Issued by U.S. Government-Sponsored Enterprises
4,710
(33
214,484
As of December 31, 2008
551
26
577
47,033
1,028
48,000
235,280
997
(266
236,011
1,941,569
37,924
(1,187
1,978,306
301,453
59
(45,199
256,313
2,243,022
37,983
(46,386
2,234,619
34
(2
32
2,525,920
40,034
(46,715
3,198
(658
242,175
As of June 30, 2008
1,648
28
1,676
47,885
154
(228
47,811
250,776
159
(1,072
249,863
2,007,001
10,930
(14,499
2,003,432
323,935
354
(15,067
309,222
2,330,936
11,284
(29,566
2,312,654
34,337
166
34,502
2,665,582
11,791
(30,867
260,586
664
(5,351
255,899
255,905
9
The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2009. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
Contractual Maturities (Unaudited)
Fair Value
Due in One Year or Less
375,441
167
375,607
Due After One Year Through Five Years
61,904
772
(111
62,565
Due After Five Years Through Ten Years
158,894
1,637
(2,018
158,513
Due After Ten Years
310,245
7,212
(384
317,073
906,484
9,788
(2,514
913,758
Gross gains and losses from the sales of investment securities for the three and six months ended June 30, 2009 and 2008 were as follows:
Gross Gains and Losses (Unaudited)
Gross Gains on Sales of Investment Securities
37
173
93
303
Gross Losses on Sales of Investment Securities
(25
(16
Net Gains on Sales of Investment Securities
The Company’s temporarily impaired investment securities as of June 30, 2009, December 31, 2008, and June 30, 2008 were as follows:
Temporarily Impaired Investment Securities (Unaudited)
Less Than 12 Months
12 Months or Longer
Debt Securities Issued by
the U.S. Treasury and Government Agencies
100,654
32,453
(170
320
(14
32,773
261
(3
1,780
(42
2,041
915,317
(11,881
2,724
(506
187,340
(20,794
190,064
918,041
(12,387
1,105,381
(33,181
Total Temporarily Impaired Investment Securities
1,051,409
(14,844
189,474
(20,851
1,240,883
(35,695
745
(11
284
(50
1,029
19,375
1,591
(38
20,966
222,468
(1,388
59,385
(457
281,853
(1,845
123,549
(16,641
121,482
(28,558
245,031
346,017
(18,029
180,867
(29,015
526,884
(47,044
366,137
(18,268
182,774
(29,105
548,911
(47,373
30,207
(214
573
30,780
164,315
(1,062
887
(10
165,202
1,079,508
(16,204
121,512
(3,646
1,201,020
(19,850
140,517
(4,267
147,233
(10,800
287,750
1,220,025
(20,471
268,745
(14,446
1,488,770
(34,917
33
1,414,547
(21,747
270,238
(14,471
1,684,785
(36,218
The gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by U.S. government-sponsored enterprises, such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and non-agencies. The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2009, which was comprised of 76 securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. In assessing non-agency mortgage-backed securities for impairment, management considers, among other factors, the severity and duration of the impairment, independent credit ratings, vintage, credit enhancements, as well as performance indicators of the underlying assets in the security (e.g., default rates, delinquency rates).
11
As of June 30, 2009, all of the Company’s non-agency mortgage-backed securities were prime jumbo, with an average amortized loan-to-value ratio of 58%, and an average credit enhancement of 5.1% of the par value outstanding. As of June 30, 2009, 85% of the fair value of the Company’s mortgage-backed securities issued by non-agencies were AAA-rated by at least one major rating agency and were originated prior to 2006. Loans past due 90 days or more, underlying the mortgage-backed securities issued by non-agencies, represented approximately 1.9% of the par value outstanding, or approximately $4.5 million as of June 30, 2009. As of June 30, 2009, there were no “sub-prime” or “Alt-A” securities in our mortgage-backed securities portfolio. The Company does not intend to sell the investment securities that are in an unrealized loss position and it is unlikely that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity.
Note 3. Leasing Transactions
In May 2009, the Company replaced an existing leveraged lease with a direct financing lease with a sub-lessee to the leveraged lease transaction. In recording this transaction, the Company removed $17.9 million in the net investment from the balance sheet and recorded a $4.4 million charge-off to the allowance for loan and lease losses. The Company also recorded a $1.6 million benefit for income taxes which resulted from the over accrual of income taxes from the inception of the lease through the termination of the leveraged lease transaction. The Company recorded a direct financing lease of $45.9 million and also recognized $32.4 million in non-recourse debt on the balance sheet, which was previously not recognized as an obligation of the Bank under leveraged lease accounting treatment.
In April 2009, the Company sold its equity interest in a cargo aircraft resulting in a $2.8 million pre-tax gain for the Company. After-tax gains from this transaction were $1.5 million. 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. After-tax gains from this transaction were $6.2 million. The pre-tax gains from these sales transactions were recorded as a component of other noninterest income in the statement of income.
Note 4. Securities Sold Under Agreements to Repurchase
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Statements of Condition (Unaudited), while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held in collateral by third party trustees.
As of June 30, 2009, the carrying value of the Company’s investment securities available-for-sale pledged where the secured party has the right to sell or repledge the investment securities was $817.1 million. As of June 30, 2009, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:
Amount
Overnight
233,500
2 to 30 Days
799,505
31 to 90 Days
58,107
Over 90 Days
708,682
Note 5. 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 and six months ended June 30, 2009 and 2008.
Business Segments Selected Financial Information (Unaudited)
Retail
Commercial
Investment
Consolidated
Banking
Services
and Other
Three Months Ended June 30, 2009
53,631
43,376
4,326
1,518
11,465
16,480
746
42,166
26,896
3,580
1,519
25,169
16,774
14,615
3,274
(42,587
(29,119
(15,797
(2,081
(89,584
24,748
14,551
2,398
2,712
(9,170
(5,205
(887
1,859
(13,403
15,578
9,346
1,511
4,571
Total Assets as of June 30, 2009
3,299,113
2,939,637
267,546
5,688,399
Three Months Ended June 30, 2008
59,529
43,285
3,938
416
2,571
4,652
56,958
38,633
3,939
466
23,644
13,623
19,019
4,253
(40,380
(26,195
(16,363
(924
(83,862
40,222
26,061
6,595
3,795
(14,882
(9,655
(2,440
(1,414
(28,391
25,340
16,406
4,155
2,381
Total Assets as of June 30, 2008
3,638,301
3,008,887
242,443
3,481,518
13
Business Segments Selected Financial Information (Unaudited) - Continued
Six Months Ended June 30, 2009
Net Interest Income (Loss)
107,021
84,966
8,318
(392
25,981
26,291
1,550
(245
Net Interest Income (Loss) After Provision for Credit Losses
81,040
58,675
6,768
(147
53,444
40,891
29,060
6,802
(84,895
(56,656
(32,357
(3,609
(177,517
49,589
42,910
3,471
3,046
(18,360
(15,676
(1,284
3,350
(31,970
31,229
27,234
2,187
6,396
Six Months Ended June 30, 2008
117,922
86,144
7,808
(2,526
10,523
11,878
(801
Net Interest Income (Loss)After Provision for Credit Losses
107,399
74,266
7,809
(1,725
48,491
39,570
37,280
21,323
(80,997
(53,721
(33,226
(9,350
(177,294
74,893
60,115
11,863
10,248
(27,710
(22,295
(4,389
2,772
(51,622
47,183
37,820
7,474
13,020
14
Note 6. 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, 2009 and 2008 are presented in the following table:
Pension Plans and Postretirement Benefit Plan (Unaudited)
Pension Benefits
Postretirement Benefits
Three Months Ended June 30,
Service Cost
109
89
Interest Cost
1,285
1,298
419
Expected Return on Plan Assets
(1,332
(1,522
Amortization of Prior Service Credit
(53
Recognized Net Actuarial Losses (Gains)
732
(119
(140
Net Periodic Benefit Cost
685
356
316
Six Months Ended June 30,
219
179
2,569
2,596
839
840
(2,664
(3,044
(107
1,464
540
(238
(280
1,369
713
632
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. The Company expects to contribute $12.0 million to its pension plans and $1.2 million to the postretirement benefit plan for the year ending December 31, 2009. The Company contributed $7.7 million to its pension plans and $1.3 million to the postretirement benefit plan for the year ended December 31, 2008. For the three and six months ended June 30, 2009, the Company contributed $0.7 million and $0.8 million, respectively, to its pension plans. For the three and six months ended June 30, 2009, the Company contributed $0.3 million and $0.6 million, respectively, to its postretirement benefit plan.
Note 7. Derivative Financial Instruments
The following table presents the Company’s derivative financial instruments, their estimated fair values, and balance sheet location as of June 30, 2009:
Fair Values of Derivative Financial Instruments (Unaudited)
Asset Derivatives
Liability Derivatives
Derivative Financial Instruments Not Designated as Hedging Instruments under SFAS No. 133
Balance SheetLocation
Forward Commitments
1,007
374
Interest Rate Lock Commitments
1,261
340
Interest Rate Swap Agreements
19,911
20,091
Foreign Exchange Contracts
381
Total Derivative Financial Instruments Not Designated as Hedging Instruments under SFAS No. 133
22,426
21,186
The following table presents the Company’s derivative financial instruments and the amount and location of the net gain recognized in the statements of income for the three and six months ended June 30, 2009:
The Effect of Derivative Financial Instruments on the Consolidated Statements of Income (Unaudited)
Derivative Financial Instruments Not Designated as Hedging Instrumentsunder SFAS No. 133
Location of Net Gain Recognized in theStatement of Income
Amount of Net Gain Recognized in the Statement of Income
Location of Net Gain Recognized in the Statement of Income
1,306
1,893
97
7,022
Other Noninterest Income
635
777
1,311
Total Derivative Financial Instruments Not Designated as Hedging Instrumentsunder SFAS No. 133
2,751
11,003
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 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.
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.
16
Note 8. 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.
17
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, 2009, December 31, 2008, and June 30, 2008:
Assets and Liabilities Measured at Fair Value on a Recurring Basis (Unaudited)
Quoted Prices in
Active Markets for
Significant
Identical Assets
Significant Other
Unobservable
or Liabilities
Observable Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Investment Securities Available-for-Sale
Total Investment Securities Available-for-Sale
3,496,890
16,833
7,767
Net Derivative Assets and Liabilities
499
1,240
Total Assets Measured at Fair Value on a Recurring Basis as of June 30, 2009
803,788
3,497,389
17,574
4,318,751
Investment Securities Trading
1,922,591
55,715
2,178,904
2,462,947
19,553
6,674
(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
119,275
Total Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008
18
Assets and Liabilities Measured at Fair Value on a Recurring Basis (Unaudited) — Continued
9,486
25,016
2,619,814
8,836
291
326
617
Total Assets Measured at Fair Value on a Recurring Basis as of June 30, 2008
10,512
2,714,452
55,614
2,780,578
121,326
Total Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2008
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.
As of June 30, 2009, the Company had no liabilities measured at fair value on a recurring basis.
19
For the three and six months ended June 30, 2009 and June 30, 2008, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
Net Derivative
Mortgage
Assets and
Assets (Unaudited) (dollars in thousands)
Servicing Rights 1
Liabilities2
Balance as of April 1, 2009
17,904
2,745
20,649
Realized and Unrealized Net Gains (Losses):
Included in Net Income
(1,071
(339
Purchases, Sales, Issuances, and Settlements, Net
Total Unrealized Net Gains Included in Net Income Related to Assets Still Held as of June 30, 2009
198
939
Available-for-Sale3
Balance as of April 1, 2008
95,219
27,149
810
123,178
1,459
1,121
2,580
Included in Other Comprehensive Income
(200
(70,003
1,664
(1,605
(69,944
Total Unrealized Net Gains Included in Net Income Related toAssets Still Held as of June 30, 2008
2,201
2,527
Liabilities (Unaudited) (dollars in thousands)
Long-Term Debt 4
128,932
Unrealized Net Gains Included in Net Income
(1,606
(6,000
Total Unrealized Net Gains Included in Net Income Related to Liabilities Still Held as of June 30, 2008
(1,416
20
Balance as of January 1, 2009
(2,720
7,799
5,079
(55,715
(10,109
(65,824
107
848
(304
(118,971
Balance as of January 1, 2008
218,980
27,588
113
246,681
(899
2,893
1,994
(194,992
3,583
(2,680
(194,089
Total Unrealized Net Gains Included in Net Income Related to Assets Still Held as of June 30, 2008
653
979
129,032
(1,706
(1,512
1 Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s consolidated statements of income (unaudited).
2 Realized and unrealized gains and losses related to forward commitments and interest rate lock commitments are reported as a component of mortgage banking income. Realized and unrealized gains and losses related to foreign exchange contracts and interest rate swap agreements are recorded as a component of other noninterest income in the Company’s consolidated statements of income (unaudited).
3 Unrealized gains and losses related to investment securities available-for-sale are reported as a component of other comprehensive income in the Company’s consolidated statements of condition (unaudited).
4 Realized and unrealized gains and losses related to long-term debt are reported as a component of other noninterest income.
Significant assumptions in the valuation of the Company’s mortgage servicing rights included changes in interest rates, estimated loan repayment rates, and the timing of cash flows, among other factors. Net derivative assets and liabilities classified as Level 3 were comprised of interest rate lock commitments and interest rate swap agreements, as significant unobservable inputs and management judgment are required.
21
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following presents the assets that the Company measures at fair value on a nonrecurring basis in accordance with GAAP as of June 30, 2009, December 31, 2008, and June 30, 2008.
Assets Measured at Fair Value on a Nonrecurring Basis (Unaudited)
Mortgage Servicing Rights - Amortization Method
7,898
Low-Income Housing and Other Equity Investments
28,185
Total Assets Measured at Fair Valueon a Nonrecurring Basis as of June 30, 2009
71,042
112,036
1,504
30,920
Total Assets Measured at Fair Valueon a Nonrecurring Basis as of December 31, 2008
32,424
53,964
33,176
Total Assets Measured at Fair Valueon a Nonrecurring Basis as of June 30, 2008
44,359
As of June 30, 2009, December 31, 2008, and June 30, 2008, the Company had no liabilities measured at fair value on a nonrecurring basis.
As of June 30, 2009 and 2008, there were no adjustments to fair value for the Company’s assets measured at fair value on a nonrecurring basis in accordance with GAAP. As of December 31, 2008, the Company recorded a $0.3 million adjustment to fair value related to the Company’s mortgage servicing rights recorded under the amortization method.
Fair Value Option
On January 1, 2008, the Company elected the fair value option for its subordinated notes, a component of long-term debt in the Company’s Consolidated Statements of Condition (Unaudited). The fair value option was elected for the subordinated notes as it provided the Company with an opportunity to better manage its interest rate risk and to achieve balance sheet management flexibility. Changes in the estimated fair value of the Company’s subordinated notes subsequent to the initial fair value measurement were recognized in earnings as a component of other noninterest income. For the three months ended June 30, 2008, the Company recorded unrealized gains of $1.6 million as a result of the change in fair value of the Company’s subordinated notes. For the six months ended June 30, 2009 and 2008, the Company recorded unrealized gains of $0.3 million and $1.7 million, respectively, as a result of the change in fair value of the Company’s subordinated notes. Interest expense related to the Company’s subordinated notes continued to be measured based on contractual interest rates and was reported as such in the statement of income. The Company repaid its subordinated notes in March 2009.
22
Disclosures about Fair Value of Financial Instruments
These disclosures exclude financial instruments that are recorded at fair value on a recurring basis on the Company’s Consolidated Statements of Condition (Unaudited) as well as short-term financial assets, such as cash and cash equivalents, and liabilities, such as short-term borrowings, for which the carrying amounts approximate fair value. The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Investment Securities Held-to-Maturity
The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. Quoted prices in active markets were used whenever available. If quoted prices were not available, estimated fair values were measured using pricing models or other valuation techniques such as the present value of future cash flows, adjusted for credit loss assumptions.
The estimated fair value of the Company’s loans held for sale was determined based on contractual prices for loans with similar characteristics.
Loans
The estimated fair value of the Company’s loans was determined by discounting the expected future cash flows of pools of loans with similar characteristics. Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. Low market liquidity resulted in wider market spreads, which adversely affected the estimated fair value of the Company’s loans as of December 31, 2008, and June 30, 2008.
Deposit Liabilities
The estimated fair values of the Company’s noninterest-bearing and interest-bearing demand deposits and savings deposits were equal to the amount payable on demand (i.e., their carrying amounts) because these products have no stated maturity. The estimated fair values of the Company’s time deposits were estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities.
The estimated fair values of the Company’s long-term debt were calculated using a discounted cash flow approach and applying discount rates currently offered for new notes with similar remaining maturities and considering the Company’s non-performance risk.
23
The following presents the carrying amount and fair values of the Company’s financial instruments as of June 30, 2009, December 31, 2008, and June 30, 2008:
As of
June 30, 2009
December 31, 2008
June 30, 2008
(dollars in thousands) (Unaudited)
CarryingAmount
Financial Instruments - Assets
41,054
11,242
Loans1
5,565,816
5,606,390
5,969,907
5,917,302
5,969,304
5,918,259
Financial Instruments - Liabilities
9,033,246
8,313,471
7,905,991
Long-Term Debt2
82,437
83,171
75,000
73,925
74,997
1 Comprised of loans, net of unearned income and the Allowance related to loans.
2 Excludes capitalized lease obligations and subordinated notes which were recorded at fair value on the Company’s consolidated statements of condition (unaudited) beginning on January 1, 2008.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements concerning, among other things, the economic and business environment in our service area and elsewhere, credit quality, and other financial and business matters in future periods. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and globally; 3) the effect of the increase in government intervention in the U.S. financial system; 4) competitive pressure among financial services and products; 5) the impact of legislation and changes in the regulatory environment; 6) changes in fiscal and monetary policies of the markets in which we operate; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) unpredicted costs and other consequences of legal or regulatory matters involving the Company; 13) resumption of common stock repurchases; and 14) geopolitical risk, military or terrorist activity, natural disasters, or adverse weather, public health, and other conditions impacting us and our customers’ operations. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, refer to the section entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2008, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission (the “SEC”).
Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. We do not undertake an obligation to update forward-looking statements to reflect later events or circumstances.
Reclassifications
Certain prior period information in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) has been reclassified to conform to current period classifications.
Overview
Bank of Hawaii Corporation (the “Parent”) is a bank holding company headquartered in Honolulu, Hawaii. The Parent’s principal and only operating subsidiary is Bank of Hawaii (the “Bank”).
The Bank, directly and through its subsidiaries, provides a broad range of financial services to businesses, consumers, and governments in Hawaii, American Samoa, and the West Pacific. References to “we,” “our,” “us,” or the “Company” refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes.
“Maximizing shareholder value over time” remains our governing objective. Our vision is “exceptional people building exceptional value for our customers, our island communities, our shareholders, and each other.”
In striving to achieve our governing objective and vision, our business plan was balanced between growth and risk management, and included the flexibility to adjust, given our anticipation of a slowing economy. We did not, however, expect an economic downturn of the magnitude that occurred in 2008 and has continued into 2009. Accordingly, we adjusted some of the strategies in our business plan. The adjustments to our strategies included an increased focus on measures of soundness such as asset quality, reserve and capital levels, and liquidity.
Hawaii Economy
Hawaii’s economy continued to reflect weakness during the second quarter of 2009. Hawaii’s seasonally adjusted unemployment rate increased to 7.4% as of June 30, 2009. Job losses in the construction industry have continued to accelerate in recent months and the recently announced State budget challenges may lead to more personal income reductions. Real estate values in Hawaii continued to be somewhat more resilient than many of the markets on the U.S. Mainland.
Earnings Summary
For the second quarter of 2009, net income was $31.0 million, a decrease of $17.3 million from the second quarter of 2008. Diluted earnings per share were $0.65 per share, a decrease of $0.35 per share from the second quarter of 2008.
Our lower net income for the second quarter of 2009 was primarily due to the following:
· The provision for credit losses (the “Provision”) increased by $21.5 million from the second quarter of 2008, primarily reflecting increased risk in our consumer lending portfolios due to weakness in the Hawaii economy;
· Our Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased by $8.7 million from the second quarter of 2008. Included in FDIC insurance expense for the second quarter of 2009 was the Company’s $5.7 million share of an industry-wide assessment by the FDIC. The increase in FDIC insurance expense was also a result of higher deposit balances, higher assessment rates, and our participation in the Temporary Liquidity Guarantee Program; and
· Net interest income decreased by $4.3 million and our net interest margin decreased by 68 basis points from the second quarter of 2008, reflecting the effects of a decreasing interest rate environment, lower loan balances, conservative investing, and our decision to maintain high levels of liquidity.
For the first six months of 2009, net income was $67.0 million, a decrease of $38.5 million from the first six months of 2008. Diluted earnings per share were $1.40 per share, a decrease of $0.78 per share from the first six months of 2008.
Our lower net income for the first six months of 2009 was primarily due to the following:
· The Provision increased by $32.0 million from the first six months of 2008, reflecting increased risk in our commercial and industrial, commercial mortgage, and consumer lending portfolios due to the weakening economy in Hawaii and the U.S. Mainland;
· Noninterest income decreased by $16.5 million from the first six months of 2008, primarily due to pre-tax gains of $13.7 million recorded in the first quarter of 2008 resulting from the mandatory redemption of our Visa, Inc. (“Visa”) shares; and
· Net interest income decreased by $9.4 million and our net interest margin decreased by 54 basis points from the first six months of 2008, reflecting the effects of a decreasing interest rate environment, lower loan balances, conservative investing, and our decision to maintain high levels of liquidity.
Our actions during the second quarter of 2009 continue to be influenced by a weakening economy in Hawaii and the U.S. Mainland, as well as the uncertainties regarding the impact of government regulation. We continued to strengthen our balance sheet in the second quarter of 2009 with increased funding, reserves for credit losses, liquidity, and capital.
· Total deposits were $9.0 billion as of June 30, 2009, a decrease of $193.1 million or 2% from March 31, 2009 and an increase of $727.6 million or 9% from December 31, 2008;
· Our Allowance for Loan and Lease Losses (the “Allowance”) was $137.4 million as of June 30, 2009, an increase of $3.0 million or 2% from March 31, 2009 and an increase of $13.9 million or 11% from December 31, 2008. The ratio of our Allowance to total loans and leases outstanding increased to 2.23% as of June 30, 2009 compared to 2.12% as of March 31, 2009 and 1.89% as of December 31, 2008;
· As of June 30, 2009, we had $656.0 million in excess reserves invested with the Federal Reserve Bank (“FRB”), a decrease of $239.6 million or 27% from March 31, 2009 and an increase of $250.2 million or 62% from December 31, 2008;
· We continued to increase our capital levels during the second quarter of 2009. Shareholders’ equity was $845.9 million as of June 30, 2009, an increase of $12.0 million or 1% from March 31, 2009 and an increase of $55.2 million or 7% from December 31, 2008; and
· Our Tier 1 capital ratio was 12.56% as of June 30, 2009 compared to 12.02% as of March 31, 2009 and 11.24% as of December 31, 2008. Our ratio of tangible common equity to risk-weighted assets was 13.02% as of June 30, 2009 compared to 12.47% as of March 31, 2009 and 11.28% as of December 31, 2008.
We also reduced our long-term debt by $111.9 million or 55% from December 31, 2008, using our excess liquidity from the growth in our deposit balances to reduce this relatively more expensive source of funds for us.
Our balance sheet is well positioned given the current economic environment. We continue to meet our near-term objective of maintaining strong liquidity and have substantial resources for sound lending and investment opportunities.
27
Table 1 presents our financial highlights for the three and six months ended June 30, 2009 and 2008 and as of June 30, 2009, December 31, 2008, and June 30, 2008.
Financial Highlights (Unaudited)
Table 1
For the Period:
Operating Results
Performance Ratios
Return on Average Assets
1.06
%
1.85
1.18
2.01
Return on Average Shareholders’ Equity
14.49
24.82
16.13
27.33
Efficiency Ratio 1
55.07
50.01
53.78
49.80
Operating Leverage 2
(8.04
(11.62
(14.62
16.01
Net Interest Margin 3
3.73
4.41
3.75
4.29
Dividend Payout Ratio 4
69.23
43.56
63.83
40.00
Average Shareholders’ Equity to Average Assets
7.30
7.45
7.34
Average Balances
Average Loans and Leases
6,258,403
6,531,587
6,351,938
6,559,753
Average Assets
11,753,580
10,504,421
11,426,766
10,574,162
Average Deposits
9,222,130
7,958,171
8,988,053
7,955,360
Average Shareholders’ Equity
858,139
782,429
838,288
776,293
Market Price Per Share of Common Stock
Closing
35.83
47.80
High
41.42
57.37
45.24
Low
31.35
46.62
25.33
40.95
As of Period End:
Balance Sheet Totals
Asset Quality
137,416
123,498
102,498
Non-Performing Assets
39,054
14,949
6,680
Financial Ratios
Allowance to Loans and Leases Outstanding
2.23
1.89
1.57
Tier 1 Capital Ratio 5
12.56
11.24
10.86
Total Capital Ratio 5
13.82
12.49
12.12
Leverage Ratio 5
6.66
7.01
Tangible Common Equity to Total Assets 6
6.65
7.06
Tangible Common Equity to Risk-Weighted Assets 6
13.02
11.28
10.81
Non-Financial Data
Full-Time Equivalent Employees
2,533
2,581
2,534
Branches and Offices
85
84
ATMs
486
462
417
1 Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).
2 Operating leverage is defined as the percentage change in income before the provision for credit losses and the provision for income taxes. Measures are presented on a linked quarter basis.
3 Net interest margin is defined as net interest income, on a taxable equivalent basis, as a percentage of average earning assets.
4 Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.
5 Tier 1 capital, total capital, and leverage ratios as of June 30, 2008 were revised from 10.91%, 12.16%, and 7.04%, respectively.
6 Tangible common equity, a non-GAAP financial measure, is defined by the Company as shareholders’ equity minus goodwill and intangible assets. Intangible assets are included as a component of other assets in the Consolidated Statements of Condition (Unaudited).
Analysis of Statements of Income
Average balances, related income and expenses, and resulting yields and rates are presented in Table 2. An analysis of the change in net interest income, on a taxable equivalent basis, is presented in Table 3.
Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited)
Table 2
Average
Income/
Yield/
(dollars in millions)
Balance
Expense
Rate
Earning Assets
5.2
0.36
33.0
0.2
2.45
5.0
0.59
30.2
0.4
2.62
833.2
0.5
0.25
81.9
2.03
872.8
1.1
110.1
1.4
2.54
97.6
1.2
4.96
24.3
0.6
4.90
96.7
2.4
3,662.1
38.5
4.21
2,649.9
35.6
5.37
3,148.3
71.0
4.51
2,640.8
70.0
5.31
219.9
4.31
269.6
3.1
4.50
227.4
4.9
4.34
277.5
6.3
4.52
24.1
9.3
0.1
5.78
23.0
4.30
9.9
0.3
5.59
Loans and Leases 1
Commercial and Industrial
984.1
4.02
1,060.7
14.3
5.42
1,007.6
20.3
4.06
1,062.9
30.9
5.84
Commercial Mortgage
763.8
5.22
663.0
10.1
6.15
747.3
19.5
5.27
656.0
20.5
6.30
Construction
144.5
1.5
4.03
177.3
2.5
5.76
149.3
4.12
188.5
5.9
6.27
Commercial Lease Financing
450.2
3.5
3.13
470.6
4.1
3.50
456.5
7.2
3.14
474.2
8.1
3.43
Residential Mortgage
2,359.0
34.6
5.88
2,494.1
38.0
6.09
2,398.0
5.92
2,495.4
76.2
6.11
Home Equity
999.3
12.6
5.07
983.7
5.85
1,013.9
25.6
5.10
988.6
30.7
6.23
Automobile
325.5
6.5
7.96
423.1
8.6
8.16
340.8
13.4
7.95
430.9
17.5
8.17
Other 2
232.0
4.6
7.89
259.1
9.11
238.5
7.88
263.3
12.3
9.43
Total Loans and Leases
6,258.4
83.1
5.32
6,531.6
97.8
6.01
6,351.9
169.4
5.36
6,559.8
202.1
6.18
79.7
1.39
79.6
2.46
79.5
0.9
2.30
Total Earning Assets 3
11,082.6
125.0
9,752.5
138.9
5.71
10,732.4
248.1
4.64
9,804.5
283.8
5.80
203.9
272.9
223.6
283.5
467.1
479.0
470.8
486.2
11,753.6
10,504.4
11,426.8
10,574.2
Interest-Bearing Liabilities
Demand
1,907.7
0.07
1,561.2
0.29
1,898.2
1,556.1
3.4
4,036.9
7.8
0.77
2,861.3
0.92
3,786.4
16.0
0.85
2,808.2
15.8
1.13
1,330.6
6.4
1.92
1,646.5
12.5
3.07
1,415.2
14.9
2.12
1,696.9
28.5
3.38
Total Interest-Bearing Deposits
7,275.2
14.5
0.80
6,069.0
20.2
1.34
7,099.8
31.5
0.89
6,061.2
47.7
1.58
16.4
0.12
61.2
1.82
17.6
0.11
70.4
1.0
2.67
1,168.2
1,060.2
7.5
2.81
1,052.4
13.1
2.48
1,112.2
18.1
3.24
71.1
0.8
4.84
224.3
109.4
3.0
5.56
6.22
Total Interest-Bearing Liabilities
8,530.9
21.8
1.02
7,414.7
1.70
8,279.2
47.6
1.16
7,475.8
74.0
1.98
103.2
107.4
200.5
209.8
Interest Rate Spread
4.01
3.48
3.82
Net Interest Margin
Noninterest-Bearing Demand Deposits
1,946.9
1,889.2
1,888.3
1,894.2
417.7
418.1
421.0
427.9
858.1
782.4
838.3
776.3
1 Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis.
2 Comprised of other consumer revolving credit, installment, and consumer lease financing.
3 Interest income includes taxable equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $331,000 and $239,000 for the three months ended June 30, 2009 and 2008, respectively, and $557,000 and $477,000 for the six months ended June 30, 2009 and 2008, respectively.
29
Analysis of Change in Net Interest Income - Taxable Equivalent Basis (Unaudited)
Table 3
Compared to June 30, 2008
Volume 1
Rate 1
Change in Interest Income:
(0.2
(0.4
2.0
(2.3
(0.3
(1.8
12.4
(11.4
(1.1
(1.4
(0.1
(1.5
(9.1
(10.6
2.6
(3.6
(1.0
(2.8
(0.6
(0.9
(2.9
(5.2
0.7
(5.8
(5.1
(0.5
(4.1
(1.9
(3.0
(7.1
(25.6
(32.7
Total Change in Interest Income
4.5
(40.2
(35.7
Change in Interest Expense:
(3.4
4.7
(4.5
(4.2
(9.4
(13.6
(17.3
(16.2
(5.0
(3.5
(0.7
Total Change in Interest Expense
(3.7
(22.7
(26.4
Change in Net Interest Income
8.2
(17.5
(9.3
1 The changes for each category of interest income and expense are allocated between the portion of changes attributable to the variance in volume and rate for that category.
30
Because of uncertainty regarding economic and industry conditions in late 2008 and into 2009, the Bank focused on building and then maintaining liquidity. As government programs and other factors helped to reduce some of the uncertain industry conditions, the Bank invested some of our liquidity into lower risk marketable securities.
The amount of net interest income is affected by both changes in interest rates (rate) and the amount and composition of earning assets and interest-bearing liabilities (volume).
Net interest income, on a taxable equivalent basis, decreased by $4.2 million or 4% in the second quarter of 2009 and by $9.3 million or 4% for the first six months of 2009 compared to the same periods in 2008. Net interest margin decreased by 68 basis points in the second quarter of 2009 and by 54 basis points for the first six months of 2009 compared to the same periods in 2008.
The decrease in net interest income, on a taxable equivalent basis, from 2008 was primarily due to lower yields on our interest-earning assets, reflecting the effects of a decreasing interest rate environment and a conservative re-investment strategy with respect to our investment securities portfolio. Yields on our interest-earning assets decreased by 119 basis points in the second quarter of 2009 and by 116 basis points for the first six months of 2009 compared to the same periods in 2008. We experienced lower yields in all of our lending categories in 2009. Yields on our loan and lease portfolio decreased by 69 basis points in the second quarter of 2009 and by 82 basis points for the first six months of 2009 compared to the same periods in 2008. We also experienced lower yields on our investment securities portfolio as a result of the lower interest rate environment. Yields on our investment securities available-for-sale decreased by 116 basis points in the second quarter of 2009 and by 80 basis points for the first six months of 2009 compared to the same periods in 2008.
The lower yields on our interest-earning assets were partially offset by lower funding costs. Rates paid on our interest-bearing liabilities decreased by 68 basis points in the second quarter of 2009 and by 82 basis points for the first six months of 2009 compared to the same periods in 2008, reflecting the re-pricing of our liabilities at lower rates. Rates paid on our interest-bearing deposits decreased by 54 basis points in the second quarter of 2009 and by 69 basis points for the first six months of 2009 compared to the same periods in 2008. Also contributing to our lower funding costs was a decrease in rates paid on our securities sold under agreements to repurchase by 61 basis points in the second quarter of 2009 and by 76 basis points for the first six months of 2009 compared to the same periods in 2008.
Average balances of our interest-earning assets increased from 2008 primarily due to a significant increase in investment securities available-for-sale and funds sold. Our deployment of funds in 2009 was made primarily in debt securities issued by the U.S. Treasury and government agencies, and in liquid investments with the FRB. Average balances in our loan and lease portfolio decreased from 2008 as we continue to experience pay downs in balances while maintaining a disciplined underwriting approach. Average interest-bearing deposits increased by $1.2 billion or 20% in the second quarter of 2009 and by $1.0 billion or 17% for the first six months of 2009 compared to the same periods in 2008. The increase in average savings deposit balances from 2008 was primarily due to the continued success of our Bonus Rate Savings Plus and business money market savings products. The increase in average savings deposit balances in 2009 was partially offset by a decrease in average time deposit balances as some customers moved their deposits to more liquid savings and interest-bearing demand products. Partially offsetting the increase in average interest-bearing deposit balances in 2009 was the decline in average balances in long-term debt primarily due to the maturity of our subordinated notes in the first quarter of 2009 and the redemption of our Capital Securities in the second quarter of 2008.
31
The Provision reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance. We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period. The Allowance is determined through detailed quarterly analyses of the loan and lease portfolio. The Allowance is based on our loss experience, changes in the economic environment, as well as an ongoing assessment of our credit quality. We recorded a Provision of $28.7 million in the second quarter of 2009 compared to a Provision of $7.2 million in the second quarter of 2008. We recorded a Provision of $53.6 million for the first six months of 2009 compared to a Provision of $21.6 million for the first six months of 2008. The higher Provision recorded in the second quarter of 2009 and for the first six months of 2009, a result of our quarterly evaluation of the adequacy of the Allowance, was primarily due to increased risk in our consumer lending, commercial and industrial, and commercial mortgage portfolios due to continued economic weakness in Hawaii and the U.S. Mainland. For further discussion on the Allowance, see the “Corporate Risk Profile — Reserve for Credit Losses” section in MD&A.
Noninterest income decreased by $0.7 million or 1% in the second quarter of 2009 and by $16.5 million or 11% for the first six months of 2009 compared to the same periods in 2008.
Trust and asset management income decreased by $3.6 million or 23% in second quarter of 2009 compared to the same period in 2008, primarily due to a $1.7 million decrease in mutual fund management fees, which were adversely affected by the decline in the value of the equity markets as well as low yields on money market accounts under management. Also contributing to the decrease in trust and asset management income was a $0.3 million decrease each in agency, special service, and revocable and irrevocable trust fee income. Trust and asset management income decreased by $7.0 million or 23% for the first six months of 2009 compared to the same period in 2008, primarily due to a $3.2 million decrease in mutual fund management fees, which were adversely affected by the decline in the value of the equity markets as well as low yields on money market accounts under management. Also contributing to the decrease in trust and asset management income was a $0.8 million decrease in agency fees, a $0.6 million decrease each in employee benefit trust and special service fees, a $0.5 million decrease in revocable and irrevocable trust fees, and a $0.4 million decrease in testamentary trust fees. Total trust assets under administration were $9.4 billion as of June 30, 2009, $9.8 billion as of December 31, 2008, and $12.1 billion as of June 30, 2008. Trust and asset management income is expected to continue to fluctuate based in part on the value of trust assets under administration and customer activity.
Table 4 presents the components of mortgage banking income for the second quarter and first six months of 2009 and 2008.
Mortgage Banking (Unaudited)
Table 4
Mortgage Origination and Servicing Activities
Servicing Income
1,686
1,552
3,297
3,079
Net Gains on the Sale of Residential Mortgage Loans
2,723
2,449
1,053
Mortgage Loan Fees
871
598
1,935
1,343
Total Mortgage Origination and Servicing Activities
5,280
2,184
7,681
5,475
Mortgage Servicing Rights and Derivative Financial Instruments
Net Change in the Fair Value of Mortgage Servicing Rights Due to Pay downs 1
(1,269
(476
(2,827
(859
Net Change in the Fair Value of Mortgage Servicing Rights Due to Changes in Valuation Assumptions and the Fair Value of Designated Securities 2
(213
(448
Net Gains (Losses) Related to Mortgage Servicing Rights Under the Amortization Method
Net Gains on Derivative Financial Instruments
1,404
1,243
8,963
2,867
Total Mortgage Servicing Rights and Derivative Financial Instruments
163
554
6,440
1,560
Total Mortgage Banking
1 Principally represents changes due to the expected realization of cash flows over time.
2 Changes in valuation assumptions principally reflects changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates. Designated Securities were comprised of mortgage-backed securities in our trading portfolio, which had been expected to offset the volatility of the fair value of our mortgage servicing rights. The investment securities trading portfolio was sold during the first quarter of 2009. Realized investment trading gains and losses were not material for the periods presented.
Mortgage banking income increased by $2.7 million in the second quarter of 2009 compared to the same period in 2008. This increase was primarily due to a $2.7 million increase in net gains on the sale of residential mortgage loans, the result of higher refinancing activity due to lower interest rates on mortgage-based products in the second quarter of 2009 compared to the second quarter of 2008. Residential mortgage loan sales were $266.9 million in the second quarter of 2009, a $143.4 million or 116% increase compared to the same period in 2008. Residential mortgage loan originations were $309.1 million in the second quarter of 2009, a $72.5 million or 31% increase compared to the same period in 2008. Servicing income increased slightly in the second quarter of 2009 compared to the same period in 2008, as our portfolio of loans serviced for third parties was $3.0 billion as of June 30, 2009 compared to $2.6 billion as of June 30, 2008.
Mortgage banking income increased by $7.1 million in the first six months of 2009 compared to the same period in 2008. This increase was primarily due to higher loan origination volume for the first six months of 2009 compared to the same period in 2008. Residential mortgage loan originations were $798.3 million for the first six months of 2009, a $270.0 million or 51% increase compared to the same period in 2008. Also
contributing to the increase in mortgage banking income was a $1.4 million increase in net gains on the sale of residential mortgage loans. Residential mortgage loan sales were $665.3 million for the first six months of 2009, a $391.9 million increase compared to the same period in 2008. Servicing income increased by $0.2 million for the first six months of 2009 compared to the same period in 2008, as our portfolio of loans serviced for third parties increased from June 30, 2008.
Service charges on deposit accounts increased by $0.5 million or 4% in the second quarter of 2009 and by $1.8 million or 7% for the first six months of 2009 compared to the same periods in 2008. The increases in service charges on deposit accounts from 2008 were primarily due to higher account analysis fees on analyzed business checking accounts as a result of lower earnings credit rates on customer accounts. This was partially offset by a decline in monthly service fees resulting from our free checking product which was introduced in July 2008.
Fees, exchange, and other service charges decreased by $0.7 million or 4% in the second quarter of 2009 and by $1.1 million or 4% for the first six months of 2009 compared to the same periods in 2008. The decreases in fees, exchange, and other services charges from 2008 were primarily due to lower merchant income and ATM fees. This was the result of lower transaction volume during 2009 which was impacted by slowness in the Hawaii economy and lower levels of visitor arrivals.
Insurance income decreased by $0.8 million or 15% in the second quarter of 2009 compared to the same period in 2008. This decrease was primarily due to a $0.5 million decline in income from annuity and life insurance products and a $0.3 million decline in commission and brokerage income. Insurance income decreased by $2.3 million or 18% for the first six months of 2009 compared to the same period in 2008. This decrease was primarily due to a $0.8 million decline each in income from annuity and life insurance products and contingent commission income, as well as a $0.7 million decline in commission and brokerage income.
In June 2009, we sold our retail insurance brokerage operation, Bank of Hawaii Insurance Services, Inc. to a third party and recognized a gain of $0.9 million. We continue to own and operate our wholesale insurance business, Triad Insurance Agency, Inc.
Other noninterest income increased by $1.4 million or 17% in the second quarter of 2009 compared to the same period in 2008 primarily due to a $2.8 million gain resulting from the sale of our equity interest in a cargo aircraft in April 2009. Also contributing to the increase in other noninterest income in the second quarter of 2009 was the previously mentioned gain of $0.9 million related to the sale of our retail insurance brokerage operation. This was partially offset by a $1.5 million decrease in the unrealized gains related to our subordinated notes recorded in the second quarter of 2008. Other noninterest income decreased by $14.7 million or 37% for the first six months of 2009 compared to the same period in 2008, primarily due to a $13.7 million gain recorded in the first quarter of 2008 resulting from the mandatory redemption of our Visa shares.
Noninterest expense increased by $5.7 million or 7% in the second quarter of 2009 and by $0.2 million or less than 1% for the first six months of 2009 compared to the same periods in 2008.
Table 5 presents the components of salaries and benefits expense for the second quarter and first six months of 2009 and 2008.
Salaries and Benefits (Unaudited)
Table 5
Salaries
30,732
30,019
60,577
58,922
Incentive Compensation
3,407
4,122
6,699
10,389
Share-Based Compensation andCash Grants for the Purchase of Company Stock
604
1,124
1,391
7,412
Commission Expense
1,750
1,992
3,865
Retirement and Other Benefits
3,804
3,499
8,423
8,725
Payroll Taxes
2,344
2,491
5,844
5,905
Medical, Dental, and Life Insurance
1,236
2,470
3,900
4,969
Separation Expense
267
369
1,270
Total Salaries and Benefits
Salaries and benefits expense decreased by $1.8 million or 4% in the second quarter of 2009 compared to the same period in 2008 primarily due to a $1.5 million reduction in reserves for medical and dental expenses. Salaries and benefits expense decreased by $10.2 million or 10% for the first six months of 2009 compared to the same period in 2008 primarily due to a $6.0 million decrease in share-based compensation and cash grants for the purchase of Company stock. Also contributing to the decrease was a $3.7 million decline in incentive compensation expense, reflecting lower levels of profitability.
Net occupancy expense decreased by $1.3 million or 12% in the second quarter of 2009 and by $1.5 million or 7% for the first six months of 2009 compared to the same periods in 2008. The decrease in net occupancy expense in the second quarter of 2009 was primarily due to decreases of $0.6 million in utilities expense, $0.5 million in net rental expense, and $0.3 million in facilities management fees. The decrease in net occupancy expense for the first six months of 2009 was primarily due to similar savings in previously noted expense categories.
Professional fees increased by $1.4 million or 55% in the second quarter of 2009 and by $1.4 million or 26% for the first six months of 2009 compared to the same periods in 2008. The increase in professional fees in the second quarter of 2009 was primarily due to a $0.8 million increase in legal fees and a $0.3 million increase in other professional services. The increase in professional fees for the first six months of 2009 was primarily due to a $0.7 million increase in legal fees and a $0.3 million increase in other professional services.
FDIC insurance expense increased by $8.7 million in the second quarter of 2009 and by $10.3 million for the first six months of 2009 compared to the same periods in 2008. The increase in the 2009 FDIC insurance expense was primarily due to the Company’s $5.7 million share of an industry-wide assessment by the FDIC. The increase in the 2009 FDIC insurance expense was also a result of higher deposit balances, higher assessment rates, and our participation in the Temporary Liquidity Guarantee Program. In 2008 and early 2009, we utilized credits from the Federal Deposit Insurance Reform Act of 2005 which were available to offset our deposit insurance assessments. We fully utilized these credits in March 2009.
35
Other noninterest expense decreased by $1.3 million or 7% in the second quarter of 2009 compared to the same period in 2008. The decrease in other noninterest expense was primarily due to:
· $0.4 million decrease in each of the categories of delivery and postage services, and unrealized gains related to deferred compensation arrangements;
· $0.3 million decrease in each of the categories of business development and travel, and merchant transaction and card processing fees; and
· $0.2 million decrease in each of the categories of data services and advertising expenses.
This was partially offset by a $0.7 million increase in legal contingency accruals in the second quarter of 2009.
Other noninterest expense increased by $0.2 million or less than 1% for the first six months of 2009 compared to the same period in 2008. The increase in other noninterest expense was primarily due to:
· $5.6 million reversal of contingency accruals related to Visa legal matters recorded in the first quarter of 2008; and
· $0.9 million premium related to the early repayment of our privately placed notes.
These increases in other noninterest expense in the first six months of 2009 compared to the same period in 2008 were partially offset by:
· $2.0 million reduction in contributions to the Bank of Hawaii Charitable Foundation;
· $1.0 million expense related to a call premium on our Capital Securities recorded in 2008;
· $0.7 million decrease in business development and travel expense;
· $0.6 million decrease in delivery and postage services expense;
· $0.5 million decrease in merchant transaction and card processing fees due to lower volume;
· $0.4 million decrease in each of the categories of directors’ fees, advertising, and education and recruitment; and
· $0.3 million decrease in unrealized gains related to deferred compensation arrangements.
Provision for Income Taxes and Effective Tax Rates (Unaudited)
Table 6
Effective Tax Rates
30.18
37.03
32.29
32.86
The lower effective tax rate in the second quarter of 2009 compared to the same period in 2008 was primarily due to a $1.6 million benefit for income taxes which was recorded in the second quarter of 2009 relating to our termination of a leveraged lease transaction. See Note 3 to the Consolidated Financial Statements (Unaudited) for more information on the termination of this leveraged lease transaction.
The effective tax rates for the six months ended June 30, 2009 and 2008 benefited from several significant transactions. The
effective tax rate for the first six months of 2009 benefited from the previously noted termination of a leveraged lease transaction. The effective tax rate for the first six months of 2008 benefited from the sale of our equity interest in an aircraft leveraged lease in March 2008. The total income tax benefit from this transaction was approximately $6.0 million.
36
Analysis of Statements of Condition
The carrying value of our investment securities was $4.5 billion as of June 30, 2009, $2.8 billion as of December 31, 2008, and $2.9 billion as of June 30, 2008. The increase in the carrying value of our investment securities during 2009 was primarily due to investments made in debt securities issued by the U.S. Treasury and mortgage-backed securities issued by U.S. Government-Sponsored Enterprises. These investments in high grade securities with relatively short durations, allows us to maintain flexibility to redeploy funds should such opportunities arise.
Investment securities with a carrying value of $2.8 billion as of June 30, 2009, $2.0 billion as of December 31, 2008, and $1.8 billion as of June 30, 2008 were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase. Investment securities available-for-sale pledged where the secured party has the right to sell or repledge the investment securities were $817.1 million as of June 30, 2009, $838.1 million as of December 31, 2008, and $739.1 million as of June 30, 2008.
Gross unrealized losses on our temporarily impaired investment securities were $35.7 million as of June 30, 2009, $47.4 million as of December 31, 2008, and $36.2 million as of June 30, 2008. Gross unrealized losses related to our temporarily impaired investment securities decreased from December 31, 2008 and June 30, 2008 primarily due to favorable movements in market interest rates.
As of June 30, 2009, we did not own any subordinated debt, or preferred or common stock of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
Table 7 presents the par value, amortized cost, and fair value of our debt and mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation as of June 30, 2009. As of June 30, 2009, we owned mortgage-backed securities issued by non-agencies with an estimated fair value of $214.6 million. See Note 2 to the Consolidated Financial Statements (Unaudited) for more information.
Investment Securities Issued by the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation (Unaudited)
Table 7
Par Value
Amortized Cost
Federal National Mortgage Association
250
252
Federal Home Loan Mortgage Corporation
500
538
Subtotal
750
751
808
745,748
747,025
772,259
654,496
654,703
677,304
1,400,244
1,401,728
1,449,563
1,400,994
1,402,479
1,450,371
Table 8 presents the composition of our loan and lease portfolio by major categories.
Loan and Lease Portfolio Balances (Unaudited)
Table 8
March 31,
September 30,
932,444
1,000,640
1,053,781
1,077,314
1,052,319
788,226
726,193
740,779
708,961
680,784
140,455
153,754
153,952
153,364
168,678
Lease Financing
468,030
454,822
468,140
467,279
471,443
Total Commercial
2,329,155
2,335,409
2,416,652
2,406,918
2,373,224
Consumer
2,309,971
2,402,061
2,461,824
2,478,925
2,485,558
977,632
1,016,381
1,033,221
1,004,437
989,683
309,877
343,642
369,789
395,015
413,338
Other 1
223,276
241,233
248,747
254,163
256,325
Total Consumer
3,820,756
4,003,317
4,113,581
4,132,540
4,144,904
6,338,726
6,539,458
1 Comprised of other revolving credit, installment, and lease financing.
Loans and leases represent our largest category of interest earning assets and the largest source of interest income. Total loans and leases as of June 30, 2009 decreased by $380.3 million or 6% from December 31, 2008 and decreased by $368.2 million or 6% from June 30, 2008.
Commercial loans and leases as of June 30, 2009 decreased by $87.5 million or 4% from December 31, 2008. The decrease in our commercial and industrial lending portfolio was primarily due to continued payoffs by corporate national customers. The decrease in our construction lending portfolio was consistent with a slowing economy in Hawaii. This was partially offset by an increase in our commercial mortgage portfolio primarily due to one new commercial credit. While we continue to lend to credit worthy customers, we remain cautious in our lending approach in the current economic environment. Consumer loans and leases as of June 30, 2009 decreased by $292.8 million or 7% from December 31, 2008. We continued to
experience higher levels of refinancing activity in the second quarter of 2009, albeit at lower levels compared to the first quarter of 2009, as a result of lower interest rates on mortgage-based products. Balances in other consumer loan categories have decreased as a result of reduced customer demand in a slowing economy in Hawaii.
Commercial loans and leases as of June 30, 2009 decreased by $44.1 million or 2% from June 30, 2008. We have experienced run-off in our commercial and industrial portfolio as the economy has slowed in Hawaii. Our strategy over the past year has been to reduce our construction lending exposure and to grow our commercial secured mortgage portfolio. Consumer loans and leases as of June 30, 2009 decreased by $324.1 million or 8% from June 30, 2008. The decrease across all consumer lending portfolios over the past year was a result of reduced customer demand in a slowing economy in Hawaii.
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Table 9 presents the composition of our loan and lease portfolio by geographic area and by major categories.
Geographic Distribution of Loan and Lease Portfolio (Unaudited)
Table 9
Hawaii
683,693
660,038
705,658
695,570
710,528
701,135
640,224
646,280
628,732
599,385
134,638
146,258
145,208
142,719
157,642
45,507
50,311
50,622
50,294
51,854
U.S. Mainland 1
172,702
234,467
229,924
244,498
207,369
14,086
14,210
14,405
4,695
4,808
5,817
6,220
6,438
8,655
9,045
385,064
372,008
385,181
387,160
389,013
Guam
64,151
73,595
77,507
78,700
71,340
69,667
70,056
78,291
73,240
74,226
1,276
2,306
1,990
1,991
18,293
14,479
13,181
10,962
11,329
Other Pacific Islands
8,470
9,343
12,177
14,660
15,942
1,510
1,609
1,703
2,188
2,365
Foreign 2
3,428
23,197
28,515
43,886
47,140
1,828
94
100
106
19,166
18,024
19,156
18,863
19,247
2,103,104
2,189,237
2,242,637
2,255,970
2,257,489
931,010
967,570
982,379
953,078
936,142
219,346
239,960
256,131
271,568
282,843
Other 3
167,695
181,102
185,479
189,417
189,087
23,222
25,876
28,034
29,473
31,881
36,302
41,785
45,559
48,631
49,792
198,941
204,902
210,987
214,748
219,857
20,223
19,726
19,546
18,625
18,313
49,799
56,665
61,907
67,600
72,428
27,475
29,518
30,992
31,961
33,078
7,926
7,922
8,200
8,207
8,212
3,177
3,209
3,262
3,261
3,347
4,430
5,232
6,192
7,216
8,275
28,096
30,609
32,271
32,780
34,157
1 For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower’s business operations are conducted.
2 Loans and leases classified as Foreign represents those which are recorded in the Company’s international business units.
3 Comprised of other revolving credit, installment, and lease financing.
Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands. Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes participation in shared national credits
and leveraged lease financing. Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.
39
Table 10 presents the major components of other assets as of June 30, 2009, December 31, 2008, and June 30, 2008.
Other Assets (Unaudited)
Table 10
Bank-Owned Life Insurance
199,241
196,043
192,716
Federal and State Tax Deposits
82,500
61,000
Federal Home Loan Bank and Federal Reserve Bank Stock
79,723
79,705
79,635
38,870
6,790
Accounts Receivable
17,919
17,607
20,747
36,000
28,922
35,202
Total Other Assets
The decrease in other assets from December 31, 2008 was primarily due to a $14.4 million decrease in the estimated fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities. This was partially offset by a $3.2 million increase each in bank-owned life insurance and prepaid insurance and other prepaid expenses. Total other assets as of June 30, 2009 increased by $36.7 million or 9% from June 30, 2008. This was primarily due to a $21.5 million increase in federal and state tax deposits. Also contributing to the increase in total other assets was a $14.1 million increase in the estimated fair value of our customer-related interest rate swap accounts, which have off-setting amounts recorded in other liabilities. This was partially offset by a $5.0 million decrease in low-income housing and other equity investments as a result of amortization of these investments recorded over this period, and a $3.7 million decrease in dealer advances.
As of June 30, 2009, the carrying value of our Federal Home Loan Bank of Seattle (“FHLB”) stock was $61.3 million. On May 20, 2009, the FHLB filed its Form 10-Q with the SEC, for the quarterly period ended March 31, 2009. The FHLB reported a net loss of $16.2 million for its first quarter of 2009. The FHLB also reported retained earnings of $198.3 million and an accumulated other comprehensive loss of $1.1 billion as of March 31, 2009. The FHLB has the capacity to issue additional debt if necessary to raise cash. Additionally, if needed, the FHLB has the ability to secure funding available to government-sponsored enterprises through the U.S. Treasury. Management expects the Company to remain a member institution of the FHLB and believes that there is no impairment related to the carrying amount of the Company’s FHLB stock as of June 30, 2009. See Note 1 to the Consolidated Financial Statements (Unaudited) for information on our accounting and impairment policy.
40
Table 11 presents the composition of our deposits by major customer categories.
Deposits (Unaudited)
Table 11
4,747,612
4,702,494
4,593,248
4,460,965
4,463,632
3,828,521
3,645,842
3,221,668
2,835,699
3,013,234
Public and Other
443,528
864,455
477,182
361,820
427,124
9,212,791
7,658,484
The increase in our deposit balances as of June 30, 2009 from December 31, 2008 was primarily due to a $577.5 million increase in our business money market savings accounts and a $203.8 million increase in our analyzed business checking accounts. The increase in our deposit balances as of June 30, 2009 from June 30, 2008 was primarily due to a $691.2 million increase in our business money market savings accounts, a
$416.7 million increase in our bonus rate savings products, and a $325.2 million increase in our analyzed business checking accounts. These increases were partially offset by a $209.8 million decrease in noninterest-bearing personal checking accounts, and a $177.1 million decrease in qualified public money management accounts.
Table 12 presents the composition of our savings deposits.
Savings Deposits (Unaudited)
Table 12
Money Market
1,769,023
1,607,375
1,173,132
965,149
1,045,790
Regular Savings
2,285,016
2,298,334
1,931,731
1,815,648
1,770,432
Total Savings Deposits
3,905,709
2,780,797
Table 13 presents our quarterly average balance of time deposits of $100,000 or more.
Average Time Deposits of $100,000 or More (Unaudited)
Table 13
Average Time Deposits
738,652
851,668
891,922
934,845
948,729
41
Borrowings and Long-Term Debt
Borrowings consisted of funds purchased and short-term borrowings, including commercial paper. Borrowings were $18.7 million as of June 30, 2009, a $2.0 million or 10% decrease from December 31, 2008, and a $60.9 million or 77% decrease from June 30, 2008. We manage the level of our borrowings to ensure that we have adequate sources of liquidity. Due to our high level of deposits and our increased capital levels, we reduced the level of borrowings as a source of funds.
Long-term debt was $91.4 million as of June 30, 2009, a $111.9 million or 55% decrease from December 31, 2008, and a $113.9 million or 55% decrease from June 30, 2008. The decrease in long-term debt from December 31, 2008 and June 30, 2008 was primarily due to our repayment of
$119.0 million in subordinated notes and our repayment of $25.0 million in privately placed notes in the first quarter of 2009. This was partially offset by our recognition of $32.4 million in non-recourse debt on the balance sheet in the second quarter of 2009, which was previously not recognized as an obligation of the Bank under leveraged lease accounting treatment. See Note 3 to the Consolidated Financial Statements (Unaudited) for more information on the leasing transaction.
Table 14 presents the composition of our securities sold under agreements to repurchase as of June 30, 2009, December 31, 2008, and June 30, 2008.
Securities Sold Under Agreements to Repurchase (Unaudited)
Table 14
Government Entities
1,124,794
353,835
378,518
Private Institutions
675,000
650,000
Total Securities Sold Under Agreements to Repurchase
As of June 30, 2009, the increase in securities sold under agreements to repurchase from 2008 was primarily due to new placements to accommodate certain government entities. A portion of the increase in securities sold under agreements to repurchase resulted from the withdrawal of public interest-bearing demand deposits in the second quarter of 2009. As of June 30, 2009, the weighted average maturity was 23 days for our securities sold under agreements to repurchase with government entities and 7.80 years for securities sold under agreements to repurchase with private institutions, subject to the private institutions’ right to terminate agreements at earlier specified dates which could decrease the weighted average
maturity to 298 days. As of June 30, 2009, $175.0 million of our securities sold under agreements to repurchase placed with private institutions were indexed to the London Inter Bank Offered Rate (“LIBOR”) with the remaining $500.0 million at fixed interest rates. If the agreements with private institutions are not terminated by the specified dates, the interest rates on the agreements become fixed, at rates ranging from 2.98% to 5.00%, for the remaining term of the respective agreements. As of June 30, 2009, the weighted average interest rate for outstanding agreements with private institutions was 3.51%.
42
As of June 30, 2009, shareholders’ equity was $845.9 million, an increase of $55.2 million or 7% from December 31, 2008 and an increase of $78.3 million or 10% from June 30, 2008. The increase in shareholders’ equity from December 31, 2008 was primarily due to earnings for the first six months of 2009 of $67.0 million and changes in the fair value of our investment securities available-for-sale, net of tax, of $26.3 million. The change in fair value of our investment securities available-for-sale, net of tax, was due to favorable interest rate movements and the larger investment portfolio as of June 30, 2009. This was partially offset by cash dividends paid of $43.1 million. Further discussion on our capital structure is included in the “Corporate Risk Profile — Capital Management” section of MD&A.
Analysis of Business Segments
Our business segments are Retail Banking, Commercial Banking, Investment Services, and Treasury. Our management accounting process measures the performance of the business segments based on the management structure of the Company. This process uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, 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 U.S. generally accepted accounting principles (“GAAP”). We use this management accounting process to assess business segment performance and to allocate resources.
The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to our overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of our assumptions that are
subject to change based on changes in current interest rates and market conditions. Funds transfer pricing also serves to transfer interest rate risk to Treasury. However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines. See Note 5 to the Consolidated Financial Statements (Unaudited) for selected financial information as of and for the three months ended June 30, 2009 and 2008.
Retail Banking
Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products include residential mortgage loans, home equity lines of credit, and installment loans. Deposit products include checking, savings, and time deposit accounts. Products and services from Retail Banking are delivered to customers through 73 Hawaii branch locations, 486 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.
Net income decreased by $9.8 million or 39% in the second quarter of 2009 compared to the same period in 2008 primarily due to an increase in the Provision, a decrease in net interest income, as well as an increase in noninterest expense. This was partially offset by an increase in noninterest income. The $8.9 million increase in the Provision was primarily due to higher net charge-offs of loans in the segment’s home equity and residential mortgage portfolios. The $5.9 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances. The $2.2 million increase in noninterest expense was primarily due to higher FDIC base insurance assessments as well as our share of an industry-wide assessment by the FDIC. The $1.5 million increase in noninterest income was primarily due to higher mortgage banking income, a result of higher refinancing activity.
Net income decreased by $16.0 million or 34% for the first six months of 2009 compared to the same period in 2008. The decrease in net income was primarily due to an increase in the Provision and noninterest expense, along with a decrease in
43
net interest income. This was partially offset by an increase in noninterest income. The $15.5 million increase in the Provision was primarily due to higher net charge-offs of loans in the segment’s home equity and residential mortgage portfolios. The $10.9 million decrease in net interest income was primarily due to lower earnings credits on the segment’s deposit portfolio, partially offset by higher average deposit balances. The $3.9 million increase in noninterest expense was primarily due to higher FDIC base insurance assessments as well as our share of an industry-wide assessment by the FDIC. The $5.0 million increase in noninterest income was primarily due to higher mortgage banking income, a result of higher refinancing activity.
Commercial Banking
Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, consumer automobile loans and leases, deposit and cash management products, merchant services to its small business customers, and wholesale/retail property and casualty insurance products. Commercial lending, deposit, and cash management services are offered to middle-market and large companies in Hawaii. Commercial real estate mortgages focus on customers that include investors, developers, and builders domiciled in Hawaii. Commercial Banking also includes syndicated lending activities, international banking, and operations at our 12 branches in the Pacific Islands.
Net income decreased by $7.7 million or 72% in the second quarter of 2009 compared to the second quarter of 2008 primarily due to an increase in the Provision and noninterest expense. The $11.8 million increase in the Provision was primarily due to higher net charge-offs of loans and leases in the segment. The $2.9 million increase in noninterest expense was primarily due to higher FDIC base insurance assessments as well as our share of an industry-wide assessment by the FDIC. This was partially offset by a $3.2 million increase in noninterest income primarily due to the pre-tax gain on the sale of our equity interest in an aircraft lease and to the net
proceeds from the sale of our retail insurance brokerage operation.
Net income decreased by $11.7 million or 44% for the first six months of 2009 compared to the same period in 2008 primarily due to an increase in the Provision and noninterest expense. The $14.4 million increase in the Provision was primarily due to higher net charge-offs of loans and leases in the segment. The $2.9 million increase in noninterest expense was primarily due to higher FDIC base insurance assessments as well as our share of an industry-wide assessment by the FDIC.
Investment Services
Investment Services includes private banking, trust services, asset management, and institutional investment advisory services. A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management. The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals. The asset management group manages portfolios and creates investment products. Institutional sales and service offers investment advice to corporations, government entities, and foundations. This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.
Net income decreased by $2.6 million or 64% in the second quarter of 2009 compared to the same period in 2008 primarily due to a decrease in noninterest income and an increase in the Provision. The $4.4 million decrease in noninterest income was primarily due to lower fee income as a result of lower asset values under trust administration. The $0.7 million increase in the Provision was primarily due to higher net charge-offs of loans in this segment.
Net income decreased by $5.3 million or 71% for the first six months of 2009 compared to the same period in 2008 primarily due to a decrease in noninterest income and an increase in the Provision. The $8.2 million decrease in noninterest income was primarily due to lower fee income as a result of lower
44
asset values under trust administration. The $1.6 million increase in the Provision was primarily due to higher net charge-offs of loans and leases in the segment.
Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign exchange business. This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, and short and long-term borrowings. The primary sources of noninterest income are from bank-owned life insurance and foreign exchange income related to customer driven currency requests from merchants and island visitors. The net residual effect of the transfer pricing of assets and liabilities is included in this segment, along with eliminations of inter-company transactions.
Net income increased by $2.2 million or 92% in the second quarter 2009 compared to the same period in 2008 primarily due to a lower provision for taxes and higher net interest income, partially offset by lower noninterest income and higher noninterest expense. The $3.3 million decrease in the provision for income taxes was primarily due to a reduction in the Company’s effective tax rate. The $1.1 million increase in net interest income was primarily due to the increase in the balance of the investment portfolio and reductions in long-term debt. The $1.2 million increase in noninterest expense was primarily due to a corporate insurance self-insurance reserve
adjustment in 2008 and higher FDIC base assessments as well as our share of an industry-wide assessment by the FDIC. The $1.0 million decrease in noninterest income was primarily due to unrealized gains related to our subordinated notes recorded in the second quarter of 2008.
Net income decreased by $6.6 million or 51% for the first six months of 2009 compared to the same period in 2008 primarily due to lower noninterest income, partially offset by lower noninterest expense and higher net interest income. The $14.5 million decrease in noninterest income was primarily due to a $13.7 million gain from the mandatory redemption of our Visa shares in the first quarter of 2008 and unrealized gains from our subordinated notes in the second quarter of 2008. The $5.7 million decrease in noninterest expense was primarily due to various accruals recorded in the first quarter of 2008 (cash awards to purchase our stock and earnings-based incentive compensation) and lower separation expense. The $2.1 million increase in net interest income was primarily due to reductions in long-term debt.
Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, Corporate Services Group, and Corporate and Regulatory Administration) included in Treasury provide a wide-range of support to our other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
45
Corporate Risk Profile
Credit Risk
Our overall credit risk position is reflective of the continued weak economic activity during the second quarter of 2009, with increasing levels ofnon-performing assets compared to December 31, 2008. The signs of slowness in the Hawaii economy continued as visitor arrivals declined in 2009 compared to the same period in 2008. Trends in the construction and real estate industries are also slowing. Hawaii’s seasonally adjusted unemployment rate increased to 7.4% as of June 30, 2009. The slow economy in Hawaii is resulting in higher delinquencies and loss rates in our loan and lease portfolio, with the primary impact in our mortgage-related consumer lending, commercial and industrial, and commercial real estate portfolios. We also have elevated risk in our air transportation portfolio due to a weaker economy in Hawaii and the U.S. Mainland.
Table 15 summarizes our outstanding air transportation credit exposure. As of June 30, 2009, included in our commercial leasing portfolio were eight leveraged leases on aircraft that were originated in the 1990’s and prior. Outstanding credit exposure related to these leveraged leases was $53.9 million as of June 30, 2009. The decrease in our air transportation
credit exposure as of June 30, 2009 compared to prior periods was primarily due to the sale of our equity interest in a cargo aircraft in the second quarter of 2009. See Note 3 to the Consolidated Financial Statements (Unaudited) for more information on this transaction.
Relative to our total loan and lease portfolio, domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, and marginal pricing power. We believe that volatile fuel costs, coupled with a weak U.S. Mainland economy, will place additional pressure on the financial health of air transportation carriers for the foreseeable future.
As of June 30, 2009, we also had an $8.2 million exposure related to one direct financing lease for an aircraft, whose intermediary and guarantor subsequently disclosed that it will not receive additional financial support from the U.S. government and that it could file for bankruptcy protection.
These aircraft leases have been considered in our quarterly evaluation of the adequacy of the Allowance as we continue to consider the ongoing financial concerns about the air transportation industry.
Air Transportation Credit Exposure 1 (Unaudited)
Table 15
Passenger Carriers Based In the United States
56,774
56,876
60,189
60,260
60,603
Passenger Carriers Based Outside the United States
5,374
5,433
5,672
5,809
7,161
Cargo Carriers
13,994
13,831
13,689
13,568
Total Air Transportation Credit Exposure
62,148
76,303
79,692
79,758
81,332
1 Exposure includes leveraged leases and a direct financing lease.
Table 16 presents information on non-performing assets (“NPAs”) and accruing loans and leases past due 90 days or more.
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More (Unaudited)
Table 16
Non-Accrual Loans and Leases 1
10,511
21,839
3,869
574
1,119
1,219
6,548
5,001
956
910
133
149
329
19,234
27,750
9,003
723
1,448
16,265
9,230
3,904
3,749
3,784
2,567
1,620
1,614
1,162
1,189
550
1,383
19,382
12,233
5,518
4,911
5,003
Total Non-Accrual Loans and Leases
38,616
39,983
14,521
5,634
6,451
346
293
Total Non-Performing Assets
40,329
5,927
Accruing Loans and Leases Past Due 90 Days or More 1
6,785
257
268
7,053
4,657
4,794
4,192
3,455
2,601
2,879
1,720
1,077
296
201
769
776
743
758
625
1,100
1,134
926
756
9,575
8,390
7,146
5,435
4,183
Total Accruing Loans and Leases Past Due 90 Days or More
9,588
8,647
14,199
Ratio of Non-Accrual Loans and Leases toTotal Loans and Leases
0.63%
0.22%
0.09%
0.10%
Ratio of Non-Performing Assets toTotal Loans and Leases and Foreclosed Real Estate
0.64%
0.23%
Ratio of Commercial Non-Performing Assets toTotal Commercial Loans and Leases
0.83%
1.19%
0.37%
0.03%
0.06%
Ratio of Consumer Non-Performing Assets toTotal Consumer Loans and Leases and Foreclosed Real Estate
0.52%
0.31%
0.14%
0.13%
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases
0.79%
0.77%
0.45%
0.17%
Quarter-to-Quarter Changes in Non-Performing Assets
Balance at Beginning of Quarter
6,045
Additions
22,459
29,164
15,464
1,355
2,900
Reductions
Payments
(15,593
(874
(955
(630
Return to Accrual Status
(230
(768
(1,468
(756
(943
Sales of Foreclosed Real Estate
(82
Charge-offs/Write-downs
(7,911
(2,060
(2,534
(397
(692
Total Reductions
(23,734
(3,784
(6,442
(2,108
(2,265
Balance at End of Quarter
1 As of June 30, 2009, troubled debt restructurings which were not included in non-accrual loans and accruing loans past due 90 days or more were $2.3 million.
2 Comprised of other revolving credit, installment, and lease financing.
47
NPAs are comprised of non-accrual loans and leases and foreclosed real estate. The $24.1 million increase in NPAs from December 31, 2008 was primarily due to additions to non-accrual status of $12.4 million in residential mortgage loans, $6.6 million in commercial and industrial loans, $1.5 million in construction loans, and $1.2 million in commercial mortgage loans.
The increase in residential mortgage non-accrual loans was primarily due to the addition to non-accrual status of five loans totaling $5.8 million. These loans were comprised of a $1.9 million loan related to an owner-occupied property on Oahu and $3.9 million in loans related to four properties on the neighbor islands. The increase in residential mortgage non-accrual loans was also due to the addition to non-accrual status of $2.3 million in land loans.
Activity in our commercial and industrial portfolio during the second quarter of 2009 included the addition to non-accrual status of three loans totaling $7.1 million to Hawaii middle-market borrowers which have been adversely impacted by the slow economy in Hawaii. This was offset by the sale of a $16.9 million commercial and industrial loan made to a large national mall owner which was previously on non-accrual status.
Residential mortgage and home equity lending comprise the largest components of our consumer lending portfolio. Home equity lending represents higher risk due to its predominantly junior lien position. As of June 30, 2009, $523.0 million of home equity loans outstanding were related to properties where we hold both the first and second lien. An additional $165.0 million in home equity loans outstanding were related to properties where our home equity lien is in the first position. The remaining $290.0 million in home equity loans outstanding were behind another institution's first lien. Within our home equity portfolio, the segment that exposes us to the most risk are those loans to customers whose home equity lines were originated in 2005 or later, have current monitoring credit scores below 660, and have current loan-to-value (“LTV”) ratios greater than 70%. This segment of our home equity portfolio was $55.0 million as of June 30, 2009, and represented approximately 6% of our total home equity portfolio.
Included in NPAs are loans that we consider impaired. Impaired loans are defined as those which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt
restructuring (“TDR”). Impaired loans were $33.8 million as of June 30, 2009, $8.3 million as of December 31, 2008, and $0.2 million as of June 30, 2008. Impaired loans had a related Allowance of $7.9 million as of June 30, 2009 and less than $0.1 million as of December 31, 2008 and June 30, 2008.
As of June 30, 2009, we had loans whose terms had been modified in a TDR of $2.9 million. This was comprised of two commercial loans totaling $2.3 million which were accruing interest as of June 30, 2009 and one residential mortgage loan of $0.6 million which was on non-accrual status as of June 30, 2009. Our loans whose terms have been modified in a TDR were primarily the result of modification of interest rates to below market rates and extensions of maturity dates.
Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Loans and leases in this category are 90 days or more past due, as to principal or interest, and still accruing interest because they are well secured and in the process of collection. The decrease in loans and leases past due 90 days or more and still accruing interest from December 31, 2008 was primarily due to the payoff of two commercial loans during the first quarter of 2009. The increase in loans and leases past due 90 days or more and still accruing interest from June 30, 2008 reflects increased delinquency activity in consumer loans, consistent with a slowing economy in Hawaii.
48
Reserve for Credit Losses
Table 17 presents the activity in our reserve for credit losses.
Reserve for Credit Losses (Unaudited)
Table 17
Balance at Beginning of Period
139,835
105,167
128,667
96,167
Loans and Leases Charged-Off
(12,249
(1,396
(18,713
(2,785
(4,473
(142
(4,493
(276
(1,814
(133
(2,641
(3,303
(473
(5,619
(1,279
(2,121
(2,187
(5,103
(5,102
(3,643
(1,954
(7,220
(4,757
Total Loans and Leases Charged-Off
(27,603
(6,285
(43,789
(14,332
Recoveries on Loans and Leases Previously Charged-Off
228
770
1,187
126
271
95
76
172
735
700
1,462
1,496
718
667
1,423
1,403
Total Recoveries on Loans and Leases Previously Charged-Off
1,913
1,613
4,130
4,233
Net Loans and Leases Charged-Off
(25,690
(4,672
(39,659
(10,099
Provision for Unfunded Commitments
Balance at End of Period 2
142,835
107,667
Components
Reserve for Unfunded Commitments
5,419
5,169
Total Reserve for Credit Losses
Average Loans and Leases Outstanding
Ratio of Net Loans and Leases Charged-Off toAverage Loans and Leases Outstanding (annualized)
1.65%
0.29%
1.26%
Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding
2.23%
1.57%
2 Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated Statements of Condition (Unaudited).
We maintain a Reserve which consists of two components, the Allowance and a Reserve for Unfunded Commitments (“Unfunded Reserve”). The Reserve provides for the risk of credit losses inherent in the loan and lease portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation. The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as
necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.
The level of the Allowance is adjusted by recording an expense or recovery through the Provision. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in
49
other noninterest expense. The Provision exceeded net charge-offs of loans and leases for the second quarter of 2009 by $3.0 million and by $13.9 million for the first six months of 2009. Commercial and industrial charge-offs for the second quarter of 2009 included a $6.9 million partial charge-off related to the previously noted sale of a loan made to a large national mall owner as well as a $2.3 million partial charge-off related to a non-relationship syndicated credit that was subsequently sold. Commercial lease financing charge-offs for the second quarter of 2009 included a $4.4 million charge-off related to the replacement of an existing leveraged lease with a direct financing lease. See Note 3 to the Consolidated Financial Statements (Unaudited) for more information. Charge-off activity in our consumer portfolios in the second quarter of 2009 was consistent with slowness in the Hawaii economy.
As of June 30, 2009, the Allowance was $137.4 million or 2.23% of total loans and leases outstanding. This represents an increase of 34 basis points from December 31, 2008 and an increase of 66 basis points from June 30, 2008. The increase in the Allowance during the second quarter of 2009 was due to increased risk in our mortgage-related consumer lending portfolios due to the overall weakness in the Hawaii economy.
Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of June 30, 2009, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.
The Reserve for Unfunded Commitments
We increased the Unfunded Reserve by $0.3 million from December 31, 2008 and June 30, 2008. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors.
Market Risk
Market risk is the potential of loss arising from adverse changes in interest rates and prices. We are exposed to market risk as a consequence of the normal course of conducting our business activities. Our market risk management process involves measuring, monitoring, controlling, and managing risks that can significantly impact our statements of income and condition. In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility. The activities associated with these market risks are categorized into “trading” and “other than trading.”
Our trading activities include foreign currency and foreign exchange contracts that expose us to a small degree of foreign currency risk. These transactions are primarily executed on behalf of customers. Our other than trading activities include normal business transactions that expose our balance sheet profile to varying degrees of market risk.
Our primary market risk exposure is interest rate risk.
Interest Rate Risk
The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.
Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the FRB. The monetary policies of the FRB influence, to a significant extent, the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities. The nature and impact of future changes in monetary policies are generally not predictable.
50
In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates. The ALCO utilizes several techniques to manage interest rate risk, which include:
· adjusting balance sheet mix or altering the interest rate characteristics of assets and liabilities;
· changing product pricing strategies;
· modifying characteristics of the investment securities portfolio; or
· using derivative financial instruments.
The use of derivative financial instruments has generally been limited. This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans, investment securities with deposits, and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by ALCO. Natural and offsetting hedges reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.
A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model. The model is used to estimate and measure the balance sheet sensitivity to changes in interest rates. These estimates are based on assumptions on the behavior of loan and deposit
pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments. The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits. While such assumptions are inherently uncertain, we believe that these assumptions are reasonable. As a result, the simulation model attempts to capture the dynamic nature of the balance sheet.
We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates. Table 18 presents, as of June 30, 2009 and 2008, an estimate of the change in net interest income during a quarterly time frame that would result from a gradual change in interest rates, moving in a parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario. The base case scenario assumes the balance sheet and interest rates are generally unchanged. Based on the net interest income simulation as of June 30, 2009, net interest income sensitivity to changes in interest rates as of June 30, 2009 was slightly more sensitive to higher interest rate scenarios but less sensitive to lower interest rate scenarios compared to the sensitivity profiles as of June 30, 2008. Economic conditions and government intervention have caused interest rates to fall to low levels and introduced significant market volatility. In addition, credit spreads remained wide relative to historic levels. These factors have contributed to greater interest rate risk to the Company as of June 30, 2009.
Net Interest Income Sensitivity Profile (Unaudited)
Table 18
Change in Net Interest Income Per Quarter
Change in Interest Rates (basis points)
+200
(605
)%
(539
+100
(403
(108
-100
(1,185
-200
(1,613
(1.6
(2,478
51
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time. Conversely, if the yield curve should steepen further from its mostly “normal” profile, net interest income may increase.
We also use the Market Value of Portfolio Equity (“MVPE”) sensitivity analysis to estimate the net present value change in our net assets (i.e., assets, liabilities, and off-balance sheet instruments) from changes in interest rates. The MVPE was approximately $1.9 billion as of June 30, 2009 and
approximately $1.8 billion as of June 30, 2008. Table 19 presents, as of June 30, 2009 and 2008, an estimate of the change in the MVPE that would occur from an instantaneous 100 and 200 basis point increase or decrease in interest rates, moving in a parallel fashion over the entire yield curve. The MVPE sensitivity decreased as of June 30, 2009 compared to June 30, 2008 as a result of changes in the balance sheet, particularly from higher deposit balances. A further significant parallel decline in interest rates effectively creates a 0% interest rate environment which greatly reduces the estimated value of both our loans and deposits.
Market Value of Equity Sensitivity Profile (Unaudited)
Table 19
Change in Market Value of Equity
(27,465
(185,348
13,945
(79,522
(48,606
(2.6
(17,573
(158,936
(8.5
(153,445
(8.7
Further enhancing the MVPE sensitivity analysis are:
· value-at-risk metrics;
· key rate analysis;
· duration of equity analysis; and
· exposure to basis risk and non-parallel yield curve shifts.
There are inherent limitations to these measures; however, used along with the MVPE sensitivity analysis, we obtain better overall insight for managing our exposures to changes in interest rates. Based on the additional analyses, we estimate that our greatest exposure is in scenarios where medium-term interest rates decrease on a relative basis more than long-term interest rates.
Liquidity Management
Liquidity is managed in an effort to ensure that we have continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancings, liability issuances and settlements, and off-balance
sheet funding commitments. We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions. The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.
In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including investment securities available-for-sale. Assets generate long-term liquidity through cash flows from investment securities and loans. With respect to liabilities, short-term liquidity is generated from securities sold under agreements to repurchase and other short-term funding sources such as federal funds while long-term liquidity is generated through growth in deposits and long-term debt.
52
We strengthened our liquidity position in the second quarter of 2009, with increased levels of funding. Total deposits were $9.0 billion as of June 30, 2009, a $727.6 million or 9% increase from December 31, 2008 and a $1.1 billion or 14% increase from June 30, 2008. As a result, cash and cash equivalents were $954.6 million as of June 30, 2009, an increase of $158.1 million from December 31, 2008 and an increase of $667.9 million from June 30, 2008.
Capital Management
The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of June 30, 2009, the Company and the Bank were “well capitalized” under this regulatory framework. There have been no conditions or events since June 30, 2009 that management believes have changed either the Company’s or the Bank’s capital classifications.
As of June 30, 2009, our shareholders’ equity was $845.9
million, a $55.2 million or 7% increase from December 31, 2008, and a $78.3 million or 10% increase from June 30, 2008.
In response to a slowing economy and economic uncertainty, we began in the second half of 2008 to increase capital. As of June 30, 2009, our Tier 1 capital ratio was 12.56%, our total capital ratio was 13.82%, our leverage ratio was 6.66%, and our ratio of tangible common equity to risk-weighted assets was 13.02%.
From the beginning of our share repurchase program in July 2001 through October 28, 2008, we repurchased a total of 45.6 million shares of common stock and returned $1.6 billion to our shareholders at an average cost of $35.44 per share. We have not repurchased shares of our common stock since October 2008, except for purchases from our employees in connection with income tax withholdings related to the vesting of restricted stock and shares purchased for our Rabbi Trust. Total share repurchase authority under our share repurchase program was $1.70 billion as of July 22, 2009. Remaining buyback authority under our share repurchase program was $85.4 million as of July 22, 2009.
In July 2009, our Board of Directors declared a quarterly cash dividend of $0.45 per share on our outstanding shares. The dividend will be payable on September 15, 2009 to our shareholders of record at the close of business on August 31, 2009.
53
Table 20 presents our regulatory capital and ratios as of June 30, 2009, December 31, 2008, and June 30, 2008.
Regulatory Capital and Ratios (Unaudited)
Table 20
2008 1
Regulatory Capital
Less:
Cumulative Change in Fair Value of Financial Liabilities Accounted for Under the Fair Value Option
(2,565
(683
(1,838
Postretirement Benefit Liability Adjustments
6,858
7,079
8,398
Unrealized Valuation and Other Adjustments
22,025
(4,276
(12,207
2,473
2,106
3,027
Tier 1 Capital
782,135
751,519
735,219
Allowable Reserve for Credit Losses
78,643
84,163
84,898
Unrealized Gains on Investment Securities Available-for-Sale
Total Regulatory Capital
860,778
835,682
820,174
Risk-Weighted Assets
6,227,230
6,688,530
6,769,036
Key Regulatory Capital Ratios
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
1 Tier 1 capital, total capital, and leverage ratios as of June 30, 2008 were revised from 10.91%, 12.16%, and 7.04%, respectively.
The revisions to our Regulatory Capital Ratios as of June 30, 2008 did not change our well capitalized position, as defined in the regulatory framework for prompt corrective action, as previously reported.
Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as variable-interest entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008.
Credit Commitments
Table 21 presents our credit commitments as of June 30, 2009.
Credit Commitments (Unaudited)
Table 21
Less Than
After 5
One Year
1-3 Years
4-5 Years
Years
Unfunded Commitments to Extend Credit
544,104
408,593
72,332
1,112,885
2,137,914
Standby Letters of Credit
89,627
108
89,742
Commercial Letters of Credit
20,522
580
21,109
Total Credit Commitments
654,253
409,281
72,346
2,248,765
54
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the “Market Risk” section of MD&A.
Item 4. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2009. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Parent’s repurchases of equity securities for the second quarter of 2009 were as follows:
Issuer Purchases of Equity Securities (Unaudited)
Total Number of Shares
Approximate Dollar Value
Purchased as Part of
of Shares that May Yet Be
Total Number of
Average Price
Publicly Announced Plans
Purchased Under the
Period
Shares Purchased 1
Paid Per Share
or Programs
Plans or Programs 2
April 1 – 30, 2009
1,899
34.31
85,356,214
May 1 – 31, 2009
1,246
31.09
June 1 – 30, 2009
654
36.20
3,799
33.58
The shares purchased in the second quarter of 2009 were from employees in connection with income tax withholdings related to the vesting of restricted stock, a stock swap by a director, and shares purchased for our Rabbi Trust. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.
The share repurchase program was first announced in July 2001. As of June 30, 2009, $85.4 million remained of the total $1.70 billion total repurchase amount authorized by the Parent’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual shareholders meeting held on April 24, 2009, the following matters were submitted to a vote of the shareholders:
a. Election of Directors *
S. Haunani Apoliona
Votes cast for:
40,699,648
Votes withheld:
611,157
Mary G. F. Bitterman
32,574,542
8,736,263
Mark A. Burak
40,771,172
539,632
Michael J. Chun
40,802,930
507,874
Clinton R. Churchill
40,783,416
527,389
David A. Heenan
32,465,989
8,844,815
Peter S. Ho
40,729,900
580,905
Robert Huret
40,766,153
544,652
Allan R. Landon
40,487,801
823,004
Kent T. Lucien
37,200,686
4,110,118
Martin A. Stein
40,763,346
547,459
Donald M. Takaki
40,409,697
901,107
Barbara J. Tanabe
32,539,782
8,771,022
Robert W. Wo, Jr.
32,595,632
8,715,172
b. Ratification of Ernst and Young LLP as independent registered public accountants for the fiscal year ending December 31, 2009.
40,603,644
Votes cast against:
679,108
Abstentions:
28,052
c. Approve the Material Terms of the Amended Performance Measures under the 2004 Stock and Incentive Compensation Plan.
28,406,697
6,481,258
140,709
* The directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded.
Item 6. Exhibits
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 27, 2009
By:
/s/ Allan R. Landon
Chairman of the Board and
Chief Executive Officer
/s/ Kent T. Lucien
Chief Financial Officer
58
Exhibit Index
Exhibit Number
Computation of Ratio of Earnings to Fixed Charges (Unaudited)
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002