UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012
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
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of July 20, 2012, there were 45,193,551 shares of common stock outstanding.
Bank of Hawaii Corporation
Form 10-Q
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
|
|
Three Months Ended |
|
Six Months Ended | ||||||||||||
|
|
June 30, |
|
June 30, | ||||||||||||
(dollars in thousands, except per share amounts) |
|
|
2012 |
|
2011 |
|
|
|
2012 |
|
2011 |
| ||||
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest and Fees on Loans and Leases |
|
|
$ |
63,910 |
|
$ |
65,542 |
|
|
|
$ |
128,601 |
|
$ |
132,135 |
|
Income on Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Available-for-Sale |
|
|
16,988 |
|
23,490 |
|
|
|
34,701 |
|
61,159 |
| ||||
Held-to-Maturity |
|
|
25,054 |
|
20,553 |
|
|
|
51,467 |
|
28,186 |
| ||||
Deposits |
|
|
1 |
|
2 |
|
|
|
3 |
|
- |
| ||||
Funds Sold |
|
|
119 |
|
297 |
|
|
|
248 |
|
548 |
| ||||
Other |
|
|
281 |
|
279 |
|
|
|
561 |
|
558 |
| ||||
Total Interest Income |
|
|
106,353 |
|
110,163 |
|
|
|
215,581 |
|
222,586 |
| ||||
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
3,219 |
|
4,792 |
|
|
|
6,692 |
|
10,024 |
| ||||
Securities Sold Under Agreements to Repurchase |
|
|
7,250 |
|
7,338 |
|
|
|
14,554 |
|
14,379 |
| ||||
Funds Purchased |
|
|
5 |
|
5 |
|
|
|
10 |
|
11 |
| ||||
Long-Term Debt |
|
|
498 |
|
529 |
|
|
|
996 |
|
976 |
| ||||
Total Interest Expense |
|
|
10,972 |
|
12,664 |
|
|
|
22,252 |
|
25,390 |
| ||||
Net Interest Income |
|
|
95,381 |
|
97,499 |
|
|
|
193,329 |
|
197,196 |
| ||||
Provision for Credit Losses |
|
|
628 |
|
3,600 |
|
|
|
979 |
|
8,291 |
| ||||
Net Interest Income After Provision for Credit Losses |
|
|
94,753 |
|
93,899 |
|
|
|
192,350 |
|
188,905 |
| ||||
Noninterest Income |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trust and Asset Management |
|
|
11,195 |
|
11,427 |
|
|
|
22,113 |
|
23,233 |
| ||||
Mortgage Banking |
|
|
7,581 |
|
2,661 |
|
|
|
12,631 |
|
5,783 |
| ||||
Service Charges on Deposit Accounts |
|
|
9,225 |
|
9,375 |
|
|
|
18,816 |
|
19,307 |
| ||||
Fees, Exchange, and Other Service Charges |
|
|
12,326 |
|
16,662 |
|
|
|
24,725 |
|
31,607 |
| ||||
Investment Securities Gains (Losses), Net |
|
|
- |
|
- |
|
|
|
(90 |
) |
6,084 |
| ||||
Insurance |
|
|
2,399 |
|
3,210 |
|
|
|
4,677 |
|
5,981 |
| ||||
Other |
|
|
4,122 |
|
6,128 |
|
|
|
12,058 |
|
11,390 |
| ||||
Total Noninterest Income |
|
|
46,848 |
|
49,463 |
|
|
|
94,930 |
|
103,385 |
| ||||
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and Benefits |
|
|
44,037 |
|
46,800 |
|
|
|
91,061 |
|
93,582 |
| ||||
Net Occupancy |
|
|
10,058 |
|
10,476 |
|
|
|
20,574 |
|
20,803 |
| ||||
Net Equipment |
|
|
4,669 |
|
4,741 |
|
|
|
10,495 |
|
9,439 |
| ||||
Professional Fees |
|
|
2,386 |
|
2,294 |
|
|
|
4,518 |
|
4,452 |
| ||||
FDIC Insurance |
|
|
2,088 |
|
2,010 |
|
|
|
4,159 |
|
5,254 |
| ||||
Other |
|
|
17,509 |
|
27,453 |
|
|
|
35,147 |
|
46,326 |
| ||||
Total Noninterest Expense |
|
|
80,747 |
|
93,774 |
|
|
|
165,954 |
|
179,856 |
| ||||
Income Before Provision for Income Taxes |
|
|
60,854 |
|
49,588 |
|
|
|
121,326 |
|
112,434 |
| ||||
Provision for Income Taxes |
|
|
20,107 |
|
14,440 |
|
|
|
36,769 |
|
34,926 |
| ||||
Net Income |
|
|
$ |
40,747 |
|
$ |
35,148 |
|
|
|
$ |
84,557 |
|
$ |
77,508 |
|
Basic Earnings Per Share |
|
|
$ |
0.90 |
|
$ |
0.74 |
|
|
|
$ |
1.86 |
|
$ |
1.63 |
|
Diluted Earnings Per Share |
|
|
$ |
0.90 |
|
$ |
0.74 |
|
|
|
$ |
1.85 |
|
$ |
1.62 |
|
Dividends Declared Per Share |
|
|
$ |
0.45 |
|
$ |
0.45 |
|
|
|
$ |
0.90 |
|
$ |
0.90 |
|
Basic Weighted Average Shares |
|
|
45,221,293 |
|
47,428,718 |
|
|
|
45,465,910 |
|
47,638,752 |
| ||||
Diluted Weighted Average Shares |
|
|
45,347,368 |
|
47,607,814 |
|
|
|
45,610,489 |
|
47,837,778 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
|
|
Three Months Ended |
|
Six Months Ended | ||||||||||||
|
|
June 30, |
|
June 30, | ||||||||||||
(dollars in thousands) |
|
|
2012 |
|
2011 |
|
|
|
2012 |
|
2011 |
| ||||
Net Income |
|
|
$ |
40,747 |
|
$ |
35,148 |
|
|
|
$ |
84,557 |
|
$ |
77,508 |
|
Other Comprehensive Income (Loss), Net of Tax: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net Unrealized Gains (Losses) on Investment Securities |
|
|
3,387 |
|
19,265 |
|
|
|
(3,067 |
) |
(235 |
) | ||||
Defined Benefit Plans |
|
|
153 |
|
577 |
|
|
|
306 |
|
1,048 |
| ||||
Other Comprehensive Income (Loss) |
|
|
3,540 |
|
19,842 |
|
|
|
(2,761 |
) |
813 |
| ||||
Comprehensive Income |
|
|
$ |
44,287 |
|
$ |
54,990 |
|
|
|
$ |
81,796 |
|
$ |
78,321 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Assets |
|
|
|
|
| ||
Interest-Bearing Deposits |
|
$ |
3,057 |
|
$ |
3,036 |
|
Funds Sold |
|
499,338 |
|
512,384 |
| ||
Investment Securities |
|
|
|
|
| ||
Available-for-Sale |
|
3,339,472 |
|
3,451,885 |
| ||
Held to Maturity (Fair Value of $3,828,954 and $3,754,206) |
|
3,729,665 |
|
3,657,796 |
| ||
Loans Held for Sale |
|
14,223 |
|
18,957 |
| ||
Loans and Leases |
|
5,671,483 |
|
5,538,304 |
| ||
Allowance for Loan and Lease Losses |
|
(132,443 |
) |
(138,606 |
) | ||
Net Loans and Leases |
|
5,539,040 |
|
5,399,698 |
| ||
Total Earning Assets |
|
13,124,795 |
|
13,043,756 |
| ||
Cash and Noninterest-Bearing Deposits |
|
131,845 |
|
154,489 |
| ||
Premises and Equipment |
|
107,421 |
|
103,550 |
| ||
Customers Acceptances |
|
176 |
|
476 |
| ||
Accrued Interest Receivable |
|
45,044 |
|
43,510 |
| ||
Foreclosed Real Estate |
|
2,569 |
|
3,042 |
| ||
Mortgage Servicing Rights |
|
23,254 |
|
24,279 |
| ||
Goodwill |
|
31,517 |
|
31,517 |
| ||
Other Assets |
|
449,005 |
|
441,772 |
| ||
Total Assets |
|
$ |
13,915,626 |
|
$ |
13,846,391 |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Deposits |
|
|
|
|
| ||
Noninterest-Bearing Demand |
|
$ |
3,105,798 |
|
$ |
2,850,923 |
|
Interest-Bearing Demand |
|
2,063,070 |
|
2,005,983 |
| ||
Savings |
|
4,435,894 |
|
4,398,638 |
| ||
Time |
|
1,943,231 |
|
1,337,079 |
| ||
Total Deposits |
|
11,547,993 |
|
10,592,623 |
| ||
Funds Purchased |
|
13,756 |
|
10,791 |
| ||
Securities Sold Under Agreements to Repurchase |
|
1,065,653 |
|
1,925,998 |
| ||
Long-Term Debt |
|
28,075 |
|
30,696 |
| ||
Bankers Acceptances |
|
176 |
|
476 |
| ||
Retirement Benefits Payable |
|
41,812 |
|
46,949 |
| ||
Accrued Interest Payable |
|
5,114 |
|
5,330 |
| ||
Taxes Payable and Deferred Taxes |
|
86,095 |
|
95,840 |
| ||
Other Liabilities |
|
123,127 |
|
135,021 |
| ||
Total Liabilities |
|
12,911,801 |
|
12,843,724 |
| ||
Shareholders Equity |
|
|
|
|
| ||
Common Stock ($.01 par value; authorized 500,000,000 shares; |
|
571 |
|
571 |
| ||
Capital Surplus |
|
511,729 |
|
507,558 |
| ||
Accumulated Other Comprehensive Income |
|
32,502 |
|
35,263 |
| ||
Retained Earnings |
|
1,044,588 |
|
1,003,938 |
| ||
Treasury Stock, at Cost (Shares: June 30, 2012 - 12,053,615 |
|
(585,565 |
) |
(544,663 |
) | ||
Total Shareholders Equity |
|
1,003,825 |
|
1,002,667 |
| ||
Total Liabilities and Shareholders Equity |
|
$ |
13,915,626 |
|
$ |
13,846,391 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity (Unaudited)
|
|
|
|
|
|
|
|
Accum. |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
| ||||||
|
|
Common |
|
|
|
|
|
Compre- |
|
|
|
|
|
|
| ||||||
|
|
Shares |
|
Common |
|
Capital |
|
hensive |
|
Retained |
|
Treasury |
|
|
| ||||||
(dollars in thousands) |
|
Outstanding |
|
Stock |
|
Surplus |
|
Income |
|
Earnings |
|
Stock |
|
Total |
| ||||||
Balance as of December 31, 2011 |
|
45,947,116 |
|
$ |
571 |
|
$ |
507,558 |
|
$ |
35,263 |
|
$ |
1,003,938 |
|
$ |
(544,663 |
) |
$ |
1,002,667 |
|
Net Income |
|
- |
|
- |
|
- |
|
- |
|
84,557 |
|
- |
|
84,557 |
| ||||||
Other Comprehensive Loss |
|
- |
|
- |
|
- |
|
(2,761 |
) |
- |
|
- |
|
(2,761 |
) | ||||||
Share-Based Compensation |
|
- |
|
- |
|
3,723 |
|
- |
|
- |
|
- |
|
3,723 |
| ||||||
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits |
|
400,094 |
|
- |
|
448 |
|
- |
|
(2,758 |
) |
10,684 |
|
8,374 |
| ||||||
Common Stock Repurchased |
|
(1,098,933 |
) |
- |
|
- |
|
- |
|
- |
|
(51,586 |
) |
(51,586 |
) | ||||||
Cash Dividends Paid ($0.90 per share) |
|
- |
|
- |
|
- |
|
- |
|
(41,149 |
) |
- |
|
(41,149 |
) | ||||||
Balance as of June 30, 2012 |
|
45,248,277 |
|
$ |
571 |
|
$ |
511,729 |
|
$ |
32,502 |
|
$ |
1,044,588 |
|
$ |
(585,565 |
) |
$ |
1,003,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance as of December 31, 2010 |
|
48,097,672 |
|
$ |
570 |
|
$ |
500,888 |
|
$ |
26,965 |
|
$ |
932,629 |
|
$ |
(449,919 |
) |
$ |
1,011,133 |
|
Net Income |
|
- |
|
- |
|
- |
|
- |
|
77,508 |
|
- |
|
77,508 |
| ||||||
Other Comprehensive Income |
|
- |
|
- |
|
- |
|
813 |
|
- |
|
- |
|
813 |
| ||||||
Share-Based Compensation |
|
- |
|
- |
|
1,360 |
|
- |
|
- |
|
- |
|
1,360 |
| ||||||
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits |
|
237,619 |
|
1 |
|
529 |
|
- |
|
(2,752 |
) |
10,051 |
|
7,829 |
| ||||||
Common Stock Repurchased |
|
(1,109,988 |
) |
- |
|
- |
|
- |
|
- |
|
(52,228 |
) |
(52,228 |
) | ||||||
Cash Dividends Paid ($0.90 per share) |
|
- |
|
- |
|
- |
|
- |
|
(42,965 |
) |
- |
|
(42,965 |
) | ||||||
Balance as of June 30, 2011 |
|
47,225,303 |
|
$ |
571 |
|
$ |
502,777 |
|
$ |
27,778 |
|
$ |
964,420 |
|
$ |
(492,096 |
) |
$ |
1,003,450 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
Six Months Ended |
| ||||
|
|
|
June 30, |
| ||||
(dollars in thousands) |
|
|
2012 |
|
2011 |
| ||
Operating Activities |
|
|
|
|
|
| ||
Net Income |
|
|
$ |
84,557 |
|
$ |
77,508 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
| ||
Provision for Credit Losses |
|
|
979 |
|
8,291 |
| ||
Depreciation and Amortization |
|
|
6,883 |
|
7,076 |
| ||
Amortization of Deferred Loan and Lease Fees |
|
|
(1,548 |
) |
(1,330 |
) | ||
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net |
|
|
28,147 |
|
23,367 |
| ||
Share-Based Compensation |
|
|
3,723 |
|
1,360 |
| ||
Benefit Plan Contributions |
|
|
(5,574 |
) |
(651 |
) | ||
Deferred Income Taxes |
|
|
(11,358 |
) |
(12,455 |
) | ||
Net Gains on Sales of Leases |
|
|
(2,841 |
) |
(602 |
) | ||
Net Losses (Gains) on Investment Securities |
|
|
90 |
|
(6,084 |
) | ||
Proceeds from Sales of Loans Held for Sale |
|
|
195,368 |
|
234,984 |
| ||
Originations of Loans Held for Sale |
|
|
(190,634 |
) |
(222,022 |
) | ||
Tax Benefits from Share-Based Compensation |
|
|
(623 |
) |
(633 |
) | ||
Net Change in Other Assets and Other Liabilities |
|
|
(11,543 |
) |
(12,981 |
) | ||
Net Cash Provided by Operating Activities |
|
|
95,626 |
|
95,828 |
| ||
|
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
|
| ||
Investment Securities Available-for-Sale: |
|
|
|
|
|
| ||
Proceeds from Prepayments and Maturities |
|
|
468,489 |
|
490,602 |
| ||
Proceeds from Sales |
|
|
34,831 |
|
682,283 |
| ||
Purchases |
|
|
(401,944 |
) |
(982,759 |
) | ||
Investment Securities Held-to-Maturity: |
|
|
|
|
|
| ||
Proceeds from Prepayments and Maturities |
|
|
446,346 |
|
110,989 |
| ||
Purchases |
|
|
(540,472 |
) |
(281,936 |
) | ||
Net Change in Loans and Leases |
|
|
(141,526 |
) |
(36,718 |
) | ||
Premises and Equipment, Net |
|
|
(10,755 |
) |
(4,691 |
) | ||
Net Cash Used in Investing Activities |
|
|
(145,031 |
) |
(22,230 |
) | ||
|
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
|
| ||
Net Change in Deposits |
|
|
955,370 |
|
90,039 |
| ||
Net Change in Short-Term Borrowings |
|
|
(857,380 |
) |
(26,794 |
) | ||
Tax Benefits from Share-Based Compensation |
|
|
623 |
|
633 |
| ||
Proceeds from Issuance of Common Stock |
|
|
7,858 |
|
7,334 |
| ||
Repurchase of Common Stock |
|
|
(51,586 |
) |
(52,228 |
) | ||
Cash Dividends Paid |
|
|
(41,149 |
) |
(42,965 |
) | ||
Net Cash Provided by (Used in) Financing Activities |
|
|
13,736 |
|
(23,981 |
) | ||
|
|
|
|
|
|
| ||
Net Change in Cash and Cash Equivalents |
|
|
(35,669 |
) |
49,617 |
| ||
Cash and Cash Equivalents at Beginning of Period |
|
|
669,909 |
|
607,547 |
| ||
Cash and Cash Equivalents at End of Period |
|
|
$ |
634,240 |
|
$ |
657,164 |
|
Supplemental Information |
|
|
|
|
|
| ||
Cash Paid for Interest |
|
|
$ |
21,785 |
|
$ |
24,279 |
|
Cash Paid for Income Taxes |
|
|
41,775 |
|
48,057 |
| ||
Non-Cash Investing Activities: |
|
|
|
|
|
| ||
Transfer from Investment Securities Available-for-Sale to Investment Securities Held-to-Maturity |
|
|
- |
|
2,220,814 |
| ||
Transfer from Loans to Foreclosed Real Estate |
|
|
2,309 |
|
1,159 |
| ||
Transfers from Loans to Loans Held for Sale |
|
|
- |
|
8,555 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Bank of Hawaii Corporation (the Parent) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii. Bank of Hawaii Corporation and its Subsidiaries (the Company) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands. The Parents principal and only operating subsidiary is Bank of Hawaii (the Bank). All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
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 Companys Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.
Investment Securities
Realized gains and losses are recorded in noninterest income using the specific identification method.
Securities Sold Under Agreements to Repurchase
In April 2011, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The provisions of ASU No. 2011-03 modify the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The Company adopted the provisions of ASU No. 2011-03 prospectively for transactions or modifications of existing transactions that occurred on or after January 1, 2012. As the Company accounted for all of its repurchase agreements as collateralized financing arrangements prior to the adoption of ASU No. 2011-03, the adoption had no impact on the Companys Consolidated Financial Statements.
Fair Value Measurements
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entitys net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entitys shareholders equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012. The fair value measurement provisions of ASU No. 2011-04 had no impact on the Companys Consolidated Financial Statements. See Note 12 to the Consolidated Financial Statements for the enhanced disclosures required by ASU No. 2011-04.
Comprehensive Income
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Under either method, entities are required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU No. 2011-05 was effective for the Companys interim reporting period beginning on or after January 1, 2012, with retrospective application required. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The provisions of ASU No. 2011-12 defer indefinitely the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. ASU No. 2011-12, which shares the same effective date as ASU No. 2011-05, does not defer the requirement for entities to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted the provisions of ASU No. 2011-05 and ASU No. 2011-12 which resulted in a new statement of comprehensive income for the interim period ended March 31, 2012. The adoption of ASU No. 2011-05 and ASU No. 2011-12 had no impact on the Companys statements of income and condition.
Future Application of Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities. This project began as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS. However, as the FASB and International Accounting Standards Board were not able to reach a converged solution with regards to offsetting requirements, they each developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no impact on the Companys Consolidated Financial Statements.
Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of the Companys investment securities as of June 30, 2012 and December 31, 2011 were as follows:
|
|
|
|
Gross |
|
Gross |
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair | ||||
(dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value | ||||
June 30, 2012 |
|
|
|
|
|
|
|
| ||||
Available-for-Sale: |
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury and Government Agencies |
|
$ |
1,104,936 |
|
$ |
12,089 |
|
$ |
(7 |
) |
$ |
1,117,018 |
Debt Securities Issued by States and Political Subdivisions |
|
684,958 |
|
21,906 |
|
(3,124 |
) |
703,740 | ||||
Debt Securities Issued by Corporations |
|
92,684 |
|
1,511 |
|
(710 |
) |
93,485 | ||||
Mortgage-Backed Securities Issued by |
|
|
|
|
|
|
|
| ||||
Government Agencies |
|
1,344,260 |
|
34,478 |
|
(748 |
) |
1,377,990 | ||||
U.S. Government-Sponsored Enterprises |
|
44,690 |
|
2,549 |
|
- |
|
47,239 | ||||
Total Mortgage-Backed Securities |
|
1,388,950 |
|
37,027 |
|
(748 |
) |
1,425,229 | ||||
Total |
|
$ |
3,271,528 |
|
$ |
72,533 |
|
$ |
(4,589 |
) |
$ |
3,339,472 |
Held-to-Maturity: |
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury and Government Agencies |
|
$ |
179,459 |
|
$ |
5,813 |
|
$ |
- |
|
$ |
185,272 |
Mortgage-Backed Securities Issued by |
|
|
|
|
|
|
|
| ||||
Government Agencies |
|
3,511,169 |
|
91,309 |
|
(300 |
) |
3,602,178 | ||||
U.S. Government-Sponsored Enterprises |
|
39,037 |
|
2,467 |
|
- |
|
41,504 | ||||
Total Mortgage-Backed Securities |
|
3,550,206 |
|
93,776 |
|
(300 |
) |
3,643,682 | ||||
Total |
|
$ |
3,729,665 |
|
$ |
99,589 |
|
$ |
(300 |
) |
$ |
3,828,954 |
|
|
|
|
|
|
|
|
| ||||
December 31, 2011 |
|
|
|
|
|
|
|
| ||||
Available-for-Sale: |
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury and Government Agencies |
|
$ |
1,220,282 |
|
$ |
11,204 |
|
$ |
(468 |
) |
$ |
1,231,018 |
Debt Securities Issued by States and Political Subdivisions |
|
391,276 |
|
15,783 |
|
- |
|
407,059 | ||||
Debt Securities Issued by Corporations |
|
97,917 |
|
607 |
|
(2,137 |
) |
96,387 | ||||
Mortgage-Backed Securities Issued by |
|
|
|
|
|
|
|
| ||||
Government Agencies |
|
1,618,913 |
|
38,066 |
|
(1,107 |
) |
1,655,872 | ||||
U.S. Government-Sponsored Enterprises |
|
58,548 |
|
3,001 |
|
- |
|
61,549 | ||||
Total Mortgage-Backed Securities |
|
1,677,461 |
|
41,067 |
|
(1,107 |
) |
1,717,421 | ||||
Total |
|
$ |
3,386,936 |
|
$ |
68,661 |
|
$ |
(3,712 |
) |
$ |
3,451,885 |
Held-to-Maturity: |
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury and Government Agencies |
|
$ |
179,474 |
|
$ |
6,704 |
|
$ |
- |
|
$ |
186,178 |
Mortgage-Backed Securities Issued by |
|
|
|
|
|
|
|
| ||||
Government Agencies |
|
3,429,038 |
|
89,801 |
|
(2,918 |
) |
3,515,921 | ||||
U.S. Government-Sponsored Enterprises |
|
49,284 |
|
2,823 |
|
- |
|
52,107 | ||||
Total Mortgage-Backed Securities |
|
3,478,322 |
|
92,624 |
|
(2,918 |
) |
3,568,028 | ||||
Total |
|
$ |
3,657,796 |
|
$ |
99,328 |
|
$ |
(2,918 |
) |
$ |
3,754,206 |
The table below presents an analysis of the contractual maturities of the Companys investment securities as of June 30, 2012. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
(dollars in thousands) |
|
Amortized Cost |
|
Fair Value | ||
Available-for-Sale: |
|
|
|
| ||
Due in One Year or Less |
|
$ |
506,168 |
|
$ |
507,766 |
Due After One Year Through Five Years |
|
350,223 |
|
357,482 | ||
Due After Five Years Through Ten Years |
|
297,872 |
|
305,803 | ||
Due After Ten Years |
|
728,315 |
|
743,192 | ||
|
|
1,882,578 |
|
1,914,243 | ||
Mortgage-Backed Securities Issued by |
|
|
|
| ||
Government Agencies |
|
1,344,260 |
|
1,377,990 | ||
U.S. Government-Sponsored Enterprises |
|
44,690 |
|
47,239 | ||
Total Mortgage-Backed Securities |
|
1,388,950 |
|
1,425,229 | ||
Total |
|
$ |
3,271,528 |
|
$ |
3,339,472 |
|
|
|
|
| ||
Held-to-Maturity: |
|
|
|
| ||
Due After One Year Through Five Years |
|
$ |
179,459 |
|
$ |
185,272 |
Mortgage-Backed Securities Issued by |
|
|
|
| ||
Government Agencies |
|
3,511,169 |
|
3,602,178 | ||
U.S. Government-Sponsored Enterprises |
|
39,037 |
|
41,504 | ||
Total Mortgage-Backed Securities |
|
3,550,206 |
|
3,643,682 | ||
Total |
|
$ |
3,729,665 |
|
$ |
3,828,954 |
Investment securities with carrying values of $3.5 billion and $3.6 billion as of June 30, 2012 and December 31, 2011, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase. As of June 30, 2012 and December 31, 2011, the Company did not have any investment securities pledged where the secured party had the right to sell or repledge the collateral.
There were no sales of investment securities for the three months ended June 30, 2012 and 2011. Gross gains on the sales of investment securities were $0.2 million and $10.3 million for the six months ended June 30, 2012 and 2011, respectively. Gross losses on the sales of investment securities were $0.3 million and $4.2 million for the six months ended June 30, 2012 and 2011, respectively.
The Companys investment securities in an unrealized loss position, segregated by continuous length of impairment, were as follows:
|
Less Than 12 Months |
|
12 Months or Longer |
|
Total | |||||||||||||
|
|
|
|
Gross |
|
|
|
Gross |
|
|
|
Gross | ||||||
|
|
|
|
Unrealized |
|
|
|
Unrealized |
|
|
|
Unrealized | ||||||
(dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses | ||||||
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Debt Securities Issued by |
|
$ |
285 |
|
$ |
(1) |
|
$ |
3,387 |
|
$ |
(6) |
|
$ |
3,672 |
|
$ |
(7) |
Debt Securities Issued by |
|
235,567 |
|
(3,124) |
|
- |
|
- |
|
235,567 |
|
(3,124) | ||||||
Debt Securities Issued by Corporations |
|
19,290 |
|
(710) |
|
- |
|
- |
|
19,290 |
|
(710) | ||||||
Mortgage-Backed Securities Issued by |
|
188,909 |
|
(903) |
|
13,290 |
|
(145) |
|
202,199 |
|
(1,048) | ||||||
Total |
|
$ |
444,051 |
|
$ |
(4,738) |
|
$ |
16,677 |
|
$ |
(151) |
|
$ |
460,728 |
|
$ |
(4,889) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Debt Securities Issued by |
|
$ |
127,644 |
|
$ |
(464) |
|
$ |
920 |
|
$ |
(4) |
|
$ |
128,564 |
|
$ |
(468) |
Debt Securities Issued by Corporations |
|
38,059 |
|
(2,137) |
|
- |
|
- |
|
38,059 |
|
(2,137) | ||||||
Mortgage-Backed Securities Issued by |
|
727,726 |
|
(3,751) |
|
34,824 |
|
(274) |
|
762,550 |
|
(4,025) | ||||||
Total |
|
$ |
893,429 |
|
$ |
(6,352) |
|
$ |
35,744 |
|
$ |
(278) |
|
$ |
929,173 |
|
$ |
(6,630) |
The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2012, which was comprised of 44 securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.
As of June 30, 2012 and December 31, 2011, the gross unrealized losses reported for mortgage-backed securities related to investment securities issued by the Government National Mortgage Association.
As of June 30, 2012, the carrying value of the Companys Federal Home Loan Bank and Federal Reserve Bank stock was $61.3 million and $18.8 million, respectively. These securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Note 3. Loans and Leases and the Allowance for Loan and Lease Losses
Loans and Leases
The Companys loan and lease portfolio was comprised of the following as of June 30, 2012 and December 31, 2011:
|
|
June 30, |
|
December 31, | ||
(dollars in thousands) |
|
2012 |
|
2011 | ||
Commercial |
|
|
|
| ||
Commercial and Industrial |
|
$ |
781,688 |
|
$ |
817,170 |
Commercial Mortgage |
|
961,984 |
|
938,250 | ||
Construction |
|
97,668 |
|
98,669 | ||
Lease Financing |
|
281,020 |
|
311,928 | ||
Total Commercial |
|
2,122,360 |
|
2,166,017 | ||
Consumer |
|
|
|
| ||
Residential Mortgage |
|
2,401,331 |
|
2,215,892 | ||
Home Equity |
|
766,839 |
|
780,691 | ||
Automobile |
|
194,339 |
|
192,506 | ||
Other 1 |
|
186,614 |
|
183,198 | ||
Total Consumer |
|
3,549,123 |
|
3,372,287 | ||
Total Loans and Leases |
|
$ |
5,671,483 |
|
$ |
5,538,304 |
1 Comprised of other revolving credit, installment, and lease financing.
Allowance for Loan and Lease Losses (the Allowance)
The following presents by portfolio segment, the activity in the Allowance for the three and six months ended June 30, 2012 and 2011. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Companys impairment measurement method and the related recorded investment in loans and leases as of June 30, 2012 and 2011.
(dollars in thousands) |
|
Commercial |
|
Consumer |
|
Total |
| |||
Three Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Balance at Beginning of Period |
|
$ |
78,174 |
|
$ |
57,432 |
|
$ |
135,606 |
|
Loans and Leases Charged-Off |
|
(1,078 |
) |
(4,858 |
) |
(5,936 |
) | |||
Recoveries on Loans and Leases Previously Charged-Off |
|
545 |
|
1,600 |
|
2,145 |
| |||
Net Loans and Leases Charged-Off |
|
(533 |
) |
(3,258 |
) |
(3,791 |
) | |||
Provision for Credit Losses |
|
371 |
|
257 |
|
628 |
| |||
Balance at End of Period |
|
$ |
78,012 |
|
$ |
54,431 |
|
$ |
132,443 |
|
Six Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Balance at Beginning of Period |
|
$ |
80,562 |
|
$ |
58,044 |
|
$ |
138,606 |
|
Loans and Leases Charged-Off |
|
(2,839 |
) |
(10,856 |
) |
(13,695 |
) | |||
Recoveries on Loans and Leases Previously Charged-Off |
|
2,574 |
|
3,979 |
|
6,553 |
| |||
Net Loans and Leases Charged-Off |
|
(265 |
) |
(6,877 |
) |
(7,142 |
) | |||
Provision for Credit Losses |
|
(2,285 |
) |
3,264 |
|
979 |
| |||
Balance at End of Period |
|
$ |
78,012 |
|
$ |
54,431 |
|
$ |
132,443 |
|
As of June 30, 2012 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Individually Evaluated for Impairment |
|
$ |
54 |
|
$ |
4,774 |
|
$ |
4,828 |
|
Collectively Evaluated for Impairment |
|
77,958 |
|
49,657 |
|
127,615 |
| |||
Total |
|
$ |
78,012 |
|
$ |
54,431 |
|
$ |
132,443 |
|
Recorded Investment in Loans and Leases: |
|
|
|
|
|
|
| |||
Individually Evaluated for Impairment |
|
$ |
14,131 |
|
$ |
32,687 |
|
$ |
46,818 |
|
Collectively Evaluated for Impairment |
|
2,108,229 |
|
3,516,436 |
|
5,624,665 |
| |||
Total |
|
$ |
2,122,360 |
|
$ |
3,549,123 |
|
$ |
5,671,483 |
|
|
|
|
|
|
|
|
| |||
Three Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Balance at Beginning of Period |
|
$ |
87,533 |
|
$ |
59,825 |
|
$ |
147,358 |
|
Loans and Leases Charged-Off |
|
(1,507 |
) |
(7,514 |
) |
(9,021 |
) | |||
Recoveries on Loans and Leases Previously Charged-Off |
|
443 |
|
2,596 |
|
3,039 |
| |||
Net Loans and Leases Charged-Off |
|
(1,064 |
) |
(4,918 |
) |
(5,982 |
) | |||
Provision for Credit Losses |
|
2,516 |
|
1,084 |
|
3,600 |
| |||
Balance at End of Period |
|
$ |
88,985 |
|
$ |
55,991 |
|
$ |
144,976 |
|
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Balance at Beginning of Period |
|
$ |
80,977 |
|
$ |
66,381 |
|
$ |
147,358 |
|
Loans and Leases Charged-Off |
|
(3,164 |
) |
(13,217 |
) |
(16,381 |
) | |||
Recoveries on Loans and Leases Previously Charged-Off |
|
1,065 |
|
4,643 |
|
5,708 |
| |||
Net Loans and Leases Charged-Off |
|
(2,099 |
) |
(8,574 |
) |
(10,673 |
) | |||
Provision for Credit Losses |
|
10,107 |
|
(1,816 |
) |
8,291 |
| |||
Balance at End of Period |
|
$ |
88,985 |
|
$ |
55,991 |
|
$ |
144,976 |
|
As of June 30, 2011 |
|
|
|
|
|
|
| |||
Allowance for Loan and Lease Losses: |
|
|
|
|
|
|
| |||
Individually Evaluated for Impairment |
|
$ |
- |
|
$ |
3,875 |
|
$ |
3,875 |
|
Collectively Evaluated for Impairment |
|
88,985 |
|
52,116 |
|
141,101 |
| |||
Total |
|
$ |
88,985 |
|
$ |
55,991 |
|
$ |
144,976 |
|
Recorded Investment in Loans and Leases: |
|
|
|
|
|
|
| |||
Individually Evaluated for Impairment |
|
$ |
5,109 |
|
$ |
24,348 |
|
$ |
29,457 |
|
Collectively Evaluated for Impairment |
|
2,081,294 |
|
3,240,722 |
|
5,322,016 |
| |||
Total |
|
$ |
2,086,403 |
|
$ |
3,265,070 |
|
$ |
5,351,473 |
|
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.
The following are the definitions of the Companys credit quality indicators:
Pass: |
|
Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass. |
|
|
|
Special Mention: |
|
Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve managements close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention. |
|
|
|
Classified: |
|
Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner. |
The Companys credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Companys loans and leases as of June 30, 2012 and December 31, 2011.
|
June 30, 2012 | |||||||||||||
(dollars in thousands) |
Commercial |
|
Commercial |
|
Construction |
|
Lease |
|
Total | |||||
Pass |
$ |
729,709 |
|
$ |
883,119 |
|
$ |
80,888 |
|
$ |
253,636 |
|
$ |
1,947,352 |
Special Mention |
24,640 |
|
37,066 |
|
6,910 |
|
25,912 |
|
94,528 | |||||
Classified |
27,339 |
|
41,799 |
|
9,870 |
|
1,472 |
|
80,480 | |||||
Total |
$ |
781,688 |
|
$ |
961,984 |
|
$ |
97,668 |
|
$ |
281,020 |
|
$ |
2,122,360 |
|
|
|
|
|
|
|
|
|
| |||||
(dollars in thousands) |
Residential |
|
Home |
|
Automobile |
|
Other 1 |
|
Total | |||||
Pass |
$ |
2,374,155 |
|
$ |
763,187 |
|
$ |
194,241 |
|
$ |
186,220 |
|
$ |
3,517,803 |
Classified |
27,176 |
|
3,652 |
|
98 |
|
394 |
|
31,320 | |||||
Total |
$ |
2,401,331 |
|
$ |
766,839 |
|
$ |
194,339 |
|
$ |
186,614 |
|
$ |
3,549,123 |
Total Recorded Investment in Loans and Leases |
|
|
|
|
|
|
|
$ |
5,671,483 |
|
December 31, 2011 | |||||||||||||
(dollars in thousands) |
Commercial |
|
Commercial |
|
Construction |
|
Lease |
|
Total | |||||
Pass |
$ |
765,339 |
|
$ |
859,891 |
|
$ |
83,722 |
|
$ |
282,081 |
|
$ |
1,991,033 |
Special Mention |
30,316 |
|
43,805 |
|
370 |
|
26,257 |
|
100,748 | |||||
Classified |
21,515 |
|
34,554 |
|
14,577 |
|
3,590 |
|
74,236 | |||||
Total |
$ |
817,170 |
|
$ |
938,250 |
|
$ |
98,669 |
|
$ |
311,928 |
|
$ |
2,166,017 |
|
|
|
|
|
|
|
|
|
| |||||
(dollars in thousands) |
Residential |
|
Home |
|
Automobile |
|
Other 1 |
|
Total | |||||
Pass |
$ |
2,186,063 |
|
$ |
776,473 |
|
$ |
192,336 |
|
$ |
182,431 |
|
$ |
3,337,303 |
Classified |
29,829 |
|
4,218 |
|
170 |
|
767 |
|
34,984 | |||||
Total |
$ |
2,215,892 |
|
$ |
780,691 |
|
$ |
192,506 |
|
$ |
183,198 |
|
$ |
3,372,287 |
Total Recorded Investment in Loans and Leases |
|
|
|
|
|
|
|
$ |
5,538,304 |
1 Comprised of other revolving credit, installment, and lease financing.
Aging Analysis of Accruing and Non-Accruing Loans and Leases
The following presents by class, an aging analysis of the Companys accruing and non-accruing loans and leases as of June 30, 2012 and December 31, 2011.
(dollars in thousands) |
|
30 - 59 |
|
60 - 89 |
|
Past Due |
|
Non- |
|
Total |
|
Current |
|
Total |
|
Non-Accrual |
| ||||||||
As of June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial and Industrial |
|
$ |
685 |
|
$ |
1,276 |
|
$ |
1 |
|
$ |
5,778 |
|
$ |
7,740 |
|
$ |
773,948 |
|
$ |
781,688 |
|
$ |
5,147 |
|
Commercial Mortgage |
|
- |
|
- |
|
- |
|
2,737 |
|
2,737 |
|
959,247 |
|
961,984 |
|
2,512 |
| ||||||||
Construction |
|
- |
|
- |
|
- |
|
1,182 |
|
1,182 |
|
96,486 |
|
97,668 |
|
1,182 |
| ||||||||
Lease Financing |
|
- |
|
14 |
|
- |
|
- |
|
14 |
|
281,006 |
|
281,020 |
|
- |
| ||||||||
Total Commercial |
|
685 |
|
1,290 |
|
1 |
|
9,697 |
|
11,673 |
|
2,110,687 |
|
2,122,360 |
|
8,841 |
| ||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Residential Mortgage |
|
6,280 |
|
4,155 |
|
4,229 |
|
26,803 |
|
41,467 |
|
2,359,864 |
|
2,401,331 |
|
4,621 |
| ||||||||
Home Equity |
|
4,337 |
|
2,352 |
|
2,445 |
|
2,425 |
|
11,559 |
|
755,280 |
|
766,839 |
|
342 |
| ||||||||
Automobile |
|
2,993 |
|
353 |
|
98 |
|
- |
|
3,444 |
|
190,895 |
|
194,339 |
|
- |
| ||||||||
Other 1 |
|
1,651 |
|
1,102 |
|
395 |
|
- |
|
3,148 |
|
183,466 |
|
186,614 |
|
- |
| ||||||||
Total Consumer |
|
15,261 |
|
7,962 |
|
7,167 |
|
29,228 |
|
59,618 |
|
3,489,505 |
|
3,549,123 |
|
4,963 |
| ||||||||
Total |
|
$ |
15,946 |
|
$ |
9,252 |
|
$ |
7,168 |
|
$ |
38,925 |
|
$ |
71,291 |
|
$ |
5,600,192 |
|
$ |
5,671,483 |
|
$ |
13,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As of December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial and Industrial |
|
$ |
2,959 |
|
$ |
743 |
|
$ |
1 |
|
$ |
6,243 |
|
$ |
9,946 |
|
$ |
807,224 |
|
$ |
817,170 |
|
$ |
5,661 |
|
Commercial Mortgage |
|
678 |
|
- |
|
- |
|
2,140 |
|
2,818 |
|
935,432 |
|
938,250 |
|
959 |
| ||||||||
Construction |
|
- |
|
- |
|
- |
|
2,080 |
|
2,080 |
|
96,589 |
|
98,669 |
|
- |
| ||||||||
Lease Financing |
|
- |
|
- |
|
- |
|
5 |
|
5 |
|
311,923 |
|
311,928 |
|
5 |
| ||||||||
Total Commercial |
|
3,637 |
|
743 |
|
1 |
|
10,468 |
|
14,849 |
|
2,151,168 |
|
2,166,017 |
|
6,625 |
| ||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Residential Mortgage |
|
8,878 |
|
9,258 |
|
6,422 |
|
25,256 |
|
49,814 |
|
2,166,078 |
|
2,215,892 |
|
1,856 |
| ||||||||
Home Equity |
|
5,310 |
|
2,694 |
|
2,194 |
|
2,024 |
|
12,222 |
|
768,469 |
|
780,691 |
|
97 |
| ||||||||
Automobile |
|
4,095 |
|
839 |
|
170 |
|
- |
|
5,104 |
|
187,402 |
|
192,506 |
|
- |
| ||||||||
Other 1 |
|
1,679 |
|
1,528 |
|
435 |
|
- |
|
3,642 |
|
179,556 |
|
183,198 |
|
- |
| ||||||||
Total Consumer |
|
19,962 |
|
14,319 |
|
9,221 |
|
27,280 |
|
70,782 |
|
3,301,505 |
|
3,372,287 |
|
1,953 |
| ||||||||
Total |
|
$ |
23,599 |
|
$ |
15,062 |
|
$ |
9,222 |
|
$ |
37,748 |
|
$ |
85,631 |
|
$ |
5,452,673 |
|
$ |
5,538,304 |
|
$ |
8,578 |
|
1 Comprised of other revolving credit, installment, and lease financing.
2 Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.
Impaired Loans
The following presents by class, information related to the Companys impaired loans as of June 30, 2012 and December 31, 2011.
(dollars in thousands) |
|
Recorded |
|
Unpaid |
|
Related Allowance | |||
June 30, 2012 |
|
|
|
|
|
| |||
Impaired Loans with No Related Allowance Recorded: |
|
|
|
|
|
| |||
Commercial |
|
|
|
|
|
| |||
Commercial and Industrial |
|
$ |
9,033 |
|
$ |
14,283 |
|
$ |
- |
Commercial Mortgage |
|
3,029 |
|
3,529 |
|
- | |||
Construction |
|
1,182 |
|
1,512 |
|
- | |||
Total Commercial |
|
13,244 |
|
19,324 |
|
- | |||
Total Impaired Loans with No Related Allowance Recorded |
|
$ |
13,244 |
|
$ |
19,324 |
|
$ |
- |
|
|
|
|
|
|
| |||
Impaired Loans with an Allowance Recorded: |
|
|
|
|
|
| |||
Commercial |
|
|
|
|
|
| |||
Commercial and Industrial |
|
$ |
887 |
|
$ |
887 |
|
$ |
54 |
Total Commercial |
|
887 |
|
887 |
|
54 | |||
Consumer |
|
|
|
|
|
| |||
Residential Mortgage |
|
26,669 |
|
32,565 |
|
4,706 | |||
Automobile |
|
5,729 |
|
5,729 |
|
48 | |||
Other 1 |
|
289 |
|
289 |
|
20 | |||
Total Consumer |
|
32,687 |
|
38,583 |
|
4,774 | |||
Total Impaired Loans with an Allowance Recorded |
|
$ |
33,574 |
|
$ |
39,470 |
|
$ |
4,828 |
|
|
|
|
|
|
| |||
Impaired Loans: |
|
|
|
|
|
| |||
Commercial |
|
$ |
14,131 |
|
$ |
20,211 |
|
$ |
54 |
Consumer |
|
32,687 |
|
38,583 |
|
4,774 | |||
Total Impaired Loans |
|
$ |
46,818 |
|
$ |
58,794 |
|
$ |
4,828 |
|
|
|
|
|
|
| |||
December 31, 2011 |
|
|
|
|
|
| |||
Impaired Loans with No Related Allowance Recorded: |
|
|
|
|
|
| |||
Commercial |
|
|
|
|
|
| |||
Commercial and Industrial |
|
$ |
6,176 |
|
$ |
13,526 |
|
$ |
- |
Commercial Mortgage |
|
2,140 |
|
2,640 |
|
- | |||
Total Commercial |
|
8,316 |
|
16,166 |
|
- | |||
Total Impaired Loans with No Related Allowance Recorded |
|
$ |
8,316 |
|
$ |
16,166 |
|
$ |
- |
|
|
|
|
|
|
| |||
Impaired Loans with an Allowance Recorded: |
|
|
|
|
|
| |||
Commercial |
|
|
|
|
|
| |||
Commercial and Industrial |
|
$ |
4,447 |
|
$ |
4,447 |
|
$ |
846 |
Commercial Mortgage |
|
292 |
|
292 |
|
19 | |||
Construction |
|
2,080 |
|
2,080 |
|
330 | |||
Total Commercial |
|
6,819 |
|
6,819 |
|
1,195 | |||
Consumer |
|
|
|
|
|
| |||
Residential Mortgage |
|
25,726 |
|
30,606 |
|
4,138 | |||
Home Equity |
|
21 |
|
21 |
|
1 | |||
Automobile |
|
6,190 |
|
6,190 |
|
75 | |||
Other 1 |
|
528 |
|
528 |
|
42 | |||
Total Consumer |
|
32,465 |
|
37,345 |
|
4,256 | |||
Total Impaired Loans with an Allowance Recorded |
|
$ |
39,284 |
|
$ |
44,164 |
|
$ |
5,451 |
|
|
|
|
|
|
| |||
Impaired Loans: |
|
|
|
|
|
| |||
Commercial |
|
$ |
15,135 |
|
$ |
22,985 |
|
$ |
1,195 |
Consumer |
|
32,465 |
|
37,345 |
|
4,256 | |||
Total Impaired Loans |
|
$ |
47,600 |
|
$ |
60,330 |
|
$ |
5,451 |
1 Comprised of other revolving credit and installment financing.
The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2012 and 2011.
|
|
Three Months Ended |
|
Three Months Ended | ||||||||
|
|
June 30, 2012 |
|
June 30, 2011 | ||||||||
(dollars in thousands) |
|
Average Recorded |
|
Interest Income |
|
Average Recorded |
|
Interest Income | ||||
Impaired Loans with No Related Allowance Recorded: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
$ |
9,093 |
|
$ |
- |
|
$ |
1,329 |
|
$ |
- |
Commercial Mortgage |
|
2,571 |
|
- |
|
3,272 |
|
- | ||||
Construction |
|
1,332 |
|
- |
|
288 |
|
- | ||||
Total Commercial |
|
12,996 |
|
- |
|
4,889 |
|
- | ||||
Total Impaired Loans with No Related Allowance Recorded |
$ |
12,996 |
|
$ |
- |
|
$ |
4,889 |
|
$ |
- | |
|
|
|
|
|
|
|
|
| ||||
Impaired Loans with an Allowance Recorded: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
$ |
918 |
|
$ |
31 |
|
$ |
2,807 |
|
$ |
21 |
Commercial Mortgage |
|
146 |
|
4 |
|
324 |
|
5 | ||||
Total Commercial |
|
1,064 |
|
35 |
|
3,131 |
|
26 | ||||
Consumer |
|
|
|
|
|
|
|
| ||||
Residential Mortgage |
|
25,133 |
|
77 |
|
23,595 |
|
95 | ||||
Home Equity |
|
- |
|
- |
|
21 |
|
- | ||||
Automobile |
|
5,803 |
|
149 |
|
5,796 |
|
145 | ||||
Other 1 |
|
402 |
|
3 |
|
600 |
|
8 | ||||
Total Consumer |
|
31,338 |
|
229 |
|
30,012 |
|
248 | ||||
Total Impaired Loans with an Allowance Recorded |
|
$ |
32,402 |
|
$ |
264 |
|
$ |
33,143 |
|
$ |
274 |
|
|
|
|
|
|
|
|
| ||||
Impaired Loans: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
14,060 |
|
$ |
35 |
|
$ |
8,020 |
|
$ |
26 |
Consumer |
|
31,338 |
|
229 |
|
30,012 |
|
248 | ||||
Total Impaired Loans |
|
$ |
45,398 |
|
$ |
264 |
|
$ |
38,032 |
|
$ |
274 |
|
|
Six Months Ended |
|
Six Months Ended | ||||||||
|
|
June 30, 2012 |
|
June 30, 2011 | ||||||||
(dollars in thousands) |
|
Average Recorded |
|
Interest Income |
|
Average Recorded |
|
Interest Income | ||||
Impaired Loans with No Related Allowance Recorded: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
$ |
8,121 |
|
$ |
- |
|
$ |
1,407 |
|
$ |
- |
Commercial Mortgage |
|
2,427 |
|
- |
|
3,307 |
|
- | ||||
Construction |
|
888 |
|
- |
|
192 |
|
- | ||||
Total Commercial |
|
11,436 |
|
- |
|
4,906 |
|
- | ||||
Total Impaired Loans with No Related Allowance Recorded |
$ |
11,436 |
|
$ |
- |
|
$ |
4,906 |
|
$ |
- | |
|
|
|
|
|
|
|
|
| ||||
Impaired Loans with an Allowance Recorded: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
$ |
2,094 |
|
$ |
64 |
|
$ |
3,590 |
|
$ |
89 |
Commercial Mortgage |
|
195 |
|
8 |
|
363 |
|
9 | ||||
Construction |
|
693 |
|
- |
|
96 |
|
- | ||||
Total Commercial |
|
2,982 |
|
72 |
|
4,049 |
|
98 | ||||
Consumer |
|
|
|
|
|
|
|
| ||||
Residential Mortgage |
|
25,330 |
|
157 |
|
22,749 |
|
174 | ||||
Home Equity |
|
7 |
|
- |
|
21 |
|
- | ||||
Automobile |
|
5,932 |
|
303 |
|
5,812 |
|
288 | ||||
Other 1 |
|
444 |
|
10 |
|
494 |
|
14 | ||||
Total Consumer |
|
31,713 |
|
470 |
|
29,076 |
|
476 | ||||
Total Impaired Loans with an Allowance Recorded |
|
$ |
34,695 |
|
$ |
542 |
|
$ |
33,125 |
|
$ |
574 |
|
|
|
|
|
|
|
|
| ||||
Impaired Loans: |
|
|
|
|
|
|
|
| ||||
Commercial |
|
$ |
14,418 |
|
$ |
72 |
|
$ |
8,955 |
|
$ |
98 |
Consumer |
|
31,713 |
|
470 |
|
29,076 |
|
476 | ||||
Total Impaired Loans |
|
$ |
46,131 |
|
$ |
542 |
|
$ |
38,031 |
|
$ |
574 |
1 Comprised of other revolving credit and installment financing.
For the three and six months ended June 30, 2012 and 2011, the amount of interest income recognized by the Company within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status. For the three and six months ended June 30, 2012 and 2011, the amount of interest income recognized using a cash-basis method of accounting during the period that the loans were impaired was not material.
Modifications
A modification of a loan constitutes a troubled debt restructuring (TDR) when the Company for economic or legal reasons related to a borrowers financial difficulties grants a concession to the borrower that it would not otherwise consider. Loans modified in a TDR were $40.0 million and $38.8 million as of June 30, 2012 and December 31, 2011, respectively. There were no commitments to lend additional funds on loans modified in a TDR as of June 30, 2012.
The Company offers various types of concessions when modifying a loan or lease, however, forgiveness of principal is rarely granted. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Lease financing modifications generally involves a short-term forbearance period, usually about three months, after which the missed payments are added to the end of the lease term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the lease remains unchanged. As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers financial needs for a period of time, normally two years. During that time, the borrowers entire monthly payment is applied to principal. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest, while leaving the interest rate unchanged. Home equity modifications are made infrequently and are offered to borrowers if the Company does not hold the first mortgage. Home equity modifications are uniquely designed to meet the specific needs of each borrower. Borrowers having both a first mortgage and home equity loan with the Company are offered a residential mortgage loan modification. Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.
Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific Allowance associated with the loan. An Allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.
The following presents by class, information related to loans modified in a TDR during the three and six months ended June 30, 2012.
|
|
Loans Modified as a TDR for the |
|
Loans Modified as a TDR for the | |||||||||||||
|
|
Three Months Ended June 30, 2012 |
|
Six Months Ended June 30, 2012 | |||||||||||||
|
|
|
|
Recorded |
|
Increase in |
|
|
|
Recorded |
|
Increase in |
| ||||
Troubled Debt Restructurings 1 |
|
Number of |
|
Investment |
|
Allowance |
|
Number of |
|
Investment |
|
Allowance |
| ||||
(dollars in thousands) |
|
Contracts |
|
(as of period end) |
|
(as of period end) |
|
Contracts |
|
(as of period end) |
|
(as of period end) |
| ||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
1 |
|
$ |
45 |
|
$ |
3 |
|
1 |
|
$ |
45 |
|
$ |
3 |
|
Construction |
|
1 |
|
1,182 |
|
- |
|
1 |
|
1,182 |
|
- |
| ||||
Total Commercial |
|
2 |
|
1,227 |
|
3 |
|
2 |
|
1,227 |
|
3 |
| ||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Residential Mortgage |
|
5 |
|
4,367 |
|
826 |
|
5 |
|
4,367 |
|
826 |
| ||||
Automobile |
|
48 |
|
516 |
|
4 |
|
88 |
|
934 |
|
8 |
| ||||
Total Consumer |
|
53 |
|
4,883 |
|
830 |
|
93 |
|
5,301 |
|
834 |
| ||||
Total |
|
55 |
|
$ |
6,110 |
|
$ |
833 |
|
95 |
|
$ |
6,528 |
|
$ |
837 |
|
1 The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid off, charged-off, or foreclosed upon by period end are not included.
The following presents by class, loans modified in a TDR that defaulted during the three and six months ended June 30, 2012, and within twelve months of their modification date. A TDR is considered to be in default once it becomes 60 days or more past due following a modification.
|
|
Three Months Ended June 30, 2012 |
|
Six Months Ended June 30, 2012 | ||||||||
TDRs that Defaulted During the Period, |
|
|
|
Recorded |
|
|
|
|
Recorded |
| ||
Within Twelve Months of their Modification Date |
|
Number of |
|
Investment |
|
|
Number of |
|
Investment |
| ||
(dollars in thousands) |
|
Contracts |
|
(as of period end) 1 |
|
|
Contracts |
|
(as of period end) 1 |
| ||
Consumer |
|
|
|
|
|
|
|
|
|
| ||
Residential Mortgage |
|
- |
|
$ |
- |
|
|
2 |
|
$ |
702 |
|
Automobile |
|
3 |
|
27 |
|
|
4 |
|
37 |
| ||
Total Consumer |
|
3 |
|
27 |
|
|
6 |
|
739 |
| ||
Total |
|
3 |
|
$ |
27 |
|
|
6 |
|
$ |
739 |
|
1 The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid off, charged-off, or foreclosed upon by period end are not included.
Of the two residential mortgage loans modified in a TDR that subsequently defaulted, one was modified by temporarily lowering monthly payments and applying all payments during this time to principal. The other residential mortgage loan in default pertained to a land loan which was modified from an interest only loan to an amortizing loan, while granting a brief extension on the balloon payment. The automobile loans modified in a TDR that subsequently defaulted were primarily modified by lowering monthly payments by extending the term. There were no other loans modified as a TDR that defaulted during the three and six months ended June 30, 2012, and within twelve months of their modification date.
Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The Allowance may be increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
Note 4. Mortgage Servicing Rights
The Companys portfolio of residential mortgage loans serviced for third parties was $3.1 billion and $3.2 billion as of June 30, 2012 and December 31, 2011, respectively. Generally, the Companys residential mortgage loans sold to third parties are sold on a non-recourse basis. The Companys mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors. Servicing income, including late and ancillary fees, was $2.1 million for the three months ended June 30, 2012 and 2011, and $4.2 million for the six months ended June 30, 2012 and 2011. Servicing income is recorded as a component of mortgage banking income in the Companys consolidated statements of income. The Companys residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawaii.
For the three and six months ended June 30, 2012 and 2011, the change in the carrying value of the Companys mortgage servicing rights accounted for under the fair value measurement method was as follows:
|
|
Three Months Ended |
|
Six Months Ended | ||||||||||
|
|
June 30, |
|
June 30, | ||||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| ||||
Balance at Beginning of Period |
|
$ |
6,423 |
|
$ |
9,692 |
|
|
$ |
7,131 |
|
$ |
10,226 |
|
Change in Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||
Due to Change in Valuation Assumptions 1 |
|
(568 |
) |
(553 |
) |
|
(881 |
) |
(487 |
) | ||||
Due to Payoffs |
|
(396 |
) |
(287 |
) |
|
(791 |
) |
(887 |
) | ||||
Total Changes in Fair Value of Mortgage Servicing Rights |
|
(964 |
) |
(840 |
) |
|
(1,672 |
) |
(1,374 |
) | ||||
Balance at End of Period |
|
$ |
5,459 |
|
$ |
8,852 |
|
|
$ |
5,459 |
|
$ |
8,852 |
|
1 Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.
For the three and six months ended June 30, 2012 and 2011, the change in the carrying value of the Companys mortgage servicing rights accounted for under the amortization method was as follows:
|
|
Three Months Ended |
|
Six Months Ended | ||||||||||
|
|
June 30, |
|
June 30, | ||||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| ||||
Balance at Beginning of Period |
|
$ |
17,492 |
|
$ |
16,227 |
|
|
$ |
17,148 |
|
$ |
15,153 |
|
Servicing Rights that Resulted From Asset Transfers |
|
961 |
|
473 |
|
|
1,969 |
|
1,962 |
| ||||
Amortization |
|
(658 |
) |
(480 |
) |
|
(1,322 |
) |
(895 |
) | ||||
Balance at End of Period |
|
$ |
17,795 |
|
$ |
16,220 |
|
|
$ |
17,795 |
|
$ |
16,220 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair Value of Mortgage Servicing Rights Accounted for |
|
|
|
|
|
|
|
|
|
| ||||
Beginning of Period |
|
$ |
20,406 |
|
$ |
22,661 |
|
|
$ |
17,159 |
|
$ |
20,340 |
|
End of Period |
|
$ |
18,937 |
|
$ |
21,483 |
|
|
$ |
18,937 |
|
$ |
21,483 |
|
The key data and assumptions used in estimating the fair value of the Companys mortgage servicing rights as of June 30, 2012 and December 31, 2011 were as follows:
|
|
June 30, |
|
December 31, |
|
|
|
2012 |
|
2011 |
|
Weighted-Average Constant Prepayment Rate 1 |
|
14.49 |
% |
15.56 |
% |
Weighted-Average Life (in years) |
|
5.40 |
|
5.03 |
|
Weighted-Average Note Rate |
|
4.77 |
% |
4.87 |
% |
Weighted-Average Discount Rate 2 |
|
5.47 |
% |
6.31 |
% |
1 Represents annualized loan repayment rate assumption.
2 Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.
A sensitivity analysis of the Companys fair value of mortgage servicing rights to changes in certain key assumptions as of June 30, 2012 and December 31, 2011 is presented in the following table.
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Constant Prepayment Rate |
|
|
|
|
| ||
Decrease in fair value from 25 basis points (bps) adverse change |
|
$ |
(312 |
) |
$ |
(295 |
) |
Decrease in fair value from 50 bps adverse change |
|
(615 |
) |
(582 |
) | ||
Discount Rate |
|
|
|
|
| ||
Decrease in fair value from 25 bps adverse change |
|
(351 |
) |
(331 |
) | ||
Decrease in fair value from 50 bps adverse change |
|
(692 |
) |
(652 |
) | ||
This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Companys mortgage servicing rights usually is not linear. Also, the effect of changing one key assumption without changing other assumptions is not realistic.
Note 5. 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 Companys consolidated statements of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees.
As of June 30, 2012, the contractual maturities of the Companys securities sold under agreements to repurchase were as follows:
(dollars in thousands) |
|
Amount |
| |
Overnight |
|
$ |
- |
|
2 to 30 Days |
|
201,100 |
| |
31 to 90 Days |
|
160,911 |
| |
Over 90 Days |
|
703,642 |
| |
Total |
|
$ |
1,065,653 |
|
Note 6. Other Comprehensive Income (Loss)
The following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011:
(dollars in thousands) |
|
Before Tax |
|
Tax Effect |
|
Net of Tax |
| |||
Three Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Net Unrealized Gains on Investment Securities: |
|
|
|
|
|
|
| |||
Net Unrealized Gains Arising During the Period |
|
$ |
9,582 |
|
$ |
3,808 |
|
$ |
5,774 |
|
Less: Reclassification Adjustment for Gains Realized in Net Income |
|
(3,939 |
) |
(1,552 |
) |
(2,387 |
) | |||
Net Unrealized Gains on Investment Securities |
|
5,643 |
|
2,256 |
|
3,387 |
| |||
Defined Benefit Plans: |
|
|
|
|
|
|
| |||
Amortization of Prior Service Credit and Net Actuarial Losses During the Period |
|
254 |
|
101 |
|
153 |
| |||
Defined Benefit Plans, Net |
|
254 |
|
101 |
|
153 |
| |||
Other Comprehensive Income |
|
$ |
5,897 |
|
$ |
2,357 |
|
$ |
3,540 |
|
|
|
|
|
|
|
|
| |||
Three Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Net Unrealized Gains on Investment Securities: |
|
|
|
|
|
|
| |||
Net Unrealized Gains Arising During the Period |
|
$ |
33,440 |
|
$ |
13,289 |
|
$ |
20,151 |
|
Less: Reclassification Adjustment for Gains Realized in Net Income |
|
(1,431 |
) |
(545 |
) |
(886 |
) | |||
Net Unrealized Gains on Investment Securities |
|
32,009 |
|
12,744 |
|
19,265 |
| |||
Defined Benefit Plans: |
|
|
|
|
|
|
| |||
Amortization of Prior Service Credit and Net Actuarial Losses During the Period |
|
777 |
|
200 |
|
577 |
| |||
Defined Benefit Plans, Net |
|
777 |
|
200 |
|
577 |
| |||
Other Comprehensive Income |
|
$ |
32,786 |
|
$ |
12,944 |
|
$ |
19,842 |
|
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Net Unrealized Losses on Investment Securities: |
|
|
|
|
|
|
| |||
Net Unrealized Gains Arising During the Period |
|
$ |
2,996 |
|
$ |
1,236 |
|
$ |
1,760 |
|
Less: Reclassification Adjustment for Gains Realized in Net Income |
|
(7,963 |
) |
(3,136 |
) |
(4,827 |
) | |||
Net Unrealized Losses on Investment Securities |
|
(4,967 |
) |
(1,900 |
) |
(3,067 |
) | |||
Defined Benefit Plans: |
|
|
|
|
|
|
| |||
Amortization of Prior Service Credit and Net Actuarial Losses During the Period |
|
505 |
|
199 |
|
306 |
| |||
Defined Benefit Plans, Net |
|
505 |
|
199 |
|
306 |
| |||
Other Comprehensive Loss |
|
$ |
(4,462 |
) |
$ |
(1,701 |
) |
$ |
(2,761 |
) |
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Net Unrealized Losses on Investment Securities: |
|
|
|
|
|
|
| |||
Net Unrealized Gains Arising During the Period |
|
$ |
7,819 |
|
$ |
3,107 |
|
$ |
4,712 |
|
Less: Reclassification Adjustment for Gains Realized in Net Income |
|
(8,132 |
) |
(3,185 |
) |
(4,947 |
) | |||
Net Unrealized Losses on Investment Securities |
|
(313 |
) |
(78 |
) |
(235 |
) | |||
Defined Benefit Plans: |
|
|
|
|
|
|
| |||
Amortization of Prior Service Credit and Net Actuarial Losses During the Period |
|
1,554 |
|
506 |
|
1,048 |
| |||
Defined Benefit Plans, Net |
|
1,554 |
|
506 |
|
1,048 |
| |||
Other Comprehensive Income |
|
$ |
1,241 |
|
$ |
428 |
|
$ |
813 |
|
Note 7. Earnings Per Share
There were no adjustments to net income, the numerator, for purposes of computing earnings per share. The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share and antidilutive stock options and restricted stock outstanding for the three and six months ended June 30, 2012 and 2011:
|
|
Three Months Ended |
|
Six Months Ended | |||||
|
|
June 30, |
|
June 30, | |||||
|
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
Denominator for Basic Earnings Per Share |
|
45,221,293 |
|
47,428,718 |
|
|
45,465,910 |
|
47,638,752 |
Dilutive Effect of Stock Options |
|
106,502 |
|
166,670 |
|
|
123,706 |
|
179,837 |
Dilutive Effect of Restricted Stock |
|
19,573 |
|
12,426 |
|
|
20,873 |
|
19,189 |
Denominator for Diluted Earnings Per Share |
|
45,347,368 |
|
47,607,814 |
|
|
45,610,489 |
|
47,837,778 |
|
|
|
|
|
|
|
|
|
|
Antidilutive Shares Outstanding |
|
537,383 |
|
217,209 |
|
|
537,383 |
|
217,209 |
Note 8. Business Segments
The Companys business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury and Other. The Companys 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. Previously reported results have been reclassified to conform to the current organizational reporting structure.
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 the Companys overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of the Companys 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.
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, automobile loans and leases, installment loans, and small business loans and leases. Deposit products include checking, savings, and time deposit accounts. Retail Banking also offers retail life insurance products. Products and services from Retail Banking are delivered to customers through 66 Hawaii branch locations, 494 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.
Commercial Banking
Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products. Commercial lending and deposit products are offered to middle-market and large companies in Hawaii. Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii. Commercial Banking also includes international banking and operations at the Banks 11 branches in the Pacific Islands and also provides merchant services to its small business customers.
Investment Services
Investment Services includes private banking, trust services, investment management, and institutional investment advisory services. A significant portion of this segments 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 investment management group manages portfolios and creates investment products. Institutional client services offer 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.
Treasury and Other
Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign currency exchange business. This segments 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, net gains from the sale of investment securities, 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 Treasury, along with the elimination of intercompany transactions.
Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) provide a wide-range of support to the Companys other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
Selected business segment financial information as of and for the three months ended June 30, 2012 and 2011 were as follows:
|
|
Retail |
|
Commercial |
|
Investment |
|
Treasury |
|
Consolidated |
| |||||
(dollars in thousands) |
|
Banking |
|
Banking |
|
Services |
|
and Other |
|
Total |
| |||||
Three Months Ended June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Interest Income |
|
$ |
38,680 |
|
$ |
30,817 |
|
$ |
3,585 |
|
$ |
22,299 |
|
$ |
95,381 |
|
Provision for Credit Losses |
|
3,334 |
|
157 |
|
301 |
|
(3,164 |
) |
628 |
| |||||
Net Interest Income After Provision for Credit Losses |
|
35,346 |
|
30,660 |
|
3,284 |
|
25,463 |
|
94,753 |
| |||||
Noninterest Income |
|
21,389 |
|
8,552 |
|
15,058 |
|
1,849 |
|
46,848 |
| |||||
Noninterest Expense |
|
(43,797 |
) |
(21,597 |
) |
(13,875 |
) |
(1,478 |
) |
(80,747 |
) | |||||
Income Before Provision for Income Taxes |
|
12,938 |
|
17,615 |
|
4,467 |
|
25,834 |
|
60,854 |
| |||||
Provision for Income Taxes |
|
(4,787 |
) |
(6,035 |
) |
(1,653 |
) |
(7,632 |
) |
(20,107 |
) | |||||
Net Income |
|
$ |
8,151 |
|
$ |
11,580 |
|
$ |
2,814 |
|
$ |
18,202 |
|
$ |
40,747 |
|
Total Assets as of June 30, 2012 |
|
$ |
3,246,917 |
|
$ |
2,289,516 |
|
$ |
287,669 |
|
$ |
8,091,524 |
|
$ |
13,915,626 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Interest Income |
|
$ |
43,890 |
|
$ |
34,686 |
|
$ |
3,792 |
|
$ |
15,131 |
|
$ |
97,499 |
|
Provision for Credit Losses |
|
5,585 |
|
397 |
|
- |
|
(2,382 |
) |
3,600 |
| |||||
Net Interest Income After Provision for Credit Losses |
|
38,305 |
|
34,289 |
|
3,792 |
|
17,513 |
|
93,899 |
| |||||
Noninterest Income |
|
21,697 |
|
9,741 |
|
15,234 |
|
2,791 |
|
49,463 |
| |||||
Noninterest Expense |
|
(52,268 |
) |
(24,236 |
) |
(15,043 |
) |
(2,227 |
) |
(93,774 |
) | |||||
Income Before Provision for Income Taxes |
|
7,734 |
|
19,794 |
|
3,983 |
|
18,077 |
|
49,588 |
| |||||
Provision for Income Taxes |
|
(2,861 |
) |
(6,946 |
) |
(1,474 |
) |
(3,159 |
) |
(14,440 |
) | |||||
Net Income |
|
$ |
4,873 |
|
$ |
12,848 |
|
$ |
2,509 |
|
$ |
14,918 |
|
$ |
35,148 |
|
Total Assets as of June 30, 2011 |
|
$ |
3,058,041 |
|
$ |
2,266,089 |
|
$ |
221,347 |
|
$ |
7,615,727 |
|
$ |
13,161,204 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six Months Ended June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Interest Income |
|
$ |
78,649 |
|
$ |
62,259 |
|
$ |
7,131 |
|
$ |
45,290 |
|
$ |
193,329 |
|
Provision for Credit Losses |
|
7,364 |
|
(511) |
|
290 |
|
(6,164 |
) |
979 |
| |||||
Net Interest Income After Provision for Credit Losses |
|
71,285 |
|
62,770 |
|
6,841 |
|
51,454 |
|
192,350 |
| |||||
Noninterest Income |
|
40,525 |
|
20,129 |
|
29,132 |
|
5,144 |
|
94,930 |
| |||||
Noninterest Expense |
|
(88,304 |
) |
(45,127 |
) |
(29,006 |
) |
(3,517 |
) |
(165,954 |
) | |||||
Income Before Provision for Income Taxes |
|
23,506 |
|
37,772 |
|
6,967 |
|
53,081 |
|
121,326 |
| |||||
Provision for Income Taxes |
|
(8,697 |
) |
(9,052 |
) |
(2,578 |
) |
(16,442 |
) |
(36,769 |
) | |||||
Net Income |
|
$ |
14,809 |
|
$ |
28,720 |
|
$ |
4,389 |
|
$ |
36,639 |
|
$ |
84,557 |
|
Total Assets as of June 30, 2012 |
|
$ |
3,246,917 |
|
$ |
2,289,516 |
|
$ |
287,669 |
|
$ |
8,091,524 |
|
$ |
13,915,626 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Interest Income |
|
$ |
88,314 |
|
$ |
69,689 |
|
$ |
7,655 |
|
$ |
31,538 |
|
$ |
197,196 |
|
Provision for Credit Losses |
|
10,628 |
|
209 |
|
(140 |
) |
(2,406 |
) |
8,291 |
| |||||
Net Interest Income After Provision for Credit Losses |
|
77,686 |
|
69,480 |
|
7,795 |
|
33,944 |
|
188,905 |
| |||||
Noninterest Income |
|
41,817 |
|
18,797 |
|
30,283 |
|
12,488 |
|
103,385 |
| |||||
Noninterest Expense |
|
(96,087 |
) |
(48,738 |
) |
(30,447 |
) |
(4,584 |
) |
(179,856 |
) | |||||
Income Before Provision for Income Taxes |
|
23,416 |
|
39,539 |
|
7,631 |
|
41,848 |
|
112,434 |
| |||||
Provision for Income Taxes |
|
(8,664 |
) |
(13,748 |
) |
(2,824 |
) |
(9,690 |
) |
(34,926 |
) | |||||
Net Income |
|
$ |
14,752 |
|
$ |
25,791 |
|
$ |
4,807 |
|
$ |
32,158 |
|
$ |
77,508 |
|
Total Assets as of June 30, 2011 |
|
$ |
3,058,041 |
|
$ |
2,266,089 |
|
$ |
221,347 |
|
$ |
7,615,727 |
|
$ |
13,161,204 |
|
Note 9. Pension Plans and Postretirement Benefit Plan
Components of net periodic benefit cost for the Companys pension plans and the postretirement benefit plan are presented in the following table for the three and six months ended June 30, 2012 and 2011.
|
|
Pension Benefits |
|
Postretirement Benefits | ||||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| ||||
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
| ||||
Service Cost |
|
$ |
- |
|
$ |
- |
|
|
$ |
145 |
|
$ |
123 |
|
Interest Cost |
|
1,263 |
|
1,305 |
|
|
319 |
|
359 |
| ||||
Expected Return on Plan Assets |
|
(1,449 |
) |
(1,612 |
) |
|
- |
|
- |
| ||||
Amortization of: |
|
|
|
|
|
|
|
|
|
| ||||
Prior Service Credit |
|
- |
|
- |
|
|
(81 |
) |
(53 |
) | ||||
Net Actuarial Losses |
|
335 |
|
830 |
|
|
- |
|
- |
| ||||
Net Periodic Benefit Cost |
|
$ |
149 |
|
$ |
523 |
|
|
$ |
383 |
|
$ |
429 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
| ||||
Service Cost |
|
$ |
- |
|
$ |
- |
|
|
$ |
290 |
|
$ |
246 |
|
Interest Cost |
|
2,526 |
|
2,610 |
|
|
639 |
|
719 |
| ||||
Expected Return on Plan Assets |
|
(3,017 |
) |
(3,225 |
) |
|
- |
|
- |
| ||||
Amortization of: |
|
|
|
|
|
|
|
|
|
| ||||
Prior Service Credit |
|
- |
|
- |
|
|
(162 |
) |
(106 |
) | ||||
Net Actuarial Losses (Gains) |
|
667 |
|
1,661 |
|
|
- |
|
(1 |
) | ||||
Net Periodic Benefit Cost |
|
$ |
176 |
|
$ |
1,046 |
|
|
$ |
767 |
|
$ |
858 |
|
The net periodic benefit cost for the Companys pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the consolidated statements of income. For the three and six months ended June 30, 2012, the Company contributed $0.1 million and $5.2 million, respectively, to the pension plans and $0.2 million and $0.3 million, respectively, to the postretirement benefit plan. The Company expects to contribute $5.5 million to the pension plans and $1.3 million to the postretirement benefit plan for the year ending December 31, 2012.
Note 10. Derivative Financial Instruments
The following table presents the Companys derivative financial instruments, their fair values, and balance sheet location as of June 30, 2012 and December 31, 2011:
|
|
June 30, 2012 |
|
December 31, 2011 | |||||||||
Derivative Financial Instruments Not Designated |
|
Asset |
|
Liability |
|
|
Asset |
|
Liability | ||||
Interest Rate Lock Commitments |
|
$ |
7,377 |
|
$ |
- |
|
|
$ |
2,344 |
|
$ |
10 |
Forward Commitments |
|
37 |
|
1,799 |
|
|
8 |
|
946 | ||||
Interest Rate Swap Agreements |
|
35,296 |
|
35,567 |
|
|
35,503 |
|
35,779 | ||||
Foreign Exchange Contracts |
|
156 |
|
125 |
|
|
230 |
|
97 | ||||
Total |
|
$ |
42,866 |
|
$ |
37,491 |
|
|
$ |
38,085 |
|
$ |
36,832 |
1 Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the consolidated statements of condition.
The following table presents the Companys derivative financial instruments and the amount and location of the net gains or losses recognized in the statements of income for the three and six months ended June 30, 2012 and 2011:
|
|
Location of Net Gains |
|
Three Months Ended |
|
|
Six Months Ended | |||||||||
Derivative Financial Instruments Not Designated |
|
(Losses) Recognized in the |
|
June 30, |
|
|
June 30, | |||||||||
as Hedging Instruments (dollars in thousands) |
|
Statement of Income |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| ||||
Interest Rate Lock Commitments |
|
Mortgage Banking |
|
$ |
9,363 |
|
$ |
1,908 |
|
|
$ |
13,066 |
|
$ |
3,389 |
|
Forward Commitments |
|
Mortgage Banking |
|
(2,028 |
) |
(341 |
) |
|
(1,762 |
) |
(105 |
) | ||||
Interest Rate Swap Agreements |
|
Other Noninterest Income |
|
(11 |
) |
339 |
|
|
5 |
|
367 |
| ||||
Foreign Exchange Contracts |
|
Other Noninterest Income |
|
713 |
|
743 |
|
|
1,580 |
|
1,640 |
| ||||
Total |
|
|
|
$ |
8,037 |
|
$ |
2,649 |
|
|
$ |
12,889 |
|
$ |
5,291 |
|
Management has received authorization from the Banks 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. As with any financial instrument, derivative financial instruments have inherent risks. Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices. Market risks associated with derivative financial instruments 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.
Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in accordance with the underlying contractual terms. Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional financial instruments. The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty, adhering to the same credit approval process used for commercial lending activities.
Derivative financial instruments are required to be carried at their fair value on the Companys consolidated statements of condition. As of June 30, 2012 and December 31, 2011, the Company did not designate any derivative financial instruments in formal hedging relationships. The Banks free-standing derivative financial instruments have been recorded at fair value on the Companys consolidated statements of condition. These financial instruments have been limited to interest rate lock commitments (IRLCs), forward commitments, interest rate swap agreements, and foreign exchange contracts.
The Company enters IRLCs for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. To mitigate this risk, the Company utilizes forward commitments as economic hedges against the potential decreases in the values of the loans held for sale. The IRLCs and forward commitments are free-standing derivatives which are carried at fair value with changes recorded in the mortgage banking component of noninterest income in the Companys consolidated statements of income. Changes in the fair value of IRLCs and forward 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.
The Company enters into interest rate swap agreements 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 with highly rated third party financial institutions. The interest rate swap agreements are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Companys consolidated statements of income. The Company is party to master netting arrangements with its institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. Collateral, usually in the form of marketable securities, is posted by the counterparty with liability positions in accordance with contract thresholds. The Company had net liability positions with its financial institution counterparties totaling $35.6 million and $35.8 million as of June 30, 2012 and December 31, 2011, respectively. The collateral posted by the Company for these net liability positions was $2.9 million and $3.6 million as of June 30, 2012 and December 31, 2011, respectively.
The Companys interest rate swap agreements with institutional counterparties contain credit-risk-related contingent features tied to the Companys debt ratings or capitalization levels. Under these provisions, if the Companys debt rating falls below investment grade or if the Companys capitalization levels fall below stipulated thresholds, certain counterparties may require immediate and ongoing collateralization on interest rate swaps in net liability positions, or may require immediate settlement of the contracts. As of June 30, 2012, the Companys debt ratings and capital levels were in excess of these minimum requirements.
The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers. The foreign exchange contracts are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Companys consolidated statements of income.
Note 11. Credit Commitments
The Companys credit commitments as of June 30, 2012 and December 31, 2011 were as follows:
(dollars in thousands) |
|
June 30, |
|
December 31, | ||
Unfunded Commitments to Extend Credit |
|
$ |
2,016,176 |
|
$ |
1,975,327 |
Standby Letters of Credit |
|
65,528 |
|
74,082 | ||
Commercial Letters of Credit |
|
13,338 |
|
18,486 | ||
Total Credit Commitments |
|
$ |
2,095,042 |
|
$ |
2,067,895 |
Unfunded Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.
Standby and Commercial Letters of Credit
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit, and holds cash and deposits as collateral on those standby letters of credit for which collateral is deemed necessary.
Note 12. Fair Value of Assets and Liabilities
Fair Value Hierarchy
Fair value is defined 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. GAAP established 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. A contractually binding sales price also provides reliable evidence of fair value. |
|
|
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 utilize model-based techniques for which all significant assumptions are observable in the market. |
|
|
Level 3: |
Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed. |
Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Companys assets and liabilities on a quarterly basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment Securities Available-for-Sale
Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service. This service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury. As quoted prices were available, unadjusted, for identical securities in active markets, these securities were classified as Level 1 measurements. Level 2 investment securities were primarily comprised of debt securities issued by the Small Business Administration, states and municipalities, corporations, as well as mortgage-backed securities issued by government agencies. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Companys third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
On a quarterly basis, management reviews the pricing information received from the Companys third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Companys third-party pricing service. Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. As of June 30, 2012 and December 31, 2011, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets. On a quarterly basis, management also reviews a sample of securities priced by the Companys third-party pricing service to review significant assumptions and valuation methodologies used. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. The Companys third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, we will challenge the quoted prices provided by our third-party pricing service. The Companys third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. The Companys third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.
Loans Held for Sale
The fair value of the Companys residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income. Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
Other Assets
Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements. Quoted prices for these investments, primarily in mutual funds, are available in active markets. Thus, the Companys investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.
Derivative Financial Instruments
Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate lock commitments (IRLCs), forward commitments, interest rate swap agreements, and foreign exchange contracts. The fair values of IRLCs are calculated based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close. This factor, the closing ratio, is derived from the Banks internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements. Forward commitments are classified as Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period. The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize Level 2 observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount, and stated interest rate. In addition, the Company included into its fair value calculation a credit factor adjustment which was based primarily on management judgment. Thus, interest rate swap agreements are classified as a Level 3 measurement. The fair values of foreign exchange contracts are calculated using the Banks multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with market data information such as the spot rates of specific currency and yield curves. Foreign exchange contracts are classified as Level 2 measurements because while they are valued using the Banks multi-currency accounting system, significant management judgment or estimation is not required.
The Company is exposed to credit risk if borrowers or counterparties fail to perform. The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements. The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings. Credit risk associated with borrowers or counterparties as well as the Companys non-performance risk is factored into the determination of the fair value of derivative financial instruments.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:
|
|
Quoted Prices in |
|
Significant |
|
Significant |
|
|
| ||||
(dollars in thousands) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
| ||||
June 30, 2012 |
|
|
|
|
|
|
|
|
| ||||
Investment Securities Available-for-Sale |
|
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury |
|
$ |
693,233 |
|
$ |
423,785 |
|
$ |
- |
|
$ |
1,117,018 |
|
Debt Securities Issued by States and Political Subdivisions |
|
- |
|
703,740 |
|
- |
|
703,740 |
| ||||
Debt Securities Issued by Corporations |
|
- |
|
93,485 |
|
- |
|
93,485 |
| ||||
Mortgage-Backed Securities Issued by |
|
- |
|
1,377,990 |
|
- |
|
1,377,990 |
| ||||
U.S. Government-Sponsored Enterprises |
|
- |
|
47,239 |
|
- |
|
47,239 |
| ||||
Total Mortgage-Backed Securities |
|
- |
|
1,425,229 |
|
- |
|
1,425,229 |
| ||||
Total Investment Securities Available-for-Sale |
|
693,233 |
|
2,646,239 |
|
- |
|
3,339,472 |
| ||||
Loans Held for Sale |
|
- |
|
14,223 |
|
- |
|
14,223 |
| ||||
Mortgage Servicing Rights |
|
- |
|
- |
|
5,459 |
|
5,459 |
| ||||
Other Assets |
|
12,091 |
|
- |
|
- |
|
12,091 |
| ||||
Net Derivative Assets and Liabilities |
|
- |
|
(1,731 |
) |
7,106 |
|
5,375 |
| ||||
Total Assets Measured at Fair Value on a |
|
$ |
705,324 |
|
$ |
2,658,731 |
|
$ |
12,565 |
|
$ |
3,376,620 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2011 |
|
|
|
|
|
|
|
|
| ||||
Investment Securities Available-for-Sale |
|
|
|
|
|
|
|
|
| ||||
Debt Securities Issued by the U.S. Treasury |
|
$ |
822,508 |
|
$ |
408,510 |
|
$ |
- |
|
$ |
1,231,018 |
|
Debt Securities Issued by States and Political Subdivisions |
|
- |
|
407,059 |
|
- |
|
407,059 |
| ||||
Debt Securities Issued by Corporations |
|
- |
|
96,387 |
|
- |
|
96,387 |
| ||||
Mortgage-Backed Securities Issued by |
|
- |
|
1,655,872 |
|
- |
|
1,655,872 |
| ||||
U.S. Government-Sponsored Enterprises |
|
- |
|
61,549 |
|
- |
|
61,549 |
| ||||
Total Mortgage-Backed Securities |
|
- |
|
1,717,421 |
|
- |
|
1,717,421 |
| ||||
Total Investment Securities Available-for-Sale |
|
822,508 |
|
2,629,377 |
|
- |
|
3,451,885 |
| ||||
Loans Held for Sale |
|
- |
|
18,957 |
|
- |
|
18,957 |
| ||||
Mortgage Servicing Rights |
|
- |
|
- |
|
7,131 |
|
7,131 |
| ||||
Other Assets |
|
11,082 |
|
- |
|
- |
|
11,082 |
| ||||
Net Derivative Assets and Liabilities |
|
- |
|
(805 |
) |
2,058 |
|
1,253 |
| ||||
Total Assets Measured at Fair Value on a |
|
$ |
833,590 |
|
$ |
2,647,529 |
|
$ |
9,189 |
|
$ |
3,490,308 |
|
For the three and six months ended June 30, 2012 and 2011, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
(dollars in thousands) |
|
Mortgage |
|
Net Derivative Assets |
|
Total |
| |||
Three Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Balance as of April 1, 2012 |
|
$ |
6,423 |
|
$ |
2,052 |
|
$ |
8,475 |
|
Realized and Unrealized Net Gains (Losses): |
|
|
|
|
|
|
| |||
Included in Net Income |
|
(964 |
) |
9,352 |
|
8,388 |
| |||
Transfers to Loans Held for Sale |
|
- |
|
(4,298 |
) |
(4,298 |
) | |||
Balance as of June 30, 2012 |
|
$ |
5,459 |
|
$ |
7,106 |
|
$ |
12,565 |
|
Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of June 30, 2012 |
|
$ |
(568 |
) |
$ |
7,106 |
|
$ |
6,538 |
|
|
|
|
|
|
|
|
| |||
Three Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Balance as of April 1, 2011 |
|
$ |
9,692 |
|
$ |
606 |
|
$ |
10,298 |
|
Realized and Unrealized Net Gains (Losses): |
|
|
|
|
|
|
| |||
Included in Net Income |
|
(840 |
) |
1,877 |
|
1,037 |
| |||
Transfers to Loans Held for Sale |
|
- |
|
(2,051 |
) |
(2,051 |
) | |||
Balance as of June 30, 2011 |
|
$ |
8,852 |
|
$ |
432 |
|
$ |
9,284 |
|
Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of June 30, 2011 |
|
$ |
(553 |
) |
$ |
432 |
|
$ |
(121 |
) |
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2012 |
|
|
|
|
|
|
| |||
Balance as of January 1, 2012 |
|
$ |
7,131 |
|
$ |
2,058 |
|
$ |
9,189 |
|
Realized and Unrealized Net Gains (Losses): |
|
|
|
|
|
|
| |||
Included in Net Income |
|
(1,672 |
) |
13,071 |
|
11,399 |
| |||
Transfers to Loans Held for Sale |
|
- |
|
(8,023 |
) |
(8,023 |
) | |||
Balance as of June 30, 2012 |
|
$ |
5,459 |
|
$ |
7,106 |
|
$ |
12,565 |
|
Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of June 30, 2012 |
|
$ |
(881 |
) |
$ |
7,106 |
|
$ |
6,225 |
|
|
|
|
|
|
|
|
| |||
Six Months Ended June 30, 2011 |
|
|
|
|
|
|
| |||
Balance as of January 1, 2011 |
|
$ |
10,226 |
|
$ |
(332 |
) |
$ |
9,894 |
|
Realized and Unrealized Net Gains (Losses): |
|
|
|
|
|
|
| |||
Included in Net Income |
|
(1,374 |
) |
3,386 |
|
2,012 |
| |||
Transfers to Loans Held for Sale |
|
- |
|
(2,622 |
) |
(2,622 |
) | |||
Balance as of June 30, 2011 |
|
$ |
8,852 |
|
$ |
432 |
|
$ |
9,284 |
|
Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held as of June 30, 2011 |
|
$ |
(487 |
) |
$ |
432 |
|
$ |
(55 |
) |
1 Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Companys consolidated statements of income.
2 Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Companys consolidated statements of income. Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Companys consolidated statements of income.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
|
|
Significant |
| |
|
|
Fair Value at |
|
|
|
|
|
Unobservable |
| |
(dollars in thousands) |
|
June 30, 2012 |
|
Valuation Technique |
|
Significant Unobservable Inputs |
|
Input Value |
| |
Mortgage Servicing Rights |
|
$ |
24,396 |
|
Discounted Cash Flow |
|
Weighted Average Constant Prepayment Rate 1 |
|
14.49 % |
|
|
|
|
|
|
|
Weighted Average Discount Rate 2 |
|
5.47 % |
| |
Net Derivative Assets and Liabilities |
|
|
|
|
|
|
|
|
| |
Interest Rate Lock Commitments |
|
$ |
7,377 |
|
Pricing Model |
|
Weighted Average Closing Ratio |
|
86.22 % |
|
Interest Rate Swap Agreements |
|
$ |
(271 |
) |
Discounted Cash Flow |
|
Weighted Average Credit Factor |
|
0.76 % |
|
1 Represents annualized loan repayment rate assumption.
2 Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.
The significant unobservable inputs used in the fair value measurement of the Companys mortgage servicing rights are the weighted average constant prepayment rate and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions of each other.
The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Companys Treasury Division enters observable and unobservable inputs into the model to arrive at an estimated fair value. To assess the reasonableness of the fair value measurement, the Treasury Division performs a backtest by applying the model to historical prepayment data. The fair value and constant prepayment rate are also compared to forward-looking estimates to assess reasonableness. The Treasury Division also compares the fair value of the Companys mortgage servicing rights to a value calculated by an independent third-party. Discussions are held with members from the Treasury, Mortgage Banking, and Controllers Divisions, along with the independent third-party to discuss and reconcile the fair value estimates and key assumptions used by the respective parties in arriving at those estimates. A subcommittee of the Companys Asset/Liability Management Committee is responsible for providing oversight over the valuation methodology and key assumptions.
The significant unobservable input used in the fair value measurement of the Companys IRLCs is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate. Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLC to increase if in a gain position, or decrease if in a loss position. The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The closing ratio is computed by our secondary marketing system using historical data and the ratio is periodically reviewed by the Companys Secondary Marketing Department of the Mortgage Banking Division for reasonableness.
The unobservable input used in the fair value measurement of the Companys interest rate swap agreements is the credit factor. This factor represents the risk that a counterparty is either unable or unwilling to settle a transaction in accordance with the underlying contractual terms. A significant increase (decrease) in the credit factor could result in a significantly lower (higher) fair value measurement. The credit factor is determined by the Treasury Division based on the risk rating assigned to each counterparty in which the Company holds a net asset position. The Companys Credit Policy Committee periodically reviews and approves the Expected Default Frequency of the Economic Capital Model for Credit Risk. The Expected Default Frequency is used as the credit factor for the interest rate swap agreements.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. As of June 30, 2012 and 2011, there were no material adjustments to fair value for the Companys assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.
Fair Value Option
The Company elected the fair value option for all residential mortgage loans held for sale originated on or after October 1, 2011. This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to economically hedge them without having to apply complex hedge accounting requirements. As noted above, the fair value of the Companys residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.
The following table reflects the difference between the aggregate fair value and the aggregate unpaid principal balance of the Companys residential mortgage loans held for sale as of June 30, 2012 and December 31, 2011.
|
|
|
|
|
|
Aggregate Fair Value |
| |||
|
|
Aggregate |
|
Aggregate |
|
Less Aggregate |
| |||
(dollars in thousands) |
|
Fair Value |
|
Unpaid Principal |
|
Unpaid Principal |
| |||
June 30, 2012 |
|
|
|
|
|
|
| |||
Loans Held for Sale |
|
$ |
14,223 |
|
$ |
13,676 |
|
$ |
547 |
|
|
|
|
|
|
|
|
| |||
December 31, 2011 |
|
|
|
|
|
|
| |||
Loans Held for Sale |
|
$ |
18,957 |
|
$ |
18,088 |
|
$ |
869 |
|
Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of mortgage banking income in the Companys consolidated statements of income. For the three and six months ended June 30, 2012, the Company recorded a net loss of $0.7 million and $0.9 million, respectively, as a result of the change in fair value of the Companys residential mortgage loans held for sale.
Disclosures about Fair Value of Financial Instruments
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 Companys investment securities held-to-maturity was primarily measured using information from a third-party pricing service. Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury as quoted prices were available, unadjusted, for identical securities in active markets. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Companys third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.
Loans
The fair value of the Companys loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 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.
Time Deposits
The fair values of the Companys 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 fair values of the Companys time deposit liabilities do not take into consideration the value of the Companys long-term relationships with depositors, which may have significant value.
Securities Sold Under Agreements to Repurchase
The fair value of the Companys securities sold under agreements to repurchase was calculated using discounted cash flow analyses, applying discount rates currently offered for new agreements with similar remaining maturities and considering the Companys non-performance risk.
Long-Term Debt
The fair value of the Companys long-term debt was calculated using a discounted cash flow approach and applying discount rates currently offered for new notes with similar remaining maturities and considering the Companys non-performance risk.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Companys financial instruments as of June 30, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
|
|
|
|
|
|
Fair Value Measurements | ||||||||||
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
Significant |
| |||||
(dollars in thousands) |
|
Carrying Amount |
|
Fair Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| |||||
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Instruments - Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Investment Securities Held-to-Maturity |
|
$ |
3,729,665 |
|
$ |
3,828,954 |
|
$ |
185,272 |
|
$ |
3,643,682 |
|
$ |
- |
|
Loans1 |
|
5,220,775 |
|
5,572,928 |
|
- |
|
- |
|
5,572,928 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Instruments - Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Time Deposits |
|
1,943,231 |
|
1,953,931 |
|
- |
|
1,953,931 |
|
- |
| |||||
Securities Sold Under Agreements to Repurchase |
|
1,065,653 |
|
1,181,110 |
|
- |
|
1,181,110 |
|
- |
| |||||
Long-Term Debt2 |
|
19,185 |
|
21,986 |
|
- |
|
21,986 |
|
- |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Instruments - Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Investment Securities Held-to-Maturity |
|
$ |
3,657,796 |
|
$ |
3,754,206 |
|
$ |
186,178 |
|
$ |
3,568,028 |
|
$ |
- |
|
Loans1 |
|
5,098,681 |
|
5,373,777 |
|
- |
|
- |
|
5,373,777 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial Instruments - Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Time Deposits |
|
1,337,079 |
|
1,347,576 |
|
- |
|
1,347,576 |
|
- |
| |||||
Securities Sold Under Agreements to Repurchase |
|
1,925,998 |
|
2,031,057 |
|
- |
|
2,031,057 |
|
- |
| |||||
Long-Term Debt2 |
|
21,787 |
|
24,076 |
|
- |
|
24,076 |
|
- |
|
1 Comprised of loans, net of unearned income and the Allowance related to loans.
2 Excludes capitalized lease obligations.
Item 2. Managements 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, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) the competitive pressure among financial services and products; 4) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act); 5) changes in fiscal and monetary policies of the markets in which we operate; 6) the increased cost of maintaining or the Companys ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 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) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments; 13) any interruption or breach in security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 14) changes to the amount and timing of proposed common stock repurchases; and 15) natural disasters or adverse weather, public unrest, public health and other conditions that impact 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 II of this report and Part I of our Annual Report on Form 10-K for the year ended December 31, 2011, 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 the 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 Managements 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 Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii. The Parents 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, Guam, and other Pacific Islands. References to we, our, us, or the Company refer to the Parent and its subsidiaries that are consolidated for financial reporting purposes.
Exceptional people working together are the foundation for our success and enable us to build exceptional value for our customers, communities, shareholders, and each other. Excellence, integrity, respect, innovation, commitment, and teamwork are the core values for the way we do business. Our business plan is balanced between growth and risk management, including the flexibility to adjust, given the uncertainties of the economy. We remain cautious about the economy, interest rates, and loan demand. We intend to continue to focus on providing customers with a competitive mix of products and services, improving expense management, and efficiently managing capital.
Hawaii Economy
Hawaiis economy was stable during the second quarter of 2012 with continued improvement in tourism, the States largest industry. For the first five months of 2012, total visitor arrivals increased by 10.0% and visitor spending increased by 16.8% compared to the same period in 2011. The increase in visitor spending was primarily due to strong growth from international visitors. Hotel occupancy and revenue per available room also continued to improve. Statewide seasonally-adjusted unemployment was 6.4% in June 2012, compared to 8.2% nationally. For the first six months of 2012, the volume of single-family home sales on Oahu was relatively unchanged from the same period in 2011, while the median price of single-family homes sold was 8.7% higher compared to the same period in 2011. Single-family home inventory on Oahu continued to shrink and was at approximately four months as of June 30, 2012.
Earnings Summary
Net income for the second quarter of 2012 was $40.7 million, an increase of $5.6 million or 16% compared to the same period in 2011. Diluted earnings per share were $0.90 for the second quarter of 2012, an increase of $0.16 or 22% compared to the same period in 2011. The change in net income for the second quarter of 2012 was primarily due to the following:
· Net interest income for the second quarter of 2012 was $95.4 million, a decrease of $2.1 million or 2% compared to the same period in 2011. The net interest margin was 2.98% in the second quarter of 2012, a decrease of 18 basis points compared to the same period in 2011. This decrease was primarily due to lower yields on loans and investments, a result of the low interest rate environment.
· The provision for credit losses (the Provision) for the second quarter of 2012 was $0.6 million, a decrease of $3.0 million or 83% compared to the same period in 2011. This decrease was primarily due to improving credit trends and the underlying risk profile of the loan portfolio as economic conditions in Hawaii continued to stabilize.
· Mortgage banking income for the second quarter of 2012 was $7.6 million, an increase of $4.9 million compared to the same period in 2011. This was primarily due to an increase in loan origination volume related to refinancing activity, a result of low interest rates.
· Salaries and benefits expense for the second quarter of 2012 was $44.0 million, a decrease of $2.8 million or 6% compared to the same period in 2011. As of June 30, 2012, we had 4% fewer full-time equivalent employees compared to June 30, 2011. We also recorded lower share-based compensation, retirement plan expense, and separation expense in the second quarter of 2012 compared to the same period in 2011.
· Other noninterest expense for the second quarter of 2012 was $17.5 million, a decrease of $9.9 million or 36% compared to the same period in 2011. This was primarily due to a $9.0 million accrual related to the settlement of overdraft litigation recorded in the second quarter of 2011.
We also experienced lower debit card income and a higher provision for income taxes. Debit card income was $4.1 million for the second quarter of 2012, a decrease of $4.0 million or 49% compared to the same period in 2011. This decrease was primarily due to changes in debit card interchange rules as a result of pricing restrictions imposed by the Durbin Amendment which was effective October 1, 2011. The provision for income taxes was $20.1 million for the second quarter of 2012, an increase of $5.7 million or 39% compared to the same period in 2011. This increase was primarily due to higher pre-tax income in the second quarter of 2012 compared to the same period in 2011 as well as a benefit for the release of reserves recorded in the second quarter of 2011.
Net income for the first six months of 2012 was $84.6 million, an increase of $7.0 million or 9% compared to the same period in 2011. Diluted earnings per share were $1.85 for the first six months of 2012, an increase of $0.23 or 14% compared to the same period in 2011. The change in net income for the first six months of 2012 was primarily due to the following:
· Net interest income was $193.3 million for the first six months of 2012, a decrease of $3.9 million or 2% compared to the same period in 2011. The net interest margin was 3.02% for the first six months of 2012, a decrease of 18 basis points compared to the same period in 2011. This decrease was primarily due to lower yields on loans and investments, a result of the low interest rate environment, and investing conservatively.
· The Provision for the first six months of 2012 was $1.0 million, a decrease of $7.3 million compared to the same period in 2011. Consistent with improvements in our credit quality, the Provision was $6.2 million less than net charge-offs of loans and leases for the first six months of 2012 compared to the same period in 2011.
· Mortgage banking income for the first six months of 2012 was $12.6 million, an increase of $6.8 million compared to the same period in 2011. This was primarily due to increased loan refinancing activity as a result of low interest rates.
· Salaries and benefits expense for the first six months of 2012 was $91.1 million, a decrease of $2.5 million or 3% compared to the same period in 2011. As noted above, we had 4% fewer full-time equivalent employees as of June 30, 2012 compared to June 30, 2011. We also recorded lower retirement plan expense and separation expense for the first six months of 2012 compared to the same period in 2011.
· Other noninterest expense for the first six months of 2012 was $35.1 million, a decrease of $11.2 million or 24% compared to the same period in 2011. As previously noted, our financial results in 2011 were adversely impacted by a $9.0 million accrual related to the settlement of overdraft litigation.
We also experienced lower debit card income and gains from the sale of investment securities. Debit card income was $7.6 million for the first six months of 2012, a decrease of $7.0 million or 48% compared to the same period in 2011. As previously noted, this decrease was primarily due to the provisions of the Durbin Amendment which was effective October 1, 2011. Net losses from the sales of investment securities were $0.1 million for the first six months of 2012 compared to net gains of $6.1 million for the same period in 2011. The amount and timing of our sale of investment securities are dependent on a number of factors, including our efforts to preserve capital levels while managing duration and extension risk.
Our results for the first six months of 2012 were influenced by a stable and generally improving economy in Hawaii. However, we remained cautious about the slow pace of economic recovery both in Hawaii and on the U.S. Mainland. We also continued to monitor regulatory changes and the associated costs of compliance as well as volatility in the financial markets. As a result of the uncertainties in the economic recovery, we continued to maintain adequate reserves for credit losses and high levels of liquidity and capital. In particular:
· The allowance for loan and lease losses (the Allowance) was $132.4 million as of June 30, 2012, a decrease of $6.2 million or 4% from December 31, 2011. The ratio of our Allowance to total loans and leases outstanding decreased to 2.34% as of June 30, 2012, compared to 2.50% as of December 31, 2011. Absent significant deterioration in the economy and assuming continued improvement and/or stability in credit quality, we may reduce the Allowance in future periods.
· Total deposits were $11.5 billion as of June 30, 2012, an increase of $955.4 million or 9% from December 31, 2011. This increase was primarily due to local government entities transferring funds from repurchase agreements to time deposits. Commercial and consumer deposits also increased over this period as customers remain cautious about investing and spending.
· We continued to invest excess liquidity in high-grade investment securities. As of June 30, 2012, the total carrying value of our investment securities portfolio was $7.1 billion. During the first six months of 2012, we continued to increase our state and municipal bond holdings in an effort to partially offset extension risk associated with our mortgage-backed securities.
· Total shareholders equity was $1.0 billion as of June 30, 2012, relatively unchanged from December 31, 2011. We continued to return capital to our shareholders in the form of share repurchases and dividends. During the first six months of 2012, we repurchased 1.1 million shares of common stock at a total cost of $50.0 million under our share repurchase program. We also paid cash dividends of $41.1 million during the first six months of 2012. In the second quarter of 2012, we reduced our share repurchases to $20.0 million compared to $30.0 million in the first quarter of 2012.
In 2012, should economic conditions continue to stabilize in Hawaii, we may see improving prospects for loan growth in certain portfolios. However, we remain cautious about interest rates, the uncertainties of government regulation, as well as increased pressure on fee-based revenues in future periods. In particular, the full year impact of compliance with the Durbin Amendment in 2012 is expected to significantly reduce debit card income. For the remainder of 2012, we intend to continue to focus on controlling expenses and maintaining adequate levels of liquidity, reserves for credit losses, and capital.
Our financial highlights are presented in Table 1.
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Financial Highlights |
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Table 1 |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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(dollars in thousands, except per share amounts) |
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2012 |
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2011 |
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2012 |
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2011 |
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For the Period: |
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Operating Results |
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Net Interest Income |
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$ |
95,381 |
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$ |
97,499 |
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$ |
193,329 |
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$ |
197,196 |
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Provision for Credit Losses |
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628 |
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3,600 |
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979 |
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8,291 |
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Total Noninterest Income |
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46,848 |
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49,463 |
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94,930 |
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103,385 |
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Total Noninterest Expense |
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80,747 |
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93,774 |
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165,954 |
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179,856 |
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Net Income |
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40,747 |
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35,148 |
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84,557 |
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77,508 |
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Basic Earnings Per Share |
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0.90 |
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0.74 |
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1.86 |
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1.63 |
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Diluted Earnings Per Share |
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0.90 |
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0.74 |
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1.85 |
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1.62 |
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Dividends Declared Per Share |
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0.45 |
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0.45 |
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0.90 |
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0.90 |
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Performance Ratios |
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Return on Average Assets |
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1.19 |
% |
1.09 |
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% |
1.24 |
% |
1.21 |
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Return on Average Shareholders Equity |
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16.19 |
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13.86 |
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16.73 |
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15.36 |
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Efficiency Ratio 1 |
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56.77 |
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63.81 |
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57.57 |
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59.84 |
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Net Interest Margin 2 |
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2.98 |
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3.16 |
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3.02 |
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3.20 |
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Dividend Payout Ratio 3 |
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50.00 |
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60.81 |
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48.39 |
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55.21 |
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Average Shareholders Equity to Average Assets |
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7.36 |
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7.84 |
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7.41 |
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7.85 |
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Average Balances |
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Average Loans and Leases |
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$ |
5,641,588 |
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$ |
5,326,123 |
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$ |
5,602,473 |
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$ |
5,318,993 |
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Average Assets |
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13,750,488 |
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12,967,232 |
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13,715,859 |
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12,966,437 |
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Average Deposits |
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10,622,420 |
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9,790,349 |
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10,526,317 |
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9,831,809 |
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Average Shareholders Equity |
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1,012,182 |
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1,016,813 |
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1,016,425 |
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1,017,795 |
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Market Price Per Share of Common Stock |
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Closing |
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$ |
45.95 |
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$ |
46.52 |
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$ |
45.95 |
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$ |
46.52 |
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High |
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49.99 |
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49.26 |
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49.99 |
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49.26 |
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Low |
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44.02 |
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44.90 |
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44.02 |
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44.32 |
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June 30, |
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December 31, |
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2012 |
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2011 |
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As of Period End: |
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Balance Sheet Totals |
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Loans and Leases |
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$ |
5,671,483 |
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$ |
5,538,304 |
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Total Assets |
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13,915,626 |
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13,846,391 |
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Total Deposits |
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11,547,993 |
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10,592,623 |
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Long-Term Debt |
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28,075 |
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30,696 |
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Total Shareholders Equity |
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1,003,825 |
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1,002,667 |
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Asset Quality |
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Allowance for Loan and Lease Losses |
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$ |
132,443 |
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$ |
138,606 |
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Non-Performing Assets |
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41,494 |
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40,790 |
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Financial Ratios |
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Allowance to Loans and Leases Outstanding |
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2.34 |
% |
2.50 |
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Tier 1 Capital Ratio |
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16.41 |
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16.68 |
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Total Capital Ratio |
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17.67 |
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17.95 |
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Tier 1 Leverage Ratio |
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6.57 |
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6.73 |
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Total Shareholders Equity to Total Assets |
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7.21 |
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7.24 |
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Tangible Common Equity to Tangible Assets 4 |
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7.00 |
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7.03 |
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Tangible Common Equity to Risk-Weighted Assets 4 |
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17.57 |
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17.93 |
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Non-Financial Data |
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Full-Time Equivalent Employees |
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2,312 |
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2,370 |
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Branches and Offices |
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77 |
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81 |
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ATMs |
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494 |
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506 |
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1 Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).
2 Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.
3 Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.
4 Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures. See the Use of Non-GAAP Financial Measures section below.
Use of Non-GAAP Financial Measures
The ratios tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures. The Company believes these measurements are useful for investors, regulators, management and others to evaluate capital adequacy relative to other financial institutions. Although these Non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. Table 2 provides a reconciliation of these Non-GAAP financial measures with financial measures defined by GAAP.
GAAP to Non-GAAP Reconciliation |
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Table 2 |
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June 30, |
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December 31, |
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(dollars in thousands) |
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2012 |
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2011 |
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Total Shareholders Equity |
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$ |
1,003,825 |
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$ |
1,002,667 |
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Less: Goodwill |
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31,517 |
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31,517 |
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Intangible Assets |
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58 |
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83 |
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Tangible Common Equity |
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$ |
972,250 |
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$ |
971,067 |
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Total Assets |
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$ |
13,915,626 |
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$ |
13,846,391 |
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Less: Goodwill |
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31,517 |
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31,517 |
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Intangible Assets |
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58 |
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83 |
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Tangible Assets |
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$ |
13,884,051 |
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$ |
13,814,791 |
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Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements |
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$ |
5,532,285 |
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$ |
5,414,481 |
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Total Shareholders Equity to Total Assets |
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7.21% |
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7.24% |
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Tangible Common Equity to Tangible Assets (Non-GAAP) |
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7.00% |
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7.03% |
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Tier 1 Capital Ratio |
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16.41% |
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16.68% |
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Tangible Common Equity to Risk-Weighted Assets (Non-GAAP) |
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17.57% |
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17.93% |
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Analysis of Statements of Income
Average balances, related income and expenses, and resulting yields and rates are presented in Table 3. An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 4.
Average Balances and Interest Rates Taxable-Equivalent Basis |
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Table 3 |
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Three Months Ended |
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Three Months Ended |
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Six Months Ended |
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Six Months Ended | |||||||||||||||||||||||||||||||||
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June 30, 2012 |
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June 30, 2011 |
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June 30, 2012 |
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June 30, 2011 | |||||||||||||||||||||||||||||||||
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Average |
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Income/ |
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Yield/ |
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Average |
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Income/ |
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Yield/ |
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Average |
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Income/ |
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Yield/ |
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Average |
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Income/ |
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Yield/ |
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(dollars in millions) |
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Balance |
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Expense |
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Rate |
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Balance |
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Expense |
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Rate |
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Balance |
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Expense |
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Rate |
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Balance |
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Expense |
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Rate |
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Earning Assets |
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Interest-Bearing Deposits |
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$ |
3.0 |
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$ |
- |
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0.12 |
% |
$ |
5.3 |
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$ |
- |
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0.15 |
% |
$ |
3.1 |
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$ |
- |
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0.19 |
% |
$ |
4.7 |
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$ |
- |
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0.02 |
% |
Funds Sold |
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237.8 |
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0.1 |
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0.20 |
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518.4 |
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0.3 |
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0.23 |
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250.1 |
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0.2 |
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0.20 |
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488.0 |
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0.6 |
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0.22 |
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Investment Securities |
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Available-for-Sale |
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3,410.4 |
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19.4 |
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2.27 |
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4,061.4 |
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23.9 |
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2.35 |
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3,431.0 |
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39.0 |
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2.28 |
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4,849.8 |
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61.9 |
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2.56 |
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Held-to-Maturity |
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3,788.9 |
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25.1 |
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2.65 |
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2,418.0 |
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20.6 |
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3.40 |
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3,763.1 |
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51.5 |
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2.74 |
|
1,663.6 |
|
|
28.2 |
|
|
3.39 |
| ||||||||
Loans Held for Sale |
|
12.1 |
|
|
0.1 |
|
|
4.22 |
|
11.5 |
|
|
0.1 |
|
|
3.25 |
|
12.0 |
|
|
0.3 |
|
|
4.22 |
|
10.0 |
|
|
0.2 |
|
|
4.26 |
| ||||||||
Loans and Leases 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial and Industrial |
|
786.3 |
|
|
7.7 |
|
|
3.93 |
|
772.4 |
|
|
7.8 |
|
|
4.02 |
|
796.1 |
|
|
15.8 |
|
|
3.98 |
|
774.1 |
|
|
15.6 |
|
|
4.07 |
| ||||||||
Commercial Mortgage |
|
953.5 |
|
|
10.4 |
|
|
4.40 |
|
890.9 |
|
|
10.8 |
|
|
4.87 |
|
947.6 |
|
|
21.0 |
|
|
4.45 |
|
871.2 |
|
|
21.2 |
|
|
4.90 |
| ||||||||
Construction |
|
99.7 |
|
|
1.3 |
|
|
5.07 |
|
79.3 |
|
|
1.0 |
|
|
5.24 |
|
101.6 |
|
|
2.6 |
|
|
5.21 |
|
80.0 |
|
|
2.0 |
|
|
5.14 |
| ||||||||
Commercial Lease Financing |
|
284.5 |
|
|
1.7 |
|
|
2.36 |
|
329.5 |
|
|
2.3 |
|
|
2.79 |
|
289.4 |
|
|
3.4 |
|
|
2.35 |
|
331.5 |
|
|
4.6 |
|
|
2.77 |
| ||||||||
Residential Mortgage |
|
2,371.7 |
|
|
27.9 |
|
|
4.71 |
|
2,113.3 |
|
|
27.7 |
|
|
5.25 |
|
2,318.0 |
|
|
55.7 |
|
|
4.80 |
|
2,107.0 |
|
|
56.3 |
|
|
5.34 |
| ||||||||
Home Equity |
|
772.3 |
|
|
8.4 |
|
|
4.36 |
|
785.3 |
|
|
9.5 |
|
|
4.83 |
|
775.6 |
|
|
16.9 |
|
|
4.39 |
|
790.6 |
|
|
19.1 |
|
|
4.87 |
| ||||||||
Automobile |
|
193.7 |
|
|
2.9 |
|
|
6.03 |
|
192.8 |
|
|
3.3 |
|
|
6.92 |
|
193.4 |
|
|
5.9 |
|
|
6.12 |
|
197.9 |
|
|
6.9 |
|
|
7.03 |
| ||||||||
Other 2 |
|
179.9 |
|
|
3.6 |
|
|
8.12 |
|
162.6 |
|
|
3.0 |
|
|
7.50 |
|
180.8 |
|
|
7.3 |
|
|
8.10 |
|
166.7 |
|
|
6.2 |
|
|
7.52 |
| ||||||||
Total Loans and Leases |
|
5,641.6 |
|
|
63.9 |
|
|
4.54 |
|
5,326.1 |
|
|
65.4 |
|
|
4.92 |
|
5,602.5 |
|
|
128.6 |
|
|
4.60 |
|
5,319.0 |
|
|
131.9 |
|
|
4.98 |
| ||||||||
Other |
|
80.0 |
|
|
0.3 |
|
|
1.41 |
|
79.9 |
|
|
0.3 |
|
|
1.40 |
|
80.0 |
|
|
0.6 |
|
|
1.40 |
|
79.9 |
|
|
0.6 |
|
|
1.40 |
| ||||||||
Total Earning Assets 3 |
|
13,173.8 |
|
|
108.9 |
|
|
3.31 |
|
12,420.6 |
|
|
110.6 |
|
|
3.56 |
|
13,141.8 |
|
|
220.2 |
|
|
3.36 |
|
12,415.0 |
|
|
223.4 |
|
|
3.61 |
| ||||||||
Cash and Noninterest-Bearing Deposits |
|
131.7 |
|
|
|
|
|
|
|
129.3 |
|
|
|
|
|
|
|
134.5 |
|
|
|
|
|
|
|
131.9 |
|
|
|
|
|
|
| ||||||||
Other Assets |
|
445.0 |
|
|
|
|
|
|
|
417.3 |
|
|
|
|
|
|
|
439.6 |
|
|
|
|
|
|
|
419.5 |
|
|
|
|
|
|
| ||||||||
Total Assets |
|
$ |
13,750.5 |
|
|
|
|
|
|
|
$ |
12,967.2 |
|
|
|
|
|
|
|
$ |
13,715.9 |
|
|
|
|
|
|
|
$ |
12,966.4 |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-Bearing Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Demand |
|
1,906.1 |
|
|
0.1 |
|
|
0.03 |
|
1,769.6 |
|
|
0.2 |
|
|
0.04 |
|
1,886.6 |
|
|
0.2 |
|
|
0.03 |
|
1,787.2 |
|
|
0.4 |
|
|
0.04 |
| ||||||||
Savings |
|
4,444.5 |
|
|
1.1 |
|
|
0.10 |
|
4,523.0 |
|
|
1.9 |
|
|
0.17 |
|
4,441.8 |
|
|
2.4 |
|
|
0.11 |
|
4,529.9 |
|
|
4.1 |
|
|
0.18 |
| ||||||||
Time |
|
1,253.9 |
|
|
2.0 |
|
|
0.63 |
|
1,009.5 |
|
|
2.7 |
|
|
1.07 |
|
1,257.0 |
|
|
4.1 |
|
|
0.64 |
|
1,027.6 |
|
|
5.5 |
|
|
1.08 |
| ||||||||
Total Interest-Bearing Deposits |
|
7,604.5 |
|
|
3.2 |
|
|
0.17 |
|
7,302.1 |
|
|
4.8 |
|
|
0.26 |
|
7,585.4 |
|
|
6.7 |
|
|
0.18 |
|
7,344.7 |
|
|
10.0 |
|
|
0.28 |
| ||||||||
Short-Term Borrowings |
|
15.0 |
|
|
- |
|
|
0.14 |
|
16.2 |
|
|
- |
|
|
0.13 |
|
15.3 |
|
|
- |
|
|
0.13 |
|
16.6 |
|
|
- |
|
|
0.13 |
| ||||||||
Securities Sold Under Agreements to Repurchase |
|
1,808.5 |
|
|
7.3 |
|
|
1.59 |
|
1,862.4 |
|
|
7.4 |
|
|
1.56 |
|
1,862.3 |
|
|
14.6 |
|
|
1.55 |
|
1,812.2 |
|
|
14.4 |
|
|
1.58 |
| ||||||||
Long-Term Debt |
|
30.6 |
|
|
0.5 |
|
|
6.51 |
|
32.6 |
|
|
0.5 |
|
|
6.49 |
|
30.7 |
|
|
1.0 |
|
|
6.50 |
|
32.6 |
|
|
1.0 |
|
|
5.99 |
| ||||||||
Total Interest-Bearing Liabilities |
|
9,458.6 |
|
|
11.0 |
|
|
0.46 |
|
9,213.3 |
|
|
12.7 |
|
|
0.55 |
|
9,493.7 |
|
|
22.3 |
|
|
0.47 |
|
9,206.1 |
|
|
25.4 |
|
|
0.55 |
| ||||||||
Net Interest Income |
|
|
|
|
$ |
97.9 |
|
|
|
|
|
|
|
$ |
97.9 |
|
|
|
|
|
|
|
$ |
197.9 |
|
|
|
|
|
|
|
$ |
198.0 |
|
|
|
| ||||
Interest Rate Spread |
|
|
|
|
|
|
|
2.85 |
% |
|
|
|
|
|
|
3.01 |
% |
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
3.06 |
% | ||||||||
Net Interest Margin |
|
|
|
|
|
|
|
2.98 |
% |
|
|
|
|
|
|
3.16 |
% |
|
|
|
|
|
|
3.02 |
% |
|
|
|
|
|
|
3.20 |
% | ||||||||
Noninterest-Bearing Demand Deposits |
|
3,017.9 |
|
|
|
|
|
|
|
2,488.2 |
|
|
|
|
|
|
|
2,940.9 |
|
|
|
|
|
|
|
2,487.0 |
|
|
|
|
|
|
| ||||||||
Other Liabilities |
|
261.8 |
|
|
|
|
|
|
|
248.9 |
|
|
|
|
|
|
|
264.9 |
|
|
|
|
|
|
|
255.5 |
|
|
|
|
|
|
| ||||||||
Shareholders Equity |
|
1,012.2 |
|
|
|
|
|
|
|
1,016.8 |
|
|
|
|
|
|
|
1,016.4 |
|
|
|
|
|
|
|
1,017.8 |
|
|
|
|
|
|
| ||||||||
Total Liabilities and Shareholders Equity |
|
$ |
13,750.5 |
|
|
|
|
|
|
|
$ |
12,967.2 |
|
|
|
|
|
|
|
$ |
13,715.9 |
|
|
|
|
|
|
|
$ |
12,966.4 |
|
|
|
|
|
|
|
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 $2,481,000 and $395,000 for the three months ended June 30, 2012 and 2011, respectively, and $4,551,000 and $778,000 for the six months ended June 30, 2012 and 2011, respectively.
Analysis of Change in Net Interest Income Taxable-Equivalent Basis |
|
|
|
|
|
Table 4 |
| |||
|
|
Six Months Ended June 30, 2012 | ||||||||
|
|
Compared to June 30, 2011 | ||||||||
(dollars in millions) |
|
Volume 1 |
|
Rate 1 |
|
Total |
| |||
Change in Interest Income: |
|
|
|
|
|
|
| |||
Funds Sold |
|
$ |
(0.3 |
) |
$ |
(0.1 |
) |
$ |
(0.4 |
) |
Investment Securities |
|
|
|
|
|
|
| |||
Available-for-Sale |
|
(16.7 |
) |
(6.2 |
) |
(22.9 |
) | |||
Held-to-Maturity |
|
29.6 |
|
(6.3 |
) |
23.3 |
| |||
Loans Held for Sale |
|
0.1 |
|
- |
|
0.1 |
| |||
Loans and Leases |
|
|
|
|
|
|
| |||
Commercial and Industrial |
|
0.5 |
|
(0.3 |
) |
0.2 |
| |||
Commercial Mortgage |
|
1.8 |
|
(2.0 |
) |
(0.2 |
) | |||
Construction |
|
0.6 |
|
- |
|
0.6 |
| |||
Commercial Lease Financing |
|
(0.5 |
) |
(0.7 |
) |
(1.2 |
) | |||
Residential Mortgage |
|
5.4 |
|
(6.0 |
) |
(0.6 |
) | |||
Home Equity |
|
(0.4 |
) |
(1.8 |
) |
(2.2 |
) | |||
Automobile |
|
(0.2 |
) |
(0.8 |
) |
(1.0 |
) | |||
Other 2 |
|
0.6 |
|
0.5 |
|
1.1 |
| |||
Total Loans and Leases |
|
7.8 |
|
(11.1 |
) |
(3.3 |
) | |||
Total Change in Interest Income |
|
20.5 |
|
(23.7 |
) |
(3.2 |
) | |||
|
|
|
|
|
|
|
| |||
Change in Interest Expense: |
|
|
|
|
|
|
| |||
Interest-Bearing Deposits |
|
|
|
|
|
|
| |||
Demand |
|
- |
|
(0.2 |
) |
(0.2 |
) | |||
Savings |
|
(0.1 |
) |
(1.6 |
) |
(1.7 |
) | |||
Time |
|
1.1 |
|
(2.5 |
) |
(1.4 |
) | |||
Total Interest-Bearing Deposits |
|
1.0 |
|
(4.3 |
) |
(3.3 |
) | |||
Securities Sold Under Agreements to Repurchase |
|
0.5 |
|
(0.3 |
) |
0.2 |
| |||
Long-Term Debt |
|
(0.1 |
) |
0.1 |
|
- |
| |||
Total Change in Interest Expense |
|
1.4 |
|
(4.5 |
) |
(3.1 |
) | |||
|
|
|
|
|
|
|
| |||
Change in Net Interest Income |
|
$ |
19.1 |
|
$ |
(19.2 |
) |
$ |
(0.1 |
) |
1 The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.
2 Comprised of other consumer revolving credit, installment, and consumer lease financing.
Net Interest Income
Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.
Net interest income was $95.4 million in the second quarter of 2012, a decrease of $2.1 million or 2% compared to the same period in 2011. On a taxable-equivalent basis, net interest income was $97.9 million in the second quarter of 2012, relatively unchanged compared to the same period in 2011. The net interest margin was 2.98% in the second quarter of 2012, a decrease of 18 basis points compared to the same period in 2011. Net interest income was $193.3 million for the first six months of 2012, a decrease of $3.9 million or 2% compared to the same period in 2011. On a taxable-equivalent basis, net interest income was $197.9 million for the first six months of 2012, relatively unchanged compared to the same period in 2011. The net interest margin was 3.02% for the first six months of 2012, a decrease of 18 basis points compared to the same period in 2011. The lower margins in 2012 were primarily due to lower yields on loans and investment securities.
Yields on our earning assets decreased by 25 basis points in both the second quarter of 2012 and for the first six months of 2012 compared to the same periods in 2011, reflective of higher levels of liquidity and lower yields on investment securities and loans. Yields on our investment securities portfolio decreased by 27 basis points in the second quarter of 2012 and by 25 basis points for the first six months of 2012 compared to the same periods in 2011. Also contributing to the decline in yields on our earning assets in 2012 were lower yields in nearly every category of loans and leases. Partially offsetting the lower yields on our earning assets were lower funding costs, primarily due to lower rates paid on our interest-bearing deposits, reflective of the re-pricing of our deposits at lower interest rates. Rates paid on our time deposits decreased by 44 basis points in both the second quarter of 2012 and for the first six months of 2012 compared to the same periods in 2011.
Average balances of our earning assets increased by $753.2 million or 6% in the second quarter of 2012 compared to the same period in 2011, primarily due to a $720.0 million increase in average balances of our investment securities portfolio. We invested our excess liquidity into state and municipal securities and securities issued by the Small Business Administration (the SBA) in an effort to manage extension risk related to our mortgage-backed securities. Average balances of our investments in state and municipal bond holdings increased by $551.5 million and average balances of our SBA securities increased by $421.2 million in the second quarter of 2012 compared to the same period in 2011. This was partially offset by a $210.4 million decrease in average balances of our U.S. Treasury notes. Also contributing to the increase in our average balances of earning assets was a $315.5 million increase in average loan and lease balances primarily due to a $258.4 million increase in the average balance of our residential mortgage loan portfolio primarily due to our decision to retain additional conforming saleable loans in our portfolio.
Average balances of our earning assets increased by $726.8 million or 6% for the first six months of 2012 compared to the same period in 2011, primarily due to a $680.6 million increase in average balances of our investment securities portfolio. In 2011 and during the first six months of 2012, we reduced our holdings in mortgage-backed securities issued by the Government National Mortgage Association (Ginnie Mae). Average balances of our mortgage-backed securities issued by Ginnie Mae decreased by $268.5 million for the first six months of 2012 compared to the same period in 2011. As noted above, we invested our excess liquidity into state and municipal securities and securities issued by the SBA. Average balances of our investments in state and municipal bond holdings increased by $489.0 million and average balances of our SBA securities increased by $420.5 million for the first six months of 2012 compared to the same period in 2011. Also contributing to the increase in our average balances of earning assets was a $283.5 million increase in average loan and lease balances primarily due to a $211.1 million increase in the average balance of our residential mortgage loan portfolio primarily due to our decision to retain additional conforming saleable loans in our portfolio.
Average balances of our interest-bearing liabilities increased by $245.3 million or 3% in the second quarter of 2012 and by $287.6 million or 3% for the first six months of 2012 compared to the same periods in 2011 primarily due to an increase in the average balances of our public time deposits from local government entities.
Provision for Credit Losses
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 and changes in the economic environment, as well as an ongoing assessment
of credit quality. We recorded a Provision of $0.6 million in the second quarter of 2012 and $1.0 million for the first six months of 2012 compared to a Provision of $3.6 million in the second quarter of 2011 and $8.3 million for the first six months of 2011. The lower Provision recorded in the second quarter of 2012 and for the first six months of 2012 reflected improving credit trends and the underlying risk profile of the loan portfolio as economic conditions in Hawaii continued to further stabilize. Net charge-offs were $3.8 million for the second quarter of 2012 and $7.1 million for the first six months of 2012, a decrease of $2.2 million and $3.5 million compared to the same periods in 2011, respectively. Non-performing assets appears to have stabilized and were $41.5 million as of June 30, 2012, an increase of $0.7 million or 2% from December 31, 2011. For further discussion, see the Corporate Risk Profile - Reserve for Credit Losses section in MD&A for information on net charge-offs, non-performing assets, and other factors considered by management in assessing the credit quality of the loan portfolio and establishing the Allowance.
Noninterest Income
Noninterest income decreased by $2.6 million or 5% in the second quarter of 2012 and by $8.5 million or 8% for the first six months of 2012 compared to the same periods in 2011.
Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets that we manage and the fee rate charged to customers. Total trust assets under administration were $9.9 billion as of June 30, 2012, $9.3 billion as of December 31, 2011, and $10.2 billion as of June 30, 2011. Trust and asset management income decreased by $0.2 million or 2% in the second quarter of 2012 and by $1.1 million or 5% for the first six months of 2012 compared to the same periods in 2011. The decrease for the first six months of 2012 was primarily due to a $0.5 million decline in special service fees which were mainly the result of two large termination fees recorded in the first quarter of 2011. In addition, mutual fund investment management fees decreased by $0.3 million. We made a decision to liquidate our proprietary money market funds in November 2011, resulting in the decrease in mutual fund investment management fee revenue.
Mortgage banking income is highly influenced by mortgage interest rates and the housing market. Mortgage banking income increased by $4.9 million in the second quarter of 2012 compared to the same period in 2011. This increase was primarily due to a $5.8 million increase in net gains related to the fair value of mortgage-related derivative financial instruments, the result of higher loan origination volume and favorable interest rate movements. Residential mortgage loan originations were $291.8 million in the second quarter of 2012, a $135.7 million or 87% increase compared to the same period in 2011. Residential mortgage loan sales were $96.6 million in the second quarter of 2012, a $44.7 million or 86% increase compared to the same period in 2011.
Mortgage banking income increased by $6.8 million for the first six months of 2012 compared to the same period in 2011. This increase was primarily due to an $8.0 million increase in net gains related to the fair value of mortgage-related derivative financial instruments. As noted above, we experienced higher loan origination volume and the fair value of our mortgage-related derivative financial instruments benefited from favorable interest rate movements. Residential mortgage loan originations were $585.7 million for the first six months of 2012, an increase of $177.9 million or 44% compared to the same period in 2011. Residential mortgage loan sales were $195.4 million for the first six months of 2012, a decrease of $16.0 million or 8% compared to the same period in 2011. This decrease was primarily due to our decision to retain additional conforming saleable loans in our portfolio, particularly in the first quarter of 2012.
Service charges on deposit accounts decreased by $0.2 million or 2% in the second quarter of 2012 and by $0.5 million or 3% for the first six months of 2012 compared to the same periods in 2011. These decreases were primarily due to a decline in account analysis fees as a result of reduced charges applied against the customers earnings credit rate. The decline in account analysis fees was partially offset by an increase in overdraft fees primarily due to growth in number of accounts and an increase in customers enrolling in our debit card overdraft coverage program.
Fees, exchange, and other service charges are primarily comprised of debit card income, fees from ATMs, merchant service activity, and other loan fees and service charges. Fees, exchange, and other service charges decreased by $4.3 million or 26% in the second quarter of 2012 and by $6.9 million or 22% for the first six months of 2012 compared to the same periods in 2011. These decreases were primarily due to a decline in debit card income resulting mainly from the pricing restrictions imposed by the Durbin Amendment, which was effective October 1, 2011.
We did not sell any investment securities in the second quarter of 2012 or 2011. Sales of investment securities resulted in a net loss of $0.1 million in the first quarter of 2012 compared to a net gain of $6.1 million for the same period in 2011. The amount and timing of our sales of investments securities are dependent on a number of factors, including our efforts to preserve capital levels while managing duration and extension risk.
Insurance income decreased by $0.8 million or 25% in the second quarter of 2012 and by $1.3 million or 22% for the first six months of 2012 compared to the same periods in 2011. These decreases were primarily due to lower sales of our annuity products. The low interest rate environment, in particular, continues to adversely affect sales of our fixed annuity products.
Other noninterest income decreased by $2.0 million or 33% in the second quarter of 2012 compared to the same period in 2011. This decrease was primarily due to a $0.9 million decline in the fair value of mutual funds in deferred compensation and retirement plans. However this decrease has marginal effect on net income as it is mostly offset by a corresponding decrease in salaries and benefits expense and other expense. Also contributing to the decrease in other noninterest income was a $0.4 million decrease in gain on sale of leased equipment due to a sale that occurred in the second quarter of 2011. In addition, we recorded $0.4 million of income in the second quarter of 2011 from facilitating customer-related interest rate swap agreements. Other noninterest income increased by $0.7 million or 6% in the first six months of 2012 compared to the same period in 2011. This increase was primarily due to a lessee exercising its early buy-out option on two cargo ship leveraged leases which resulted in a pre-tax gain of $3.5 million in the first quarter of 2012. This increase was partially offset by a $1.0 million pre-tax loss related to the sale and termination of an aircraft lease in the first quarter of 2012, coupled with the aforementioned $0.4 million gain on sale of leased equipment that occurred in the second quarter of 2011. Also offsetting the increase was a $0.8 million decline in the fair value of mutual funds in deferred compensation and retirement plans, coupled with the aforementioned $0.4 million of income recognized in the second quarter of 2011 from facilitating customer-related interest rate swap agreements.
Noninterest Expense
Noninterest expense decreased by $13.0 million or 14% in the second quarter of 2012 and by $13.9 million or 8% for the first six months of 2012 compared to the same periods in 2011.
Table 5 presents the components of salaries and benefits expense.
Salaries and Benefits |
|
|
|
Table 5 |
| ||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
| |||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| |||||
Salaries |
|
$ 27,831 |
|
$ 29,142 |
|
|
$ 56,518 |
|
$ 58,217 |
| |||||
Incentive Compensation |
|
4,132 |
|
4,243 |
|
|
8,186 |
|
7,709 |
| |||||
Share-Based Compensation and Cash Grants for the Purchase of Company Stock |
|
1,758 |
|
2,483 |
|
|
3,443 |
|
3,158 |
| |||||
Commission Expense |
|
1,754 |
|
1,553 |
|
|
3,290 |
|
3,216 |
| |||||
Retirement and Other Benefits |
|
3,481 |
|
3,804 |
|
|
7,871 |
|
8,766 |
| |||||
Payroll Taxes |
|
2,437 |
|
2,335 |
|
|
6,255 |
|
6,374 |
| |||||
Medical, Dental, and Life Insurance |
|
2,239 |
|
2,438 |
|
|
4,676 |
|
4,661 |
| |||||
Separation Expense |
|
405 |
|
802 |
|
|
822 |
|
1,481 |
| |||||
Total Salaries and Benefits |
|
$ 44,037 |
|
$ 46,800 |
|
|
$ 91,061 |
|
$ 93,582 |
| |||||
Salaries and benefits expense decreased by $2.8 million or 6% in the second quarter of 2012 compared to the same period in 2011. Salaries expense decreased by $1.3 million or 4% in the second quarter of 2012 compared to the same period in 2011. We had 4% fewer full-time equivalent employees as of June 30, 2012 compared to June 30, 2011. Share-based compensation decreased by $0.7 million primarily due to a $2.0 million accrual for a share appreciation program that was recorded in the second quarter of 2011, but subsequently reversed in the fourth quarter of 2011. The share appreciation program was replaced by a stock option program. Compensation expense recorded for this new stock option program was $0.8 million for the second quarter of 2012. Also contributing to the decrease in salaries and benefits expense were declines in retirement plan expense and separation expense. Salaries and benefits expense decreased by $2.5 million or 3% for the first six months of 2012 compared to the same period in 2011. Salaries expense decreased by $1.7 million or 3% for the first six months of 2012 compared to the same period in 2011. As noted above, we had 4% fewer full-time equivalent employees as of June 30, 2012 compared to June 30, 2011. Also contributing to the decrease were declines in retirement plan expense and separation expense, partially offset by an increase in incentive compensation.
Net occupancy expense decreased by $0.4 million or 4% in the second quarter of 2012 compared to the same period in 2011. This decrease was primarily due to a gain recognized upon adjusting the book value of two bank-owned properties to fair value prior to being donated in the second quarter of 2012. Net occupancy expense decreased by $0.2 million or 1% for the first six months of 2012 compared to the same period in 2011.
Net equipment expense decreased by $0.1 million or 2% in the second quarter of 2012 and increased by $1.1 million or 11% for the first six months of 2012 compared to the same periods in 2011. The increase for the first six months of 2012 was primarily due to the purchase of technology equipment in the first quarter of 2012.
FDIC insurance expense increased by $0.1 million or 4% in the second quarter of 2012 and decreased by $1.1 million or 21% for the first six months of 2012 compared to the same periods in 2011. The decrease for the first six months of 2012 was primarily due to lower rate assessments as a result of new rules finalized by the FDIC. As required by the Dodd-Frank Act, on February 7, 2011, the FDIC finalized new rules which redefined the assessment base as average consolidated total assets minus average tangible equity. The new rate schedule and other revisions to the assessment rules became effective April 1, 2011.
Other noninterest expense decreased by $9.9 million or 36% in the second quarter of 2012 and by $11.2 million or 24% for the first six months of 2012 compared to the same periods in 2011. These decreases were primarily due to the accrual of $9.0 million related to the settlement of overdraft litigation recorded in the second quarter of 2011. Also contributing to the decrease in 2012 was a decline in operating losses, which include losses as a result of bank error, fraud, items processing, or theft. These items were partially offset by the donation in the second quarter of 2012 of two bank-owned properties appraised at $1.0 million.
Provision for Income Taxes
Table 6 presents our provision for income taxes and effective tax rates.
Provision for Income Taxes and Effective Tax Rates |
|
Table 6 |
| ||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
| |||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| |||
Provision for Income Taxes |
|
$ 20,107 |
|
$ 14,440 |
|
|
$ 36,769 |
|
$ 34,926 |
| |||
Effective Tax Rates |
|
33.04% |
|
29.12% |
|
|
30.31% |
|
31.06% |
| |||
The higher effective tax rate for the second quarter of 2012 compared to the same period in 2011 was primarily due to a benefit recorded in the second quarter of 2011 for the release of reserves due to the closing of the Internal Revenue Service audit for tax years 2007 and 2008. The slightly lower effective tax rate for the first six months of 2012 compared to the same period in 2011 was primarily due to the sale of our equity interest in two leveraged leases which resulted in a $2.7 million credit to the provision for income taxes in the first quarter of 2012.
Analysis of Statements of Condition
Investment Securities
The carrying value of our investment securities was $7.1 billion as of June 30, 2012, a decrease of $40.5 million or 1% compared to December 31, 2011.
We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.
During the second quarter of 2012, we continued to reduce our positions in mortgage-backed securities issued by the Government National Mortgage Corporation (Ginnie Mae) and U.S. Treasury Notes. We increased our holdings in state and municipal securities in an effort to manage extension risk related to our mortgage-backed securities. As of June 30, 2012, our remaining portfolio of Ginnie Mae mortgage-backed securities were primarily comprised of securities issued between 2008 and 2011. As of June 30, 2012, the credit ratings of these mortgage-backed securities were all AAA-rated, with a low probability of a change in ratings in the near future. As of June 30, 2012, our remaining available-for-sale investment securities portfolio was comprised of securities with an average base duration of less than three years.
Gross unrealized gains in our investment securities portfolio were $172.1 million as of June 30, 2012 and $168.0 million as of December 31, 2011. Gross unrealized losses on our temporarily impaired investment securities were $4.9 million as of June 30, 2012 and $6.6 million as of December 31, 2011. As of June 30, 2012, the gross unrealized losses were primarily attributable to changes in interest rates related to state and municipal securities, relative to when the investment securities were purchased.
As of June 30, 2012, 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. See Note 2 to the Consolidated Financial Statements for more information.
Loans and Leases
Table 7 presents the composition of our loan and lease portfolio by major categories.
Loan and Lease Portfolio Balances |
|
Table 7 |
| ||||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Commercial |
|
|
|
|
| ||
Commercial and Industrial |
|
$ |
781,688 |
|
$ |
817,170 |
|
Commercial Mortgage |
|
961,984 |
|
938,250 |
| ||
Construction |
|
97,668 |
|
98,669 |
| ||
Lease Financing |
|
281,020 |
|
311,928 |
| ||
Total Commercial |
|
2,122,360 |
|
2,166,017 |
| ||
Consumer |
|
|
|
|
| ||
Residential Mortgage |
|
2,401,331 |
|
2,215,892 |
| ||
Home Equity |
|
766,839 |
|
780,691 |
| ||
Automobile |
|
194,339 |
|
192,506 |
| ||
Other 1 |
|
186,614 |
|
183,198 |
| ||
Total Consumer |
|
3,549,123 |
|
3,372,287 |
| ||
Total Loans and Leases |
|
$ |
5,671,483 |
|
$ |
5,538,304 |
|
1 Comprised of other revolving credit, installment, and lease financing.
Total loans and leases as of June 30, 2012 increased by $133.2 million or 2% from December 31, 2011.
Commercial loans and leases as of June 30, 2012 decreased by $43.7 million or 2% from December 31, 2011. Commercial and industrial loans decreased by $35.5 million or 4% from December 31, 2011 primarily due to several large payoffs during the first six months of 2012. Commercial mortgage loans increased by $23.7 million or 3% from December 31, 2011 primarily due to refinancing activity and new lending opportunities. Construction loans decreased by $1.0 million or 1% from December 31, 2011 as demand for new development activity remained weak. Lease financing decreased by $30.9 million or 10% from December 31, 2011 primarily due to a $16.6 million decrease in balances related to a lessees decision to exercise its early buy-out option on two cargo ship leveraged leases in the first quarter of 2012. Also contributing to the decrease in lease financing balances was a $6.1 million decrease related to the sale and termination of an aircraft lease in the first quarter of 2012.
Consumer loans and leases as of June 30, 2012 increased by $176.8 million or 5% from December 31, 2011. Residential mortgage loans increased by $185.4 million or 8% from December 31, 2011 primarily due to strong refinancing activity, the result of low interest rates, as well as our decision to retain additional conforming saleable loans in our portfolio. Home equity loans decreased by $13.9 million or 2% from December 31, 2011 primarily due to continued paydowns and reduced line utilization. As of June 30, 2012, automobile loan balances remained relatively unchanged from December 31, 2011. Other consumer loans increased by $3.4 million or 2% from December 31, 2011 primarily due to the success of our installment loan product.
Table 8 presents the composition of our loan and lease portfolio by geographic area and by major categories.
Geographic Distribution of Loan and Lease Portfolio |
|
|
|
|
|
|
|
Table 8 |
| ||||||||||||||||||
|
|
|
|
U.S. |
|
|
|
Other |
|
|
|
|
| ||||||||||||||
(dollars in thousands) |
|
Hawaii |
|
Mainland 1 |
|
Guam |
|
Pacific Islands |
|
Foreign 2 |
|
Total |
| ||||||||||||||
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Commercial and Industrial |
|
$ |
679,923 |
|
$ |
31,677 |
|
$ |
65,190 |
|
$ |
2,362 |
|
$ |
2,536 |
|
$ |
781,688 |
| ||||||||
Commercial Mortgage |
|
864,993 |
|
33,637 |
|
63,354 |
|
- |
|
- |
|
961,984 |
| ||||||||||||||
Construction |
|
97,668 |
|
- |
|
- |
|
- |
|
- |
|
97,668 |
| ||||||||||||||
Lease Financing |
|
31,853 |
|
207,715 |
|
17,914 |
|
- |
|
23,538 |
|
281,020 |
| ||||||||||||||
Total Commercial |
|
1,674,437 |
|
273,029 |
|
146,458 |
|
2,362 |
|
26,074 |
|
2,122,360 |
| ||||||||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Residential Mortgage |
|
2,251,156 |
|
- |
|
145,039 |
|
5,136 |
|
- |
|
2,401,331 |
| ||||||||||||||
Home Equity |
|
736,806 |
|
9,024 |
|
18,923 |
|
2,086 |
|
- |
|
766,839 |
| ||||||||||||||
Automobile |
|
137,924 |
|
6,157 |
|
47,609 |
|
2,649 |
|
- |
|
194,339 |
| ||||||||||||||
Other 3 |
|
135,913 |
|
- |
|
20,480 |
|
30,216 |
|
5 |
|
186,614 |
| ||||||||||||||
Total Consumer |
|
3,261,799 |
|
15,181 |
|
232,051 |
|
40,087 |
|
5 |
|
3,549,123 |
| ||||||||||||||
Total Loans and Leases |
|
$ |
4,936,236 |
|
$ |
288,210 |
|
$ |
378,509 |
|
$ |
42,449 |
|
$ |
26,079 |
|
$ |
5,671,483 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Commercial and Industrial |
|
$ |
700,570 |
|
$ |
42,296 |
|
$ |
67,870 |
|
$ |
3,325 |
|
$ |
3,109 |
|
$ |
817,170 |
| ||||||||
Commercial Mortgage |
|
849,551 |
|
23,965 |
|
64,711 |
|
3 |
|
20 |
|
938,250 |
| ||||||||||||||
Construction |
|
98,669 |
|
- |
|
- |
|
- |
|
- |
|
98,669 |
| ||||||||||||||
Lease Financing |
|
30,488 |
|
236,203 |
|
21,868 |
|
- |
|
23,369 |
|
311,928 |
| ||||||||||||||
Total Commercial |
|
1,679,278 |
|
302,464 |
|
154,449 |
|
3,328 |
|
26,498 |
|
2,166,017 |
| ||||||||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Residential Mortgage |
|
2,059,448 |
|
- |
|
150,676 |
|
5,768 |
|
- |
|
2,215,892 |
| ||||||||||||||
Home Equity |
|
750,196 |
|
10,512 |
|
17,877 |
|
2,106 |
|
- |
|
780,691 |
| ||||||||||||||
Automobile |
|
140,111 |
|
9,073 |
|
41,113 |
|
2,209 |
|
- |
|
192,506 |
| ||||||||||||||
Other 3 |
|
139,229 |
|
- |
|
19,136 |
|
24,828 |
|
5 |
|
183,198 |
| ||||||||||||||
Total Consumer |
|
3,088,984 |
|
19,585 |
|
228,802 |
|
34,911 |
|
5 |
|
3,372,287 |
| ||||||||||||||
Total Loans and Leases |
|
$ |
4,768,262 |
|
$ |
322,049 |
|
$ |
383,251 |
|
$ |
38,239 |
|
$ |
26,503 |
|
$ |
5,538,304 |
| ||||||||
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 borrowers business operations are conducted.
2 Loans classified as Foreign represent those which are recorded in the Companys international business units. Lease financing classified as Foreign represent those with air transportation carriers based outside the United States.
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 leveraged lease financing and participation in Shared National Credits. Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.
Other Assets
Table 9 presents the major components of other assets.
Other Assets |
|
|
|
Table 9 |
| ||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Bank-Owned Life Insurance |
|
$ |
215,218 |
|
$ |
213,113 |
|
Federal Home Loan Bank and |
|
80,132 |
|
79,946 |
| ||
Low-Income Housing and Other |
|
40,864 |
|
35,860 |
| ||
Derivative Financial Instruments |
|
42,866 |
|
38,085 |
| ||
Prepaid Expenses |
|
26,667 |
|
28,979 |
| ||
Accounts Receivable |
|
12,553 |
|
13,607 |
| ||
Federal and State Tax Deposits |
|
6,069 |
|
6,069 |
| ||
Other |
|
24,636 |
|
26,113 |
| ||
Total Other Assets |
|
$ |
449,005 |
|
$ |
441,772 |
|
Other assets increased by $7.2 million or 2% from December 31, 2011. The increase in other assets from December 31, 2011 was primarily due to a $7.5 million increase in commitments to fund low-income housing investments. Also contributing to the increase was a $4.8 million increase in the fair value of our derivative financial instruments and a $2.1 million increase in the value of our bank-owned life insurance. This was partially offset by a $2.4 million decrease in funds that were in the process of settlement and a $3.8 million decrease in prepaid FDIC assessments due to amortization recorded in the first six months of 2012.
As of June 30, 2012, the carrying value of our Federal Home Loan Bank of Seattle (FHLB) stock was $61.3 million. Our investment in the FHLB is a condition of membership and, as such, is required to obtain credit and other services from the FHLB. As of March 31, 2012, the FHLB met all of its regulatory capital requirements, but remained classified as undercapitalized by its primary regulator, the Federal Housing Finance Agency (Finance Agency), due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements. As such, the FHLB remains restricted from redeeming or repurchasing capital stock or paying dividends. We consider our investment in the FHLB as a long-term investment and we value the investment based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We understand that in addition to meeting all of its regulatory capital requirements, as of March 31, 2012, the FHLB met all minimum financial requirements stipulated under a Consent Order issued by the Finance Agency in October 2010. The FHLB also continues to meet its debt obligations and if needed has an additional source of liquidity available to U.S. Government-Sponsored Enterprises through the U.S. Treasury. Based upon the foregoing, we have not recorded an impairment of the carrying value of our FHLB stock as of June 30, 2012.
Deposits
Table 10 presents the composition of our deposits by major customer categories.
Deposits |
|
|
|
Table 10 |
| ||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Consumer |
|
$ |
5,360,325 |
|
$ |
5,241,827 |
|
Commercial |
|
4,403,095 |
|
4,320,712 |
| ||
Public and Other |
|
1,784,573 |
|
1,030,084 |
| ||
Total Deposits |
|
$ |
11,547,993 |
|
$ |
10,592,623 |
|
Our strong brand continues to play a key role as we compete with other financial institutions for a share of the deposit market.
During the second quarter of 2012, customers continued to seek liquidity and safety in light of the slow pace of economic recovery both in Hawaii and on the U.S. Mainland. Deposit balances as of June 30, 2012 increased by $955.4 million or 9% from December 31, 2011. The increase was primarily due to a $660.1 million increase in public time deposits, mainly the result of local government entities transferring funds from repurchase agreements to time deposits. Also contributing to the increase was a $175.2 million increase in our consumer and commercial noninterest-bearing demand accounts and a $106.6 million increase in our consumer interest-bearing demand and savings products.
Table 11 presents the composition of our savings deposits.
Savings Deposits |
|
|
|
Table 11 |
| ||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Money Market |
|
$ |
1,701,839 |
|
$ |
1,732,999 |
|
Regular Savings |
|
2,734,055 |
|
2,665,639 |
| ||
Total Savings Deposits |
|
$ |
4,435,894 |
|
$ |
4,398,638 |
|
Table 12 presents our quarterly average balance of time deposits of $100,000 or more.
Average Time Deposits of $100,000 or More |
Table 12 |
| |||||
|
|
Three Months Ended |
| ||||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Average Time Deposits |
|
$ |
893,270 |
|
$ |
769,024 |
|
Borrowings
Borrowings consisted of funds purchased as of June 30, 2012 and December 31, 2011. Borrowings were $13.8 million as of June 30, 2012, a $3.0 million or 27% increase from December 31, 2011. We manage the level of our borrowings to ensure that we have adequate sources of liquidity. Due to our successful deposit gathering efforts and our strong capital levels, our level of borrowings as a source of funds has remained low.
Securities Sold Under Agreements to Repurchase
Table 13 presents the composition of our securities sold under agreements to repurchase.
Securities Sold Under Agreements to Repurchase |
Table 13 |
|
|
June 30, |
|
December 31, | ||
(dollars in thousands) |
|
2012 |
|
2011 | ||
Government Entities |
|
$ |
465,653 |
|
$ |
1,325,998 |
Private Institutions |
|
600,000 |
|
600,000 | ||
Total Securities Sold Under Agreements to |
|
$ |
1,065,653 |
|
$ |
1,925,998 |
Securities sold under agreements to repurchase as of June 30, 2012 decreased by $860.3 million or 45% from December 31, 2011. The decrease was primarily due to local government entities transferring funds from repurchase agreements to time deposits. As of June 30, 2012, the weighted average maturity was 119 days for our securities sold under agreements to repurchase with government entities and 5.4 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 2.7 years. As of June 30, 2012, all of our securities sold under agreements to repurchase were at fixed interest rates. As of June 30, 2012, the weighted average interest rate for outstanding agreements with government entities and private institutions was 0.09% and 4.63%, respectively. We have not entered into agreements in which the securities sold and the related liability were not recorded on the consolidated statements of condition.
Long-Term Debt
Long-term debt was $28.1 million as of June 30, 2012, a $2.6 million or 9% decrease from December 31, 2011. Due to our strong liquidity position, we have not needed additional long-term funding in recent years.
Analysis of Business Segments
Our business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury and Other.
Table 14 summarizes net income from our business segments. Additional information about segment performance is presented in Note 8 to the Consolidated Financial Statements.
Business Segment Net Income |
|
Table 14 |
| ||||||||||||||
|
|
Three Months Ended |
|
|
Six Months Ended |
| |||||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
|
2012 |
|
2011 |
| |||||||
Retail Banking |
|
$ |
8,151 |
|
$ |
4,873 |
|
|
$ |
14,809 |
|
$ |
14,752 |
| |||
Commercial Banking |
|
11,580 |
|
12,848 |
|
|
28,720 |
|
25,791 |
| |||||||
Investment Services |
|
2,814 |
|
2,509 |
|
|
4,389 |
|
4,807 |
| |||||||
Total |
|
22,545 |
|
20,230 |
|
|
47,918 |
|
45,350 |
| |||||||
Treasury and Other |
|
18,202 |
|
14,918 |
|
|
36,639 |
|
32,158 |
| |||||||
Consolidated Total |
|
$ |
40,747 |
|
$ |
35,148 |
|
|
$ |
84,557 |
|
$ |
77,508 |
| |||
Retail Banking
Net income increased by $3.3 million or 67% in the second quarter of 2012 compared to the same period in 2011 primarily due to decreases in noninterest expense and the Provision, partially offset by a decrease in net interest income. The decrease in noninterest expense was primarily due to lower allocated expenses related to the segments share of the $9.0 million overdraft litigation settlement accrued in the second quarter of 2011. The decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment combined with improving credit trends and the underlying risk profile of the loan portfolio. The decrease in net interest income was primarily due to lower earnings credits on the segments deposit portfolio, partially offset by higher average deposit balances and higher average loan balances.
Net income remained relatively unchanged during the first six months of 2012 compared to the same period in 2011, as decreases in noninterest expense and the Provision were largely offset by decreases in net interest income and noninterest income. The decrease in noninterest expense was primarily due to lower allocated expenses related to the overdraft litigation settlement accrued in the second quarter of 2011. The decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment combined with improving credit trends and the underlying risk profile of the loan portfolio. The decrease in net interest income was primarily due to lower earnings credits on the segments deposit portfolio, partially offset by higher average balances. The decrease in noninterest income was primarily due to lower debit card interchange income resulting from the pricing restrictions imposed by the Durbin Amendment, partially offset by higher mortgage banking income.
Commercial Banking
Net income decreased by $1.3 million or 10% in the second quarter of 2012 compared to the same period in 2011 primarily due to decreases in net interest income and noninterest income, partially offset by a decrease in noninterest expense. The decrease in net interest income was due to lower earnings credits on the segments deposit portfolio, partially offset by higher average deposit balances. The decrease in noninterest income was due to lower net gains on the sale of leased assets, lower fees from facilitating customer interest rate swaps, and lower account analysis fees. The decrease in noninterest expense was primarily due to lower allocated expenses related to the overdraft litigation settlement accrued in the second quarter of 2011.
Net income increased by $2.9 million or 11% for the first six months of 2012 compared to the same period in 2011 primarily due to decreases in the provision for income taxes and noninterest expense, coupled with an increase in noninterest income, partially offset by a decrease in net interest income. The decrease in the provision for income taxes and the increase in noninterest income were attributed to a gain recognized upon a lessee exercising its early buy-out option on two cargo ship leveraged leases. The decrease in noninterest expense was primarily due to lower other operating expense and lower allocated expenses related to the overdraft litigation settlement accrued in the second quarter of 2011. The decrease in net interest income was due to lower earnings credits on the segments deposit portfolio, partially offset by higher average deposit balances.
Investment Services
Net income increased by $0.3 million or 12% in the second quarter of 2012 compared to the same period in 2011 primarily due to a decrease in noninterest expense, partially offset by decreases in net interest income and noninterest income. The decrease in noninterest expense was primarily due to lower salaries, other operating, and allocated expenses. The decrease in net interest income was due to lower earnings credits on the segments deposit portfolio. The decrease in noninterest income was due primarily to lower annuity and life insurance fee income from the segments full service brokerage, partially offset by higher mortgage banking income.
Net income decreased by $0.4 million or 9% for the first six months of 2012 compared to the same period in 2011 primarily due to decreases in noninterest income and net interest income, partially offset by a decrease in noninterest expense. The decrease in noninterest income was primarily due to lower annuity and life insurance fee income from the segments full service brokerage and lower special service (termination) fees, partially offset by higher mortgage banking income. The decrease in net interest income was primarily due to lower earnings credits on the segments deposit portfolio. The decrease in noninterest expense was primarily due to lower salaries and other operating expense.
Treasury and Other
Net income increased by $3.3 million or 22% in the second quarter of 2012 compared to the same period in 2011 primarily due to an increase in net interest income. This increase was primarily due to lower deposit funding costs.
Net income increased by $4.5 million or 14% for the first six months of 2012 compared to the same period in 2011 primarily due to an increase in net interest income coupled with a lower Provision, partially offset by a decrease in noninterest income. The increase in net interest income was primarily due to lower deposit funding costs. The decrease in the Provision represents a reduction in the Allowance due to improving credit trends and the underlying risk profile of the loan portfolio. The decrease in noninterest income was primarily due to lower net investment securities gains.
Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury and Other provide a wide-range of support to the Companys other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
Corporate Risk Profile
Credit Risk
As of June 30, 2012, our overall credit risk position reflects a continued stabilizing Hawaii economy. However, we remain cautious because of the slow pace of economic recovery both in Hawaii and the U.S. Mainland. We also remain concerned about U.S. and global economic volatility.
Although asset quality has improved over the past two and a half years, we remain vigilant in light of the uncertainties in the U.S. economy as well as concerns related to specific segments of our lending portfolio that present a higher risk profile. As of June 30, 2012, the higher risk segments within our loan and lease portfolio continue to be concentrated in residential home building, residential land loans, home equity loans, and air transportation leases. In addition, loans and leases based on Hawaiian islands other than Oahu (the neighbor islands) may present a higher risk profile as the neighbor islands have continued to experience higher levels of unemployment and have shown signs of slower economic recovery when compared to Oahu.
We continue to monitor our loan and lease portfolio to identify higher risk segments. We also actively manage exposures with deteriorating asset quality to reduce levels of potential loss exposure and have systematically built our reserves and capital base to address both anticipated and unforeseen issues. Risk management activities have included curtailing activities in some higher risk segments. We have also conducted detailed analysis of portfolio segments and stress tested those segments to ensure that reserve and capital levels are appropriate. We are also performing frequent loan and lease-level risk monitoring and risk rating review which provides opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.
Table 15 presents balances in our loan and lease portfolio which demonstrate a higher risk profile.
Higher Risk Loans and Leases Outstanding |
|
Table 15 |
| ||||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Residential Home Building |
|
$ |
8,777 |
|
$ |
13,475 |
|
Residential Land Loans |
|
16,703 |
|
18,163 |
| ||
Home Equity Loans |
|
22,029 |
|
21,413 |
| ||
Air Transportation |
|
27,633 |
|
36,144 |
| ||
Total |
|
$ |
75,142 |
|
$ |
89,195 |
|
As of June 30, 2012, our higher risk loans and leases outstanding decreased by $14.1 million or 16% from December 31, 2011.
Residential home building loans represented $48.6 million or 50% of our total commercial construction portfolio balance as of June 30, 2012. The higher risk loans in our residential home building portfolio consist of loans with a well-defined weakness or weaknesses that could jeopardize the orderly repayment of the loans. These higher risk loans were $8.8 million as of June 30, 2012. This included $1.4 million in projects on the neighbor islands. The Allowance associated with the higher risk residential home building loans, which was comprised of four loans, was $1.7 million or 19% of outstanding loan balances. There were no delinquencies in this portfolio of higher risk loans, however, one of the loans is on non-accrual status due to concerns about its full collectability.
Residential land loans in our residential mortgage portfolio consist of consumer loans secured by unimproved lots. These loans often represent higher risk due to the volatility in the value of the underlying collateral. Our residential land loan portfolio was $16.7 million as of June 30, 2012, of which $14.3 million related to properties on the neighbor islands. The decrease in our higher risk exposure in this portfolio segment for the first six months of 2012 was primarily due to $1.2 million in paydowns and $0.3 million in charge-offs. Residential land loans that have not been modified in a troubled debt restructuring (TDR) are collectively evaluated for impairment in connection with the evaluation of our residential mortgage portfolio. As of June 30, 2012, there was a nominal specific Allowance associated with the remaining balance of our residential land loans and there were no residential land loans that were past due 90 days or more as to principal or interest.
The higher risk segment within our Hawaii home equity lending portfolio was $22.0 million or 3% of our total home equity loans outstanding as of June 30, 2012. The higher risk segment within our Hawaii home equity portfolio includes those loans originated in 2005 or later, with current monitoring credit scores below 600, and with original loan-to-value (LTV) ratios greater than 70%. Higher risk loans in our Hawaii home equity portfolio are collectively evaluated for impairment in connection with the evaluation of our entire home equity portfolio. As of June 30, 2012, there was no specific Allowance associated with the balance of our higher risk home equity loans. The higher risk home equity loans had a 90 day past due delinquency ratio of 3.5% and $1.8 million in charge-offs were recorded during the first six months of 2012.
We consider all of our air transportation leases to be of higher risk due to the volatile financial profile of the industry. Domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, consumer demand, and marginal pricing power. Carriers are migrating to newer generations of more fuel efficient fleets which is negatively impacting older generation aircraft
valuations. We believe that volatile fuel costs, coupled with a slowly recovering economy, could place additional pressure on the financial health of air transportation carriers for the foreseeable future. As of June 30, 2012, our air transportation leasing portfolio was comprised of four leveraged leases on aircraft that were originated in the 1990s and prior. In the first six months of 2012, we sold one aircraft and terminated the lease and transferred one aircraft to equipment held for sale, a component of other assets, at the lease termination date. These two transactions decreased our higher risk air transportation exposure by $8.6 million, which had a related Allowance of $3.4 million. As of June 30, 2012, the
Allowance associated with our air transportation leases was $20.2 million of the outstanding balance. For the first six months of 2012, there were no delinquencies in our air transportation lease portfolio and no charge-offs were recorded.
All of these higher risk loans and leases have been considered in our quarterly evaluation of the adequacy of the Allowance.
Non-Performing Assets
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 |
|
|
|
Table 16 |
| ||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Non-Performing Assets |
|
|
|
|
| ||
Non-Accrual Loans and Leases |
|
|
|
|
| ||
Commercial |
|
|
|
|
| ||
Commercial and Industrial |
|
$ |
5,778 |
|
$ |
6,243 |
|
Commercial Mortgage |
|
2,737 |
|
2,140 |
| ||
Construction |
|
1,182 |
|
2,080 |
| ||
Lease Financing |
|
- |
|
5 |
| ||
Total Commercial |
|
9,697 |
|
10,468 |
| ||
Consumer |
|
|
|
|
| ||
Residential Mortgage |
|
26,803 |
|
25,256 |
| ||
Home Equity |
|
2,425 |
|
2,024 |
| ||
Total Consumer |
|
29,228 |
|
27,280 |
| ||
Total Non-Accrual Loans and Leases |
|
38,925 |
|
37,748 |
| ||
Foreclosed Real Estate |
|
2,569 |
|
3,042 |
| ||
Total Non-Performing Assets |
|
$ |
41,494 |
|
$ |
40,790 |
|
|
|
|
|
|
| ||
Accruing Loans and Leases Past Due 90 Days or More |
|
|
|
|
| ||
Commercial |
|
|
|
|
| ||
Commercial and Industrial |
|
$ |
1 |
|
$ |
1 |
|
Total Commercial |
|
1 |
|
1 |
| ||
Consumer |
|
|
|
|
| ||
Residential Mortgage |
|
4,229 |
|
6,422 |
| ||
Home Equity |
|
2,445 |
|
2,194 |
| ||
Automobile |
|
98 |
|
170 |
| ||
Other 1 |
|
395 |
|
435 |
| ||
Total Consumer |
|
7,167 |
|
9,221 |
| ||
Total Accruing Loans and Leases Past Due 90 Days or More |
|
$ |
7,168 |
|
$ |
9,222 |
|
Restructured Loans on Accrual Status and Not Past Due 90 Days or More |
|
$ |
31,124 |
|
$ |
33,703 |
|
Total Loans and Leases |
|
$ |
5,671,483 |
|
$ |
5,538,304 |
|
|
|
|
|
|
| ||
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases |
|
0.69% |
|
0.68% |
| ||
|
|
|
|
|
| ||
Ratio of Non-Performing Assets to Total Loans and Leases, and Foreclosed Real Estate |
|
0.73% |
|
0.74% |
| ||
|
|
|
|
|
| ||
Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases, |
|
0.51% |
|
0.56% |
| ||
|
|
|
|
|
| ||
Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases |
|
0.87% |
|
0.85% |
| ||
|
|
|
|
|
| ||
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days |
|
0.86% |
|
0.90% |
| ||
|
|
|
|
|
| ||
Changes in Non-Performing Assets |
|
|
|
|
| ||
Balance at December 31, 2011 |
|
$ |
40,790 |
|
|
| |
Additions |
|
12,908 |
|
|
| ||
Reductions |
|
|
|
|
| ||
Payments |
|
(5,466 |
) |
|
| ||
Return to Accrual Status |
|
(2,620 |
) |
|
| ||
Sales of Foreclosed Real Estate |
|
(3,296 |
) |
|
| ||
Charge-offs/Write-downs |
|
(822 |
) |
|
| ||
Total Reductions |
|
(12,204 |
) |
|
| ||
Balance at June 30, 2012 |
|
$ |
41,494 |
|
|
|
1 Comprised of other revolving credit, installment, and lease financing.
NPAs consist of non-accrual loans and leases, and foreclosed real estate. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.
Total NPAs were $41.5 million as of June 30, 2012, an increase of $0.7 million or 2% from December 31, 2011. The ratio of our non-accrual loans and leases to total loans and leases was 0.69% as of June 30, 2012 and 0.68% as of December 31, 2011.
Commercial and industrial non-accrual loans decreased by $0.5 million or 7% from December 31, 2011 primarily due to paydowns. As of June 30, 2012, three commercial borrowers comprised 99% of the non-accrual balance in this category. We individually evaluated these loans for impairment and have previously recorded partial charge-offs of $5.3 million on two of these loans.
Commercial mortgage non-accrual loans increased by $0.6 million from December 31, 2011 due to the addition of one loan. We have individually evaluated all four of these loans for impairment and have previously recorded a partial charge-off of $0.5 million on one of these loans.
There was one construction non-accrual loan as of June 30, 2012 and December 31, 2011. The $0.9 million decrease from December 31, 2011was due to a partial charge-off of $0.3 million and paydowns of $0.6 million.
Residential mortgage non-accrual loans increased by $1.5 million or 6% from December 31, 2011 primarily due to $6.9 million in additions with 21% representing Oahu owner-occupant properties. This increase was partially offset by $5.2 million in repayments. Residential mortgage non-accrual loans remain at elevated levels due mainly to the lengthy judiciary foreclosure process. As of June 30, 2012, our residential mortgage non-accrual loans were comprised of 66 loans with a weighted average current LTV ratio of 83%.
Foreclosed real estate represents property acquired as the result of borrower defaults on loans. Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. Foreclosed real estate decreased by $0.5 million or 16% from December 31, 2011 primarily due to the sale of one commercial property in the first half of 2012.
Included in NPAs are loans that we consider impaired. Impaired loans are defined as loans which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement. Included in impaired loans are all classes of commercial non-accruing loans (except lease financing and small business loans), and all loans modified in a TDR. Impaired loans exclude lease financing and smaller balance homogeneous loans (consumer and small business non-accruing loans) that are collectively evaluated for impairment. Impaired loans were $46.8 million as of June 30, 2012 and $47.6 million as of December 31, 2011, and had a related Allowance of $4.8 million as of June 30, 2012 and $5.5 million as of December 31, 2011. The decrease in impaired loans during the first six months of 2012 was primarily due to payments received on commercial non-accrual loans. As of June 30, 2012, we have recorded charge-offs of $12.0 million related to our impaired loans. As of June 30, 2012, our impaired loans have been included in managements assessment of the overall adequacy of the Allowance.
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 are still accruing interest because they are well secured and in the process of collection. Loans and leases past due 90 days or more and still accruing interest were $7.2 million as of June 30, 2012, a $2.1 million or 22% decrease from December 31, 2011. The decrease was primarily in our neighbor island residential mortgage portfolio.
Table 17 presents information on loans whose terms have been modified in a TDR.
Loans Modified in a Troubled Debt Restructuring |
|
|
|
Table 17 |
| ||
|
|
June 30, |
|
December 31, |
| ||
(dollars in thousands) |
|
2012 |
|
2011 |
| ||
Restructured Loans on Accrual Status and Not Past Due 90 Days or More |
|
$ |
31,124 |
|
$ |
33,703 |
|
Restructured Loans Included in Non-Accrual Loans or Accruing Loans Past Due 90 Days or More |
|
8,830 |
|
5,127 |
| ||
Total Restructured Loans |
|
$ |
39,954 |
|
$ |
38,830 |
|
Loans modified in a TDR increased by $1.1 million or 3% from December 31, 2011. The majority of our TDRs are residential mortgage loans where we lowered monthly payments to accommodate the borrowers financial needs for a period of time. Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated
performance under the modified terms by making six consecutive payments. The increase in loans modified in a TDR from December 31, 2011 was primarily due to the modification of a commercial construction loan.
Reserve for Credit Losses
Table 18 presents the activity in our reserve for credit losses.
Reserve for Credit Losses |
|
|
|
|
|
|
|
Table 18 |
| ||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(dollars in thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Balance at Beginning of Period |
|
$ |
141,025 |
|
$ |
152,777 |
|
$ |
144,025 |
|
$ |
152,777 |
|
Loans and Leases Charged-Off |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
(1,078 |
) |
(1,507 |
) |
(2,509 |
) |
(3,164 |
) | ||||
Construction |
|
- |
|
- |
|
(330 |
) |
- |
| ||||
Consumer |
|
|
|
|
|
|
|
|
| ||||
Residential Mortgage |
|
(1,369 |
) |
(1,977 |
) |
(2,949 |
) |
(3,728 |
) | ||||
Home Equity |
|
(1,657 |
) |
(3,252 |
) |
(4,098 |
) |
(4,611 |
) | ||||
Automobile |
|
(438 |
) |
(797 |
) |
(964 |
) |
(1,826 |
) | ||||
Other 1 |
|
(1,394 |
) |
(1,488 |
) |
(2,845 |
) |
(3,052 |
) | ||||
Total Loans and Leases Charged-Off |
|
(5,936 |
) |
(9,021 |
) |
(13,695 |
) |
(16,381 |
) | ||||
Recoveries on Loans and Leases Previously Charged-Off |
|
|
|
|
|
|
|
|
| ||||
Commercial |
|
|
|
|
|
|
|
|
| ||||
Commercial and Industrial |
|
524 |
|
399 |
|
2,457 |
|
971 |
| ||||
Commercial Mortgage |
|
10 |
|
- |
|
34 |
|
- |
| ||||
Lease Financing |
|
11 |
|
44 |
|
83 |
|
94 |
| ||||
Consumer |
|
|
|
|
|
|
|
|
| ||||
Residential Mortgage |
|
376 |
|
622 |
|
1,042 |
|
881 |
| ||||
Home Equity |
|
165 |
|
750 |
|
735 |
|
1,089 |
| ||||
Automobile |
|
482 |
|
652 |
|
1,020 |
|
1,301 |
| ||||
Other 1 |
|
577 |
|
572 |
|
1,182 |
|
1,372 |
| ||||
Total Recoveries on Loans and Leases Previously Charged-Off |
|
2,145 |
|
3,039 |
|
6,553 |
|
5,708 |
| ||||
Net Loans and Leases Charged-Off |
|
(3,791 |
) |
(5,982 |
) |
(7,142 |
) |
(10,673 |
) | ||||
Provision for Credit Losses |
|
628 |
|
3,600 |
|
979 |
|
8,291 |
| ||||
Balance at End of Period 2 |
|
$ |
137,862 |
|
$ |
150,395 |
|
$ |
137,862 |
|
$ |
150,395 |
|
|
|
|
|
|
|
|
|
|
| ||||
Components |
|
|
|
|
|
|
|
|
| ||||
Allowance for Loan and Lease Losses |
|
$ |
132,443 |
|
$ |
144,976 |
|
$ |
132,443 |
|
$ |
144,976 |
|
Reserve for Unfunded Commitments |
|
5,419 |
|
5,419 |
|
5,419 |
|
5,419 |
| ||||
Total Reserve for Credit Losses |
|
$ |
137,862 |
|
$ |
150,395 |
|
$ |
137,862 |
|
$ |
150,395 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average Loans and Leases Outstanding |
|
$ |
5,641,588 |
|
$ |
5,326,123 |
|
$ |
5,602,473 |
|
$ |
5,318,993 |
|
|
|
|
|
|
|
|
|
|
| ||||
Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding (annualized) |
|
0.27% |
|
0.45% |
|
0.26% |
|
0.40% |
| ||||
Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding |
|
2.34% |
|
2.71% |
|
2.34% |
|
2.71% |
|
1 |
Comprised of other revolving credit, installment, and lease financing. |
2 |
Included in this analysis is activity related to the Companys reserve for unfunded commitments, which is separately recorded in other liabilities in the Consolidated statements of condition. |
We maintain a reserve for credit losses that consists of two components, the Allowance and a reserve for unfunded commitments (the Unfunded Reserve). The reserve for credit losses 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 other noninterest expense.
Allowance for Loan and Lease Losses
As of June 30, 2012, the Allowance was $132.4 million or 2.34% of total loans and leases outstanding, compared with an Allowance of $138.6 million or 2.50% of total loans and leases outstanding as of December 31, 2011. The decrease in the Allowance was commensurate with improvements in credit quality and a generally improving economy in Hawaii. With continued stability in the Hawaii economy and continued improvements in our credit quality, including reductions in our higher risk loan segments, we may require a lower level of the Allowance in future periods.
The allocation of the Allowance between the commercial and consumer categories changed during the first six months of 2012 based on managements ongoing assessment of the Allowance. Factors contributing to the change in the allocation of the Allowance included managements consideration of energy prices, economic uncertainty both domestically and globally, and the direct and indirect impact these items potentially have on Hawaii tourism, employment, and discretionary spending. We continue to see improvements in our credit quality, with most metrics showing positive trends through 2011 and for the first six months of 2012.
Net charge-offs of loans and leases were $3.8 million or 0.27% of total average loans and leases in the second quarter of 2012 compared to $6.0 million or 0.45% of total average loans and leases in the second quarter of 2011. Net charge-offs of loans and leases were $7.1 million or 0.26% of total average loans and leases in the first six months of 2012 compared to $10.7 million or 0.40% of total average loans and leases in the first six months of 2011. In 2012 we experienced improvement in net charge-offs in all of our lending categories except for commercial construction. We recorded a $0.3 million partial charge-off on a commercial construction loan in the first six months of 2012, while this lending category had no charge-offs in the first six months of 2011. Net charge-offs of loans and leases in the second quarter of 2012 and for the first six months of 2012 were primarily in our home equity and residential mortgage portfolios. These loan portfolios, while improved over 2011, continue to be negatively impacted by elevated but declining unemployment levels and continued downward trending of neighbor island residential real estate prices.
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, 2012, 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
The Unfunded Reserve was $5.4 million as of June 30, 2012, unchanged from December 31, 2011. 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.
Risks Related to Representation and Warranty Provisions
We sell residential mortgage loans in the secondary market primarily to Fannie Mae. We also pool Federal Housing Administration (FHA) insured and U.S. Department of Veterans Affairs (VA) guaranteed residential mortgage loans for sale to Ginnie Mae. These pools of FHA-insured and VA-guaranteed residential mortgage loans are securitized by Ginnie Mae. The agreements under which we sell residential mortgage loans to Fannie Mae or Ginnie Mae and the insurance or guaranty agreements with FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters.
As of June 30, 2012, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.9 billion. The agreements under which we sell residential mortgage loans require us to deliver various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans where required documents are not delivered or are defective. Investors may require the immediate repurchase of a mortgage loan when an early payment default underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. Upon receipt of a repurchase request, we work with investors or insurers to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor or insurer and to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the first six months of 2012, we repurchased two residential mortgage loans with an unpaid principal balance totaling $0.7 million as a result of the representation and warranty provisions contained in these contracts. One of these loans was delinquent as to principal and interest at the time of repurchase. However, no losses were incurred related to these repurchases. As of June 30, 2012, there were no pending repurchase requests related to representation and warranty provisions.
Risks Relating to Residential Mortgage Loan Servicing Activities
In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. The loans we service were originated by us or by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales.
Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by us in such capacity and provides protection against expenses and liabilities incurred by us when acting in compliance with the respective servicing agreements. However, if we commit a material breach of our obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Bank. Remedies could include repurchase of an affected loan. As of June 30, 2012, there were no pending repurchase requests related to loan servicing activities.
Although to date repurchase requests related to representation and warranty provisions, and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of June 30, 2012, we believe that this exposure is not material due to the historical level of repurchase requests and loss trends and thus have not established a liability for losses related to mortgage loan repurchases. As of June 30, 2012, 99% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with our investors and will continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in our investor portfolios.
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 mitigating 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.
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 Federal Reserve Bank (the FRB). The monetary policies of the FRB can influence 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.
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, which is comprised of members of executive management, 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, as detailed in Note 10 to the Consolidated Financial Statements, has generally been limited. This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and 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 the ALCO. We utilize natural and offsetting economic hedges in an effort to 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 models 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 19 presents, for the twelve months subsequent to June 30, 2012 and December 31, 2011, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel fashion over the entire yield curve, 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, 2012, net interest income sensitivity to changes in interest rates as of June 30, 2012 was more sensitive compared to the sensitivity profile as of December 31, 2011. As a result of our strategy to maintain a relatively short investment portfolio duration, net interest income is expected to increase as interest rates rise. Economic conditions and government intervention continue to result in interest rates remaining relatively low.
Net Interest Income Sensitivity Profile |
Table 19 |
|
Impact on Future Annual Net Interest Income |
| ||||||
(dollars in thousands) |
June 30, 2012 |
|
December 31, 2011 |
| ||||
Gradual Change in |
|
|
|
|
|
|
| |
+200 |
$ 5,771 |
|
1.6% |
|
$ 2,934 |
|
0.8% |
|
+100 |
3,381 |
|
0.9% |
|
2,036 |
|
0.5% |
|
-100 |
(8,893 |
) |
-2.4% |
|
(7,900 |
) |
-2.0% |
|
|
|
|
|
|
|
|
|
|
Immediate Change in |
|
|
|
|
|
|
| |
+200 |
$ 11,095 |
|
3.0% |
|
$ 10,086 |
|
2.6% |
|
+100 |
8,097 |
|
2.2% |
|
7,226 |
|
1.9% |
|
-100 |
(25,958 |
) |
-7.1% |
|
(25,750 |
) |
-6.7% |
|
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, net interest income may increase.
Other Market Risks
In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions. Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk. These transactions are primarily executed on behalf of customers. Our trust and asset management income are at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities. Also, our share-based compensation expense is dependent on the fair value of the stock options and restricted stock at the date of grant. The fair value of both stock options and restricted stock is impacted by the market price of the Parents common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.
Liquidity Risk Management
The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds. Funding requirements are impacted by loan originations and refinancings, deposit growth, 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. We have immediate liquid resources in cash and noninterest-bearing deposits and funds sold. The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including available-for-sale investment securities. Short-term liquidity is further enhanced by our ability to sell loans in the secondary market and to secure borrowings from the FRB and FHLB. Short-term liquidity is also generated from securities sold under agreements to repurchase, funds purchased, and short-term borrowings. Deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding. Additional funding is available through the issuance of long-term debt. In recent years, we have retired some long-term debt due to our strong liquidity position.
We continued to maintain a strong liquidity position throughout the second quarter of 2012. As of June 30, 2012, cash and cash equivalents were $634.2 million, available-for-sale investment securities were $3.3 billion, and total deposits were $11.5 billion. As of June 30, 2012, we continued to maintain our excess liquidity primarily in mortgage-backed securities issued by Ginnie Mae, state and municipal securities, and in U.S. Treasury Notes. As of June 30, 2012, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of less than three years.
Capital Management
In our ongoing efforts to maximize shareholder value over time, we regularly review our capital management activities including the amount of earnings we retain in excess of cash dividends paid and the amount and pace of common stock repurchases. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory well-capitalized thresholds by an amount commensurate with our risk profile. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.
The Company and the Bank are each 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, 2012, the Company and the Bank were well capitalized under this regulatory framework. The Companys regulatory capital ratios are presented in Table 20 below. There have been no conditions or events since June 30, 2012 that management believes have changed either the Companys or the Banks capital classifications.
As of June 30, 2012, shareholders equity was $1.0 billion, relatively unchanged from December 31, 2011. Earnings for the first six months of 2012 of $84.6 million and common stock issuances of $8.4 million were offset by cash dividends paid of $41.1 million and a net decrease in unrealized gains related to available-for-sale and held-to-maturity investment securities of $3.1 million. In the first six months of 2012, we also repurchased 1.1 million shares of our common stock under our share repurchase program at an average cost per share of $46.95 and a total cost of $50.0 million. In the second quarter of 2012, we reduced our share repurchases to $20.0 million compared to $30.0 million in the first quarter of 2012. From the beginning of our share repurchase program in July 2001 through June 30, 2012, we repurchased a total of
49.6 million shares of common stock and returned a total of $1.8 billion to our shareholders at an average cost of $36.22 per share. As of June 30, 2012, remaining buyback authority under our share repurchase program was $24.0 million of the total $1.82 billion repurchase amount authorized by our Board of Directors. On July 20, 2012, our Board of Directors approved a $75.0 million increase in our buyback authority under our share repurchase program raising the total repurchase authority to $1.9 billion.
From July 1, 2012 through July 20, 2012, the Parent repurchased an additional 70,000 shares of common stock at an average cost of $46.10 per share for a total of $3.2 million. Remaining buyback authority was $95.8 million as of July 20, 2012. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.
In July 2012, the Parents Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parents outstanding shares. The dividend will be payable on September 17, 2012 to shareholders of record at the close of business on August 31, 2012.
We continue to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process. See the Regulatory Initiatives Related to Liquidity, Capital, and Stress Testing section in MD&A for more information on the potential impact that these regulatory proposals may have on our liquidity and capital requirements.
Table 20 presents our regulatory capital and ratios as of June 30, 2012 and December 31, 2011.
Regulatory Capital and Ratios |
|
|
Table 20 |
| |
|
June 30, |
|
December 31, |
| |
(dollars in thousands) |
2012 |
|
2011 |
| |
Regulatory Capital |
|
|
|
|
|
Shareholders Equity |
$ 1,003,825 |
|
$ 1,002,667 |
| |
Less: Goodwill |
31,517 |
|
31,517 |
| |
Postretirement Benefit |
2,717 |
|
2,815 |
| |
Net Unrealized Gains on |
59,865 |
|
62,932 |
| |
Other |
2,127 |
|
2,230 |
| |
Tier 1 Capital |
907,599 |
|
903,173 |
| |
Allowable Reserve for Credit Losses |
70,002 |
|
68,624 |
| |
Total Regulatory Capital |
$ 977,601 |
|
$ 971,797 |
| |
|
|
|
|
| |
Risk-Weighted Assets |
$ 5,532,285 |
|
$ 5,414,481 |
| |
|
|
|
|
| |
Key Regulatory Capital Ratios |
|
|
|
| |
Tier 1 Capital Ratio |
16.41 |
% |
16.68 |
% | |
Total Capital Ratio |
17.67 |
|
17.95 |
| |
Tier 1 Leverage Ratio |
6.57 |
|
6.73 |
| |
Regulatory Initiatives Related to Liquidity, Capital, and Stress Testing
Basel III
On December 16, 2010, the Basel Committee on Banking Supervision (the BCBS) released the final text of the Basel III package on capital, leverage, and liquidity reforms. Under Basel III, financial institutions are required to have more capital and a higher quality of capital. It does so by increasing the minimum regulatory capital ratios, narrowing the definition of capital, and requiring capital buffers. Basel III also imposes a leverage ratio requirement and liquidity standards.
On June 7, 2012, the Office of the Comptroller of the Currency (the OCC), the FRB, and the FDIC published notices of proposed rulemakings that would revise and replace the agencies current capital requirements to make them consistent with the above Basel III capital standards.
The new minimum capital requirements will be phased in between January 1, 2013 and January 1, 2015 as follows: (1) the minimum requirement for common equity to total risk-weighted assets will be increased from the current 2.0% to 4.5%; (2) the minimum requirement for the Tier 1 Capital Ratio to be considered adequately capitalized will be increased from the current 4.0% to 6.0%; (3) an additional 2.5% of common equity to total risk-weighted assets will be phased in between January 1, 2016 and January 1, 2019; and (4) a minimum Tier 1 Leverage Ratio of 3.0% will be tested under a stress scenario starting January 1, 2013.
The BCBS quantitative liquidity requirements are not part of the published notices of proposed rulemakings by the OCC, the FRB, and the FDIC. The liquidity proposals under Basel III include: (1) a liquidity coverage ratio (to become effective January 1, 2015); (2) a net stable funding ratio (to become effective January 1, 2018); and (3) a set of monitoring tools to establish minimum reporting requirements of financial institutions to their regulatory supervisors. The liquidity coverage ratio is intended to ensure that banks have sufficient high-quality liquid assets to sustain a significant liquidity stress scenario lasting 30 days. The net stable funding ratio, which has a one year time horizon, is intended to promote the use of more stable sources of funding on an ongoing basis. As of the date of this filing, final regulations have not been issued.
Proposed Joint Guidance on Stress Testing
The Dodd-Frank Act also requires federal banking agencies to issue regulations that require banks with total consolidated assets of more than $10.0 billion to conduct and publish annual stress tests. On June 15, 2011, the OCC, the FRB, and the FDIC issued joint proposed guidance on annual stress testing. On May 14, 2012, the agencies issued final supervisory guidance regarding stress-testing practices. This guidance builds upon previously issued supervisory guidance
proposing that each bank subject to these rules would be required to conduct and publish annual stress tests to assess the potential impact of different scenarios on the consolidated earnings and capital of that bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. As of the date of this filing, final regulations have not been issued.
Operational Risk
Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, business continuation and disaster recovery, and the risk of cyber security attacks. We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business. The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.
The Operational Risk Committee (the ORC) provides oversight and assesses the most significant operational risks facing the Company. We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units.
While we believe that internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur. On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to its systems of internal controls.
European Debt Crisis
We continue to monitor the debt crisis in Europe and the potential direct and indirect impact it may have on us. As of June 30, 2012, we had no direct exposure to sovereign European governments and our non-sovereign European exposures posed a low risk of loss to the Company. The U.S. and Hawaii economies and our customers may be adversely affected by future developments arising from the debt crisis in Europe. However, we believe that there is a low risk that this indirect exposure will have a material impact to our financial condition, results of operations, or cash flows.
Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations
Off-Balance Sheet Arrangements
We hold interests in several unconsolidated variable interest entities (VIEs). These unconsolidated VIEs are primarily low-income housing partnerships. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entitys net asset value. The primary beneficiary consolidates the VIE. We have
determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs.
Credit Commitments and Contractual Obligations
Our credit commitments and contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the Market Risk section of MD&A.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2012. The Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of June 30, 2012.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2012 that have materially affected or are reasonably likely to materially affect the Companys internal control over financial reporting.
As previously disclosed in our Annual Report on Form 10-K, on February 15, 2011, a purported class action lawsuit was filed in the Circuit Court of the First Circuit, State of Hawaii, by customers who claimed that the Bank had improperly charged overdraft fees on debit card transactions. On July 15, 2011, the Company reached a tentative settlement providing for payment by the Company of $9.0 million to be used to refund class members and to pay attorneys fees and administrative and other costs, in exchange for a complete release of all claims asserted against the Company. On September 19, 2011, the $9.0 million settlement amount was paid to the Fund Administrator. On February 14, 2012, the court gave its final approval to the settlement, and as of April 20, 2012, the Administrator paid refunds to all class members.
In addition to the litigation noted above, the Company is subject to various other pending and threatened legal proceedings arising out of the normal course of business or operations. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the most recent information available. On a case-by-case basis, reserves are established for those legal claims for which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. Based on information currently available, management believes that the eventual outcome of these other actions against the Company will not be materially in excess of such amounts accrued by the Company. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters may be material to the Companys statement of income for any particular period.
There are no material changes from the risk factors set forth under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Parents repurchases of its common stock during the second quarter of 2012 were as follows:
Issuer Purchases of Equity Securities |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Approximate Dollar Value |
|
|
|
|
|
|
|
Purchased as Part of |
|
|
of Shares that May Yet Be |
|
|
|
Total Number of |
|
Average Price |
|
Publicly Announced |
|
|
Purchased Under the |
|
Period |
|
Shares Purchased 1 |
|
Paid Per Share |
|
Plans or Programs |
|
|
Plans or Programs 2 |
|
April 1 - 30, 2012 |
|
165,118 |
|
$ 47.87 |
|
160,000 |
|
|
$ 36,352,308 |
|
May 1 - 31, 2012 |
|
131,418 |
|
47.87 |
|
129,900 |
|
|
30,132,732 |
|
June 1 - 30, 2012 |
|
134,988 |
|
45.10 |
|
134,988 |
|
|
24,044,393 |
|
Total |
|
431,524 |
|
$ 47.00 |
|
424,888 |
|
|
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1 During the second quarter of 2012, 6,636 shares were purchased from directors in connection with stock swaps and shares purchased for a deferred compensation plan. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Parents common stock on the dates of purchase.
2 The share repurchase program was first announced in July 2001. As of June 30, 2012, $24.0 million remained of the total $1.82 billion total repurchase amount authorized by the Parents Board of Directors under the share repurchase program. The program has no set expiration or termination date.
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
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 23, 2012 |
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Bank of Hawaii Corporation |
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By: |
/s/ Peter S. Ho |
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Peter S. Ho |
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Chairman of the Board, |
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Chief Executive Officer, and |
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President |
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By: |
/s/ Kent T. Lucien |
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Kent T. Lucien |
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Chief Financial Officer |
Exhibit Index
Exhibit Number |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934 |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934 |
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32 |
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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 |
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101 |
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Interactive Data File |
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Under the Securities Exchange Act of 1934
I, Peter S. Ho, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit and risk committee of the registrants board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 23, 2012 |
/s/ Peter S. Ho |
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Peter S. Ho |
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Chairman of the Board, |
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Chief Executive Officer, and |
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President |
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Under the Securities Exchange Act of 1934
I, Kent T. Lucien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit and risk committee of the registrants board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: July 23, 2012 |
/s/ Kent T. Lucien |
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Kent T. Lucien |
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Chief Financial Officer |
Exhibit 32
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
We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Bank of Hawaii Corporation for the quarterly period ended June 30, 2012 (the Periodic Report):
· fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
· the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of Bank of Hawaii Corporation.
Date: July 23, 2012 |
/s/ Peter S. Ho |
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Peter S. Ho |
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Chairman of the Board, |
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Chief Executive Officer, and |
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President |
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/s/ Kent T. Lucien |
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Kent T. Lucien |
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Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Periodic Report or as a separate disclosure document.