Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2009

 

 

or

 

 

o

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

 

Commission File Number: 1-6887

 

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

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

 

 

 

130 Merchant Street, Honolulu, Hawaii

 

96813

(Address of principal executive offices)

 

(Zip Code)

 

1-888-643-3888

(Registrant’s telephone number, including area code)

 

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

Yes x   No o

 

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

Yes o   No o

 

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

 

Large accelerated filer x

Accelerated filer o

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

Smaller reporting company o

 

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

Yes o   No x

 

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

 

As of October 21, 2009, there were 47,938,676 shares of common stock outstanding.

 

 

 



Table of Contents

 

Bank of Hawaii Corporation

Form 10-Q

Index

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Statements of Income – Three and nine months ended
September 30, 2009 and 2008

2

 

 

 

 

Consolidated Statements of Condition – September 30, 2009,
December 31, 2008, and September 30, 2008

3

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Nine months ended
September 30, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Cash Flows – Nine months ended
September 30, 2009 and 2008

5

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

52

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 6.

Exhibits

52

 

 

 

Signatures

53

 

1



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands, except per share amounts)

 

2009

 

2008

 

2009

 

2008

 

Interest Income

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

79,530

 

$

92,744

 

$

249,464

 

$

295,116

 

Income on Investment Securities

 

 

 

 

 

 

 

 

 

Trading

 

 

1,174

 

594

 

3,543

 

Available-for-Sale

 

46,419

 

35,152

 

116,875

 

104,724

 

Held-to-Maturity

 

2,179

 

2,870

 

7,115

 

9,142

 

Deposits

 

3

 

33

 

18

 

432

 

Funds Sold

 

320

 

141

 

1,423

 

1,553

 

Other

 

277

 

490

 

829

 

1,405

 

Total Interest Income

 

128,728

 

132,604

 

376,318

 

415,915

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

12,235

 

17,736

 

43,741

 

65,439

 

Securities Sold Under Agreements to Repurchase

 

6,394

 

7,675

 

19,523

 

25,780

 

Funds Purchased

 

5

 

507

 

15

 

1,410

 

Short-Term Borrowings

 

 

13

 

 

59

 

Long-Term Debt

 

1,207

 

3,098

 

4,239

 

10,304

 

Total Interest Expense

 

19,841

 

29,029

 

67,518

 

102,992

 

Net Interest Income

 

108,887

 

103,575

 

308,800

 

312,923

 

Provision for Credit Losses

 

27,500

 

20,358

 

81,077

 

41,957

 

Net Interest Income After Provision for Credit Losses

 

81,387

 

83,217

 

227,723

 

270,966

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

10,915

 

14,193

 

34,428

 

44,739

 

Mortgage Banking

 

4,656

 

621

 

18,777

 

7,656

 

Service Charges on Deposit Accounts

 

14,014

 

13,045

 

40,310

 

37,539

 

Fees, Exchange, and Other Service Charges

 

14,801

 

15,604

 

45,187

 

47,098

 

Investment Securities Gains (Losses), Net

 

(5

)

159

 

63

 

446

 

Insurance

 

7,304

 

5,902

 

17,689

 

18,622

 

Other

 

5,115

 

7,462

 

30,543

 

47,550

 

Total Noninterest Income

 

56,800

 

56,986

 

186,997

 

203,650

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

46,387

 

46,764

 

137,595

 

148,221

 

Net Occupancy

 

10,350

 

11,795

 

30,686

 

33,581

 

Net Equipment

 

4,502

 

4,775

 

13,320

 

13,570

 

Professional Fees

 

2,642

 

3,270

 

9,196

 

8,471

 

FDIC Insurance

 

3,290

 

321

 

14,091

 

817

 

Other

 

16,816

 

19,865

 

56,616

 

59,424

 

Total Noninterest Expense

 

83,987

 

86,790

 

261,504

 

264,084

 

Income Before Provision for Income Taxes

 

54,200

 

53,413

 

153,216

 

210,532

 

Provision for Income Taxes

 

17,729

 

6,004

 

49,699

 

57,626

 

Net Income

 

$

36,471

 

$

47,409

 

$

103,517

 

$

152,906

 

Basic Earnings Per Share

 

$

0.76

 

$

1.00

 

$

2.17

 

$

3.20

 

Diluted Earnings Per Share

 

$

0.76

 

$

0.99

 

$

2.16

 

$

3.17

 

Dividends Declared Per Share

 

$

0.45

 

$

0.44

 

$

1.35

 

$

1.32

 

Basic Weighted Average Shares

 

47,745,375

 

47,518,078

 

47,665,146

 

47,738,245

 

Diluted Weighted Average Shares

 

48,045,873

 

48,057,965

 

47,930,271

 

48,295,901

 

 

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

 

2



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

 

September 30,

 

December 31,

 

September 30,

 

(dollars in thousands)

 

2009

 

2008

 

2008

 

Assets

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

$

5,863

 

$

5,094

 

$

13,845

 

Funds Sold

 

401,200

 

405,789

 

 

Investment Securities

 

 

 

 

 

 

 

Trading

 

 

91,500

 

90,993

 

Available-for-Sale

 

4,827,588

 

2,519,239

 

2,572,111

 

Held-to-Maturity (Fair Value of $201,118; $242,175; and $245,720)

 

194,444

 

239,635

 

249,083

 

Loans Held for Sale

 

19,346

 

21,540

 

14,903

 

Loans and Leases

 

5,931,358

 

6,530,233

 

6,539,458

 

Allowance for Loan and Lease Losses

 

(142,658

)

(123,498

)

(115,498

)

Net Loans and Leases

 

5,788,700

 

6,406,735

 

6,423,960

 

Total Earning Assets

 

11,237,141

 

9,689,532

 

9,364,895

 

Cash and Noninterest-Bearing Deposits

 

291,480

 

385,599

 

285,762

 

Premises and Equipment

 

110,173

 

116,120

 

118,333

 

Customers’ Acceptances

 

950

 

1,308

 

1,250

 

Accrued Interest Receivable

 

43,047

 

39,905

 

41,061

 

Foreclosed Real Estate

 

201

 

428

 

293

 

Mortgage Servicing Rights

 

25,437

 

21,057

 

27,707

 

Goodwill

 

34,959

 

34,959

 

34,959

 

Other Assets

 

464,637

 

474,567

 

460,787

 

Total Assets

 

$

12,208,025

 

$

10,763,475

 

$

10,335,047

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

2,055,872

 

$

1,754,724

 

$

1,592,251

 

Interest-Bearing Demand

 

1,588,705

 

1,854,611

 

1,708,183

 

Savings

 

4,365,257

 

3,104,863

 

2,780,798

 

Time

 

1,240,266

 

1,577,900

 

1,577,252

 

Total Deposits

 

9,250,100

 

8,292,098

 

7,658,484

 

Funds Purchased

 

8,670

 

15,734

 

189,700

 

Short-Term Borrowings

 

7,200

 

4,900

 

10,621

 

Securities Sold Under Agreements to Repurchase

 

1,524,755

 

1,028,835

 

1,109,431

 

Long-Term Debt (includes $119,275 and $120,598 carried at fair value
as of December 31, 2008 and September 30, 2008, respectively)

 

91,424

 

203,285

 

204,616

 

Banker’s Acceptances

 

950

 

1,308

 

1,250

 

Retirement Benefits Payable

 

43,918

 

54,776

 

22,438

 

Accrued Interest Payable

 

9,740

 

13,837

 

12,702

 

Taxes Payable and Deferred Taxes

 

254,375

 

229,699

 

240,795

 

Other Liabilities

 

114,094

 

128,299

 

104,990

 

Total Liabilities

 

11,305,226

 

9,972,771

 

9,555,027

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2009 - 57,028,554 / 47,937,543;
December 31, 2008 - 57,019,887 / 47,753,371;
and September 30, 2008 - 57,022,797 / 47,707,629)

 

569

 

568

 

568

 

Capital Surplus

 

492,346

 

492,515

 

491,419

 

Accumulated Other Comprehensive Income (Loss)

 

37,307

 

(28,888

)

(18,643

)

Retained Earnings

 

825,709

 

787,924

 

770,373

 

Treasury Stock, at Cost (Shares: September 30, 2009 - 9,091,011;
December 31, 2008 - 9,266,516; and September 30, 2008 - 9,315,168)

 

(453,132

)

(461,415

)

(463,697

)

Total Shareholders’ Equity

 

902,799

 

790,704

 

780,020

 

Total Liabilities and Shareholders’ Equity

 

$

12,208,025

 

$

10,763,475

 

$

10,335,047

 

 

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

 

3



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hensive

 

 

 

 

 

 

Compre-

 

 

 

 

 

Common

 

Capital

 

Income

 

Retained

 

Treasury

 

 

hensive

 

(dollars in thousands)

 

Total

 

Stock

 

Surplus

 

(Loss)

 

Earnings

 

Stock

 

 

Income

 

Balance as of December 31, 2008

 

$

790,704

 

$

568

 

$

492,515

 

$

(28,888

)

$

787,924

 

$

(461,415

)

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

103,517

 

 

 

 

103,517

 

 

 

$

103,517

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

65,121

 

 

 

65,121

 

 

 

 

65,121

 

Amortization of Net Loss Related to Pension and Postretirement Benefit Plans

 

1,074

 

 

 

1,074

 

 

 

 

1,074

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

169,712

 

Share-Based Compensation

 

1,700

 

 

1,700

 

 

 

 

 

 

 

Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits (209,847 shares)

 

6,202

 

1

 

(1,869

)

 

(1,101

)

9,171

 

 

 

 

Common Stock Repurchased (25,675 shares)

 

(888

)

 

 

 

 

(888

)

 

 

 

Cash Dividends Paid

 

(64,631

)

 

 

 

(64,631

)

 

 

 

 

Balance as of September 30, 2009

 

$

902,799

 

$

569

 

$

492,346

 

$

37,307

 

$

825,709

 

$

(453,132

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2007

 

$

750,255

 

$

567

 

$

484,790

 

$

(5,091

)

$

688,638

 

$

(418,649

)

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of Accounting Standards Related to the Fair Value Option

 

(2,736

)

 

 

 

(2,736

)

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

152,906

 

 

 

 

152,906

 

 

 

$

152,906

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(13,699

)

 

 

(13,699

)

 

 

 

(13,699

)

Amortization of Net Loss Related to Pension and Postretirement Benefit Plans

 

147

 

 

 

147

 

 

 

 

147

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

139,354

 

Share-Based Compensation

 

4,480

 

 

4,480

 

 

 

 

 

 

 

Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits (378,382 shares)

 

13,728

 

1

 

2,149

 

 

(5,075

)

16,653

 

 

 

 

Common Stock Repurchased (1,260,398 shares)

 

(61,701

)

 

 

 

 

(61,701

)

 

 

 

Cash Dividends Paid

 

(63,360

)

 

 

 

(63,360

)

 

 

 

 

Balance as of September 30, 2008

 

$

780,020

 

$

568

 

$

491,419

 

$

(18,643

)

$

770,373

 

$

(463,697

)

 

 

 

 

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

 

4



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

(dollars in thousands)

 

2009

 

2008

 

Operating Activities

 

 

 

 

 

Net Income

 

$

103,517

 

$

152,906

 

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

 

 

 

 

 

Provision for Credit Losses

 

81,077

 

41,957

 

Depreciation and Amortization

 

10,130

 

10,878

 

Amortization of Deferred Loan and Lease Fees

 

(1,754

)

(1,563

)

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

 

4,920

 

1,117

 

Share-Based Compensation

 

1,700

 

4,480

 

Benefit Plan Contributions

 

(12,302

)

(8,403

)

Deferred Income Taxes

 

(21,235

)

(32,559

)

Gain on Sale of Insurance Business

 

(742

)

 

Net Gains on Investment Securities

 

(63

)

(446

)

Net Change in Trading Securities

 

91,500

 

(23,707

)

Proceeds from Sales of Loans Held for Sale

 

902,169

 

340,955

 

Originations of Loans Held for Sale

 

(863,849

)

(343,517

)

Tax Benefits from Share-Based Compensation

 

(122

)

(1,813

)

Net Change in Other Assets and Other Liabilities

 

(5,589

)

(21,944

)

Net Cash Provided by Operating Activities

 

289,357

 

118,341

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

1,341,645

 

601,213

 

Proceeds from Sales

 

169,952

 

233,085

 

Purchases

 

(3,722,753

)

(864,985

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

44,892

 

43,184

 

Proceeds from Sale of Insurance Business

 

1,769

 

 

Net Change in Loans and Leases

 

535,023

 

25,509

 

Premises and Equipment, Net

 

(4,183

)

(12,034

)

Net Cash Provided by (Used In) Investing Activities

 

(1,633,655

)

25,972

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net Change in Deposits

 

958,002

 

(283,888

)

Net Change in Short-Term Borrowings

 

491,156

 

194,585

 

Repayments of Long-Term Debt

 

(143,971

)

(32,425

)

Tax Benefits from Share-Based Compensation

 

122

 

1,813

 

Proceeds from Issuance of Common Stock

 

6,569

 

11,998

 

Repurchase of Common Stock

 

(888

)

(61,701

)

Cash Dividends Paid

 

(64,631

)

(63,360

)

Net Cash Provided by (Used In) Financing Activities

 

1,246,359

 

(232,978

)

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

(97,939

)

(88,665

)

Cash and Cash Equivalents at Beginning of Period

 

796,482

 

388,272

 

Cash and Cash Equivalents at End of Period

 

$

698,543

 

$

299,607

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

Cash Paid for:

 

 

 

 

 

Interest

 

$

71,615

 

$

110,766

 

Income Taxes

 

56,347

 

75,758

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

Transfers from Loans and Leases to Foreclosed Real Estate

 

92

 

174

 

Transfers from Loans and Leases to Loans Held for Sale

 

36,126

 

 

Replacement of a Leveraged Lease with a Direct Financing Lease

 

32,437

 

 

 

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

 

5



Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

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

 

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

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 

Investment Securities

 

Realized gains and losses on investment securities are recorded in noninterest income using the specific identification method.

 

Non-Marketable Equity Securities

 

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

 

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Table of Contents

 

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”)

 

In June 2009, the FASB issued an accounting standard which established the Codification to become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff.  All guidance contained in the Codification carries an equal level of authority.  The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics.  The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended September 30, 2009.  The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Company’s statements of income and condition.

 

Fair Value Measurements

 

In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Company on January 1, 2008.  This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements.  On January 1, 2008, the Company adopted this accounting standard related to fair value measurements for the Company’s financial assets and financial liabilities.  The Company deferred adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009.  The adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.  This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.”

 

In April 2009, the FASB issued an accounting standard which provided guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and in identifying transactions that are not orderly.  In such instances, the accounting standard provides that management may determine that further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with GAAP.  The Company adopted this accounting standard on April 1, 2009.  The provisions in this accounting standard were applied prospectively and did not result in significant changes to the Company’s valuation techniques.  Furthermore, the adoption of this accounting standard, which was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures,” is not expected to have a material impact on the Company’s statements of income and condition.

 

In April 2009, the FASB issued an accounting standard related to disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements.  The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended June 30, 2009.  As this accounting standard amended only the disclosure requirements about the fair value of financial instruments in interim periods, the adoption had no impact on the Company’s statements of income and condition.  See Note 8 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 825, “Financial Instruments.”

 

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Table of Contents

 

Derivative Financial Instruments

 

In March 2008, the FASB issued an accounting standard related to disclosure requirements for derivative financial instruments and hedging activities.  Expanded qualitative disclosures required under this accounting standard included:  (1) how and why an entity uses derivative financial instruments; (2) how derivative financial instruments and related hedged items are accounted for under GAAP; and (3) how derivative financial instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  This accounting standard also required several added quantitative disclosures in financial statements.  The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended March 31, 2009.  As this accounting standard amended only the disclosure requirements for derivative financial instruments and hedged items, the adoption had no impact on the Company’s statements of income and condition.  See Note 7 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 815, “Derivatives and Hedging.”

 

Other-Than-Temporary-Impairments for Debt Securities

 

In April 2009, the FASB issued an accounting standard which amended other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security.  If an entity intends to sell a security or if it is more likely than not that the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value.  If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income.  This accounting standard does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities.  This accounting standard also extends disclosure requirements related to debt and equity securities to interim reporting periods.  The Company adopted this accounting standard on April 1, 2009.  The adoption of this accounting standard had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition.  See Note 2 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 320, “Investments — Debt and Equity Securities.”

 

Future Application of Accounting Pronouncements

 

In June 2009, the FASB issued an accounting standard which amends current GAAP related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP.  This new accounting standard also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset.  This accounting standard is effective for financial asset transfers occurring after December 31, 2009.  The adoption of this accounting standard will have no impact on the Company’s statements of income and condition.

 

In June 2009, the FASB issued an accounting standard which will require a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes.  The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE.  This accounting standard is effective for the Company on January 1, 2010.  The adoption of this accounting standard will have no impact on the Company’s statements of income and condition.

 

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Table of Contents

 

Federal Deposit Insurance Corporation (“FDIC”) Assessments

 

On September 29, 2009, the FDIC issued a proposal to amend its assessment regulations to require insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.  This proposal indicates that depository institutions are to prepay their assessments on December 30, 2009.  Should this proposed rule become final, the Company estimates its prepaid assessment to be approximately $45.7 million.

 

Subsequent Events

 

On October 9, 2009, the Company signed an agreement to sell certain assets of our wholesale insurance business, Triad Insurance Agency, Inc. (“Triad”), to a third party.  The agreement precludes the Bank from competing directly or indirectly with Triad for a period of 5 years after the closing date of the sale.  In connection with this sale, several employees of Triad were hired by the third party.  The sale of Triad closed on October 22, 2009 and resulted in pre-tax gains of approximately $1.5 million.  Net income of Triad for the year ended December 31, 2008 was $4.5 million.

 

Management has considered subsequent events through October 26, 2009, which is the date we issued our financial statements, in preparing the September 30, 2009 Consolidated Financial Statements.

 

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Table of Contents

 

Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s investment securities as of September 30, 2009, December 31, 2008, and September 30, 2008 were as follows:

 

Investment Securities

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2009

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

537,636

 

$

14,937

 

$

(462

)

$

552,111

 

Debt Securities Issued by States and Political Subdivisions

 

61,968

 

2,343

 

(12

)

64,299

 

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

 

751

 

51

 

 

802

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

2,869,636

 

39,826

 

(4,331

)

2,905,131

 

U.S. Government-Sponsored Enterprises

 

1,145,778

 

52,845

 

 

1,198,623

 

Private-Label Mortgage-Backed Securities

 

91,668

 

50

 

(10,292

)

81,426

 

Total Mortgage-Backed Securities

 

4,107,082

 

92,721

 

(14,623

)

4,185,180

 

Other Debt Securities

 

25,081

 

116

 

(1

)

25,196

 

Total

 

$

4,732,518

 

$

110,168

 

$

(15,098

)

$

4,827,588

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

62,502

 

$

2,314

 

$

 

$

64,816

 

U.S. Government-Sponsored Enterprises

 

131,942

 

4,360

 

 

136,302

 

Total

 

$

194,444

 

$

6,674

 

$

 

$

201,118

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

3,562

 

$

50

 

$

(51

)

$

3,561

 

Debt Securities Issued by States and Political Subdivisions

 

47,033

 

1,028

 

(61

)

48,000

 

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

 

232,269

 

973

 

(215

)

233,027

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

421,030

 

8,952

 

(852

)

429,130

 

U.S. Government-Sponsored Enterprises

 

1,520,539

 

28,972

 

(335

)

1,549,176

 

Private-Label Mortgage-Backed Securities

 

301,453

 

59

 

(45,199

)

256,313

 

Total Mortgage-Backed Securities

 

2,243,022

 

37,983

 

(46,386

)

2,234,619

 

Other Debt Securities

 

34

 

 

(2

)

32

 

Total

 

$

2,525,920

 

$

40,034

 

$

(46,715

)

$

2,519,239

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

71,907

 

$

1,463

 

$

 

$

73,370

 

U.S. Government-Sponsored Enterprises

 

167,728

 

1,735

 

(658

)

168,805

 

Total

 

$

239,635

 

$

3,198

 

$

(658

)

$

242,175

 

 

 

 

 

 

 

 

 

 

 

September 30, 2008

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

3,767

 

$

32

 

$

(19

)

$

3,780

 

Debt Securities Issued by States and Political Subdivisions

 

47,079

 

117

 

(505

)

46,691

 

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

 

232,268

 

57

 

(2,883

)

229,442

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

423,770

 

3,887

 

(3,533

)

424,124

 

U.S. Government-Sponsored Enterprises

 

1,574,229

 

8,105

 

(9,787

)

1,572,547

 

Private-Label Mortgage-Backed Securities

 

311,537

 

183

 

(19,229

)

292,491

 

Total Mortgage-Backed Securities

 

2,309,536

 

12,175

 

(32,549

)

2,289,162

 

Other Debt Securities

 

3,033

 

4

 

(1

)

3,036

 

Total

 

$

2,595,683

 

$

12,385

 

$

(35,957

)

$

2,572,111

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

73,963

 

$

20

 

$

(1,722

)

$

72,261

 

U.S. Government-Sponsored Enterprises

 

175,120

 

762

 

(2,423

)

173,459

 

Total

 

$

249,083

 

$

782

 

$

(4,145

)

$

245,720

 

 

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Table of Contents

 

Investment securities pledged where the secured parties have the right to sell or repledge the investment securities had a carrying value of $2.9 billion as of September 30, 2009, $2.0 billion as of December 31, 2008, and $2.1 billion as of September 30, 2008.  These investment securities were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2009.  Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

Contractual Maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

Due in One Year or Less

 

$

86,742

 

$

125

 

$

(1

)

$

86,866

 

Due After One Year Through Five Years

 

78,078

 

796

 

(14

)

78,860

 

Due After Five Years Through Ten Years

 

153,559

 

3,384

 

(449

)

156,494

 

Due After Ten Years

 

307,057

 

13,142

 

(11

)

320,188

 

 

 

625,436

 

17,447

 

(475

)

642,408

 

Mortgage-Backed Securities issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

2,869,636

 

39,826

 

(4,331

)

2,905,131

 

U.S. Government-Sponsored Enterprises

 

1,145,778

 

52,845

 

 

1,198,623

 

Private-Label Mortgage-Backed Securities

 

91,668

 

50

 

(10,292

)

81,426

 

Total Mortgage-Backed Securities

 

4,107,082

 

92,721

 

(14,623

)

4,185,180

 

Total

 

$

4,732,518

 

$

110,168

 

$

(15,098

)

$

4,827,588

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

Mortgage-Backed Securities issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Agencies

 

$

62,502

 

$

2,314

 

$

 

$

64,816

 

U.S. Government-Sponsored Enterprises

 

 

131,942

 

 

4,360

 

 

 

 

136,302

 

Total

 

$

194,444

 

$

6,674

 

$

 

$

201,118

 

 

Gross gains and losses from the sales of investment securities for the three and nine months ended September 30, 2009 and 2008 were not significant.

 

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Table of Contents

 

The Company’s temporarily impaired investment securities as of September 30, 2009, December 31, 2008, and September 30, 2008 were as follows:

 

Temporarily Impaired Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(dollars in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

 

$

86,656

 

$

(427

)

$

1,831

 

$

(35

)

$

88,487

 

$

(462

)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

 

559

 

(1

)

323

 

(11

)

882

 

(12

)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Agencies

 

393,823

 

(4,331

)

 

 

393,823

 

(4,331

)

Private-Label Mortgage-Backed Securities

 

 

 

71,152

 

(10,292

)

71,152

 

(10,292

)

Total Mortgage-Backed Securities

 

393,823

 

(4,331

)

71,152

 

(10,292

)

464,975

 

(14,623

)

Other Debt Securities

 

 

 

34

 

(1

)

34

 

(1

)

Total Temporarily Impaired Investment Securities

 

$

481,038

 

$

(4,759

)

$

73,340

 

$

(10,339

)

$

554,378

 

$

(15,098

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

 

$

612

 

$

(12

)

$

1,591

 

$

(39

)

$

2,203

 

$

(51

)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

 

745

 

(11

)

284

 

(50

)

1,029

 

(61

)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

18,763

 

(215

)

 

 

18,763

 

(215

)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Agencies

 

73,638

 

(852

)

 

 

73,638

 

(852

)

U.S. Government-Sponsored Enterprises

 

148,830

 

(536

)

59,385

 

(457

)

208,215

 

(993

)

Private-Label Mortgage-Backed Securities

 

123,549

 

(16,641

)

121,482

 

(28,558

)

245,031

 

(45,199

)

Total Mortgage-Backed Securities

 

346,017

 

(18,029

)

180,867

 

(29,015

)

526,884

 

(47,044

)

Other Debt Securities

 

 

 

32

 

(2

)

32

 

(2

)

Total Temporarily Impaired Investment Securities

 

$

366,137

 

$

(18,267

)

$

182,774

 

$

(29,106

)

$

548,911

 

$

(47,373

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

the U.S. Treasury and Government Agencies

 

$

584

 

$

(3

)

$

1,431

 

$

(16

)

$

2,015

 

$

(19

)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

States and Political Subdivisions

 

30,278

 

(471

)

552

 

(34

)

30,830

 

(505

)

Debt Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-Sponsored Enterprises

 

228,384

 

(2,883

)

 

 

228,384

 

(2,883

)

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Agencies

 

221,859

 

(3,693

)

54,780

 

(1,562

)

276,639

 

(5,255

)

U.S. Government-Sponsored Enterprises

 

817,740

 

(10,718

)

61,444

 

(1,492

)

879,184

 

(12,210

)

Private-Label Mortgage-Backed Securities

 

136,021

 

(5,883

)

140,490

 

(13,346

)

276,511

 

(19,229

)

Total Mortgage-Backed Securities

 

1,175,620

 

(20,294

)

256,714

 

(16,400

)

1,432,334

 

(36,694

)

Other Debt Securities

 

 

 

33

 

(1

)

33

 

(1

)

Total Temporarily Impaired Investment Securities

 

$

1,434,866

 

$

(23,651

)

$

258,730

 

$

(16,451

)

$

1,693,596

 

$

(40,102

)

 

The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2009, which was comprised of 35 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.

 

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The gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by government agencies such as the Government National Mortgage Association, U.S. government-sponsored enterprises such as the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and private-label mortgage-backed securities.  In assessing private-label mortgage-backed securities for impairment, management considers, among other factors, the severity and duration of the depressed price indication, independent credit ratings, vintage, and credit enhancements, as well as performance indicators of the underlying assets in the security (e.g., default rates, delinquency rates).  As of September 30, 2009, the Company’s private-label mortgage-backed securities were prime jumbo, with an average amortized loan-to-value ratio of 62%, and an average credit enhancement of 6.0% of the par value outstanding.  As of September 30, 2009, 63% of the fair value of the Company’s private-label mortgage-backed securities was AAA-rated by at least one major rating agency and was originated prior to 2006.  Loans past due 90 days or more, underlying the private-label mortgage-backed securities, represented approximately 4.1% of the par value outstanding, or approximately $3.8 million as of September 30, 2009.  As of September 30, 2009, there were no “sub-prime” or “Alt-A” securities in our mortgage-backed securities portfolio.

 

Note 3.  Leasing Transactions

 

In May 2009, the Company replaced an existing leveraged lease with a direct financing lease with a sub-lessee to the leveraged lease transaction.  In recording this transaction, the Company removed $17.9 million in the net investment from the balance sheet and recorded a $4.4 million charge-off to the allowance for loan and lease losses.   The Company also recorded a $1.6 million benefit for income taxes which resulted from the over accrual of income taxes from the inception of the lease through the termination of the leveraged lease transaction.  The Company recorded a direct financing lease of $45.9 million and also recognized $32.4 million in non-recourse debt on the balance sheet, which was previously not recognized as an obligation of the Company under leveraged lease accounting treatment.

 

In April 2009, the Company sold its equity interest in a cargo aircraft resulting in a $2.8 million pre-tax gain for the Company.  After-tax gains from this transaction were $1.5 million.  In March 2009, the Company sold its equity interest in two watercraft leveraged leases resulting in a $10.0 million pre-tax gain for the Company.  After-tax gains from this transaction were $6.2 million.  The pre-tax gains from these sales transactions were recorded as a component of other noninterest income in the statement of income.

 

Note 4.  Securities Sold Under Agreements to Repurchase

 

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Statements of Condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held in collateral by third party trustees.

 

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As of September 30, 2009, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:

 

Contractual Maturities

 

 

 

(dollars in thousands)

 

Amount

 

Overnight

 

$

25,000

 

2 to 30 Days

 

702,021

 

31 to 90 Days

 

99,621

 

Over 90 Days

 

698,113

 

Total

 

$

1,524,755

 

 

Note 5.  Business Segments

 

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

 

Selected financial information for each business segment is presented below as of and for the three and nine months ended September 30, 2009 and 2008.

 

Business Segment Selected Financial Information