XNYS:BOH Bank of Hawaii Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 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

(Registrant’s telephone number, including area code)

 

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

Yes x   No o

 

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

Yes x  No o

 

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

 

Large accelerated filer x

Accelerated filer o

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

Smaller reporting company o

 

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

Yes o  No x

 

As of July 20, 2012, there were 45,193,551 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 six months ended June 30, 2012 and 2011

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income –
Three and six months ended June 30, 2012 and 2011

 

3

 

 

 

 

 

 

 

Consolidated Statements of Condition –
June 30, 2012 and December 31, 2011

 

4

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Six months ended June 30, 2012 and 2011

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –
Six months ended June 30, 2012 and 2011

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

 

 

Item 2.

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

 

34

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

63

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

63

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

64

 

 

 

 

 

 

Item 1A.

Risk Factors

 

64

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

 

 

Item 6.

Exhibits

 

64

 

 

 

 

 

 

Signatures

 

 

65

 

 

1



Table of Contents

 

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).

 

2



Table of Contents

 

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).

 

3



Table of Contents

 

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

 

Banker’s 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;
issued / outstanding: June 30, 2012 - 57,301,892 / 45,248,277
and December 31, 2011 - 57,134,470 / 45,947,116)

 

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
and December 31, 2011 - 11,187,354)

 

(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).

 

4



Table of Contents

 

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).

 

5



Table of Contents

 

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).

 

6



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 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 Parent’s 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 Company’s 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 Company’s Consolidated Financial Statements.

 

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Table of Contents

 

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 entity’s 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 entity’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Consolidated Financial Statements.

 

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Table of Contents

 

Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of 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

 

9



Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s 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 Company’s investment securities in an unrealized loss position, segregated by continuous length of impairment, were as follows:

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

(dollars in thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 285

 

$

 (1)

 

$

 3,387

 

$

 (6)

 

$

 3,672

 

$

 (7)

Debt Securities Issued by
States and Political Subdivisions

 

235,567

 

(3,124)

 

-

 

-

 

235,567

 

(3,124)

Debt Securities Issued by Corporations

 

19,290

 

(710)

 

-

 

-

 

19,290

 

(710)

Mortgage-Backed Securities Issued by
Government Agencies

 

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
the U.S. Treasury and Government Agencies

 

$

 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
Government Agencies

 

727,726

 

(3,751)

 

34,824

 

(274)

 

762,550

 

(4,025)

Total

 

$

 893,429

 

$

 (6,352)

 

$

 35,744

 

$

 (278)

 

$

 929,173

 

$

 (6,630)

 

10



Table of Contents

 

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 Company’s 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 Company’s 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.

 

11



Table of Contents

 

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 Company’s 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

 

 

12



Table of Contents

 

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 Company’s 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 management’s 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.

 

13



Table of Contents

 

The Company’s 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 Company’s loans and leases as of June 30, 2012 and December 31, 2011.

 

 

June 30, 2012

(dollars in thousands)

Commercial
and Industrial

 

Commercial
Mortgage

 

Construction

 

Lease
Financing

 

Total
Commercial

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
Mortgage

 

Home
Equity

 

Automobile

 

Other 1

 

Total
Consumer

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
and Industrial

 

Commercial
Mortgage

 

Construction

 

Lease
Financing

 

Total
Commercial

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