XNYS:BOH Bank of Hawaii Corp Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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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 September 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 October 15, 2012, there were 44,950,484 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, 2012 and 2011

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income –
Three and nine months ended September 30, 2012 and 2011

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2012 and 2011

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended September 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

 

36

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

65

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

65

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

66

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

 

 

 

 

 

 

Item 6.

Exhibits

 

66

 

 

 

 

 

 

Signatures

 

 

67

 

 

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)

 

 

2012

 

2011

 

 

 

2012

 

2011

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

 

$

64,668

 

$

65,344

 

 

 

$

193,269

 

$

197,479

Income on Investment Securities

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

15,922

 

23,097

 

 

 

50,623

 

84,256

Held-to-Maturity

 

 

23,232

 

20,344

 

 

 

74,699

 

48,530

Deposits

 

 

3

 

6

 

 

 

6

 

6

Funds Sold

 

 

105

 

160

 

 

 

353

 

708

Other

 

 

283

 

279

 

 

 

844

 

837

Total Interest Income

 

 

104,213

 

109,230

 

 

 

319,794

 

331,816

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,931

 

4,561

 

 

 

9,623

 

14,585

Securities Sold Under Agreements to Repurchase

 

 

7,185

 

7,400

 

 

 

21,739

 

21,779

Funds Purchased

 

 

7

 

4

 

 

 

17

 

15

Long-Term Debt

 

 

458

 

499

 

 

 

1,454

 

1,475

Total Interest Expense

 

 

10,581

 

12,464

 

 

 

32,833

 

37,854

Net Interest Income

 

 

93,632

 

96,766

 

 

 

286,961

 

293,962

Provision for Credit Losses

 

 

-

 

2,180

 

 

 

979

 

10,471

Net Interest Income After Provision for Credit Losses

 

 

93,632

 

94,586

 

 

 

285,982

 

283,491

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

 

11,050

 

10,788

 

 

 

33,163

 

34,021

Mortgage Banking

 

 

11,745

 

5,480

 

 

 

24,376

 

11,263

Service Charges on Deposit Accounts

 

 

9,346

 

9,820

 

 

 

28,162

 

29,127

Fees, Exchange, and Other Service Charges

 

 

11,907

 

16,219

 

 

 

36,632

 

47,826

Investment Securities Gains (Losses), Net

 

 

13

 

-

 

 

 

(77

)

6,084

Insurance

 

 

2,326

 

2,664

 

 

 

7,003

 

8,645

Other

 

 

5,987

 

5,892

 

 

 

18,045

 

17,282

Total Noninterest Income

 

 

52,374

 

50,863

 

 

 

147,304

 

154,248

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

 

47,231

 

44,307

 

 

 

138,292

 

137,889

Net Occupancy

 

 

10,524

 

11,113

 

 

 

31,098

 

31,916

Net Equipment

 

 

4,523

 

4,662

 

 

 

15,018

 

14,101

Professional Fees

 

 

2,494

 

2,245

 

 

 

7,012

 

6,697

FDIC Insurance

 

 

1,822

 

2,065

 

 

 

5,981

 

7,319

Other

 

 

18,284

 

19,563

 

 

 

53,431

 

65,889

Total Noninterest Expense

 

 

84,878

 

83,955

 

 

 

250,832

 

263,811

Income Before Provision for Income Taxes

 

 

61,128

 

61,494

 

 

 

182,454

 

173,928

Provision for Income Taxes

 

 

19,896

 

18,188

 

 

 

56,665

 

53,114

Net Income

 

 

$

41,232

 

$

43,306

 

 

 

$

125,789

 

$

120,814

Basic Earnings Per Share

 

 

$

0.92

 

$

0.93

 

 

 

$

2.78

 

$

2.55

Diluted Earnings Per Share

 

 

$

0.92

 

$

0.92

 

 

 

$

2.77

 

$

2.54

Dividends Declared Per Share

 

 

$

0.45

 

$

0.45

 

 

 

$

1.35

 

$

1.35

Basic Weighted Average Shares

 

 

44,913,348

 

46,806,439

 

 

 

45,280,541

 

47,358,049

Diluted Weighted Average Shares

 

 

45,050,638

 

46,934,140

 

 

 

45,421,624

 

47,531,066

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

(dollars in thousands)

 

 

2012

 

2011

 

 

 

2012

 

2011

 

Net Income

 

 

$

41,232

 

$

43,306

 

 

 

$

125,789

 

$

120,814

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains on Investment Securities

 

 

9,770

 

18,611

 

 

 

6,703

 

18,376

 

Defined Benefit Plans

 

 

152

 

365

 

 

 

458

 

1,413

 

Other Comprehensive Income

 

 

9,922

 

18,976

 

 

 

7,161

 

19,789

 

Comprehensive Income

 

 

$

51,154

 

$

62,282

 

 

 

$

132,950

 

$

140,603

 

 

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)

 

 

September 30,

 

December 31,

 

(dollars in thousands)

 

2012

 

2011

 

Assets

 

 

 

 

 

Interest-Bearing Deposits

 

$

4,673

 

$

3,036

 

Funds Sold

 

251,664

 

512,384

 

Investment Securities

 

 

 

 

 

Available-for-Sale

 

3,124,209

 

3,451,885

 

Held-to-Maturity (Fair Value of $3,587,997 and $3,754,206)

 

3,475,259

 

3,657,796

 

Loans Held for Sale

 

25,971

 

18,957

 

Loans and Leases

 

5,782,304

 

5,538,304

 

Allowance for Loan and Lease Losses

 

(130,971

)

(138,606

)

Net Loans and Leases

 

5,651,333

 

5,399,698

 

Total Earning Assets

 

12,533,109

 

13,043,756

 

Cash and Noninterest-Bearing Deposits

 

153,599

 

154,489

 

Premises and Equipment

 

107,144

 

103,550

 

Customers’ Acceptances

 

242

 

476

 

Accrued Interest Receivable

 

47,192

 

43,510

 

Foreclosed Real Estate

 

3,067

 

3,042

 

Mortgage Servicing Rights

 

23,980

 

24,279

 

Goodwill

 

31,517

 

31,517

 

Other Assets

 

482,575

 

441,772

 

Total Assets

 

$

13,382,425

 

$

13,846,391

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest-Bearing Demand

 

$

2,985,561

 

$

2,850,923

 

Interest-Bearing Demand

 

2,034,319

 

2,005,983

 

Savings

 

4,480,733

 

4,398,638

 

Time

 

1,719,934

 

1,337,079

 

Total Deposits

 

11,220,547

 

10,592,623

 

Funds Purchased

 

10,942

 

10,791

 

Securities Sold Under Agreements to Repurchase

 

818,080

 

1,925,998

 

Long-Term Debt

 

28,065

 

30,696

 

Banker’s Acceptances

 

242

 

476

 

Retirement Benefits Payable

 

41,872

 

46,949

 

Accrued Interest Payable

 

5,997

 

5,330

 

Taxes Payable and Deferred Taxes

 

94,369

 

95,840

 

Other Liabilities

 

137,749

 

135,021

 

Total Liabilities

 

12,357,863

 

12,843,724

 

Shareholders’ Equity

 

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2012 - 57,315,093 / 45,004,813
and December 31, 2011 - 57,134,470 / 45,947,116)

 

571

 

571

 

Capital Surplus

 

513,758

 

507,558

 

Accumulated Other Comprehensive Income

 

42,424

 

35,263

 

Retained Earnings

 

1,065,245

 

1,003,938

 

Treasury Stock, at Cost (Shares: September 30, 2012 - 12,310,280 and
December 31, 2011 - 11,187,354)

 

(597,436

)

(544,663

)

Total Shareholders’ Equity

 

1,024,562

 

1,002,667

 

Total Liabilities and Shareholders’ Equity

 

$

13,382,425

 

$

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

 

-

 

-

 

-

 

-

 

125,789

 

-

 

125,789

 

Other Comprehensive Income

 

-

 

-

 

-

 

7,161

 

-

 

-

 

7,161

 

Share-Based Compensation

 

-

 

-

 

5,687

 

-

 

-

 

-

 

5,687

 

Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits

 

471,104

 

-

 

513

 

-

 

(3,023

)

13,472

 

10,962

 

Common Stock Repurchased

 

(1,413,407

)

-

 

-

 

-

 

-

 

(66,245

)

(66,245

)

Cash Dividends Paid ($1.35 per share)

 

-

 

-

 

-

 

-

 

(61,459

)

-

 

(61,459

)

Balance as of September 30, 2012

 

45,004,813

 

$

571

 

$

513,758

 

$

42,424

 

$

1,065,245

 

$

(597,436

)

$

1,024,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2010

 

48,097,672

 

$

570

 

$

500,888

 

$

26,965

 

$

932,629

 

$

(449,919

)

$

1,011,133

 

Net Income

 

-

 

-

 

-

 

-

 

120,814

 

-

 

120,814

 

Other Comprehensive Income

 

-

 

-

 

-

 

19,789

 

-

 

-

 

19,789

 

Share-Based Compensation

 

-

 

-

 

2,001

 

-

 

-

 

-

 

2,001

 

Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits

 

309,108

 

1

 

366

 

-

 

(3,193

)

13,303

 

10,477

 

Common Stock Repurchased

 

(1,836,367

)

-

 

-

 

-

 

-

 

(82,391

)

(82,391

)

Cash Dividends Paid ($1.35 per share)

 

-

 

-

 

-

 

-

 

(64,048

)

-

 

(64,048

)

Balance as of September 30, 2011

 

46,570,413

 

$

571

 

$

503,255

 

$

46,754

 

$

986,202

 

$

(519,007

)

$

1,017,775

 

 

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)

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

(dollars in thousands)

 

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

 

Net Income

 

 

$

125,789

 

$

120,814

 

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

 

 

 

 

 

 

Provision for Credit Losses

 

 

979

 

10,471

 

Depreciation and Amortization

 

 

10,339

 

10,918

 

Amortization of Deferred Loan and Lease Fees

 

 

(2,493

)

(1,986

)

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

 

 

42,633

 

35,899

 

Share-Based Compensation

 

 

5,687

 

2,001

 

Benefit Plan Contributions

 

 

(5,888

)

(965

)

Deferred Income Taxes

 

 

(16,793

)

(8,277

)

Net Gain on Sale of Proprietary Mutual Funds

 

 

-

 

(1,956

)

Net Gains on Sales of Loans and Leases

 

 

(11,645

)

(4,658

)

Net Losses (Gains) on Investment Securities

 

 

77

 

(6,084

)

Proceeds from Sales of Loans Held for Sale

 

 

369,481

 

334,883

 

Originations of Loans Held for Sale

 

 

(367,965

)

(317,646

)

Tax Benefits from Share-Based Compensation

 

 

(712

)

(696

)

Net Change in Other Assets and Other Liabilities

 

 

(24,094

)

9,770

 

Net Cash Provided by Operating Activities

 

 

125,395

 

182,488

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

 

737,377

 

730,294

 

Proceeds from Sales

 

 

44,844

 

682,283

 

Purchases

 

 

(452,430

)

(1,535,348

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

 

689,246

 

199,844

 

Purchases

 

 

(540,472

)

(384,785

)

Proceeds from Sale of Proprietary Mutual Funds

 

 

-

 

1,956

 

Net Change in Loans and Leases

 

 

(253,521

)

(37,522

)

Premises and Equipment, Net

 

 

(13,933

)

(7,257

)

Net Cash Provided by (Used in) Investing Activities

 

 

211,111

 

(350,535

)

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

Net Change in Deposits

 

 

627,924

 

120,018

 

Net Change in Short-Term Borrowings

 

 

(1,107,767

)

28,786

 

Tax Benefits from Share-Based Compensation

 

 

712

 

696

 

Proceeds from Issuance of Common Stock

 

 

10,356

 

9,919

 

Repurchase of Common Stock

 

 

(66,245

)

(82,391

)

Cash Dividends Paid

 

 

(61,459

)

(64,048

)

Net Cash Provided by (Used in) Financing Activities

 

 

(596,479

)

12,980

 

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

 

(259,973

)

(155,067

)

Cash and Cash Equivalents at Beginning of Period

 

 

669,909

 

607,547

 

Cash and Cash Equivalents at End of Period

 

 

$

409,936

 

$

452,480

 

Supplemental Information

 

 

 

 

 

 

Cash Paid for Interest

 

 

$

31,483

 

$

35,448

 

Cash Paid for Income Taxes

 

 

58,625

 

68,613

 

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

 

 

3,230

 

2,067

 

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.  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.

 

7



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 expanded 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 statements of income and condition.  See Note 12 to the Consolidated Financial Statements for the expanded 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 statements of income and condition.

 

8



Table of Contents

 

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.”  The provisions of ASU No. 2012-02 permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test, as is currently required by GAAP.  ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  As the Company does not have any indefinite-lived intangible assets, other than goodwill, the adoption of ASU No. 2012-02 is expected to have no impact on the Company’s Consolidated Financial Statements.

 

Note 2.  Investment Securities

 

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2012

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

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

 

$

990,957

 

$

15,193

 

$

(4

)

$

1,006,146

 

Debt Securities Issued by States and Political Subdivisions

 

682,054

 

32,990

 

(1

)

715,043

 

Debt Securities Issued by Corporations

 

82,567

 

2,341

 

(10

)

84,898

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

1,241,154

 

35,876

 

(615

)

1,276,415

 

U.S. Government-Sponsored Enterprises

 

39,327

 

2,380

 

-

 

41,707

 

Total Mortgage-Backed Securities

 

1,280,481

 

38,256

 

(615

)

1,318,122

 

Total

 

$

3,036,059

 

$

88,780

 

$

(630

)

$

3,124,209

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

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

 

$

179,451

 

$

5,802

 

$

-

 

$

185,253

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

 

 

 

 

Government Agencies

 

3,260,932

 

104,407

 

(22

)

3,365,317

 

U.S. Government-Sponsored Enterprises

 

34,876

 

2,551

 

-

 

37,427

 

Total Mortgage-Backed Securities

 

3,295,808

 

106,958

 

(22

)

3,402,744

 

Total

 

$

3,475,259

 

$

112,760

 

$

(22

)

$

3,587,997

 

 

 

 

 

 

 

 

 

 

 

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 September 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

 

$

515,969

 

$

517,705

 

Due After One Year Through Five Years

 

234,406

 

242,906

 

Due After Five Years Through Ten Years

 

302,891

 

315,529

 

Due After Ten Years

 

702,312

 

729,947

 

 

 

1,755,578

 

1,806,087

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

Government Agencies

 

1,241,154

 

1,276,415

 

U.S. Government-Sponsored Enterprises

 

39,327

 

41,707

 

Total Mortgage-Backed Securities

 

1,280,481

 

1,318,122

 

Total

 

$

3,036,059

 

$

3,124,209

 

 

 

 

 

 

 

Held-to-Maturity:

 

 

 

 

 

Due After One Year Through Five Years

 

$

179,451

 

$

185,253

 

Mortgage-Backed Securities Issued by

 

 

 

 

 

Government Agencies

 

3,260,932

 

3,365,317

 

U.S. Government-Sponsored Enterprises

 

34,876

 

37,427

 

Total Mortgage-Backed Securities

 

3,295,808

 

3,402,744

 

Total

 

$

3,475,259

 

$

3,587,997

 

 

Investment securities with carrying values of $2.9 billion and $3.6 billion as of September 30, 2012 and December 31, 2011, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.  As of September 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.

 

Gross realized gains were less than $0.1 million and there were no gross realized losses on the sales of investment securities for the three months ended September 30, 2012.  There were no sales of investment securities for the three months ended September 30, 2011.  Gross realized gains on the sales of investment securities were $0.3 million and $10.3 million for the nine months ended September 30, 2012 and 2011, respectively.  Gross realized losses on the sales of investment securities were $0.3 million and $4.2 million for the nine months ended September 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

 

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

260

 

$

(1

)

$

626

 

$

(3

)

$

886

 

$

(4

)

Debt Securities Issued by
States and Political Subdivisions

 

100

 

(1

)

-

 

-

 

100

 

(1

)

Debt Securities Issued by Corporations

 

-

 

-

 

9,990

 

(10

)

9,990

 

(10

)

Mortgage-Backed Securities Issued by
Government Agencies

 

57,368

 

(533

)

12,663

 

(104

)

70,031

 

(637

)

Total

 

$

57,728

 

$

(535

)

$

23,279

 

$

(117

)

$

81,007

 

$

(652

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2012, which was comprised of 18 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

 

As of September 30, 2012 and December 31, 2011, the gross unrealized losses reported for mortgage-backed securities were attributable related to investment securities issued by the Government National Mortgage Association.

 

As of September 30, 2012, the carrying value of the Company’s Federal Home Loan Bank and Federal Reserve Bank stock was $60.7 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 September 30, 2012 and December 31, 2011:

 

 

 

September 30,

 

December 31,

 

(dollars in thousands)

 

2012

 

2011

 

Commercial

 

 

 

 

 

Commercial and Industrial

 

$

808,621

 

$

817,170

 

Commercial Mortgage

 

1,039,556

 

938,250

 

Construction

 

101,818

 

98,669

 

Lease Financing

 

277,328

 

311,928

 

Total Commercial

 

2,227,323

 

2,166,017

 

Consumer

 

 

 

 

 

Residential Mortgage

 

2,392,871

 

2,215,892

 

Home Equity

 

770,284

 

780,691

 

Automobile

 

200,788

 

192,506

 

Other 1

 

191,038

 

183,198

 

Total Consumer

 

3,554,981

 

3,372,287

 

Total Loans and Leases

 

$

5,782,304

 

$

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 nine months ended September 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 September 30, 2012 and 2011.

 

(dollars in thousands)

 

Commercial

 

Consumer

 

Total

 

Three Months Ended September 30, 2012

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

78,012

 

$

54,431

 

$

132,443

 

Loans and Leases Charged-Off

 

(519

)

(4,515

)

(5,034

)

Recoveries on Loans and Leases Previously Charged-Off

 

678

 

2,884

 

3,562

 

Net Loans and Leases Charged-Off

 

159

 

(1,631

)

(1,472

)

Provision for Credit Losses

 

1,647

 

(1,647

)

-

 

Balance at End of Period

 

$

79,818

 

$

51,153

 

$

130,971

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

80,562

 

$

58,044

 

$

138,606

 

Loans and Leases Charged-Off

 

(3,358

)

(15,371

)

(18,729

)

Recoveries on Loans and Leases Previously Charged-Off

 

3,252

 

6,863

 

10,115

 

Net Loans and Leases Charged-Off

 

(106

)

(8,508

)

(8,614

)

Provision for Credit Losses

 

(638

)

1,617

 

979

 

Balance at End of Period

 

$

79,818

 

$

51,153

 

$

130,971

 

As of September 30, 2012

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

39

 

$

3,244

 

$

3,283

 

Collectively Evaluated for Impairment

 

79,779

 

47,909

 

127,688

 

Total

 

$

79,818

 

$

51,153

 

$

130,971

 

Recorded Investment in Loans and Leases:

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

13,119

 

$

34,889

 

$

48,008

 

Collectively Evaluated for Impairment

 

2,214,204

 

3,520,092

 

5,734,296

 

Total

 

$

2,227,323

 

$

3,554,981

 

$

5,782,304

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2011

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

88,985

 

$

55,991

 

$

144,976

 

Loans and Leases Charged-Off

 

(4,215

)

(6,556

)

(10,771

)

Recoveries on Loans and Leases Previously Charged-Off

 

4,929

 

2,096

 

7,025

 

Net Loans and Leases Charged-Off

 

714

 

(4,460

)

(3,746

)

Provision for Credit Losses

 

(7,024

)

9,204

 

2,180

 

Balance at End of Period

 

$

82,675

 

$

60,735

 

$

143,410

 

Nine Months Ended September 30, 2011

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

80,977

 

$

66,381

 

$

147,358

 

Loans and Leases Charged-Off

 

(7,379

)

(19,773

)

(27,152

)

Recoveries on Loans and Leases Previously Charged-Off

 

5,994

 

6,739

 

12,733

 

Net Loans and Leases Charged-Off

 

(1,385

)

(13,034

)

(14,419

)

Provision for Credit Losses

 

3,083

 

7,388

 

10,471

 

Balance at End of Period

 

$

82,675

 

$

60,735

 

$

143,410

 

As of September 30, 2011

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

-

 

$

4,179

 

$

4,179

 

Collectively Evaluated for Impairment

 

82,675

 

56,556

 

139,231

 

Total

 

$

82,675

 

$

60,735

 

$

143,410

 

Recorded Investment in Loans and Leases:

 

 

 

 

 

 

 

Individually Evaluated for Impairment

 

$

8,602

 

$

26,400

 

$

35,002

 

Collectively Evaluated for Impairment

 

2,085,561

 

3,227,909

 

5,313,470

 

Total

 

$

2,094,163

 

$

3,254,309

 

$

5,348,472

 

 

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.

 

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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 September 30, 2012 and December 31, 2011.

 

 

 

September 30, 2012

(dollars in thousands)

 

Commercial
and Industrial

 

Commercial
Mortgage

 

Construction

 

Lease
Financing

 

Total
Commercial

 

Pass

 

$

752,688

 

$

956,582

 

$

86,050

 

$

249,734

 

$

2,045,054

 

Special Mention

 

23,640

 

30,851

 

11,684

 

26,282

 

92,457

 

Classified

 

32,293

 

52,123

 

4,084

 

1,312

 

89,812

 

Total

 

$

808,621

 

$

1,039,556

 

$

101,818

 

$

277,328

 

$

2,227,323

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Residential
Mortgage

 

Home
Equity

 

Automobile

 

Other 1

 

Total
Consumer

 

Pass

 

$

2,367,353

 

$

766,462

 

$

200,634

 

$

190,459

 

$

3,524,908

 

Classified

 

25,518

 

3,822

 

154

 

579

 

30,073

 

Total

 

$

2,392,871

 

$

770,284

 

$

200,788

 

$

191,038

 

$

3,554,981

 

Total Recorded Investment in Loans and Leases

 

 

 

 

 

 

 

$

5,782,304

 

 

 

 

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

 

Total

 

$

817,170

 

$

938,250

 

$

98,669

 

$

311,928

 

$

2,166,017

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)