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| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | | | for the quarterly period ended March 31,June 30, 2004 | | | | or | | | | o |
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to | | | | for the transition period from to Commission File Number 1-6887
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Commission File Number 1-6887
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
BANK OF HAWAII CORPORATION | (Exact name of registrant as specified in its charter) | | | | Delaware |
| 99-0148992 | (State of incorporation) | | (IRS 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, and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value; outstanding at AprilJuly 23, 2004 – 53,287,24952,583,973 shares
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 March 31,June 30, 2004 and 2003 | 3 | | | | | Consolidated Statements of Condition – March 31,June 30, 2004, December 31, 2003, and March 31,June 30, 2003 | 4 | | | | | Consolidated Statements of Shareholders’ Equity – ThreeSix months ended March 31,June 30, 2004 and 2003 | 5 | | | | | Consolidated Statements of Cash Flows – ThreeSix months ended March 31,June 30, 2004 and 2003 | 6 | | | | | Notes to Consolidated Financial Statements | 7 | | | | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | | | | Item 3. | Quantitative and Qualitative Disclosures of Market Risk | 2832
| | | | Item 4. | Controls and Procedures | 2832
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| Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 2933
| | | | Item 4. | Submission of Matters to a Vote of Security Holders | 33 | | | | Item 5. | Other Information | 34 | | | | Item 6. | Exhibits and Reports on Form 8-K | 2935
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Bank of Hawaii Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) | | Three Months Ended | | | Three Months Ended June 30, | | Six Months Ended June 30, | | (dollars in thousands except per share amounts) | | March 31, 2004 | | March 31, 2003 | | | 2004 | | 2003 | | 2004 | | 2003 | | Interest Income | | | | | | | | | | | | | | | Interest and Fees on Loans and Leases | | $ | 81,428 | | $ | 85,773 | | | $ | 80,346 | | $ | 85,954 | | $ | 161,774 | | $ | 171,727 | | Income on Investment Securities - Held to Maturity | | 6,976 | | 2,283 | | | 6,711 | | 3,083 | | 13,687 | | 5,366 | | Income on Investment Securities - Available for Sale | | 20,846 | | 22,463 | | | 21,745 | | 19,815 | | 42,591 | | 42,278 | | Deposits | | 1,231 | | 1,307 | | | 1,646 | | 1,161 | | 2,877 | | 2,468 | | Funds Sold | | 417 | | 764 | | | 177 | | 822 | | 594 | | 1,586 | | Other | | 858 | | 1,189 | | | 865 | | 1,016 | | 1,723 | | 2,205 | | Total Interest Income | | 111,756 | | 113,779 | | | 111,490 | | 111,851 | | 223,246 | | 225,630 | | Interest Expense | | | | | | | | | | | | | | | Deposits | | 9,200 | | 14,447 | | | 8,560 | | 13,309 | | 17,760 | | 27,756 | | Security Repurchase Agreements | | 1,926 | | 2,242 | | | Securities Sold Under Agreements to Repurchase | | | 2,222 | | 2,391 | | 4,148 | | 4,633 | | Funds Purchased | | 231 | | 205 | | | 506 | | 219 | | 737 | | 424 | | Short-Term Borrowings | | 15 | | 24 | | | 13 | | 25 | | 28 | | 49 | | Long-Term Debt | | 4,353 | | 5,861 | | | 4,340 | | 5,422 | | 8,693 | | 11,283 | | Total Interest Expense | | 15,725 | | 22,779 | | | 15,641 | | 21,366 | | 31,366 | | 44,145 | | Net Interest Income | | 96,031 | | 91,000 | | | 95,849 | | 90,485 | | 191,880 | | 181,485 | | Provision for Loan and Lease Losses | | — | | — | | | (3,500) | | — | | (3,500) | | — | | Net Interest Income After Provision for Loan and Lease Losses | | 96,031 | | 91,000 | | | 99,349 | | 90,485 | | 195,380 | | 181,485 | | Non-Interest Income | | | | | | | | | | | | | | | Trust and Asset Management | | 13,864 | | 13,181 | | | 12,995 | | 12,545 | | 26,859 | | 25,726 | | Mortgage Banking | | 1,977 | | 283 | | | 2,808 | | 6,061 | | 4,785 | | 6,344 | | Service Charges on Deposit Accounts | | 9,950 | | 8,950 | | | 9,540 | | 8,645 | | 19,490 | | 17,595 | | Fees, Exchange, and Other Service Charges | | 13,239 | | 12,989 | | | 14,243 | | 13,473 | | 27,482 | | 26,462 | | Investment Securities Gains | | — | | 583 | | | Investment Securities Gains (Losses) | | | (37) | | 587 | | (37) | | 1,170 | | Insurance | | 3,643 | | 3,080 | | | 3,303 | | 3,015 | | 6,946 | | 6,095 | | Other | | 6,169 | | 5,687 | | | 11,996 | | 6,413 | | 18,165 | | 12,100 | | Total Non-Interest Income | | 48,842 | | 44,753 | | | 54,848 | | 50,739 | | 103,690 | | 95,492 | | Non-Interest Expense | | | | | | | | | | | | | | | Salaries and Benefits | | 46,001 | | 46,429 | | | 46,689 | | 47,711 | | 92,690 | | 94,140 | | Net Occupancy Expense | | 9,386 | | 9,613 | | | 9,543 | | 9,628 | | 18,929 | | 19,241 | | Net Equipment Expense | | 5,964 | | 9,748 | | | 5,799 | | 9,208 | | 11,763 | | 18,956 | | Information Technology Systems Replacement Project | | — | | 7,417 | | | — | | 10,105 | | — | | 17,522 | | Other | | 21,671 | | 16,993 | | | 23,094 | | 18,742 | | 44,765 | | 35,735 | | Total Non-Interest Expense | | 83,022 | | 90,200 | | | 85,125 | | 95,394 | | 168,147 | | 185,594 | | Income Before Income Taxes | | 61,851 | | 45,553 | | | 69,072 | | 45,830 | | 130,923 | | 91,383 | | Provision for Income Taxes | | 22,052 | | 15,752 | | | 24,840 | | 15,796 | | 46,892 | | 31,548 | | Net Income | | $ | 39,799 | | $ | 29,801 | | | $ | 44,232 | | $ | 30,034 | | $ | 84,031 | | $ | 59,835 | | Basic Earnings Per Share | | $ | 0.73 | | $ | 0.49 | | | $ | 0.84 | | $ | 0.50 | | $ | 1.57 | | $ | 0.99 | | Diluted Earnings Per Share | | $ | 0.69 | | $ | 0.47 | | | $ | 0.79 | | $ | 0.48 | | $ | 1.48 | | $ | 0.95 | | Dividends Declared Per Share | | $ | 0.30 | | $ | 0.19 | | | $ | 0.30 | | $ | 0.19 | | $ | 0.60 | | $ | 0.38 | | Basic Weighted Average Shares | | 54,286,648 | | 61,294,460 | | | 52,491,874 | | 59,566,970 | | 53,389,261 | | 60,425,943 | | Diluted Weighted Average Shares | | 57,746,520 | | 63,535,609 | | | 55,662,415 | | 62,301,337 | | 56,710,653 | | 62,907,697 | |
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Bank of Hawaii Corporation and Subsidiaries Consolidated Statements of Condition (Unaudited) (dollars in thousands) | | March 31, 2004 | | December 31, 2003 | | March 31, 2003 | | | June 30, 2004 | | December 31, 2003 | | June 30, 2003 | | | | | (Unaudited) | | | | (Unaudited) | | Assets | | | | | | | | | | | | | | | Interest-Bearing Deposits | | $ | 479,882 | | $ | 154,735 | | $ | 157,067 | | | $ | 179,680 | | $ | 154,735 | | $ | 307,552 | | Investment Securities - Held to Maturity (Market Value of $719,308, $720,699 and $180,043) | | 717,867 | | 727,233 | | 175,600 | | | Investment Securities - Held to Maturity (Market Value of $663,534, $720,699, and $555,878) | | | 679,382 | | 727,233 | | 548,719 | | Investment Securities - Available for Sale | | 1,995,713 | | 1,991,116 | | 2,497,508 | | | 2,275,272 | | 1,991,116 | | 2,140,607 | | Funds Sold | | 255,000 | | — | | 175,000 | | | — | | — | | 250,000 | | Loans Held for Sale | | 67,328 | | 9,211 | | 47,269 | | | 9,565 | | 9,211 | | 71,892 | | Loans and Leases | | 5,714,996 | | 5,757,175 | | 5,565,371 | | | 5,787,314 | | 5,757,175 | | 5,471,870 | | Allowance for Loan and Lease Losses | | (127,185 | ) | (129,080 | ) | (140,028 | ) | | (124,904) | | (129,080) | | (137,974) | | Net Loans | | 5,587,811 | | 5,628,095 | | 5,425,343 | | | 5,662,410 | | 5,628,095 | | 5,333,896 | | Total Earning Assets | | 9,103,601 | | 8,510,390 | | 8,477,787 | | | 8,806,309 | | 8,510,390 | | 8,652,666 | | Cash and Non-Interest Bearing Deposits | | 313,090 | | 363,495 | | 331,994 | | | Cash and Non-Interest-Bearing Deposits | | | 339,486 | | 363,495 | | 297,868 | | Premises and Equipment | | 155,488 | | 160,005 | | 170,696 | | | 149,128 | | 160,005 | | 165,542 | | Customers’ Acceptance Liability | | 1,844 | | 1,707 | | 1,372 | | | 1,213 | | 1,707 | | 1,371 | | Accrued Interest Receivable | | 34,658 | | 32,672 | | 36,845 | | | 36,378 | | 32,672 | | 35,849 | | Foreclosed Real Estate | | 4,416 | | 4,377 | | 9,097 | | | 4,889 | | 4,377 | | 9,285 | | Mortgage Servicing Rights | | 21,138 | | 22,178 | | 25,801 | | | 20,819 | | 22,178 | | 24,841 | | Goodwill | | 36,216 | | 36,216 | | 36,216 | | | 36,216 | | 36,216 | | 36,216 | | Other Assets | | 342,991 | | 330,607 | | 320,402 | | | 294,331 | | 330,607 | | 327,296 | | Total Assets | | $ | 10,013,442 | | $ | 9,461,647 | | $ | 9,410,210 | | | $ | 9,688,769 | | $ | 9,461,647 | | $ | 9,550,934 | | Liabilities | | | | | | | | | | | | | | | Deposits | | | | | | | | | | | | | | | Non-Interest Bearing Demand | | $ | 1,915,678 | | $ | 1,933,928 | | $ | 1,714,601 | | | Interest Bearing Demand | | 1,407,494 | | 1,356,330 | | 1,164,975 | | | Non-Interest-Bearing Demand | | | $ | 1,939,580 | | $ | 1,933,928 | | $ | 1,843,750 | | Interest-Bearing Demand | | | 1,464,207 | | 1,356,330 | | 1,161,409 | | Savings | | 2,888,877 | | 2,833,379 | | 2,669,409 | | | 2,976,108 | | 2,833,379 | | 2,754,607 | | Time | | 1,151,873 | | 1,209,142 | | 1,438,346 | | | 1,089,393 | | 1,209,142 | | 1,381,083 | | Total Deposits | | 7,363,922 | | 7,332,779 | | 6,987,331 | | | 7,469,288 | | 7,332,779 | | 7,140,849 | | Securities Sold Under Agreements to Repurchase | | 1,039,204 | | 472,757 | | 646,317 | | | 687,816 | | 472,757 | | 699,256 | | Funds Purchased | | 98,370 | | 109,090 | | 69,890 | | | 139,055 | | 109,090 | | 90,200 | | Short-Term Borrowings | | 11,349 | | 12,690 | | 12,096 | | | 11,055 | | 12,690 | | 22,424 | | Current Maturities of Long-Term Debt | | 102,252 | | 96,505 | | 118,792 | | | 80,000 | | 96,505 | | 34,000 | | Banker’s Acceptances Outstanding | | 1,844 | | 1,707 | | 1,372 | | | 1,213 | | 1,707 | | 1,371 | | Retirement Benefits Payable | | 62,298 | | 61,841 | | 62,091 | | | 62,821 | | 61,841 | | 62,678 | | Accrued Interest Payable | | 6,978 | | 7,483 | | 12,761 | | | 7,169 | | 7,483 | | 9,755 | | Taxes Payable and Deferred Taxes | | 228,785 | | 207,101 | | 206,139 | | | 225,989 | | 207,101 | | 196,868 | | Other Liabilities | | 95,091 | | 138,999 | | 70,644 | | | 87,325 | | 138,999 | | 81,988 | | Long-Term Debt | | 217,581 | | 227,563 | | 270,770 | | | 217,600 | | 227,563 | | 298,535 | | Total Liabilities | | 9,227,674 | | 8,668,515 | | 8,458,203 | | | 8,989,331 | | 8,668,515 | | 8,637,924 | | Shareholders’ Equity | | | | | | | | | | | | | | | Common Stock ($.01 par value); authorized 500,000,000 shares; issued / outstanding: March 2004 - 81,641,545 / 54,216,350, December 2003 - 81,647,729 / 54,928,480, March 2003 - 81,276,420 / 60,418,539 | | 807 | | 807 | | 807 | | | Common Stock ($.01 par value); authorized 500,000,000 shares; issued / outstanding: June 2004 - 81,711,599 / 52,426,010, December 2003 - 81,647,729 / 54,928,480, June 2003 - 81,588,394 / 58,896,230 | | | 813 | | 807 | | 807 | | Capital Surplus | | 396,335 | | 391,701 | | 372,887 | | | 403,150 | | 391,701 | | 386,565 | | Accumulated Other Comprehensive Income (Loss) | | 4,289 | | (5,711 | ) | 8,273 | | | (27,258) | | (5,711) | | 12,412 | | Retained Earnings | | 1,222,602 | | 1,199,077 | | 1,133,642 | | | 1,251,689 | | 1,199,077 | | 1,151,623 | | Deferred Stock Grants | | (7,594 | ) | (8,309 | ) | 74 | | | (9,391) | | (8,309) | | (8,168) | | Treasury Stock, at Cost (Shares: March 2004 - 27,425,195, December 2003 - 26,719,249, March 2003 - 20,857,881) | | (830,671 | ) | (784,433 | ) | (563,676 | ) | | Treasury Stock, at Cost (Shares: June 2004 - 29,285,589, December 2003 - 26,719,249, June 2003 - 22,692,164) | | | (919,565) | | (784,433) | | (630,229) | | Total Shareholders’ Equity | | 785,768 | | 793,132 | | 952,007 | | | 699,438 | | 793,132 | | 913,010 | | Total Liabilities and Shareholders’ Equity | | $ | 10,013,442 | | $ | 9,461,647 | | $ | 9,410,210 | | | $ | 9,688,769 | | $ | 9,461,647 | | $ | 9,550,934 | |
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Bank of Hawaii Corporation and Subsidiaries Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollars in thousands) | | Total | | Common Stock | | Capital Surplus | | Accum. Other Compre- hensive Income (Loss) | | Retained Earnings | | Deferred Stock Grants | | Treasury Stock | | Compre- hensive Income | | | Total | | Common Stock | | Capital Surplus | | Accum. Other Compre- hensive Income (Loss) | | Retained Earnings | | Deferred Stock Grants | | Treasury Stock | | Compre- hensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2003 | | $ | 793,132 | | $ | 807 | | $ | 391,701 | | $ | (5,711 | ) | $ | 1,199,077 | | $ | (8,309 | ) | $ | (784,433 | ) | | | | $ | 793,132 | | $ | 807 | | $ | 391,701 | | $ | (5,711) | | $ | 1,199,077 | | $ | (8,309) | | $ | (784,433) | | | | Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Income | | 39,799 | | — | | — | | — | | 39,799 | | — | | — | | $ | 39,799 | | | 84,031 | | — | | — | | — | | 84,031 | | — | | — | | $ | 84,031 | | Other Comprehensive Income, Net of Tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in Unrealized Gains and Losses on Investment Securities | | 10,000 | | — | | — | | 10,000 | | — | | — | | — | | 10,000 | | | (21,547) | | — | | — | | (21,547) | | — | | — | | — | | (21,547) | | Total Comprehensive Income | | | | | | | | | | | | | | | | $ | 49,799 | | | | | | | | | | | | | | | | | $ | 62,484 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Issued under Stock Plans and Related Tax Benefits (611,820 shares) | | 18,482 | | — | | 4,634 | | — | | 144 | | 715 | | 12,989 | | | | | Treasury Stock Purchased (1,323,050 shares) | | (59,227 | ) | — | | — | | — | | — | | — | | (59,227 | ) | | | | Common Stock Issued under Stock Plans and Related Tax Benefits (908,502 shares) | | | 32,028 | | 6 | | 11,449 | | — | | 803 | | (1,082) | | 20,852 | | | | Treasury Stock Purchased (3,527,779 shares) | | | (155,984) | | — | | — | | — | | — | | — | | (155,984) | | | | Cash Dividends Paid | | (16,418 | ) | — | | — | | — | | (16,418 | ) | — | | — | | | | | (32,222) | | — | | — | | — | | (32,222) | | — | | — | | | | Balance at March 31, 2004 | | $ | 785,768 | | $ | 807 | | $ | 396,335 | | $ | 4,289 | | $ | 1,222,602 | | $ | (7,594 | ) | $ | (830,671 | ) | | | | Balance at June 30, 2004 | | | $ | 699,438 | | $ | 813 | | $ | 403,150 | | $ | (27,258) | | $ | 1,251,689 | | $ | (9,391) | | $ | (919,565) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2002 | | $ | 1,015,759 | | $ | 806 | | $ | 372,192 | | $ | 11,659 | | $ | 1,115,910 | | $ | (1,424 | ) | $ | (483,384 | ) | | | | $ | 1,015,759 | | $ | 806 | | $ | 372,192 | | $ | 11,659 | | $ | 1,115,910 | | $ | (1,424) | | $ | (483,384) | | | | Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Income | | 29,801 | | — | | — | | — | | 29,801 | | — | | — | | $ | 29,801 | | | 59,835 | | — | | — | | — | | 59,835 | | — | | — | | $ | 59,835 | | Other Comprehensive Income, Net of Tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in Unrealized Gains and Losses on Investment Securities | | (3,386 | ) | — | | — | | (3,386 | ) | — | | — | | — | | (3,386 | ) | | 753 | | — | | — | | 753 | | — | | — | | — | | 753 | | Total Comprehensive Income | | | | | | | | | | | | | | | | $ | 26,415 | | | | | | | | | | | | | | | | | $ | 60,588 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Issued under Stock Plans and Related Tax Benefits (261,802 shares) | | 7,721 | | 1 | | 695 | | — | | (507 | ) | 1,498 | | 6,034 | | | | | Treasury Stock Purchased (2,856,600 shares) | | (86,326 | ) | — | | — | | — | | — | | — | | (86,326 | ) | | | | Common Stock Issued under Stock Plans and Related Tax Benefits (992,802 shares) | | | 21,785 | | 1 | | 14,373 | | — | | (1,190) | | (6,744) | | 15,345 | | | | Treasury Stock Purchased (5,107,779 shares) | | | (162,190) | | — | | — | | — | | — | | — | | (162,190) | | | | Cash Dividends Paid | | (11,562 | ) | — | | — | | — | | (11,562 | ) | — | | — | | | | | (22,932) | | — | | — | | — | | (22,932) | | — | | — | | | | Balance at March 31, 2003 | | $ | 952,007 | | $ | 807 | | $ | 372,887 | | $ | 8,273 | | $ | 1,133,642 | | $ | 74 | | $ | (563,676 | ) | | | | Balance at June 30, 2003 | | | $ | 913,010 | | $ | 807 | | $ | 386,565 | | $ | 12,412 | | $ | 1,151,623 | | $ | (8,168) | | $ | (630,229) | | | |
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Bank of Hawaii Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
| | Three Months Ended | | | Six Months Ended June 30, | | (dollars in thousands) | | March 31, 2004 | | March 31, 2003 | | | 2004 | | 2003 | | | | | | | | | | | | | Operating Activities | | | | | | | | | | | Net Income | | $ | 39,799 | | $ | 29,801 | | | $ | 84,031 | | $ | 59,835 | | Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: | | | | | | | | | | | Provision for Loan and Lease Losses | | | (3,500) | | — | | Depreciation and Amortization | | 5,331 | | 8,924 | | | 10,523 | | 17,344 | | Amortization of Deferred Loan and Lease Fees | | (636 | ) | (1,902 | ) | | (1,248) | | (3,759) | | Amortization and Accretion of Investment Securities | | 3,013 | | 9,185 | | | 6,830 | | 19,282 | | Deferred Stock Grants | | 1,047 | | 1,134 | | | 2,444 | | 3,382 | | Deferred Income Taxes | | 3,205 | | 2,664 | | | 8,296 | | 7,672 | | Net Gain on Investment Securities | | — | | (583 | ) | | Net (Gain) Loss on Investment Securities | | | 37 | | (1,170) | | Proceeds From Sales of Loans Held for Sale | | 78,837 | | 43,021 | | | 250,449 | | 372,187 | | Originations of Loans Held for Sale | | (136,954 | ) | (50,172 | ) | | (250,803) | | (403,961) | | Net Change in Other Assets and Liabilities | | (41,006 | ) | 13,291 | | | 11,323 | | 2,824 | | Net Cash Provided (Used) by Operating Activities | | (47,364 | ) | 55,363 | | | Net Cash Provided by Operating Activities | | | 118,382 | | 73,636 | | | | | | | | | | | | | Investing Activities | | | | | | | | | | | Proceeds from Redemptions of Investment Securities Held to Maturity | | 45,436 | | 65,912 | | | 117,212 | | 109,183 | | Purchases of Investment Securities Held to Maturity | | (36,445 | ) | (11,772 | ) | | (70,238) | | (428,287) | | Proceeds from Sales and Redemptions of Investment Securities Available for Sale | | 142,489 | | 528,496 | | | 347,709 | | 1,004,004 | | Purchases of Investment Securities Available for Sale | | (134,098 | ) | (752,729 | ) | | (671,520) | | (874,254) | | Net (Increase) Decrease in Loans and Lease Financing | | 40,920 | | (207,290 | ) | | Net Increase in Loans and Leases | | | (29,567) | | (113,986) | | Premises and Equipment, Net | | (814 | ) | (2,651 | ) | | 354 | | (5,917) | | Net Cash Provided (Used) by Investing Activities | | 57,488 | | (380,034 | ) | | Net Cash Used by Investing Activities | | | (306,050) | | (309,257) | | | | | | | | | | | | | Financing Activities | | | | | | | | | | | Net Increase (Decrease) in Demand Deposits | | 32,914 | | (11,889 | ) | | Net Increase in Demand Deposits | | | 113,529 | | 113,694 | | Net Increase in Savings Deposits | | 55,498 | | 134,190 | | | 142,729 | | 219,388 | | Net Decrease in Time Deposits | | (57,269 | ) | (55,131 | ) | | (119,749) | | (112,394) | | Proceeds from Long-Term Debt | | | — | | 50,000 | | Repayments of Long-Term Debt | | (4,235 | ) | (223 | ) | | (26,468) | | (107,250) | | Net Increase (Decrease) in Short-Term Borrowings | | 554,386 | | (105,205 | ) | | 243,389 | | (21,628) | | Proceeds from Issuance of Common Stock | | 13,969 | | 5,548 | | | 23,380 | | 15,023 | | Repurchase of Common Stock | | (59,227 | ) | (86,326 | ) | | (155,984) | | (162,190) | | Cash Dividends | | (16,418 | ) | (11,562 | ) | | (32,222) | | (22,932) | | Net Cash Provided (Used) by Financing Activities | | 519,618 | | (130,598 | ) | | 188,604 | | (28,289) | | Increase (Decrease) in Cash and Cash Equivalents | | 529,742 | | (455,269 | ) | | 936 | | (263,910) | | Cash and Cash Equivalents at Beginning of Period | | 518,230 | | 1,119,330 | | | 518,230 | | 1,119,330 | | Cash and Cash Equivalents at End of Period | | $ | 1,047,972 | | $ | 664,061 | | | $ | 519,166 | | $ | 855,420 | |
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Bank of Hawaii Corporation Notes to Consolidated Financial StatementsStatements (Unaudited)
Note 1. Summary of Significant Accounting Policies Bank of Hawaii Corporation (the “Company”) is a bank holding company providing a broad range of financial products and services to customers in Hawaii and the Pacific Islands (Guam, nearby islands and American Samoa). The Company’s principal subsidiary is Bank of Hawaii (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of Presentation The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principlesU.S. generally accepted in the United Statesaccounting principles 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 footnotes required by accounting principlesU.S. generally accepted in the United Statesaccounting principles for complete financial statements. In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the interim periods. Certain prior period amounts have been reclassified to conform to current period classifications. These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2003 Annual Report on Form 10-K. Operating results for the threesix months ended March 31,June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Stock-Based Compensation The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. Generally, stock-based employee compensation expense associated with stock options is not reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”): 7
| | Three Months Ended March 31, | | (dollars in thousands except per share and per option data) | | 2004 | | 2003 | | Net Income, as reported | | $ | 39,799 | | $ | 29,801 | | Add: Stock-Based Employee Compensation Expense included in reported Net Income, Net of Related Tax Effects | | — | | 163 | | Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Method For All Awards, Net of Related Tax Effects | | (1,760 | ) | (3,101 | ) | Pro Forma Net Income1 | | $ | 38,039 | | $ | 26,863 | | | | | | | | Earnings Per Share: | | | | | | Basic-as reported | | $ | 0.73 | | $ | 0.49 | | Basic-pro forma1 | | $ | 0.70 | | $ | 0.44 | | Diluted-as reported | | $ | 0.69 | | $ | 0.47 | | Diluted-pro forma1 | | $ | 0.66 | | $ | 0.42 | | | | | | | | Weighted Average Fair Value of Options | | | | | | Granted During the Period1 | | — | | $ | 7.98 | | Assumptions: | | | | | | Average Risk Free Interest Rate | | — | | 4.89 | % | Average Expected Volatility | | — | | 31.41 | % | Expected Dividend Yield | | — | | 3.16 | % | Expected Life | | — | | 6.7 years | |
| | Six Months Ended June 30, | | (dollars in thousands except per share and option data) | | 2004 | | 2003 | | Net Income, as Reported | | $ | 84,031 | | $ | 59,835 | | Add: | Stock-Based Employee Compensation Expense Associated with Stock Options Included in Reported Net Income, Net of Related Tax Effects | | — | | 326 | | Less: | Total Stock-Based Employee Compensation Expense Associated with Stock Options Determined Under Fair Value Method for all Option Awards, Net of Related Tax Effects | | (2,867) | | (5,691) | | Pro Forma Net Income 1 | | $ | 81,164 | | $ | 54,470 | | | | | | | | Earnings Per Share: | | | | | | Basic-as reported | | $ | 1.57 | | $ | 0.99 | | Basic-pro forma 1 | | $ | 1.52 | | $ | 0.90 | | Diluted-as reported | | $ | 1.48 | | $ | 0.95 | | Diluted-pro forma 1 | | $ | 1.43 | | $ | 0.87 | | | | | | | | Weighted Average Fair Value of Options Granted During the Year1 | | — | | $ | 8.58 | | Assumptions: | | | | | | Average Risk Free Interest Rate | | — | | 3.85% | | Average Expected Volatility | | — | | 31.94% | | Expected Dividend Yield | | — | | 3.07% | | Expected Life | | — | | 6.6 years | |
1A Black-Scholes option pricing model was used to developdetermine the fair valuesvalue of the grants.options granted. Note 2. Business Segments
The information under the caption “Business Segments” in Management’s Discussion and Analysis is incorporated herein by reference. Note 3.Pension Plans and Postretirement Benefits Components of net periodic benefit cost for the aggregated pension plans and the postretirement benefits are presented in the following table. | | Three Months Ended March 31, | | | Six Months Ended June 30, | | | | Pension Benefits | | Postretirement Benefits | | | Pension Benefits | | Postretirement Benefits | | (dollars in thousands) | | 2004 | | 2003 | | 2004 | | 2003 | | | 2004 | | 2003 | | 2004 | | 2003 | | Components of Net Periodic Cost: | | | | | | | | | | | Components of Net Periodic Benefit Cost: | | | | | | | | | | | Service Cost | | $ | — | | $ | — | | $ | 247 | | $ | 310 | | | $ | — | | $ | — | | $ | 494 | | $ | 620 | | Interest Cost | | 1,092 | | 1,069 | | 443 | | 514 | | | 2,183 | | 2,136 | | 886 | | 1,028 | | Expected Return on Plan Assets | | (1,182 | ) | (1,162 | ) | — | | — | | | (2,364) | | (2,324) | | — | | — | | Amortization of Unrecognized Net Transition (Asset) Obligation | | — | | — | | 147 | | 163 | | | Amortization of Unrecognized Net Transition Obligation | | | — | | — | | 294 | | 326 | | Actuarial (Gain) Loss | | 328 | | 198 | | (156 | ) | (66 | ) | | 656 | | 455 | | (312) | | (132) | | Total Components of Net Periodic Cost | | $ | 238 | | $ | 105 | | $ | 681 | | $ | 921 | | | Total Components of Net Periodic Benefit Cost | | | $ | 475 | | $ | 267 | | $ | 1,362 | | $ | 1,842 | |
There were no significant changes from the previously reported $1.8 million in contributions expected to be paid during 2004. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted on December 8, 2003. The Act expands Medicare, primarily adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Company electedIn May 2004, the Financial Accounting Standards Board issued Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to defer recognizingthe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-2”), that provides accounting guidance for the effects of the Act and intends to review itsregarding prescription drug benefits under Medicare for sponsors of retiree health care strategy in lightbenefit plans. The Company evaluated the impact of the newAct in conjunction with the guidance provided in FSP 106-2 and it is not expected that the Medicare provisions that may reducechanges will have an effect on the Company’s obligations in the plan. Therefore, the retiree medical obligations and costs reported as of March 31, 2004 do not reflect the impact, if any, of this legislation. FASB Staff Position 106-1 permits deferring the recognition of the new Medicare provisions due to pending authoritative guidance on the accounting for the Act. The final accounting guidance could require changes to previously reported information.postretirement benefit obligations. 8
Note 4. Information Technology Systems Replacement Project
In July 2002, the Company entered into contracts with Metavante Corporation to provide for technology services, including professional services to convert existing systems to Metavante systems. The conversion was completed in the third quarter of 2003.2003 and the final payments were made in the second quarter of 2004. The following summarizes the change in the liability balance during the threesix months ended March 31,June 30, 2004: (dollars in thousands) | | Professional Fees | | Employee Termination Benefits | | Other Associated Costs1 | | Total | | | Professional Fees | | Employee Termination Benefits | | Other Associated Costs 1 | | Total | | | | | | | | | | | | | Liability Balance at December 31, 2003 | | $ | 1,002 | | $ | 471 | | $ | 513 | | $ | 1,986 | | | $ | 1,002 | | $ | 471 | | $ | 513 | | $ | 1,986 | | Payments | | (605 | ) | (421 | ) | — | | (1,026 | ) | | (605) | | (421) | | — | | (1,026) | | Adjustments | | (51 | ) | — | | 51 | | — | | | (51) | | — | | 51 | | — | | Liability Balance at March 31, 2004 | | $ | 346 | | $ | 50 | | $ | 564 | | $ | 960 | | | 346 | | 50 | | 564 | | 960 | | | | | | | | | | | | | Payments | | | (346) | | (50) | | (564) | | (960) | | Liability Balance at June 30, 2004 | | | $ | — | | $ | — | | $ | — | | $ | — | |
1Includes contract termination, equipment, excise tax and other costs. Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This report, including the Earnings Outlook herein, contains forward-looking statements concerning, among other things, the economic environment in the Company’s service area, the expected level of loan loss provisioning, the effect of our new three-year plan, and anticipated net income, dividends, revenues and expenses during 2004 and beyond. The Company believes the assumptions underlying ourCompany’s forward-looking statements are reasonable. However,based on numerous assumptions, any of the assumptionswhich could prove to be inaccurate and actual results may differ materially from those projected for a variety of reasons, including, but not limited to: 1) unanticipated changes in business and economic conditions, the competitive environment, fiscal and monetary policies, or legislation in Hawaii and the other markets the Company serves; 2) changes in the Company’s credit quality or risk profile which may increase or decrease the required level of allowance for loan and lease losses; 3) changes in market interest rates that may affect the Company’s credit markets and ability to maintain its net interest margin; 4) changes to the amount and timing of the Company’s proposed equity repurchases and repayment of maturing debt; 5) inability to achieve expected benefits of the Company’s business process changes due to adverse changes in implementation processes or costs, operational savings, or timing; 6) real or threatened acts of war or terrorist activity affecting business conditions; and 7) adverse weather and other natural conditions impacting the Company and its customers’ operations. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and similar expressions are intended to identify forward-looking statements but are not exclusive means of identifying such statements. The Company does not undertake any obligation to update forward-looking statements to reflect later events or circumstances. 9
OVERVIEW In January 2004, the Company announced its 2004-2006 plan (the “Plan”), which continues to build on the objective of maximizing shareholder value over time that was established in the previous three-year strategic plan. There are five key elements of the Plan: 1) accelerate revenue growth in our island markets; 2) better integrate our business segments; 3) continue to develop our management teams; 4) improve operating efficiency; and 5) maintain a culture of dependable risk and capital management. The Company plans to accelerate growth by improving customer service levels and developing a more proactive, integrated sales culture across the Company. In order to better integrate the Company’s three primary business segments - Retail Banking, Commercial Banking and Investment Services Group - each segment plans to work more closely with the others to improve the breadth of customer relationships. In continuing to develop the management team, the Company plans to assess leadership talent, build leadership capabilities and continue the development of a comprehensive succession plan. To improve efficiency, the Company plans to identify opportunities and implement changes that lower costs without negatively impacting customer service. In maintaining a discipline of dependable risk and capital management, the Company seeks to optimally balance risk, liquidity and capital. Risk will be managed in accordance with established tolerance levels while supporting business units in making value-adding risk/return decisions. The Company utilizes various financial measures to evaluate its performance and against the objectives of the Plan. These measures include diluted earnings per share, return on average assets, return on average equity, efficiency ratio and operating leverage, which is defined as the impact of relative changes in revenues and expenses on operating income. Management also uses net income after capital charge as a key measure of the value the Company is creating for its shareholders. In managing risk, the Company looks at credit quality measures such as the ratio of the allowance for loan and lease losses to loans and leases outstanding, the ratio of net loan charge-offs to average loans outstanding and the ratio of non-performing assets to total loans and foreclosed real estate. In the second quarter of 2004, the Company’s diluted earnings per share were $0.79, an increase of $0.10 or 14% from diluted earnings per share of $0.69 reported in the first quarter of 2004, and an increase of $0.31 or 65% from diluted earnings per share of $0.48 in the second quarter of 2003. Net income for the second quarter of 2004 was $44.2 million, an increase of $4.4 million or 11% from net income of $39.8 million in the previous quarter and an increase of $14.2 million or 47% from net income of $30.0 million reported in the same prior year quarter. For the six months ended June 30, 2004, net income was $84.0 million, an increase of $24.2 million from the same prior year period. Diluted earnings per share were $1.48 for the first half of 2004, an increase of 56% from diluted earnings per share of $0.95 for the first half of 2003. The year-to-date return on average assets was 1.73%, an increase from 1.29% from the same period in 2003. The year-to-date return on average equity was 22.03%, an increase from 12.67% from the same period in 2003. Net income after capital charge was $31.6 million, compared to ($0.1) million for the first six months of 2003. For additional information, refer to the section on “Business Segments.” Factors that had an impact on the comparability of year-over-year results include the effect of the Company’s ongoing stock repurchase program, non-core transactions in the second quarter of 2004 that impacted both non-interest income and non-interest expense and the negative provision for loan and lease losses. Non-core transactions in the second quarter of 2004 included non-interest income of $3.2 million from a leasing partnership distribution that was dissolved and a $2.5 million gain realized on the sale of a parcel of land. Also included was non-interest expense of $2.2 million for a legal accrual, which was primarily for the settlement of litigation, and a $1.0 million discretionary contribution to the Bank of Hawaii Charitable Foundation. In addition, results for the second quarter of 2003 were significantly affected by the costs associated with the systems replacement project. These items are further discussed in the section on “Analysis of Statement of Income.” Management believes operating leverage and the efficiency ratio measures are more meaningful when the second quarter 2004 non-core transactions and the systems replacement costs incurred in 2003 are excluded. Excluding the aforementioned items, operating leverage for the first six months of 2004 was 14% and the efficiency ratio for the second quarter of 2004 was 57% compared to 60% in second quarter 2003. Table 1 presents the Company’s financial highlights and performance ratios for the three and six months ended June 30, 2004 and 2003. 10
Highlights (Unaudited) |
| Table 1 | (dollars in thousands except per share amounts)
| |
| | Three Months Ended March 31, | | Earnings Highlights and Performance Ratios | | 2004 | | 2003 | | | | | | | | Net Income | | $ | 39,799 | | $ | 29,801 | | Basic Earnings Per Share | | 0.73 | | 0.49 | | Diluted Earnings Per Share | | 0.69 | | 0.47 | | Cash Dividends | | 16,418 | | 11,562 | | Net Income to Average Total Assets (ROA) | | 1.65 | % | 1.31 | % | Net Income to Average Shareholders’ Equity (ROE) | | 19.98 | % | 12.42 | % | Net Interest Margin | | 4.30 | % | 4.29 | % | Efficiency Ratio1 | | 57.31 | % | 66.44 | % | Efficiency Ratio excluding System Replacement Costs | | 57.31 | % | 60.98 | % | | | | | | | | | March 31, | | Statement of Condition Highlights and Performance Ratios | | 2004 | | 2003 | | | | | | | | Total Assets | | $ | 10,013,442 | | $ | 9,410,210 | | Net Loans | | 5,587,811 | | 5,425,343 | | Total Deposits | | 7,363,922 | | 6,987,331 | | Total Shareholders’ Equity | | 785,768 | | 952,007 | | | | | | | | Book Value Per Common Share | | $ | 14.49 | | $ | 15.76 | | Allowance / Loans and Leases Outstanding | | 2.23 | % | 2.52 | % | Average Equity / Average Assets | | 8.28 | % | 10.53 | % | Employees (FTE) | | 2,703 | | 2,891 | | Branches and offices | | 89 | | 91 | | | | | | | | Market Price Per Share of Common Stock for the Quarter Ended: | | | | | | | Closing | | $ | 46.33 | | $ | 30.80 | | | High | | $ | 47.45 | | $ | 31.50 | | | Low | | $ | 41.75 | | $ | 29.25 | |
(dollars in thousands except per share amounts) | | Three Months Ended June 30, | | Six Months Ended June 30, | | Earnings Highlights and Performance Ratios | | 2004 | | 2003 | | 2004 | | 2003 | | Net Income | | $ | 44,232 | | $ | 30,034 | | $ | 84,031 | | $ | 59,835 | | Basic Earnings Per Share | | 0.84 | | 0.50 | | 1.57 | | 0.99 | | Diluted Earnings Per Share | | 0.79 | | 0.48 | | 1.48 | | 0.95 | | Cash Dividends | | 15,804 | | 11,370 | | 32,222 | | 22,932 | | Net Income to Average Total Assets (ROA) | | 1.80% | | 1.27% | | 1.73% | | 1.29% | | Net Income to Average Shareholders’ Equity (ROE) | | 24.28% | | 12.93% | | 22.03% | | 12.67% | | Net Interest Margin | | 4.17% | | 4.12% | | 4.23% | | 4.21% | | Efficiency Ratio 1 | | 56.49% | | 67.55% | | 56.89% | | 67.01% | | Efficiency Ratio excluding System Replacement Costs | | 56.49% | | 60.39% | | 56.89% | | 60.68% | | | | | | | | | | | | | | | |
| | | | | | June 30, | | Statement of Condition Highlights and Performance Ratios | | 2004 | | 2003 | | Total Assets | | | | | | $ | 9,688,769 | | $ | 9,550,934 | | Net Loans | | | | | | 5,662,410 | | 5,333,896 | | Total Deposits | | | | | | 7,469,288 | | 7,140,849 | | Total Shareholders’ Equity | | | | | | 699,438 | | 913,010 | | | | | | | | | | | | Book Value Per Common Share | | | | | | $ | 13.34 | | $ | 15.50 | | Allowance / Loans and Leases Outstanding | | | | | | 2.16% | | 2.52% | | Average Equity / Average Assets | | | | | | 7.84% | | 10.16% | | Employees (FTE) | | | | | | 2,683 | | 2,879 | | Branches and offices | | | | | | 89 | | 91 | | | | | | | | | | | | Market Price Per Share of Common Stock for the Quarter Ended: | | | | | | | | | | | | | | Closing | | $ | 45.22 | | $ | 33.15 | | | | | | High | | $ | 46.84 | | $ | 35.90 | | | | | | Low | | $ | 40.97 | | $ | 30.75 | |
1The efficiency ratio is defined as non-interest expense divided by total revenue (net interest income and non-interest income). ANALYSIS OF STATEMENT OF INCOME Net Interest Income Net interest income on a taxable equivalent basis increased by $5.1 million, or 6%, for the first quarter ofthree and six month periods ended June 30, 2004 increased from the comparable periodperiods in 2003.2003 by $5.4 million and $10.4 million, respectively, or 6% for both periods. The increase in net interest income from the prior year was primarily a result of a decrease in interest expense due to lower average interest rates paid on deposits, in particularparticularly time deposits, short-term borrowings and a reduction in long-term debt. The lowerdecrease in interest expense was partially offset by thea decline in interest income, largely due to lower interest earned on residential mortgage loans. Lower residential mortgage interest rates resultedloans, which declined approximately 14% and 13%, respectively, for the three and six months ended June 30, 2004, from the same periods in a 12% decline in interest income notwithstanding a 3% increase in average balance.2003. Average earning assets in the first quartersix months of 2004 increased $442.0$427.3 million or 5%, from the same period in 2003 primarily due to a $281.6$267.8 million increase in average loans outstanding (primarily consumer loans) and a $238.0$227.2 million increase in the investment securities portfolio. In the first quartersix months of 2004, average interest bearinginterest-bearing liabilities increased $341.2$324.3 million or 5%, from 2003, largely due to an increase in interest bearing demand and savingsinterest-bearing deposits and short-term borrowings, particularly securities repurchase agreements. 1011
The net interest margin was 4.30%4.17% for the quarterthree months ended March 31,June 30, 2004, a onefive basis point increase from the comparable period in 2003. The slightnet interest margin increased two basis points in the first six months of 2004 compared to the same prior year period. The improvement in margin for both periods of 2004 was a result ofprimarily attributable to lower rateaverage rates paid on time deposits and long-term debt,interest-bearing liabilities which lowered the Company’s cost of funds. The five basis pointlower average rate paid on interest-bearing liabilities was partially offset by the decline in the net interest margin for the quarter ended March 31, 2004 compared to the fourth quarter of 2003 is mainly attributable to declines in the yields on earning assets. Although the average balance of earning assets increased by 5% and the related interest income increased by 3% from the fourth quarter of 2003, the average yield declined by seven basis points. The lower yield on earning assets, was partially offset by a three basis point decline in the average rate paid on interest bearing liabilities.primarily loans. Average balances, related income and expenses, and resulting yields and rates are presented in Table 2. An analysis of changeschange in net interest income is presented in Table 3. Consolidated Average Balances and Interest Rates - Taxable Equivalent Basis (Unaudited) |
| Table 2 |
| | Three Months Ended March 31, 2004 | | Three Months Ended December 31, 20031 | | Three Months Ended March 31, 20031 | | | Three Months Ended June 30, 2004 | | Three Months Ended June 30, 2003 | | Six Months Ended June 30, 2004 | | Six Months Ended June 30, 2003 | | (dollars in millions) | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate | | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate | | Average Balance | | Income/ Expense | | Yield/ Rate | | Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Bearing Deposits | | $ | 249.6 | | $ | 1.2 | | 1.98 | % | $ | 218.6 | | $ | 1.2 | | 2.12 | % | $ | 253.8 | | $ | 1.3 | | 2.09 | % | | Interest-Bearing Deposits | | | $ | 408.8 | | $ | 1.6 | | 1.62% | | $ | 212.4 | | $ | 1.2 | | 2.19% | | $ | 329.2 | | $ | 2.8 | | 1.76% | | $ | 233.0 | | $ | 2.5 | | 2.14% | | Funds Sold | | 168.9 | | 0.4 | | 0.99 | | 34.3 | | 0.1 | | 0.99 | | 250.5 | | 0.8 | | 1.22 | | | 71.3 | | 0.2 | | 0.99 | | 267.3 | | 0.9 | | 1.23 | | 120.1 | | 0.6 | | 0.99 | | 259.0 | | 1.6 | | 1.22 | | Investment Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held to Maturity | | 719.6 | | 7.0 | | 3.90 | | 742.1 | | 7.2 | | 3.89 | | 202.0 | | 2.3 | | 4.61 | | | 709.8 | | 6.8 | | 3.80 | | 324.8 | | 3.1 | | 3.85 | | 714.8 | | 13.8 | | 3.85 | | 263.7 | | 5.4 | | 4.14 | | Available for Sale | | 1,988.5 | | 20.8 | | 4.20 | | 1,898.6 | | 19.0 | | 4.01 | | 2,268.1 | | 22.5 | | 3.96 | | | 2,148.9 | | 21.7 | | 4.05 | | 2,316.9 | | 19.8 | | 3.42 | | 2,068.7 | | 42.5 | | 4.12 | | 2,292.6 | | 42.3 | | 3.69 | | Loans Held for Sale | | 15.4 | | 0.2 | | 5.33 | | 13.9 | | 0.2 | | 6.21 | | 10.1 | | 0.1 | | 5.16 | | | 20.7 | | 0.3 | | 5.54 | | 81.6 | | 1.1 | | 5.43 | | 18.1 | | 0.5 | | 5.45 | | 46.0 | | 1.2 | | 5.38 | | Loans and Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | 844.4 | | 10.1 | | 4.81 | | 858.2 | | 10.6 | | 4.90 | | 886.4 | | 10.5 | | 4.81 | | | 828.0 | | 10.2 | | 4.97 | | 834.6 | | 10.0 | | 4.81 | | 836.2 | | 20.3 | | 4.89 | | 860.4 | | 20.5 | | 4.81 | | Construction | | 100.4 | | 1.1 | | 4.31 | | 99.2 | | 1.1 | | 4.30 | | 115.4 | | 1.4 | | 5.08 | | | 100.4 | | 0.9 | | 3.80 | | 83.0 | | 0.9 | | 4.50 | | 100.4 | | 2.0 | | 4.05 | | 99.1 | | 2.4 | | 4.83 | | Commercial Mortgage | | 634.1 | | 8.6 | | 5.45 | | 627.4 | | 8.9 | | 5.62 | | 597.8 | | 9.0 | | 6.14 | | | 638.9 | | 8.6 | | 5.39 | | 682.5 | | 10.1 | | 5.93 | | 636.5 | | 17.2 | | 5.42 | | 640.5 | | 19.2 | | 6.03 | | Residential Mortgage | | 2,317.5 | | 33.3 | | 5.75 | | 2,336.3 | | 34.5 | | 5.90 | | 2,249.0 | | 37.7 | | 6.70 | | | 2,281.8 | | 32.2 | | 5.65 | | 2,295.1 | | 37.3 | | 6.50 | | 2,299.6 | | 65.5 | | 5.70 | | 2,272.1 | | 75.0 | | 6.60 | | Installment | | 651.0 | | 14.3 | | 8.84 | | 598.1 | | 13.4 | | 8.89 | | 501.9 | | 12.8 | | 10.36 | | | 700.4 | | 14.5 | | 8.34 | | 535.6 | | 13.6 | | 10.18 | | 675.7 | | 28.8 | | 8.58 | | 518.8 | | 26.4 | | 10.27 | | Home Equity | | 489.2 | | 5.8 | | 4.75 | | 453.0 | | 5.6 | | 4.89 | | 434.5 | | 5.7 | | 5.28 | | | 534.6 | | 6.1 | | 4.63 | | 442.7 | | 5.6 | | 5.06 | | 511.9 | | 11.9 | | 4.68 | | 438.6 | | 11.2 | | 5.17 | | Purchased Home Equity | | 204.9 | | 2.7 | | 5.18 | | 104.7 | | 0.6 | | 2.24 | | 180.2 | | 2.6 | | 5.78 | | | 178.8 | | 1.9 | | 4.16 | | 162.3 | | 2.0 | | 4.96 | | 191.8 | | 4.6 | | 4.70 | | 171.2 | | 4.6 | | 5.39 | | Lease Financing | | 500.9 | | 5.4 | | 4.33 | | 494.0 | | 5.5 | | 4.44 | | 495.6 | | 5.9 | | 4.81 | | | 510.1 | | 5.6 | | 4.38 | | 482.6 | | 5.3 | | 4.42 | | 505.5 | | 11.0 | | 4.35 | | 489.1 | | 11.2 | | 4.62 | | Total Loans and Leases | | 5,742.4 | | 81.3 | | 5.68 | | 5,570.9 | | 80.2 | | 5.73 | | 5,460.8 | | 85.6 | | 6.32 | | | 5,773.0 | | 80.0 | | 5.56 | | 5,518.4 | | 84.8 | | 6.16 | | 5,757.6 | | 161.3 | | 5.62 | | 5,489.8 | | 170.5 | | 6.24 | | Other | | 77.5 | | 0.9 | | 4.45 | | 76.8 | | 1.0 | | 5.20 | | 74.6 | | 1.2 | | 6.47 | | | 78.1 | | 0.9 | | 4.45 | | 75.3 | | 1.0 | | 5.41 | | 77.8 | | 1.8 | | 4.45 | | 74.9 | | 2.2 | | 5.93 | | Total Earning Assets | | 8,961.9 | | 111.8 | | 5.00 | | 8,555.2 | | 108.9 | | 5.07 | | 8,519.9 | | 113.8 | | 5.38 | | | 9,210.6 | | 111.5 | | 4.86 | | 8,796.7 | | 111.9 | | 5.09 | | 9,086.3 | | 223.3 | | 4.93 | | 8,659.0 | | 225.7 | | 5.23 | | Cash and Non-Interest Bearing Deposits | | 327.6 | | | | | | 323.5 | | | | | | 331.6 | | | | | | | Cash and Non-Interest-Bearing Deposits | | | 306.3 | | | | | | 325.6 | | | | | | 316.9 | | | | | | 328.6 | | | | | | Other Assets | | 388.4 | | | | | | 379.1 | | | | | | 391.5 | | | | | | | 376.4 | | | | | | 385.9 | | | | | | 382.4 | | | | | | 388.7 | | | | | | Total Assets | | $ | 9,677.9 | | | | | | $ | 9,257.8 | | | | | | $ | 9,243.0 | | | | | | | $ | 9,893.3 | | | | | | $ | 9,508.2 | | | | | | $ | 9,785.6 | | | | | | $ | 9,376.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | Interest Bearing Deposits | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | Demand | | $ | 1,370.0 | | 0.5 | | 0.15 | | $ | 1,293.8 | | 0.5 | | 0.16 | | $ | 1,151.9 | | 0.7 | | 0.26 | | | $ | 1,390.2 | | 0.6 | | 0.17 | | $ | 1,169.4 | | 0.7 | | 0.25 | | $ | 1,380.1 | | 1.1 | | 0.16 | | $ | 1,160.7 | | 1.5 | | 0.25 | | Savings | | 2,871.6 | | 3.3 | | 0.46 | | 2,786.6 | | 3.2 | | 0.46 | | 2,608.2 | | 4.6 | | 0.71 | | | 2,911.5 | | 3.1 | | 0.43 | | 2,744.1 | | 4.5 | | 0.65 | | 2,891.6 | | 6.4 | | 0.44 | | 2,676.5 | | 9.0 | | 0.68 | | Time | | 1,188.8 | | 5.4 | | 1.83 | | 1,227.9 | | 5.7 | | 1.83 | | 1,472.1 | | 9.2 | | 2.52 | | | 1,129.5 | | 4.9 | | 1.74 | | 1,427.1 | | 8.2 | | 2.28 | | 1,159.1 | | 10.3 | | 1.79 | | 1,449.4 | | 17.2 | | 2.40 | | Total Interest Bearing Deposits | | 5,430.4 | | 9.2 | | 0.68 | | 5,308.3 | | 9.4 | | 0.71 | | 5,232.2 | | 14.5 | | 1.12 | | | Total Interest-Bearing Deposits | | | 5,431.2 | | 8.6 | | 0.63 | | 5,340.6 | | 13.4 | | 1.00 | | 5,430.8 | | 17.8 | | 0.66 | | 5,286.6 | | 27.7 | | 1.06 | | Short-Term Borrowings | | 862.3 | | 2.2 | | 1.01 | | 608.0 | | 1.7 | | 1.06 | | 649.8 | | 2.5 | | 1.54 | | | 1,082.5 | | 2.7 | | 1.02 | | 810.2 | | 2.6 | | 1.30 | | 972.4 | | 4.9 | | 1.02 | | 730.5 | | 5.1 | | 1.41 | | Long-Term Debt | | 320.9 | | 4.3 | | 5.44 | | 324.2 | | 4.4 | | 5.43 | | 390.4 | | 5.8 | | 6.02 | | | 317.3 | | 4.3 | | 5.48 | | 371.5 | | 5.4 | | 5.84 | | 319.1 | | 8.6 | | 5.46 | | 380.9 | | 11.3 | | 5.94 | | Total Interest Bearing Liabilities | | 6,613.6 | | 15.7 | | 0.96 | | 6,240.5 | | 15.5 | | 0.99 | | 6,272.4 | | 22.8 | | 1.47 | | | Total Interest-Bearing Liabilities | | | 6,831.0 | | 15.6 | | 0.92 | | 6,522.3 | | 21.4 | | 1.31 | | 6,722.3 | | 31.3 | | 0.94 | | 6,398.0 | | 44.1 | | 1.39 | | Net Interest Income | | | | $ | 96.1 | | | | | | $ | 93.4 | | | | | | $ | 91.0 | | | | | | | $ | 95.9 | | | | | | $ | 90.5 | | | | | | $ | 192.0 | | | | | | $ | 181.6 | | | | Interest Rate Spread | | | | | | 4.04 | % | | | | | 4.08 | % | | | | | 3.91 | % | | | | | | 3.94% | | | | | | 3.78% | | | | | | 3.99% | | | | | | 3.84% | | Net Interest Margin | | | | | | 4.30 | % | | | | | 4.35 | % | | | | | 4.29 | % | | | | | | 4.17% | | | | | | 4.12% | | | | | | 4.23% | | | | | | 4.21% | | Non-Interest Bearing Demand Deposits | | 1,889.5 | | | | | | 1,836.4 | | | | | | 1,636.8 | | | | | | | Non-Interest-Bearing Demand Deposits | | | 1,940.2 | | | | | | 1,695.3 | | | | | | 1,914.8 | | | | | | 1,666.2 | | | | | | Other Liabilities | | 373.6 | | | | | | 355.7 | | | | | | 360.7 | | | | | | | 389.4 | | | | | | 358.7 | | | | | | 381.5 | | | | | | 359.7 | | | | | | Shareholders’ Equity | | 801.2 | | | | | | 825.2 | | | | | | 973.1 | | | | | | | 732.7 | | | | | | 931.9 | | | | | | 767.0 | | | | | | 952.4 | | | | | | Total Liabilities and Shareholders' Equity | | $ | 9,677.9 | | | | | | $ | 9,257.8 | | | | | | $ | 9,243.0 | | | | | | | Total Liabilities and Shareholders’ Equity | | | $ | 9,893.3 | | | | | | $ | 9,508.2 | | | | | | $ | 9,785.6 | | | | | | $ | 9,376.3 | | | | | |
12
1 Certain 2003 information has been reclassified to conform to 2004 presentation.
11
Analysis of ChangesChange in Net Interest Income - TaxTaxable Equivalent Basis (Unaudited) | | Table 3 |
| | Three Months Ended March 31, 2004 Compared to March 31, 20031 | | | Six Months Ended June 30, 2004 Compared to June 30, 2003 | | (dollars in millions) | | Volume2 | | Rate2 | | Total | | | Volume 1 | | Rate 1 | | Total | | Change in Interest Income: | | | | | | | | | | | | | | | Interest Bearing Deposits | | $ | — | | $ | (0.1 | ) | $ | (0.1 | ) | | Interest-Bearing Deposits | | | $ | 0.9 | | $ | (0.6) | | $ | 0.3 | | Funds Sold | | (0.2 | ) | (0.2 | ) | (0.4 | ) | | (0.7) | | (0.3) | | (1.0) | | Investment Securities | | | | | | | | | | | | | | | Held to Maturity | | 5.1 | | (0.4 | ) | 4.7 | | | 8.8 | | (0.4) | | 8.4 | | Available for Sale | | (2.9 | ) | 1.2 | | (1.7 | ) | | (4.4) | | 4.6 | | 0.2 | | Loans Held for Sale | | 0.1 | | — | | 0.1 | | | (0.7) | | — | | (0.7) | | Loans and Leases | | | | | | | | | | | | | | | Commercial and Industrial | | (0.4 | ) | — | | (0.4 | ) | | (0.6) | | 0.4 | | (0.2) | | Construction | | (0.1 | ) | (0.2 | ) | (0.3 | ) | | — | | (0.4) | | (0.4) | | Commercial Mortgage | | 0.6 | | (1.0 | ) | (0.4 | ) | | (0.1) | | (1.9) | | (2.0) | | Residential Mortgage | | 1.1 | | (5.5 | ) | (4.4 | ) | | 0.8 | | (10.3) | | (9.5) | | Installment | | 3.5 | | (2.0 | ) | 1.5 | | | 7.2 | | (4.8) | | 2.4 | | Home Equity | | 0.7 | | (0.6 | ) | 0.1 | | | 1.8 | | (1.1) | | 0.7 | | Purchased Home Equity | | 0.4 | | (0.3 | ) | 0.1 | | | 0.6 | | (0.6) | | — | | Lease Financing | | 0.1 | | (0.6 | ) | (0.5 | ) | | 0.4 | | (0.6) | | (0.2) | | Total Loans and Leases | | 5.9 | | (10.2 | ) | (4.3 | ) | | 10.1 | | (19.3) | | (9.2) | | Other | | 0.1 | | (0.4 | ) | (0.3 | ) | | 0.1 | | (0.5) | | (0.4) | | | | | | | | | | | Total Change in Interest Income | | 8.1 | | (10.1 | ) | (2.0 | ) | | 14.1 | | (16.5) | | (2.4) | | | | | | | | | | | | | | | | | Change in Interest Expense: | | | | | | | | | | | | | | | Interest Bearing Deposits | | | | | | | | | Interest-Bearing Deposits | | | | | | | | | Demand | | 0.1 | | (0.3 | ) | (0.2 | ) | | 0.2 | | (0.6) | | (0.4) | | Savings | | 0.4 | | (1.7 | ) | (1.3 | ) | | 0.7 | | (3.3) | | (2.6) | | Time | | (1.5 | ) | (2.3 | ) | (3.8 | ) | | (3.0) | | (3.9) | | (6.9) | | Total Interest Bearing Deposits | | (1.0 | ) | (4.3 | ) | (5.3 | ) | | Total Interest-Bearing Deposits | | | (2.1) | | (7.8) | | (9.9) | | Short-Term Borrowings | | 0.7 | | (1.0 | ) | (0.3 | ) | | 7.4 | | (7.6) | | (0.2) | | Long-Term Debt | | (1.0 | ) | (0.5 | ) | (1.5 | ) | | (1.7) | | (1.0) | | (2.7) | | | | | | | | | | | Total Change in Interest Expense | | (1.3 | ) | (5.8 | ) | (7.1 | ) | | 3.6 | | (16.4) | | (12.8) | | | | | | | | | | | | | | | | | Change in Net Interest Income | | $ | 9.4 | | $ | (4.3 | ) | $ | 5.1 | | | $ | 10.5 | | $ | (0.1) | | $ | 10.4 | |
1 The changes for each category of interest income and expense are divided between the portion of changes attributable to the variance in volume or rate for that category | Certain 2003 information has been reclassified to conform to 2004 presentation.
| | | 2
| The changes for each category of interest income and expense are divided between the portion of changes attributable to the variance in volume or rate for that category.
|
1213
Provision for Loan and Lease Losses NoA negative Provision for Loan and Lease Losses (the “Provision”(“Provision”) of $3.5 million was recorded for the three months ended March 31, 2004. ThisJune 30, 2004 as a result of improvement in credit quality and ongoing assessments of economic conditions and risk. The combination of the negative Provision and the net recoveries resulted in a reduction in the Allowance for Loan and Lease Losses (the “Allowance”(“Allowance”) from December 31, 2003 equal toof $2.3 million in the amountsecond quarter of net charge-offs of $1.9 million.2004. No Provision was recorded in the previous seven quarters. For further information on Credit Quality, refer to the section onentitled “Corporate Risk Profile.”
Non-Interest Income Non-interest income increased $4.1 million or 8% and $8.2 million or 9% for the three and six months ended March 31,June 30, 2004, increased $4.1 millionrespectively, from the comparable periodperiods in 2003. The 5% increase in trustTrust and asset management income inincreased $0.5 million and $1.1 million, respectively, for the first quarter ofthree and six months ended June 30, 2004, fromor 4% for both periods compared to the same quarter of 2003periods in 2003. The increase in fee income was primarily attributabledue to an improvement in market conditions resulting in an increase in the average market value of assets under management.
Mortgage banking income increasedis sensitive to the interest rate environment and to conditions in the first quarter ofreal estate market. Mortgage banking income decreased $3.3 million or 54% and $1.6 million or 25% in the three and six months ended June 30, 2004, respectively, compared to the first quarter of 2003same periods in 2003. The declines primarily due to a $1.0 million increase inresulted from lower gains realized on the sale of mortgage loans. Inloans in 2004, which were attributable to lower loan production in 2004 than in 2003. Partially offsetting the first quarter of 2003, originations were heldlower gains was a reduction in the portfolio rather than selling them in the secondary market. Also contributing to the increase was the decline in amortization of mortgage servicing rights due to the reductiona decrease in prepayment volume.loan prepayments in 2004. Service charges on deposit accounts increased $0.9 million or 10% and $1.9 million or 11% in the first quarter ofthree and six months ended June 30, 2004, respectively, compared to the same period last year.prior year periods. The increase was largely due to higher account analysis fees resulting from lower offsetting earnings credits in the lower interest rate environment.credits. Overdraft fees also increased in 2004 mainlyin part due to the increase in the number of transactional deposit accounts. InsuranceOther non-interest income increased 18% from$5.6 million or 87% and $6.1 million or 50% in the three and six months ended June 30, 2004, respectively, over the same periods of 2003. The second quarter of 2003increase was primarily due to higher commission and brokerage income from the Company’s commercial property, liability and casualty business. The increase in commissions resulteda $3.2 million distribution from a higher customer retention rateleasing partnership investment that was dissolved and an increasea $2.5 million gain realized on the sale of a parcel of land. Also contributing to the year-to-date change from 2003 was a $0.7 million gain realized in new accounts.
Other operating income for the first quarter of 2004 increased 8% from the first quarter of 2003 primarily duerelated to a gain of $0.7 million from the sale of the Corporate Trustcorporate trust business.
Non-Interest Expense Non-interest expense for the first quarter ofthree months ended June 30, 2004 of $83.0declined $10.3 million declined 8%or 11% compared to the same period in 2003. For the first six months of 2004, non-interest expense declined $17.4 million or 9% compared to the same 2003 period. Included in thisnon-interest expense in the first quarter of 2003 were systems replacement costs of $7.4 million.$10.1 million and $17.5 million for the three and six months ended June 30, 2003, respectively. Excluding systems replacement costs, non-interest expense was $82.8 million in 2004 remained flat compared to the first quarter of 2003.same prior year periods. Refer to Note 4 to the Consolidated Financial Statements for additional information on the systems replacement project. Salaries and benefits expense decreased $0.4$1.5 million infor the first quartersix months of 2004 compared to the comparable period in 2003. Base salaries decreased $1.3$3.2 million or 5%, from 2003 largely due to a 7% decrease in the number of employees. Also contributing to the decline were reductions in commission expense due to reduced mortgage loan originations and lower separation expense. Partially offsetting the decrease in base salaries was an expense for restricted stock units awarded in the second half of 2003.2003 and in April 2004. 1314
Table 4 presents the components of salaries and benefits expense for the three and six months ended March 31,June 30, 2004 and 2003. Salaries and Benefits (Unaudited) | | Table 4 |
| | Three Months Ended | | | Three Months Ended June 30, | | Six Months Ended June 30, | | (dollars in thousands) | | March 31, 2004 | | March 31, 2003 | | | 2004 | | 2003 | | 2004 | | 2003 | | | | | | | | | | | | | | | | | Salaries | | $ | 27,204 | | $ | 28,514 | | | $ | 27,904 | | $ | 29,783 | | $ | 55,108 | | $ | 58,297 | | Incentive Compensation | | 3,816 | | 3,591 | | | 3,260 | | 2,993 | | 7,076 | | 6,584 | | Stock Based Compensation | | 2,896 | | 1,118 | | | 3,233 | | 2,206 | | 6,129 | | 3,324 | | Commission Expense | | 1,627 | | 2,487 | | | 2,284 | | 2,925 | | 3,911 | | 5,412 | | Retirement and Other Benefits | | 4,357 | | 4,451 | | | 4,214 | | 4,091 | | 8,571 | | 8,542 | | Payroll Taxes | | 3,430 | | 3,449 | | | 3,103 | | 2,708 | | 6,533 | | 6,157 | | Medical, Dental and Life Insurance | | 2,104 | | 2,070 | | | Medical, Dental, and Life Insurance | | | 2,136 | | 1,679 | | 4,240 | | 3,749 | | Separation Expense | | 567 | | 749 | | | 555 | | 1,326 | | 1,122 | | 2,075 | | Total Salaries and Benefits | | $ | 46,001 | | $ | 46,429 | | | $ | 46,689 | | $ | 47,711 | | $ | 92,690 | | $ | 94,140 | |
Net equipment expense declined $3.8$3.4 million or 39%,37% and $7.2 million or 38% in the first quarter ofthree and six months ended June 30, 2004 compared to the same periodperiods in 20032003. The decrease was mainly due to reduced depreciation expense and software license fees resulting from expense savings from the systems replacement project. Other operatingnon-interest expense increased $4.7$4.4 million or 28%,23% and $9.0 million or 25% in the first quarter ofthree and six months ended June 30, 2004 fromcompared to the same quarterperiods in 2003. This increase was partially due in part to the cost of outsourcing technology services, which was the endwere outsourced as a result of the systems replacement project. During the second quarter of 2004, a $1.0 million discretionary contribution was made to the Bank of Hawaii Charitable Foundation and a legal accrual of $2.2 million was recorded, largely related to the settlement of a lawsuit. In addition, infor the first six months of 2004, expenses were incurred for outside professional services relating to a review and improvement of the controls and the policies and procedures of the Company’s mutual funds. BALANCE SHEET ANALYSIS Short-Term Earning Assets Short-term earning assets, consisting of interest-bearing deposits and funds sold, totaled $734.9$179.7 million at March 31,June 30, 2004, compared to $154.7 million at December 31, 2003 and $332.1$557.6 million at March 31,June 30, 2003. The increase relateddecline from June 30, 2003 was mainly due to a higher levelthe use of funding resulting from securitiesfunds to repurchase agreements by public entitiesthe Company’s stock and continued deposit growth.reduce debt. Investment Securities Investment securities were substantially unchangedincreased 9% from December 31, 2003 and March 31, 2003.due to increased liquidity. At March 31,June 30, 2004 and December 31, 2003 investment securities with a book value of $1.6$1.5 billion and $1.4 billion, respectively, were pledged as collateral forto secure deposits of public (government) entities and repurchase agreements. Changes in interest rates influence the fair market values of certain investment securities, including mortgage-backed securities, which can result in temporary gross unrealized losses. The gross unrealized losslosses on temporarily impaired investment securities that havehad been impaired for less than 12 months as of March 31,June 30, 2004 totaled $4.9$51.4 million, or 2% of the total investment securities book value, compared to $16.6 million at December 31, 2003. The decrease in gross unrealized loss isincrease was primarily related to mortgage-backed securities, which were impacted by the decreasean increase in mortgage interest rates from December 31, 2003. The Company has both the intent and ability to hold the securities for the time necessary to recover the amortized cost. As of March 31,June 30, 2004, no investment security had been impaired for more than 12 months. 1415
Table 5 presents the detail of the investment securities portfolio at March 31,June 30, 2004 and December 31, 2003. Investment Securities (Unaudited) | | Table 5 |
(dollars in thousands) | | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | | At March 31, 2004 | | | | | | | At June 30, 2004 | | | | | | | Securities Held to Maturity: | | | | | | | | | | | Debt Securities Issued by the U.S. Treasury and Agencies | | $ | 36,708 | | $ | 36,706 | | | $ | 15,018 | | $ | 15,010 | | Debt Securities Issued by States and Municipalities | | 130 | | 141 | | | 130 | | 138 | | Mortgage-Backed Securities | | 681,029 | | 682,461 | | | 664,234 | | 648,386 | | Total | | $ | 717,867 | | $ | 719,308 | | | $ | 679,382 | | $ | 663,534 | | Securities Available for Sale: | | | | | | | | | | | Equity Securities | | $ | 264 | | $ | 264 | | | $ | 3 | | $ | 3 | | Debt Securities Issued by the U.S. Treasury and Agencies | | 54,860 | | 56,304 | | | 61,091 | | 62,144 | | Debt Securities Issued by States and Municipalities | | 5,953 | | 6,186 | | | 6,733 | | 6,849 | | Mortgage-Backed Securities | | 1,713,541 | | 1,740,424 | | | 1,915,649 | | 1,899,171 | | Other Debt Securities | | 188,643 | | 192,535 | | | 308,635 | | 307,105 | | Total | | $ | 1,963,261 | | $ | 1,995,713 | | | $ | 2,292,111 | | $ | 2,275,272 | | | | | | | | | At December 31, 2003 | | | | | | | | | | | Securities Held to Maturity: | | | | | | | | | | | Debt Securities Issued by the U.S. Treasury and Agencies | | $ | 22,021 | | $ | 22,018 | | | $ | 22,021 | | $ | 22,018 | | Debt Securities Issued by States and Municipalities | | 130 | | 142 | | | 130 | | 142 | | Mortgage-Backed Securities | | 705,082 | | 698,539 | | | 705,082 | | 698,539 | | Total | | $ | 727,233 | | $ | 720,699 | | | $ | 727,233 | | $ | 720,699 | | Securities Available for Sale: | | | | | | | | | | | Equity Securities | | $ | 261 | | $ | 261 | | | $ | 261 | | $ | 261 | | Debt Securities Issued by the U.S. Treasury and Agencies | | 59,339 | | 60,990 | | | 59,339 | | 60,990 | | Debt Securities Issued by States and Municipalities | | 5,957 | | 6,220 | | | 5,957 | | 6,220 | | Mortgage-Backed Securities | | 1,790,692 | | 1,805,273 | | | 1,790,692 | | 1,805,273 | | Other Debt Securities | | 118,040 | | 118,372 | | | 118,040 | | 118,372 | | Total | | $ | 1,974,289 | | $ | 1,991,116 | | | $ | 1,974,289 | | $ | 1,991,116 | |
Loans Held for Sale Loans held for sale, consisting of residential mortgage loans, totaled $67.3$9.6 million at March 31,June 30, 2004, an increase of $58.1 million from $9.2 million at December 31, 2003, and $20.1 million from $47.3$71.9 million at March 31,June 30, 2003. The increasedecrease from June 30, 2003 is due to the timingwas a result of higher mortgage loan sales.sales activity. 1516
Loans and LeaseLeases As of March 31,June 30, 2004, loans and leaseleases outstanding were $5.7$5.8 billion, a decrease of $42.2 million fromcomparable to December 31, 2003 and an increase of $149.6$72.3 million from March 31, 2004 and $315.4 million from June 30, 2003. Continued growth has occurred in the consumer loan portfolios. During the second quarter of 2004, commercial loan originations increased 7% from the first quarter of 2004, however higher repayments more than offset the increase. Table 6 presents the composition of the loan portfolio by major loan categories and Table 7 presents the composition of consumer loans by geographic area. Loan Portfolio Balances (Unaudited) | | Table 6 |
(dollars in thousands) | | March 31, 2004 | | December 31, 2003 | | March 31, 2003 | | Domestic Loans | | | | | | | | Commercial | | | | | | | | Commercial and Industrial | | $ | 793,293 | | $ | 816,246 | | $ | 824,906 | | Commercial Mortgage | | 650,566 | | 639,354 | | 691,736 | | Construction | | 91,002 | | 101,321 | | 86,690 | | Lease Financing | | 442,590 | | 435,934 | | 430,342 | | Total Commercial 1 | | 1,977,451 | | 1,992,855 | | 2,033,674 | | Consumer | | | | | | | | Residential Mortgage | | 2,254,654 | | 2,320,410 | | 2,305,329 | | Home Equity | | 510,378 | | 467,019 | | 439,011 | | Purchased Home Equity | | 191,066 | | 212,514 | | 170,946 | | Other Consumer | | 671,893 | | 658,831 | | 518,501 | | Lease Financing | | 34,816 | | 35,320 | | 33,842 | | Total Consumer 1 | | 3,662,807 | | 3,694,094 | | 3,467,629 | | Total Domestic Loans | | 5,640,258 | | 5,686,949 | | 5,501,303 | | Foreign Loans | | 74,738 | | 70,226 | | 64,068 | | Total Loans and Leases | | $ | 5,714,996 | | $ | 5,757,175 | | $ | 5,565,371 | |
1As of March 31, 2004, commercial and consumer commitments were $1.3 billion and $1.0 billion, respectively. As of December 31, 2003, commercial and consumer commitments were $1.4 billion and $0.9 billion, respectively.
(dollars in thousands) | | June 30, 2004 | | March 31, 2004 | | December 31, 2003 | | June 30, 2003 | | Domestic Loans | | | | | | | | | | Commercial | | | | | | | | | | Commercial and Industrial | | $ | 776,815 | | $ | 793,293 | | $ | 816,246 | | $ | 808,503 | | Commercial Mortgage | | 643,382 | | 650,566 | | 639,354 | | 689,759 | | Construction | | 98,916 | | 91,002 | | 101,321 | | 83,583 | | Lease Financing | | 447,673 | | 442,590 | | 435,934 | | 416,920 | | Total Commercial | | 1,966,786 | | 1,977,451 | | 1,992,855 | | 1,998,765 | | Consumer | | | | | | | | | | Residential Mortgage | | 2,257,624 | | 2,254,654 | | 2,320,410 | | 2,222,003 | | Home Equity | | 559,225 | | 510,378 | | 467,019 | | 450,273 | | Purchased Home Equity | | 162,730 | | 191,066 | | 212,514 | | 145,588 | | Other Consumer | | 721,386 | | 671,893 | | 658,831 | | 554,795 | | Lease Financing | | 34,676 | | 34,816 | | 35,320 | | 33,972 | | Total Consumer | | 3,735,641 | | 3,662,807 | | 3,694,094 | | 3,406,631 | | Total Domestic Loans | | 5,702,427 | | 5,640,258 | | 5,686,949 | | 5,405,396 | | Foreign Loans | | 84,887 | | 74,738 | | 70,226 | | 66,474 | | Total Loans and Leases | | $ | 5,787,314 | | $ | 5,714,996 | | $ | 5,757,175 | | $ | 5,471,870 | |
Consumer Loans by Geographic Area (Unaudited) |
| Table 7 |
(dollars in thousands) | | March 31, 2004 | | December 31, 20031 | | March 31, 20031 | | | June 30, 2004 | | March 31, 2004 | | December 31, 2003 1 | | June 30, 2003 1 | | Hawaii | | | | | | | | | | | | | | | | | Residential Mortgage | | $ | 2,042,032 | | $ | 2,106,456 | | $ | 2,102,095 | | | $ | 2,042,079 | | $ | 2,042,032 | | $ | 2,106,456 | | $ | 2,019,280 | | Home Equity | | 502,261 | | 458,425 | | 429,607 | | | 551,099 | | 502,261 | | 458,425 | | 441,167 | | Other Consumer | | 557,234 | | 550,411 | | 442,412 | | | 589,671 | | 557,234 | | 550,411 | | 466,101 | | | | | | | | | | | | | | | | | | | Guam | | | | | | | | | | | | | | | | | Residential Mortgage | | 207,174 | | 208,339 | | 198,410 | | | 209,972 | | 207,174 | | 208,339 | | 197,577 | | Home Equity | | 8,117 | | 8,594 | | 9,404 | | | 8,067 | | 8,117 | | 8,594 | | 9,106 | | Other Consumer | | 75,675 | | 68,999 | | 44,047 | | | 87,963 | | 75,675 | | 68,999 | | 52,615 | | | | | | | | | | | | | | | | | | | U.S. Mainland | | | | | | | | | | | | | | | | | Purchased Home Equity | | 191,066 | | 212,514 | | 170,946 | | | 162,730 | | 191,066 | | 212,514 | | 145,588 | | | | | | | | | | | | | | | | | | | Other Pacific Islands | | | | | | | | | | | | | | | | | Residential Mortgage | | 5,448 | | 5,615 | | 4,824 | | | 5,573 | | 5,448 | | 5,615 | | 5,146 | | Home Equity | | | 59 | | — | | — | | — | | Other Consumer | | 73,800 | | 74,741 | | 65,884 | | | 78,428 | | 73,800 | | 74,741 | | 70,051 | | | | | | | | | | | | | | | | | | | Total Consumer Loans | | $ | 3,662,807 | | $ | 3,694,094 | | $ | 3,467,629 | | | $ | 3,735,641 | | $ | 3,662,807 | | $ | 3,694,094 | | $ | 3,406,631 | |
1 Certain 2003 information has been reclassified to conform to 2004 presentation. 1617
Mortgage Servicing Rights As of March 31,June 30, 2004, the Company’s portfolio of residential loans serviced for third parties totaled $2.8$2.7 billion, a decrease of $0.1$0.2 billion and $0.7$0.6 billion from December 31, 2003 and March 31,June 30, 2003, respectively. The carrying value of mortgage servicing rights was $21.1$20.8 million at March 31,June 30, 2004, a decrease of $1.0$1.4 million and $4.7$4.0 million from December 31, 2003 and March 31,June 30, 2003, respectively. Although mortgage prepayments have slowed from 2003, the decline in the carrying value of mortgage servicing rights continuescontinued to be attributable to higher mortgage prepayments resulting fromreflective of the low interest rate environment. Recently, theRecent prepayment speeds offor Hawaii mortgages have been approximatingcontinued to approximate national averages. Deposits As of March 31,June 30, 2004, deposits totaled $7.4$7.5 billion, a $31.1 million and $376.6$136.5 million increase from December 31, 2003 and March 31, 2003, respectively.a $328.4 million increase from June 30, 2003. The Company’s deposit growth continuescontinued to be primarily in interest bearing demand and savings deposits, while higher cost time deposits have been reduced. AverageThe average time deposits of $100,000 and greater were $607.5 million, $633.6 million and $751.7 million for the three months ended March 31, 2004, December 31, 2003 and March 31, 2003, respectively.or more is presented in Table 8.
Average Time Deposits of $100,000 or More (Unaudited) | Table 8 |
| | Three Months Ended | | Six Months Ended | | (dollars in thousands) | | June 30, 2004 | | December 31, 2003 | | June 30, 2003 | | June 30, 2004 | | June 30, 2003 | | Average Time Deposits | | $ | 570,738 | | $ | 633,602 | | $ | 727,953 | | $ | 589,100 | | $ | 739,640 | | | | | | | | | | | | | | | | | | |
Borrowings Short-term borrowings, including securities sold under agreements to repurchase, funds purchased and other short-term borrowings, totaled $1.1$0.8 billion at March 31,June 30, 2004 and 2003, compared to $0.6 billion at December 31, 2003 and $0.7 billion at March 31, 2003. The increase in short-term borrowings reflectedfrom December 31, 2003 was due to higher fundingplacements received forfrom public (government) entities in the form of securities sold under agreements to repurchase by the Company’s public entity clients.repurchase. For additional information, refer to the section on “Corporate Risk Profile – Liquidity Management.” Shareholders’ Equity The Company’s capital position remains strong. The 1%12% net reduction in capital from December 31, 2003 to June 30, 2004 is attributable to the Company’s common stock repurchase programsprogram and dividends offset by earnings for the first quartersix months of 2004. A further discussion of the Company’s capital is included in the Corporate“Corporate Risk Profile – Capital Management” section of this report. Guarantees The Company’s standby letterletters of credit totaled $110.2$115.6 million as of March 31,at June 30, 2004. 1718
BUSINESS SEGMENTS The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services Group and Treasury and Other Corporate. The management accounting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Various techniques are used to assign balance sheet and income statement amounts to the business segments, including allocations of overhead, the Provision and capital. This process is dynamic and requires certain allocations based on judgment and subjective factors. Unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting that is equivalent to accounting principles generally accepted in the United States. The business segments are managed with a focus on performance measures, including risk adjusted return on capital (“RAROC”) and net income after capital charge (“NIACC”). RAROC is the ratio of net income to risk-adjusted equity. Equity is allocated to each business segment based on an assessment of its inherent risk. NIACC is net income less a charge for allocated capital. The cost of capital is determined by multiplying management’s estimate of the shareholder’s minimum required rate of return on capital invested (11% for 2004 and 2003) by the segment’s allocated equity. The Company assumes a cost of capital that is equal to a risk-free rate plus a risk premium of an equity investment in the Company. The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of management decisions and assumptions which are subject to change based on changes in current interest rate and market conditions. The Provision recorded in the Retail Banking, Commercial Banking and Investment Services Group segments represents actual net charge-offs of these segments. The Provision charged to the Treasury and Other Corporate segment primarily represents the change in the level of the Allowance and also includes recoveries from the divested businesses. The financial results for the three and six months ended March 31,June 30, 2004 and 2003 are discussed below and are presented in Table 8.9a and Table 9b, respectively. Retail Banking The Company’s Retail Banking segment offers a broad range of financial products and services to consumers and small businesses. Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases and installment loans. Deposit products include checking, savings and time deposit accounts. The Retail Banking segment also provides merchant services to its small business customers. Products and services from the Retail Banking segment are delivered to customers through 74 Hawaii branch locations and over 500 ATMs, e-Bankoh (on-line banking service) and a 24-hour telephone banking service. Also included in the segment is Bankoh Investment Services, Inc., a full service brokerage offering equities, mutual funds, life insurance and annuities. The segment’s key financial measures remained relatively unchangedNIACC and RAROC for the Retail Banking segment decreased for the three and six months ended March 31,June 30, 2004 as compared to the same periodperiods in 2003. The segment experienced higher non-interest income, primarily as a result of higher mortgage banking income, lower non-interest expense, and no systems replacement costs for the three months ended March 31, 2004 compared to the same period in 2003. These positive trends were offset by a decrease in net interest income, non-interest income and increases in the Provision.a higher economic provision. The decrease in net interest income was primarily due to the decrease in the earnings credit from funds transfer pricing on the segment’s deposit account balances, reflective of lower interest rates. The lower non-interest income was primarily a result of reduced mortgage banking income, partially offset by higher service charges on deposit accounts. The increase in the Provision and economic provision werewas primarily due to growthseasoning in the segment’s automobile and installment loan portfolios. The decrease in non-interest expense was mainly due to lower net equipment expense and no systems replacement cost. 1819
Commercial Banking The Commercial Banking segment offers products including corporate banking and commercial real estate loans, lease financing, auto dealer financing, deposit and cash management products and property and casualty insurance products. Lending, deposit and cash management services are offered to middle-market and large companies in Hawaii. Commercial real estate mortgages are focused on customers that include investors, developers and builders primarily domiciled in Hawaii. The Commercial Banking unit also serves customers through its 14 branches in the Pacific Islands. The improvement in the segment’s financial measures for the three months and six months ended March 31,June 30, 2004 compared to the same periodperiods in 2003 was a result of an increase in non-interest income, moderatelypartially offset by lower net interest income and a decrease in non-interest expense. The increase in non-interest income was primarily due primarily to higher account analysis fees resulting from lower offsetting earnings credit and from a leasing partnership investment distribution in the continued low rate environment and an increase in insurance income. The decline in non-interest expense was primarily due to lower staffing levels, the realization of system conversion benefits and lower allocated expenses.quarter ended June 30, 2004. The decrease in net interest income was primarily due to the decrease in the earnings credit from funds transfer pricing on the segment’s deposit account balances reflective of continued lower interest rates. The decline in non-interest expense was primarily due to lower allocated expenses. Investment Services Group The Investment Services Group includes private banking, trust services, asset management, and institutional investment advice and retail brokerage.advice. A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management. The private banking and personal trust group assistsassist individuals and families in building and preserving their wealth by providing investment, credit and trust expertise to high-net-worth individuals. The asset management group manages portfolios and creates investment products. Institutional sales and service offers investment advice to corporations, government entities and foundations. Also included in the segment is Bankoh Investment Services, Inc., a full service brokerage offering equities, mutual funds, life insurance and annuities. The improvement in the segment’s key financial measures remained relatively unchanged for the three months ended March 31,June 30, 2004 compared to the same period in 2003 was2003. Net interest income increased primarily due to higher deposit and loan balances, and non-interest income increased as a result of an increase in trust and asset management fee income due to an improvement in market conditions. These positive trends were offset by increases in both direct and allocated non-interest income. Thisexpense. The increase in direct non-interest expense was due to increased professional fees, partially offset by no systems replacement costs. The segment’s financial measures remained flat for the six months ended June 30, 2004 compared to the same period in 2003. The increase in non-interest income was attributable to a combination of an increase in trust and asset management fee income due to an improvement in market conditions and an increase in other operating income due to the sale of the corporate trust business.business in first quarter 2004. The increase in non-interest expense for the first three months of 2004 compared to the same period in 2003 was primarily due primarily to increased professional fees, partially offset by no systems replacement costs. 20
Treasury and Other Corporate The primary income earning component of this segment is Treasury, which consists of corporate asset and liability management activities, including interest rate risk management and foreign exchange business. This segment’s assets and liabilities (and related net interest income) consist of interest bearinginterest-bearing deposits, investment securities, federal funds sold and purchased, government deposits and short and long-term borrowings. The primary source of foreign exchange income relates to customer driven currency requests from merchants and island visitors. The net residual effect of transfer pricing of assets and liabilities is included in Treasury, along with eliminations of inter-company transactions. This segment also includes divisions that provide a wide-range of support (Technology, and Operations, Human Resources, Finance, and LegalCredit and Risk Management)Management and Corporate and Regulatory Administration) to the other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process. Results for this segment in 2003 include the systems replacement costs that were not incurred by or allocated to the Retail, Commercial and Investment Services Group segments. 19
The improvement in the segment’s key financial measures for the three months and six months ended March 31,June 30, 2004, compared to the same periodperiods in 2003, waswere primarily due to an increase in net interest income and non-interest income and no systems replacement costs. The increase in net interest income was primarily due to the low interest rate environment and its impact in reducingof the lower cost of funding deposits by the Treasury unit. The increase in non-interest income was due to a gain realized in the second quarter of 2004 from the sale of a parcel of land. This segment’s NIACC was also favorably impacted by a lower capital charge was due to the reduction of the Company’s excess capital as a result of the continuing share repurchase activity. 21
Business Segment Selected Financial Information (Unaudited) | | Table 89a |
(dollars in thousands) | | Retail Banking | | Commercial Banking | | Investment Services Group | | Treasury and Other Corporate | | Consolidated Total | | | Retail Banking | | Commercial Banking | | Investment Services Group | | Treasury and Other Corporate | | Consolidated Total | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2004 | | | | | | | | | | | | | Three Months Ended June 30, 2004 | | | | | | | | | | | | | Net Interest Income | | $ | 50,189 | | $ | 33, 758 | | $ | 3,191 | | $ | 8,893 | | $ | 96,031 | | | $ | 49,568 | | $ | 33,607 | | $ | 2,844 | | $ | 9,830 | | $ | 95,849 | | Provision for Loan and Lease Losses | | (2,747 | ) | 253 | | (49 | ) | 2,543 | | — | | | 2,587 | | 2,730 | | (1) | | (8,816) | | (3,500) | | Net Interest Income After Provision for Loan and Lease Losses | | 47,442 | | 34,011 | | 3,142 | | 11,436 | | 96,031 | | | 46,981 | | 30,877 | | 2,845 | | 18,646 | | 99,349 | | Non-Interest Income | | 19,505 | | 9,723 | | 16,663 | | 2,951 | | 48,842 | | | 24,388 | | 12,188 | | 12,938 | | 5,334 | | 54,848 | | | | 66,947 | | 43,734 | | 19,805 | | 14,387 | | 144,873 | | | 71,369 | | 43,065 | | 15,783 | | 23,980 | | 154,197 | | Non-Interest Expense | | (40,435 | ) | (22,584 | ) | (16,372 | ) | (3,631 | ) | (83,022 | ) | | (44,560) | | (23,009) | | (13,145) | | (4,411) | | (85,125) | | Income Before Income Taxes | | 26,512 | | 21,150 | | 3,433 | | 10,756 | | 61,851 | | | 26,809 | | 20,056 | | 2,638 | | 19,569 | | 69,072 | | Provision for Income Taxes | | (9,809 | ) | (7,806 | ) | (1,270 | ) | (3,167 | ) | (22,052 | ) | | (9,919) | | (7,421) | | (976) | | (6,524) | | (24,840) | | Allocated Net Income | | 16,703 | | 13,344 | | 2,163 | | 7,589 | | 39,799 | | | 16,890 | | 12,635 | | 1,662 | | 13,045 | | 44,232 | | Allowance Funding Value | | (128 | ) | (737 | ) | (8 | ) | 873 | | — | | | (148) | | (688) | | (6) | | 842 | | — | | GAAP Provision | | 2,747 | | (253 | ) | 49 | | (2,543 | ) | — | | | 2,587 | | 2,730 | | (1) | | (8,816) | | (3,500) | | Economic Provision | | (3,396 | ) | (2,769 | ) | (102 | ) | (2 | ) | (6,269 | ) | | (3,510) | | (2,821) | | (99) | | (3) | | (6,433) | | Tax Effect of Adjustments | | 287 | | 1,391 | | 23 | | 619 | | 2,320 | | | 396 | | 288 | | 39 | | 2,951 | | 3,674 | | Income Before Capital Charge | | 16,213 | | 10,976 | | 2,125 | | 6,536 | | 35,850 | | | 16,215 | | 12,144 | | 1,595 | | 8,019 | | 37,973 | | Capital Charge | | (5,602 | ) | (5,196 | ) | (1,522 | ) | (9,718 | ) | (22,038 | ) | | (5,485) | | (5,134) | | (1,302) | | (8,231) | | (20,152) | | Net Income (Loss) After Capital Charge (NIACC) | | $ | 10,611 | | $ | 5,780 | | $ | 603 | | $ | (3,182 | ) | $ | 13,812 | | | $ | 10,730 | | $ | 7,010 | | $ | 293 | | $ | (212) | | $ | 17,821 | | | | | | | | | | | | | | | | | | | | | | | | | RAROC (ROE for the Company) | | 32 | % | 23 | % | 15 | % | 25 | % | 20 | % | | 33% | | 26% | | 14% | | 28% | | 24% | | | | | | | | | | | | | | | | | | | | | | | | | Total Assets at March 31, 2004 | | $ | 3,692,657 | | $ | 2,276,958 | | $ | 137,632 | | $ | 3,906,195 | | $ | 10,013,442 | | | Total Assets at June 30, 2004 | | | $ | 3,693,382 | | $ | 2,331,968 | | $ | 114,021 | | $ | 3,549,398 | | $ | 9,688,769 | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 20031 | | | | | | | | | | | | | Three Months Ended June 30, 2003 1 | | | | | | | | | | | | | Net Interest Income | | $ | 52,103 | | $ | 34,691 | | $ | 3,665 | | $ | 541 | | $ | 91,000 | | | $ | 53,139 | | $ | 34,394 | | $ | 2,635 | | $ | 317 | | $ | 90,485 | | Provision for Loan and Lease Losses | | (848 | ) | (2,151 | ) | — | | 2,999 | | — | | | 1,321 | | 1,022 | | — | | (2,343) | | — | | Net Interest Income After Provision for Loan and Lease Losses | | 51,255 | | 32,540 | | 3,665 | | 3,540 | | 91,000 | | | 51,818 | | 33,372 | | 2,635 | | 2,660 | | 90,485 | | Non-Interest Income | | 17,386 | | 8,416 | | 15,680 | | 3,271 | | 44,753 | | | 26,613 | | 8,302 | | 12,355 | | 3,469 | | 50,739 | | | | 68,641 | | 40,956 | | 19,345 | | 6,811 | | 135,753 | | | 78,431 | | 41,674 | | 14,990 | | 6,129 | | 141,224 | | Information Technology Systems Replacement Project | | (583 | ) | (23 | ) | (244 | ) | (6,567 | ) | (7,417 | ) | | (368) | | — | | (90) | | (9,647) | | (10,105) | | Non-Interest Expense | | (40,668 | ) | (22,719 | ) | (15,904 | ) | (3,492 | ) | (82,783 | ) | | (45,238) | | (23,884) | | (12,145) | | (4,022) | | (85,289) | | Income (Loss) Before Income Taxes | | 27,390 | | 18,214 | | 3,197 | | (3,248 | ) | 45,553 | | | 32,825 | | 17,790 | | 2,755 | | (7,540) | | 45,830 | | Provision for Income Taxes | | (10,134 | ) | (6,642 | ) | (1,183 | ) | 2,207 | | (15,752 | ) | | (12,145) | | (6,465) | | (1,019) | | 3,833 | | (15,796) | | Allocated Net Income (Loss) | | 17,256 | | 11,572 | | 2,014 | | (1,041 | ) | 29,801 | | | 20,680 | | 11,325 | | 1,736 | | (3,707) | | 30,034 | | Allowance Funding Value | | (152 | ) | (1,141 | ) | (10 | ) | 1,303 | | — | | | (161) | | (1,100) | | (7) | | 1,268 | | — | | GAAP Provision | | 848 | | 2,151 | | — | | (2,999 | ) | — | | | 1,321 | | 1,022 | | — | | (2,343) | | — | | Economic Provision | | (2,708 | ) | (3,059 | ) | (132 | ) | (5 | ) | (5,904 | ) | | (2,901) | | (3,031) | | (108) | | (5) | | (6,045) | | Tax Effect of Adjustments | | 744 | | 758 | | 53 | | 629 | | 2,184 | | | 644 | | 1,150 | | 42 | | 401 | | 2,237 | | Income (Loss) Before Capital Charge | | 15,988 | | 10,281 | | 1,925 | | (2,113 | ) | 26,081 | | | 19,583 | | 9,366 | | 1,663 | | (4,386) | | 26,226 | | Capital Charge | | (5,392 | ) | (5,378 | ) | (1,517 | ) | (14,464 | ) | (26,751 | ) | | (5,683) | | (5,418) | | (1,255) | | (13,275) | | (25,631) | | Net Income (Loss) After Capital Charge (NIACC) | | $ | 10,596 | | $ | 4,903 | | $ | 408 | | $ | (16,577 | ) | $ | (670 | ) | | $ | 13,900 | | $ | 3,948 | | $ | 408 | | $ | (17,661) | | $ | 595 | | | | | | | | | | | | | | | | | | | | | | | | | RAROC (ROE for the Company) | | 33 | % | 21 | % | 14 | % | (7 | )% | 12 | % | | 38% | | 19% | | 15% | | (12)% | | 13% | | | | | | | | | | | | | | | | | | | | | | | | | Total Assets at March 31, 2003 | | $ | 3,471,677 | | $ | 2,254,381 | | $ | 145,925 | | $ | 3,538,227 | | $ | 9,410,210 | | | Total Assets at June 30, 2003 | | | $ | 3,487,565 | | $ | 2,242,905 | | $ | 97,414 | | $ | 3,723,050 | | $ | 9,550,934 | |
1 Certain 2003 information has been reclassified to conform to 2004 presentation. 2022
Business Segment Selected Financial Information (Unaudited) |
| Table 9b |
(dollars in thousands) | | Retail Banking | | Commercial Banking | | Investment Services Group | | Treasury and Other Corporate | | Consolidated Total | | | | | | | | | | | | | | Six Months Ended June 30, 2004 | | | | | | | | | | | | Net Interest Income | | $ | 99,807 | | $ | 67,671 | | $ | 5,679 | | $ | 18,723 | | $ | 191,880 | | Provision for Loan and Lease Losses | | 5,334 | | 2,477 | | 48 | | (11,359) | | (3,500) | | Net Interest Income After Provision for Loan and Lease Losses | | 94,473 | | 65,194 | | 5,631 | | 30,082 | | 195,380 | | Non-Interest Income | | 45,403 | | 22,660 | | 27,338 | | 8,289 | | 103,690 | | | | 139,876 | | 87,854 | | 32,969 | | 38,371 | | 299,070 | | Non-Interest Expense | | (87,777) | | (46,247) | | (26,082) | | (8,041) | | (168,147) | | Income Before Income Taxes | | 52,099 | | 41,607 | | 6,887 | | 30,330 | | 130,923 | | Provision for Income Taxes | | (19,277) | | (15,376) | | (2,548) | | (9,691) | | (46,892) | | Allocated Net Income | | 32,822 | | 26,231 | | 4,339 | | 20,639 | | 84,031 | | Allowance Funding Value | | (277) | | (1,425) | | (14) | | 1,716 | | — | | GAAP Provision | | 5,334 | | 2,477 | | 48 | | (11,359) | | (3,500) | | Economic Provision | | (6,906) | | (5,598) | | (193) | | (5) | | (12,702) | | Tax Effect of Adjustments | | 684 | | 1,682 | | 59 | | 3,570 | | 5,995 | | Income Before Capital Charge | | 31,657 | | 23,367 | | 4,239 | | 14,561 | | 73,824 | | Capital Charge | | (11,255) | | (10,405) | | (2,580) | | (17,950) | | (42,190) | | Net Income (Loss) After Capital Charge (NIACC) | | $ | 20,402 | | $ | 12,962 | | $ | 1,659 | | $ | (3,389) | | $ | 31,634 | | | | | | | | | | | | | | RAROC (ROE for the Company) | | 31% | | 25% | | 18% | | 27% | | 22% | | | | | | | | | | | | | | Total Assets at June 30, 2004 | | $ | 3,693,382 | | $ | 2,331,968 | | $ | 114,021 | | $ | 3,549,398 | | $ | 9,688,769 | | | | | | | | | | | | | | Six Months Ended June 30, 2003 1 | | | | | | | | | | | | Net Interest Income | | $ | 105,331 | | $ | 69,353 | | $ | 5,955 | | $ | 846 | | $ | 181,485 | | Provision for Loan and Lease Losses | | 2,169 | | 3,173 | | — | | (5,342) | | — | | Net Interest Income After Provision for Loan and Lease Losses | | 103,162 | | 66,180 | | 5,955 | | 6,188 | | 181,485 | | Non-Interest Income | | 46,310 | | 17,100 | | 25,342 | | 6,740 | | 95,492 | | | | 149,472 | | 83,280 | | 31,297 | | 12,928 | | 276,977 | | Information Technology Systems Replacement Project | | (950) | | (23) | | (334) | | (16,215) | | (17,522) | | Non-Interest Expense | | (88,878) | | (47,308) | | (24,374) | | (7,512) | | (168,072) | | Income (Loss) Before Income Taxes | | 59,644 | | 35,949 | | 6,589 | | (10,799) | | 91,383 | | Provision for Income Taxes | | (22,068) | | (13,087) | | (2,438) | | 6,045 | | (31,548) | | Allocated Net Income (Loss) | | 37,576 | | 22,862 | | 4,151 | | (4,754) | | 59,835 | | Allowance Funding Value | | (313) | | (2,241) | | (17) | | 2,571 | | — | | GAAP Provision | | 2,169 | | 3,173 | | — | | (5,342) | | — | | Economic Provision | | (5,609) | | (6,094) | | (236) | | (10) | | (11,949) | | Tax Effect of Adjustments | | 1,389 | | 1,910 | | 93 | | 1,029 | | 4,421 | | Income (Loss) Before Capital Charge | | 35,212 | | 19,610 | | 3,991 | | (6,506) | | 52,307 | | Capital Charge | | (11,255) | | (10,865) | | (2,523) | | (27,740) | | (52,383) | | Net Income (Loss) After Capital Charge (NIACC) | | $ | 23,957 | | $ | 8,745 | | $ | 1,468 | | $ | (34,246) | | $ | (76) | | | | | | | | | | | | | | RAROC (ROE for the Company) | | 35% | | 20% | | 18% | | (9)% | | 13% | | | | | | | | | | | | | | Total Assets at June 30, 2003 | | $ | 3,487,565 | | $ | 2,242,905 | | $ | 97,414 | | $ | 3,723,050 | | $ | 9,550,934 | |
1 Certain 2003 information has been reclassified to conform to 2004 presentation. 23
FOREIGN OPERATIONS The countries in which the Company maintains its largest exposure on a cross-border basis include Netherlands, United Kingdom Netherlands, Canada and Switzerland.Australia. Table 910 presents as of March 31,June 30, 2004, December 31, 2003 and March 31,June 30, 2003, a geographic distribution of the Company’s cross-border assets for selected countries. The primary componentcomponents of cross-border assets as of March 31,June 30, 2004 was interest bearingwere investment securities and interest-bearing deposits of $477.7 million.$296.5 million and $178.5 million, respectively. Geographic Distribution of Cross-Border International Assets (Unaudited)1 | | Table 910 |
(dollars in thousands) | | | | | | | | | Country | | March 31, 2004 | | December 31, 20032 | | March 31, 20032 | | | June 30, 2004 | | December 31, 2003 2 | | June 30, 2003 2 | | | | | | | | | | | | | | | | | Canada | | $ | 82,962 | | $ | 31,138 | | $ | 32,948 | | | Australia | | | $ | 80,561 | | $ | 36,283 | | $ | 38,002 | | Netherlands | | 119,828 | | 42,229 | | 38,101 | | | 142,242 | | 42,229 | | 92,590 | | Switzerland | | 76,541 | | 50,541 | | 226 | | | United Kingdom | | 237,156 | | 110,460 | | 60,797 | | | 110,095 | | 110,460 | | 135,969 | | All Others | | 239,233 | | 116,641 | | 152,701 | | | 245,422 | | 162,037 | | 172,534 | | Total | | $ | 755,720 | | $ | 351,009 | | $ | 284,773 | | | Total Cross - Border International Assets | | | $ | 578,320 | | $ | 351,009 | | $ | 439,095 | |
1Cross-border outstandings are defined as foreign monetary assets that are payable to the Company in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets. 2 | Cross-border outstandings are defined as foreign monetary assets that are payable to the Company in U.S. dollars or other non-local currencies, plus amounts payable in local currency but funded with U.S. dollars or other non-local currencies. Cross-border outstandings include loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets.
| | | 2
| Certain 2003 information has been reclassified to conform to 2004 presentation. |
Because the U.S. dollar is used in the Pacific Island Division locations (Guam and American Samoa, which are U.S. territories, and other nearby islands), these operations are not considered foreign for financial reporting purposes. CORPORATE RISK PROFILE Credit Risk Credit Risk is defined as the risk that borrowers or counterparties will not be able to repay their obligations to the Company. Credit exposures reflect legally binding commitments for loans, leases, banker’s acceptances, financial and standby letters of credit and overnight overdrafts. The Company’s asset quality continued to improveimproved as evidenced by lower levels of internally criticized loans and non-performing assets, and a continued positive trend in the level of net charge-offs.assets. The ratio of non-performing assets to total loans and foreclosed real estate was 0.49%0.37% at March 31,June 30, 2004, a decrease from 0.55% at December 31, 2003 and 0.79% at March 31, 2003. AsNet charge-offs were in a net recovery position of $1.2 million for the second quarter 2004. Net charge-offs for the first six months of 2004 (annualized) as a percent of average loans outstanding for the quarter ended March 31, 2004, net charge-offs (annualized) were 0.13%0.02%, compared to 0.26% for0.18% in the quarter ended December 31, 2003. In Hawaii, the economy remains strong with a stable to upward trend in tourism, a strong real estate market and a construction industry that is expected to grow for the foreseeable future. Hawaii continues to have low unemployment and positive job growth.same prior year period.
The Company’s more favorable credit risk position relative to a year ago reflects the portfolio strategy which shifted to borrowers and industries believed to have a lower risk profile, as well as reduced large borrower concentrations. Portfolio monitoringconcentrations and an improving mainland economy. In addition, ongoing portfolio management is an ongoing process intended to result in early identification and disengagement from deteriorating credits. In addition, overall Overall risk in the Hawaii portfolio of Hawaii-based loans has been generally improving, primarily due to the expanding Hawaii economy.a local economy that remains satisfactory with some positive trends in real economic measures. 2124
Although the Company’s overall credit risk profile continuescontinued to improve, two components, air transportation and Guam, continuecontinued to carry higher risk characteristics.characteristics than the overall portfolio. Information about these components is summarizedare included in Table 10.11. The air transportation industry has recently experienced increased passenger travel, but continues to have a higher risk profile as some domestic legacy carriers continue to struggle with elevated cost structures, growing competition from low cost carriers that have reduced higher-margin business travel, potential global mergers and marketing alliances, rising fuel costs that are difficult to pass on to consumers, and a less certain geopolitical environment. The Company’s exposure is characterized as improving based on specific borrower and industry analysis. With a numberfinancially. As of internal risk rating upgrades during the first quarter ofJune 30, 2004, centered in regional and international segments, 10% of the Company’s total air transportation outstandings were internally classified, as of March 31, 2004, improvingan improvement from 16% at December 31, 2003. Selected Concentrations of Credit Exposure (Unaudited) |
| Table 11 |
| | | | June 30, 2004 | | | | Dec. 31, 2003 1 | | June 30, 2003 1 | | (dollars in thousands) | | Outstandings | | Unused Commitments | | Total Exposure | | Total Exposure | | Total Exposure | | | | | | | | | | | | | | Air Transportation | | | | | | | | | | | | United States Regional Passenger Carriers | | $ | 45,308 | | $ | 13,183 | | $ | 58,491 | | $ | 59,231 | | $ | 59,702 | | United States National Passenger Carriers | | 37,581 | | — | | 37,581 | | 37,259 | | 37,557 | | Passenger Carriers Based Outside United States | | 30,325 | | — | | 30,325 | | 31,549 | | 31,794 | | Cargo Carriers | | 14,122 | | — | | 14,122 | | 14,405 | | 14,739 | | Total Air Transportation | | $ | 127,336 | | $ | 13,183 | | $ | 140,519 | | $ | 142,444 | | $ | 143,792 | | | | | | | | | | | | | | Guam | | | | | | | | | | | | Hotel | | $ | 15,614 | | $ | — | | $ | 15,614 | | $ | 17,733 | | $ | 42,806 | | Other Commercial | | 146,872 | | 42,441 | | 189,313 | | 184,129 | | 183,765 | | Consumer | | 306,002 | | 12,075 | | 318,077 | | 288,831 | | 265,851 | | Total Guam | | $ | 468,488 | | $ | 54,516 | | $ | 523,004 | | $ | 490,693 | | $ | 492,422 | | | | | | | | | | | | | | Syndicated Exposure | | $ | 265,908 | | $ | 636,293 | | $ | 902,201 | | $ | 912,896 | | $ | 930,118 | | | | | | | | | | | | | | Other Large Borrowers 2 | | $ | 62,734 | | $ | 216,048 | | $ | 278,782 | | $ | 336,748 | | $ | 372,924 | |
Exposure includes loans, leveraged leases and operating leases.
1For three borrowers, reclassifications have occurred between Regional and National Carriers. Syndicated Exposure has been restated to include a purchased participation. 2Other Large Borrowers is defined as exposure with commitments of $25.0 million and greater, excluding those collateralized by cash and those separately identified as Air Transportation, Guam and Syndicated Exposure. In the Guam portfolio, which is sensitive to tourism and military spending, economic indicators are positive although some uncertainty remains. Internallycontinues to exist. As of June 30, 2004, internally classified exposure was reduced 38%by 12% from MarchDecember 31, 20032003. This reduction was achieved through active disengagement with negligible loss.strategic reduction and some borrower improvement. Targeted lending to select commercial borrowers is active, while the consumer lending business is leading the portfolio growth. At March 31, 2004, Guam’s hotel industry portfolio of $15.7 million included one credit with $4.0 million exposure, or 25% of the portfolio, which was guaranteed by an offshore financial institution with limited exposure to tourism. At March 31,June 30, 2004, the Company still has some significant credit exposures to commercial borrowers. The Company’s largest syndicated loan outstanding totaled $40.2$39.2 million to a local trust with an A+ bond rating whileand the second largest syndicated loan outstanding totaled $22.6$21.0 million to a prominent Hawaii basedfor new hotel operator.construction on Maui. The ten largest syndicated loans outstanding totaled $172.6$164.7 million or 58%,62% of total syndicated loans and consisted mainly of loans in the hospitality and real estate hospitality and television cable industries. One unfundedNo syndicated commitment, which had $5.5 million in exposure (less than 1% of total syndicated commitments), wasoutstandings were internally classified. The increase in syndicated exposure from December 31, 2003 primarily reflects lending activity to several Hawaii businesses partially offset by pay-offs of national credits. The Company’s other large borrowers include sixfive exposures of $25.0 million and greater. The borrowers are major companies, most with Hawaii operations. Three borrowers, with exposures totaling $111.0 million,are commercial paper backup lines to investment grade companies and are undrawn. The remaining two exposures have their loans collateralized by real estate and other assets and are substantially funded. The remaining three exposures are commercial paper backup lines to investment grade companies and are undrawn. Selected Concentrations of Credit Exposure (Unaudited)
| | Table 10
|
| | March 31, 2004 | | Dec. 31, 20031 | | Mar. 31, 20031 | | (dollars in thousands) | | Outstandings | | Unused Commitments | | Total Exposure | | Total Exposure | | Total Exposure | | | | | | | | | | | | | | Air Transportation | | | | | | | | | | | | United States Regional Passenger Carriers | | $ | 46,003 | | $ | 12,173 | | $ | 58,176 | | $ | 59,231 | | $ | 60,888 | | United States National Passenger Carriers | | 37,413 | | — | | 37,413 | | 37,259 | | 37,441 | | Passenger Carriers Based Outside United States | | 30,475 | | — | | 30,475 | | 31,549 | | 31,922 | | Cargo Carriers | | 14,122 | | — | | 14,122 | | 14,405 | | 14,739 | | Total Air Transportation | | $ | 128,013 | | $ | 12,173 | | $ | 140,186 | | $ | 142,444 | | $ | 144,990 | | | | | | | | | | | | | | Guam | | | | | | | | | | | | Hotel | | $ | 15,692 | | $ | — | | $ | 15,692 | | $ | 17,733 | | $ | 42,843 | | Other Commercial | | 130,128 | | 45,920 | | 176,048 | | 184,129 | | 171,300 | | Consumer | | 290,966 | | 12,638 | | 303,604 | | 288,831 | | 263,900 | | Total Guam | | $ | 436,786 | | $ | 58,558 | | $ | 495,344 | | $ | 490,693 | | $ | 478,043 | | | | | | | | | | | | | | Syndicated Exposure | | $ | 297,512 | | $ | 642,624 | | $ | 940,136 | | $ | 912,896 | | $ | 997,516 | | | | | | | | | | | | | | Other Large Borrowers2 | | $ | 86,658 | | $ | 235,143 | | $ | 321,801 | | $ | 336,748 | | $ | 381,386 | | | | | | | | | | | | | |
25
Exposure includes loans, leveraged leases and operating leases.
1
| For three borrowers, reclassifications have occurred between Regional and National Carriers. Syndicated Exposure has been restated to include a purchased participation.
| 2
| Other Large Borrowers is defined as exposure with commitments of $25.0 million and greater, excluding those collateralized by cash and those separately identified as Air Transportation, Guam and Syndicated Exposure.
|
22
Non-Performing Assets Non-performing assets (“NPAs”) consist of non-accrual loans and foreclosed real estate. The net decreaseAs of $3.9June 30, 2004, NPAs have decreased by $10.6 million or 12%, from December 31, 2003 includedto $21.2 million, primarily due to the partial charge-off and disengagement of a $2.9 millionHawaii business, a loan pay-off in Guam and $1.7 million reduction in residential mortgage, primarily in Hawaii, due tothe return to accrual status.status of Hawaii residential mortgage loans. At March 31, 2004, the ratio of non-performing assets to total loans and foreclosed real estate was 0.49%, a decrease from 0.55% at December 31, 2003 and 0.79% at March 31, 2003. As of March 31, 2004, 55% of total NPAs were concentrated in commercial loans (27% in commercial mortgage) and 29% in residential mortgage related, relatively unchanged from December 31, 2003. At March 31, 2003, the mix was concentrated 53% in commercial loans (41% in commercial mortgage) and 26% were in residential mortgage related. NPAs in Guam as of March 31,June 30, 2004 were $9.5$9.1 million, a decrease of $3.2$3.6 million or 25%, and $13.1 million, or 58%,28% from December 31, 2003 and March 31, 2003, respectively.2003. The improvement from December 2003 is primarily due to the loan pay-off noted previously, while the improvement from March 2003 primarily reflects payments from a number of commercial borrowers. As a percent of total NPAs, Guam exposure represented 34%, a decrease from 40% and 51% at December 31, 2003 and March 31, 2003, respectively.
Impaired loans totaled $6.7 million at March 31,June 30, 2004, a decrease of $13.7 million decreased $2.3$9.3 million or 14%,58% from $16.0 million at December 31, 2003. These loans had a related Allowance that totaled $3.4$0.6 million at March 31,June 30, 2004, an increasea decrease of $2.5$0.3 million from year endDecember 31, 2003. Compared to March 31, 2003, impaired loans decreased by $21.3 million, or 61%, from $35.0 million and had a related Allowance of $3.2 million. Loans Past Due 90 Days or More and Still Accruing Interest Accruing loans past due 90 days or more were $3.3$2.6 million at March 31,June 30, 2004, a decrease of $0.2$0.8 million from December 31, 2003 and $0.9 million from March 31, 2003. The change from December 31, 2003 reflects improvement inwas primarily a result of having a lower number of residential mortgages, offset by an increase in commercial mortgage loans where positive resolution is expected.past due and offsetting activity on commercial loans. Refer to Table 1112 for further information on non-performing assets. 2326
Consolidated Non-Performing Assets and Accruing Loans Past Due 90 Days or More (Unaudited) | | Table 1112 |
(dollars in thousands) | | March 31, 2004 | | December 31, 2003 | | September 30, 2003 | | June 30, 2003 | | March 31, 2003 | | | June 30, 2004 | | March 31, 2004 | | December 31, 2003 | | September 30, 2003 | | June 30, 2003 | | Non-Performing Assets | | | | | | | | | | | | | | | | | | | | | | | Non-Accrual Loans | | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | $ | 6,009 | | $ | 6,015 | | $ | 7,856 | | $ | 8,832 | | $ | 2,367 | | | $ | 680 | | $ | 6,009 | | $ | 6,015 | | $ | 7,856 | | $ | 8,832 | | Commercial Mortgage | | 7,388 | | 9,337 | | 10,977 | | 11,216 | | 17,930 | | | 5,649 | | 7,388 | | 9,337 | | 10,977 | | 11,216 | | Lease Financing | | 1,962 | | 2,181 | | 2,388 | | 2,423 | | 3,183 | | | 1,948 | | 1,962 | | 2,181 | | 2,388 | | 2,423 | | Total Commercial | | 15,359 | | 17,533 | | 21,221 | | 22,471 | | 23,480 | | | 8,277 | | 15,359 | | 17,533 | | 21,221 | | 22,471 | | Consumer | | | | | | | | | | | | | | | | | | | | | | | Residential Mortgage | | 7,685 | | 9,354 | | 9,669 | | 10,196 | | 11,523 | | | 7,688 | | 7,685 | | 9,354 | | 9,669 | | 10,196 | | Home Equity | | 406 | | 460 | | 497 | | — | | 117 | | | 306 | | 406 | | 460 | | 497 | | — | | Total Consumer | | 8,091 | | 9,814 | | 10,166 | | 10,196 | | 11,640 | | | 7,994 | | 8,091 | | 9,814 | | 10,166 | | 10,196 | | Total Non-Accrual Loans | | 23,450 | | 27,347 | | 31,387 | | 32,667 | | 35,120 | | | 16,271 | | 23,450 | | 27,347 | | 31,387 | | 32,667 | | Foreclosed Real Estate | | 4,416 | | 4,377 | | 8,757 | | 9,285 | | 9,097 | | | 4,889 | | 4,416 | | 4,377 | | 8,757 | | 9,285 | | Total Non-Performing Assets | | $ | 27,866 | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | | $ | 44,217 | | | $ | 21,160 | | $ | 27,866 | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | | | | | | | | | | | | | | | | | | | | | | | | | Accruing Loans Past Due 90 Days or More | | | | | | | | | | | | | | | | | | | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | $ | 707 | | $ | 725 | | $ | 695 | | $ | 523 | | $ | 1 | | | $ | 19 | | $ | 707 | | $ | 725 | | $ | 695 | | $ | 523 | | Commercial Mortgage | | 702 | | — | | — | | — | | 368 | | | 693 | | 702 | | — | | — | | — | | Lease Financing | | — | | 117 | | — | | — | | — | | | — | | — | | 117 | | — | | — | | Total Commercial | | 1,409 | | 842 | | 695 | | 523 | | 369 | | | 712 | | 1,409 | | 842 | | 695 | | 523 | | Consumer | | | | | | | | | | | | | | | | | | | | | | | Residential Mortgage | | 595 | | 1,430 | | 2,027 | | 1,817 | | 1,580 | | | 698 | | 595 | | 1,430 | | 2,027 | | 1,817 | | Home Equity | | — | | — | | — | | 84 | | 17 | | | — | | — | | — | | — | | 84 | | Purchased Home Equity | | 107 | | — | | 107 | | 98 | | — | | | 32 | | 107 | | — | | 107 | | 98 | | Other Consumer | | 1,180 | | 1,210 | | 1,059 | | 368 | | 2,257 | | | 1,142 | | 1,180 | | 1,210 | | 1,059 | | 368 | | Lease Financing | | — | | — | | — | | 19 | | — | | | 57 | | — | | — | | — | | 19 | | Total Consumer | | 1,882 | | 2,640 | | 3,193 | | 2,386 | | 3,854 | | | 1,929 | | 1,882 | | 2,640 | | 3,193 | | 2,386 | | Total Accruing and Past Due | | $ | 3,291 | | $ | 3,482 | | $ | 3,888 | | $ | 2,909 | | $ | 4,223 | | | $ | 2,641 | | $ | 3,291 | | $ | 3,482 | | $ | 3,888 | | $ | 2,909 | | | | | | | | | | | | | | | | | | | | | | | | | Total Loans | | $ | 5,714,996 | | $ | 5,757,175 | | $ | 5,570,405 | | $ | 5,471,870 | | $ | 5,565,371 | | | Total Loans and Leases | | | $ | 5,787,314 | | $ | 5,714,996 | | $ | 5,757,175 | | $ | 5,570,405 | | $ | 5,471,870 | | | | | | | | | | | | | | | | | | | | | | | | | Ratio of Non-Accrual Loans to Total Loans | | 0.41 | % | 0.48 | % | 0.56 | % | 0.60 | % | 0.63 | % | | 0.28% | | 0.41% | | 0.48% | | 0.56% | | 0.60% | | | | | | | | | | | | | | | | | | | | | | | | | Ratio of Non-Performing Assets to Total Loans and Foreclosed Real Estate | | 0.49 | % | 0.55 | % | 0.72 | % | 0.77 | % | 0.79 | % | | 0.37% | | 0.49% | | 0.55% | | 0.72% | | 0.77% | | | | | | | | | | | | | | | | | | | | | | | | | Ratio of Non-Performing Assets and Accruing Loans Past Due 90 Days or More to Total Loans | | 0.55 | % | 0.61 | % | 0.79 | % | 0.82 | % | 0.87 | % | | 0.41% | | 0.55% | | 0.61% | | 0.79% | | 0.82% | | | | | | | | | | | | | | | | | | | | | | | | | Quarter to Quarter Changes in Non-Performing Assets | | | | | | | | | | | | | | | | | | | | | | | Balance at Beginning of Quarter | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | | $ | 44,217 | | $ | 54,406 | | | $ | 27,866 | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | | $ | 44,217 | | Additions | | 3,293 | | 2,340 | | 3,199 | | 11,603 | | 4,805 | | | 3,909 | | 3,293 | | 2,340 | | 3,199 | | 11,603 | | Reductions | | | | | | | | | | | | | | | | | | | | | | | Payments and Sales of Loans | | (4,555 | ) | (3,416 | ) | (1,782 | ) | (4,279 | ) | (5,641 | ) | | Payments | | | (4,232) | | (4,555) | | (3,416) | | (1,782) | | (4,279) | | Return to Accrual | | (1,444 | ) | (839 | ) | (1,464 | ) | (7,556 | ) | (5,571 | ) | | (2,700) | | (1,444) | | (839) | | (1,464) | | (7,556) | | Sales of Foreclosed Assets | | (310 | ) | (4,418 | ) | (1,025 | ) | (672 | ) | (1,091 | ) | | (147) | | (310) | | (4,418) | | (1,025) | | (672) | | Charge-offs/Write-downs | | (842 | ) | (2,087 | ) | (736 | ) | (1,361 | ) | (2,691 | ) | | (3,536) | | (842) | | (2,087) | | (736) | | (1,361) | | Total Reductions | | (7,151 | ) | (10,760 | ) | (5,007 | ) | (13,868 | ) | (14,994 | ) | | (10,615) | | (7,151) | | (10,760) | | (5,007) | | (13,868) | | Balance at End of Quarter | | $ | 27,866 | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | | $ | 44,217 | | | $ | 21,160 | | $ | 27,866 | | $ | 31,724 | | $ | 40,144 | | $ | 41,952 | |
2427
Allowance for Loan and Lease Losses The Company maintains an Allowance adequate to cover management’s estimate of probable credit losses inherent in its lending portfolios based on a comprehensive quarterly analysis of historical loss experience supplemented by judgmental expectations of portfolio performance and economic conditions as of a given balance sheet date. The Allowance at March 31,June 30, 2004 totaled $124.9 million, a decrease of $127.2 million decreased $1.9 million and $12.8$4.2 million from December 31, 2003 and March 31, 2003, respectively. Due to continued improvements in the Company’s credit quality and management’s assessment of economic conditions and risks, no Provision was recorded during the first quarter of 2004 or the previous six quarters, resulting in a reduction of the Allowance equal to net charge-offs.2003. The ratio of the Allowance to total loans and leases outstanding was 2.23%2.16% at March 31,June 30, 2004, a decrease from 2.24% at December 31, 2003 and 2.52% at March 31,June 30, 2003. A summary of the activity for the Allowance is presented in Table 12. Net13. Loan charge-offs forin the firstsecond quarter of 2004 of $8.8 million were $1.9more than offset by recoveries of $10.0 million, or 0.13% (annualized),resulting in a net recovery position of total average loans compared to $2.8$1.2 million or 0.21% (annualized),for the quarter. The higher than normal level of total average loansrecoveries resulted from a $6.0 million recovery from a previously charged-off Asia loan. Based on further improvement in credit quality and ongoing assessments of economic conditions and risk, a negative Provision of $3.5 million was recorded in the firstsecond quarter of 2003.2004. The improvementcombination of the negative Provision and the net recoveries resulted in a $2.3 million reduction in the currentAllowance during the second quarter of 2004. No Provision was recorded in the result of higher recoveries thanprevious seven quarters, resulting in 2003. The low net charge-off rate reflects strong collections and resolutions of credits, resulting from the continuationa reduction of the Company’s risk management strategies and an improving Hawaii economy.Allowance equal to net charge-offs in those periods.
28
Consolidated Allowance for Loan and Lease Losses (Unaudited) |
| Table 1213 |
| | Three Months Ended | | (dollars in thousands) | | March 31, 2004 | | December 31, 2003 | | March 31, 2003 | | Balance at Beginning of Period | | $ | 129,080 | | $ | 132,675 | | $ | 142,853 | | Loans Charged-Off | | | | | | | | Commercial | | | | | | | | Commercial and Industrial | | 387 | | 1,997 | | 1,617 | | Commercial Mortgage | | 574 | | — | | — | | Construction | | — | | — | | 529 | | Lease Financing | | 228 | | — | | 15 | | Consumer | | | | | | | | Residential Mortgage | | 145 | | 462 | | 689 | | Home Equity | | — | | 250 | | 82 | | Purchased Home Equity | | 90 | | 143 | | — | | Other Consumer | | 4,655 | | 3,919 | | 3,089 | | Lease Financing | | 36 | | 100 | | 67 | | Total Charge-Offs | | 6,115 | | 6,871 | | 6,088 | | Recoveries on Loans Previously Charged-Off | | | | | | | | Commercial | | | | | | | | Commercial and Industrial | | 980 | | 936 | | 572 | | Commercial Mortgage | | 689 | | 23 | | 17 | | Construction | | 435 | | 3 | | 900 | | Lease Financing | | 15 | | 88 | | 17 | | Consumer | | | | | | | | Residential Mortgage | | 294 | | 115 | | 203 | | Home Equity | | 39 | | 4 | | 53 | | Other Consumer | | 1,663 | | 2,015 | | 1,327 | | Lease Financing | | 55 | | 30 | | 45 | | Foreign | | 50 | | 62 | | 129 | | Total Recoveries | | 4,220 | | 3,276 | | 3,263 | | Net Loan Charge-Offs | | (1,895 | ) | (3,595 | ) | (2,825 | ) | Provision for Loan and Lease Losses | | — | | — | | — | | Balance at End of Period | | $ | 127,185 | | $ | 129,080 | | $ | 140,028 | | Average Loans Outstanding | | $ | 5,742,368 | | $ | 5,570,844 | | $ | 5,460,847 | | Ratio of Net Loan Charge-Offs to Average Loans Outstanding (annualized) | | 0.13 | % | 0.26 | % | 0.21 | % | Ratio of Allowance to Loans and Leases Outstanding | | 2.23 | % | 2.24 | % | 2.52 | % | | | | | | | | | | | | |
25
| | Three Months Ended | | Six Months Ended | | (dollars in thousands) | | June 30, 2004 | | March 31, 2004 | | June 30, 2003 | | June 30, | | 2004 | | 2003 | | | | | | | | | | | | | Balance at Beginning of Period | | $ | 127,185 | | $ | 129,080 | | $ | 140,028 | | $ | 129,080 | | $ | 142,853 | | Loans Charged-Off | | | | | | | | | | | | Commercial | | | | | | | | | | | | Commercial and Industrial | | 3,328 | | 387 | | 565 | | 3,715 | | 2,182 | | Commercial Mortgage | | — | | 574 | | 400 | | 574 | | 400 | | Construction | | — | | — | | — | | — | | 529 | | Lease Financing | | 379 | | 228 | | 325 | | 607 | | 340 | | Consumer | | | | | | | | | | | | Residential Mortgage | | 319 | | 145 | | 687 | | 464 | | 1,376 | | Home Equity | | 9 | | — | | 7 | | 9 | | 89 | | Purchased Home Equity | | 201 | | 90 | | — | | 291 | | — | | Other Consumer | | 4,564 | | 4,655 | | 3,619 | | 9,219 | | 6,708 | | Lease Financing | | 28 | | 36 | | 50 | | 64 | | 117 | | Total Loans Charged-Off | | 8,828 | | 6,115 | | 5,653 | | 14,943 | | 11,741 | | Recoveries on Loans Previously Charged-Off | | | | | | | | | | | | Commercial | | | | | | | | | | | | Commercial and Industrial | | 1,245 | | 954 | | 1,819 | | 2,199 | | 2,391 | | Commercial Mortgage | | 151 | | 689 | | 57 | | 840 | | 74 | | Construction | | — | | 435 | | 55 | | 435 | | 955 | | Lease Financing | | 1 | | 15 | | — | | 16 | | 17 | | Consumer | | | | | | | | | | | | Residential Mortgage | | 304 | | 294 | | 254 | | 598 | | 457 | | Home Equity | | 101 | | 39 | | 50 | | 140 | | 103 | | Purchased Home Equity | | 57 | | — | | — | | 57 | | — | | Other Consumer | | 1,703 | | 1,663 | | 1,342 | | 3,366 | | 2,669 | | Lease Financing | | 16 | | 55 | | 8 | | 71 | | 53 | | Foreign | | 6,469 | | 76 | | 14 | | 6,545 | | 143 | | Total Recoveries on Loans Previously Charged-Off | | 10,047 | | 4,220 | | 3,599 | | 14,267 | | 6,862 | | Net Loan Recoveries (Charge-Offs) | | 1,219 | | (1,895) | | (2,054) | | (676) | | (4,879) | | Provision for Loan and Lease Losses | | (3,500) | | — | | — | | (3,500) | | — | | Balance at End of Period | | $ | 124,904 | | $ | 127,185 | | $ | 137,974 | | $ | 124,904 | | $ | 137,974 | | | | | | | | | | | | | | Average Loans Outstanding | | $ | 5,772,926 | | $ | 5,742,368 | | $ | 5,518,401 | | $ | 5,757,647 | | $ | 5,489,783 | | | | | | | | | | | | | | Ratio of Net Loan Charge-Offs to Average Loans Outstanding (annualized) | | (0.08)% | | 0.13% | | 0.15% | | 0.02% | | 0.18% | | Ratio of Allowance to Loans and Leases Outstanding | | 2.16% | | 2.23% | | 2.52% | | 2.16% | | 2.52% | |
Market Risk Market risk is the potential of loss arising from adverse changes in interest rates and prices. The Company is exposed to market risk as a consequence of the normal course of conducting its business activities. Financial products that expose the Company to market risk include investment securities, loans, deposits, debt and derivative financial instruments. The Company’s market risk management process involves measuring, monitoring, controlling and managing risks that can significantly impact the Company’s financial position and operating results. In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance and shareholder value, while limiting the volatility of each. The activities associated with these market risks are categorized into “trading” and “other than trading.” 29
The Company’s trading activities include foreign currency and foreign exchange contracts that expose the Company to a minor degree of foreign currency risk. These transactions are primarily executed on behalf of customers and at times for the Company’s own account. The Company’s “other than trading” activities include normal business transactions that expose the Company’s balance sheet profile to varying degrees of market risk. Interest Rate Risk The Company’s balance sheet is sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from the Company’s normal business activities of making loans and taking deposits. Many other factors also affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences and historical pricing relationships. Table 1314 presents, as of March 31,June 30, 2004, December 31, 2003 and March 31,June 30, 2003, the estimate of the change in net interest income (the “NII”(“NII”) that would result from a gradual 200 basis point increasedecrease or decreaseincrease in interest rates, moving in parallel fashion over the entire yield curve, over the next 12-month period, relative to the measured base case scenario for NII. The 200 basis point increase would equate to an average increase of $4.2$2.7 million increase in NII per quarter. The Company’s balance sheet continues to be asset-sensitive. The resulting estimated NII exposure is within the guidelines approved by the Company’s Asset Liability Management Committee. Market Risk Exposure to Interest Rate Changes (Unaudited) | | Table 1314 |
| | March 31, 2004 | | December 31, 2003 | | March 31, 2003 | | | June 30, 2004 | | December 31, 2003 | | June 30, 2003 | | | | Interest Rate Change (in basis points) | | Interest Rate Change (in basis points) | | Interest Rate Change (in basis points) | | | Interest Rate Change (in basis points) | | Interest Rate Change (in basis points) | | Interest Rate Change (in basis points) | | (dollars in millions) | | -200 | | +200 | | -200 | | +200 | | -200 | | +200 | | | -200 | | +200 | | -200 | | +200 | | -200 | | +200 | | Estimated Exposure as a Percent of Net Interest Income | | (5.2 | )% | 4.3 | % | (4.8 | )% | 4.0 | % | (2.8 | )% | 5.1 | % | | (5.0)% | | 2.8% | | (4.8)% | | 4.0% | | (2.5)% | | 5.9% | | Estimated Exposure to Net Interest Income Per Quarter | | $ | (5.0 | ) | $ | 4.2 | | $ | (4.4 | ) | $ | 3.7 | | $ | (2.6 | ) | $ | 4.6 | | | $ | (4.8) | | $ | 2.7 | | $ | (4.4) | | $ | 3.7 | | $ | (2.3) | | $ | 5.4 | | |
In managing interest rate risk, the Company uses several approaches to modify its risk position. Approaches that are used in an effort to shift balance sheet mix or alter the interest rate characteristics of assets and liabilities include changing product pricing strategies, modifying investment portfolio characteristics, or using financial derivative instruments. The use of financial derivatives has been limited over the past several years. Liquidity Management Liquidity is managed in an effort to ensure that the Company has continuous access to sufficient, reasonably priced funding to conduct its business in a normal manner. The Bank is a member of the Federal Home Loan Bank of Seattle (the “FHLB”), which provides an additional source of short and long-term funding. Outstanding borrowings from the FHLB were $64.5$62.5 million at March 31,June 30, 2004, compared to $68.5 million at December 31, 2003 and $26.5$76.5 million at March 31,June 30, 2003. The decrease from December 31, 2003 was mainly attributabledue to a $4.0 million maturity.maturities. 26
Additionally, the Bank maintains a $1 billion senior and subordinated bank note program. Under this facility, the Bank may issue additional notes provided that the aggregate amount outstanding does not exceed $1 billion. Subordinated notes outstanding under this bank note program totaled $124.7 million at March 31,June 30, 2004, December 31, 2003 and March 31,June 30, 2003. In the second and third quartersquarter of 2004, $90.3$20.0 million of privately placed notes mature. It is currently expected that repayment will comematured and were not replaced. An additional $70.0 million of privately placed notes matured in July 2004 and were not replaced. Repayment came from liquidity, however the source of repayment will be determined at maturity.existing liquidity. 30
Capital Management The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. The Company’s objective is to hold sufficient capital on a regulatory basis to exceed the minimum guidelines of a “well-capitalized” financial institution, while over the long term optimize shareholder value, support asset growth, reflect risks inherent in its markets, provide protection against unforeseen losses and comply with regulatory requirements. At March 31,June 30, 2004, shareholders’ equity totaled $785.8$699.4 million, a 1%12% net decrease from December 31, 2003. The decrease in shareholders’ equity during the first three monthshalf of 2004 was primarily attributable to the Company’s repurchase of its common stock under the repurchase programsprogram and dividends offset by earnings. During the threesix months ended March 31,June 30, 2004, 1.33.4 million shares of common stock were repurchased at an average cost of $44.77$44.24 per share, totaling $57.8$150.7 million. As of March 31,June 30, 2004, the Company had repurchased a total of 31.133.2 million shares since July 2001, under allthe share repurchase programs,program, totaling $912.9$1,005.7 million at an average cost of $29.34$30.27 per share. TheIn July 2004, the Company’s Board of Directors authorizedincreased the authorization under the share repurchase program by an additional stock repurchase of up to $50 million of its common stock.$100.0 million. This authorization, combined with the Company’s previously announced authorizations of $1.0 billion,$1,050.0 million, brings the total repurchase authority to $1,050$1,150.0 million. Subsequent to March 31,June 30, 2004 through AprilJuly 23, 2004, 984,800160,000 shares were repurchased at an average cost of $43.92$45.50 per share for a total of $43.2$7.3 million, resulting in remaining buyback authority under the existing repurchase programsprogram of $93.9$137.0 million. In AprilJuly 2004, the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share on the Company’s outstanding shares. The dividend will be payable on June 14,September 15, 2004 to shareholders of record at the close of business on May 24,August 30, 2004. Table 1415 presents the regulatory capital and ratios as of March 31,June 30, 2004, December 31, 2003 and March 31,June 30, 2003. Regulatory Capital and Ratios (Unaudited) | | Table 1415 |
(dollars in thousands) | (dollars in thousands) | | March 31, 2004 | | December 31, 2003 | | March 31, 2003 | | (dollars in thousands) | | June 30, 2004 | | December 31, 2003 | | June 30, 2003 | | Regulatory Capital | Regulatory Capital | | | | | | | | Regulatory Capital | | | | | | | | Shareholders’ Equity | Shareholders’ Equity | | $ | 785,768 | | $ | 793,132 | | $ | 952,007 | | Shareholders’ Equity | | $ | 699,438 | | $ | 793,132 | | $ | 913,010 | | Add: | 8.25% Capital Securities of Bancorp Hawaii Capital Trust I | | 31,425 | | 31,425 | | 31,425 | | 8.25% Capital Securities of Bancorp Hawaii Capital Trust I | | 31,425 | | 31,425 | | 31,425 | | | | | | | | | | | | Less: | Goodwill | | 36,216 | | 36,216 | | 36,216 | | Goodwill | | 36,216 | | 36,216 | | 36,216 | | | Unrealized Valuation and Other Adjustments | | 20,771 | | 10,771 | | 23,820 | | Unrealized Valuation and Other Adjustments | | (10,776) | | 10,771 | | 27,958 | | | | | | | | | | | | | | | | | | | Tier I Capital | Tier I Capital | | 760,206 | | 777,570 | | 923,396 | | Tier I Capital | | 705,423 | | 777,570 | | 880,261 | | Allowable Reserve for Loan Losses | Allowable Reserve for Loan Losses | | 79,941 | | 78,147 | | 76,399 | | Allowable Reserve for Loan Losses | | 79,889 | | 78,147 | | 76,332 | | Subordinated Debt | Subordinated Debt | | 99,777 | | 124,709 | | 124,671 | | Subordinated Debt | | 99,787 | | 124,709 | | 124,683 | | Unrealized Gains on Available for Sale Equity Securities | Unrealized Gains on Available for Sale Equity Securities | | 79 | | 66 | | 125 | | Unrealized Gains on Available for Sale Equity Securities | | 48 | | 66 | | 113 | | Total Capital | Total Capital | | $ | 940,003 | | $ | 980,492 | | $ | 1,124,591 | | Total Capital | | $ | 885,147 | | $ | 980,492 | | $ | 1,081,389 | | | | | | | | | | | | | | | | | | | Risk Weighted Assets | Risk Weighted Assets | | $ | 6,348,075 | | $ | 6,200,831 | | $ | 6,048,290 | | Risk Weighted Assets | | $ | 6,346,134 | | $ | 6,200,831 | | $ | 6,044,941 | | | | | | | | | | | | | | | | | | | Key Capital Ratios | Key Capital Ratios | | | | | | | | Key Capital Ratios | | | | | | | | Average Equity/Average Assets Ratio | Average Equity/Average Assets Ratio | | 8.28 | % | 9.60 | % | 10.53 | % | Average Equity/Average Assets Ratio | | 7.41% | | 9.60% | | 9.80% | | Tier I Capital Ratio | Tier I Capital Ratio | | 11.98 | % | 12.54 | % | 15.27 | % | Tier I Capital Ratio | | 11.12% | | 12.54% | | 14.56% | | Total Capital Ratio | Total Capital Ratio | | 14.81 | % | 15.81 | % | 18.59 | % | Total Capital Ratio | | 13.95% | | 15.81% | | 17.89% | | Leverage Ratio | Leverage Ratio | | 7.88 | % | 8.43 | % | 10.03 | % | Leverage Ratio | | 7.16% | | 8.43% | | 9.29% | |
2731
Economic Outlook During the first quarter of 2004, airline passenger arrivalsBased on projected visitor counts, tourism in Hawaii increased 6% overall includingmay reach record high levels during the summer of 2004. Total visitor counts were up 9% year-to-date through May 2004 and up 13% in June 2004 compared to last year. Growth in tourism is a 9% gainresult of the continued strength in domestic travel, comparedvisitors to Hawaii and increased international visitors, partially due to the first quarter of 2003. The strong yen is expected to further helpimproving Japan economy and favorable yen/dollar exchange rates. Hotel revenues rose 6%, matched by growth in overall business receipts, during the tourism-dependent sectors of the Hawaii economy.State’s fiscal year ending in June 2004.
Hawaii’s real personal income growth is most recently forecastseasonally-adjusted unemployment rate declined to 3% in May 2004, one percentage point below a year ago, as labor markets tightened. Seasonally-adjusted payrolls grew at 3.5% for 2004 after adjusting for increasing inflation due to higher housing costs. Hawaii construction should remain strong in 2004, based on 20% growtha 1.7% annualized rate in the 2003 valuemost recent six-month period, and were up 2.1% on a year-over-year basis in May 2004. Hawaii real estate investment continues to dominate near-term growth prospects. Home sales volumes in Honolulu have grown at annual rates of residential building permits,more than 15% since 1997 and a doubling in nonresidential building permits, combined with military housing construction. Record high home prices continued rising during the first quarter of 2004 along with statewide home sales volumes. Interest rate sensitivity isrecord volumes are expected to be modest and strong fundamentals support the localreached this summer. Military housing valuation trends. Currently, itprivatization is anticipated that interest rates will increase slightly in the latter part of 2004. Tight labor market conditions in Hawaii persisted during the first quarter of 2004. Statewide unemployment declined from 4.4%to double annual homebuilding on Oahu beginning in the fourth quarter of 20032004. Overall, construction employment is expected to 3.9%return to early-1990s cyclical peaks.
Honolulu’s semiannual inflation rate for the first half of 2004 is expected to repeat the 3% recorded in the first quartersecond half of 2004. Overall Hawaii job growth continued at around 2% through the first quarter, with the construction sector leading (up 7%)2003, up from 1% a year earlier. Strong China, Eastern Asia and Southern California economies, and recoveries in Northern California and the information sector lagging (down 9%). External pressures that could constrainPacific Northwest, put Hawaii at the center of regional economic growth in Hawaii include higher petroleum prices and a rising interest rate environment.strength once again. Earnings Outlook Bank of Hawaii Corporation’s previously published earnings guidance of approximately $157 million inThe Company currently anticipates net income for the full year of 2004 remains unchanged, however gains from asset sales and loan loss recoveries could allow net incomewill be approximately $163 million to exceed the $157 million level.$167 million. Based on currentpresent conditions, the Company does not expect to record a Provision infor the remainder of 2004. However, the actual amount of the Provision depends on determinations of credit risk that are made near the end of each quarter. Earnings per share and return on equity projections continue to be dependent upon the terms and timing of share repurchases.
Item 3.Quantitative and Qualitative Disclosures of Market Risk See Management’s Discussion and Analysis of Results of Operations and Financial Condition-Market Risk. Item 4.Controls and Procedures The Company’s management, including the Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31,June 30, 2004. Based on this evaluation, the Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the firstsecond quarter of 2004 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. 2832
Part II. - Other Information Items 1 3, 4 and 53 omitted pursuant to instructions. Item 2.Changes in Securities, Use of Proceeds andand Issuer Purchases of Equity Securities Issuer Purchases of Equity Securities Period | | Total Number of Shares Purchased1 | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program2 | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Program2 | | | | | | | | | | | | January 1 - 31, 2004 | | 380,100 | | $ | 43.11 | | 351,100 | | $ | 129,878,600 | | February 1 - 29, 2004 | | 328,900 | | 44.77 | | 328,900 | | 115,152,700 | | March 1 - 31, 2004 | | 614,050 | | 45.79 | | 611,800 | | 87,141,000 | | Total | | 1,323,050 | | $ | 44.77 | | 1,291,800 | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased 1 | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program 2, 3 | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Program 2, 4 | | | | | | | | | | | | April 1 - 30, 2004 | | 1,179,817 | | $ | 43.83 | | 1,091,800 | | $ | 89,240,654 | | May 1 - 31, 2004 | | 814,446 | | 43.90 | | 812,969 | | 53,548,915 | | June 1 - 30, 2004 | | 210,466 | | 44.16 | | 210,000 | | 44,274,238 | | Total | | 2,204,729 | | $ | 43.89 | | 2,114,769 | | | | | | | | | | | | | | | |
1
| The January period included 29,000 shares purchased from employees in connection with the vesting of restricted stock. The March period included 2,250
1The April period included 88,017 shares purchased from employees in connection with the vesting of restricted stock. The May and June periods included 1,477 and 466 shares, respectively, purchased from employees in connection with stock option exercises. These shares were not purchased as part of the publicly announced program. The shares were purchased at the closing price of the Company’s common stock on the dates of purchase. 2The Company announced an authorization of additional share repurchase of $50.0 million and $200.0 million on April 27, 2004 and September 29, 2003, respectively. 3In May 2004, the Company purchased 644,069 shares from the Chairman and CEO of the Company at a volume weighted average price of $44.26, totaling $28.5 million. 4 In July 2004, the Company announced an authorization of additional share repurchase of $100.0 million under the announced program. Item 4.Submission of Matters to a Vote of Security Holders At the annual shareholders meeting held on April 23, 2004, the following matters were submitted to a vote of the shareholders. a. Election of Directors - Four directors were elected to the Board of Directors as follows: * S. Haunani Apoliona | | | 2
| The Company announced a $200 million share repurchase program on September 29, 2003.
| | Votes cast for: | | 47,063,521 | Votes withheld: | | 948,929 | | | | Michael J. Chun | | | | | | Votes cast for: | | 47,229,237 | Votes withheld: | | 783,213 | | | | Allan R. Landon | | | | | | Votes cast for: | | 46,138,609 | Votes withheld: | | 1,873,841 | | | | Barbara J. Tanabe | | | | | | Votes cast for: | | 47,277,087 | Votes withheld: | | 735,363 |
33
b. Election of Directors – Three directors whose terms in office were expiring were re-elected to the Board of Directors as follows: * Mary G.F. Bitterman | | | | | | Votes cast for: | | 45,859,105 | Votes withheld: | | 2,153,345 | | | | Martin A. Stein | | | | | | Votes cast for: | | 45,960,790 | Votes withheld: | | 2,051,660 | | | | Robert W. Wo, Jr. | | | | | | Votes cast for: | | 46,540,989 | Votes withheld: | | 1,471,461 |
c. Approval of Bank of Hawaii Corporation 2004 Stock and Incentive Compensation Plan ** Votes cast for: | | 32,139,354 | Votes cast against: | | 8,597,372 | Broker non-votes: | | 6,350,190 | Abstentions: | | 925,534 |
d. Election of an Independent Auditor - Ernst & Young, LLP Votes cast for: | | 45,692,457 | Votes cast against: | | 2,216,493 | Abstentions: | | 103,500 |
* The directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded. ** A broker non-vote had no effect on this proposal and an abstention had the same effect as a vote against the proposal. Item 5. Other Information The Company announced on July 26, 2004 it has elected Allan R. Landon, currently President and Chief Operating Officer, to succeed Michael E. O’Neill as Chairman and Chief Executive Officer, effective September 1, 2004. 34
Item 6.Exhibits and Reports on Form 8-K a. Exhibit Index | a.
| Exhibit Index
| | | | | | | | Exhibit Number | | |
| | | | | | | | | 10.1 | | Bank of Hawaii Corporation 2004 Stock and Incentive Compensation Plan (incorporated by reference from Appendix C to the Company's Definitive Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Shareholders, as filed on March 18, 2004)* | | | | | | | | 10.2 | | Form of Retention Agreement dated May 3, 2004 with certain Managing Committee Members* | | | | | | | | 12 | | Statement Regarding Computation of Ratios | | | | | | | | 31.1 | 31.1
| Rule 13a - 14(a) Certifications | | | | | | | | 31.2 | 31.2
| Rule 13a - 14(a) Certifications | | | | | | | | | 32
| Section 1350 Certification
| 31.3 | | | | | | b.
| The following report on Form 8-K was filed during the quarter ended March 31, 2004:Rule 13a - 14(a) Certifications
| | | | | | | | 32 | Filed January 27, 2004, under Item 12 of Form 8-K, regarding the Company’s financial results for the quarter ended December 31, 2003.
| Section 1350 Certification | | | | | | |
29* Management contract or compensatory plan or arrangement.
b. The following reports on Form 8-K were filed during the quarter ended June 30, 2004: Filed April 27, 2004 under Item 5 of Form 8-K, regarding President Allan R. Landon to add responsibility of Chief Operating Officer and announcement of new senior management appointments. Filed May 11, 2004, under Item 5 of Form 8-K, regarding Bank of Hawaii Corporation buys block of shares from its Chairman and Chief Executive Officer. 35
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: | AprilJuly 28, 2004
| BANK OF HAWAII CORPORATION | | | | | | | | By: | /s/ Michael E. O’Neill | | | | Michael E. O’Neill | | | Chairman of the Board and Chief Executive Officer | | | | | | | | By: | /s/ Allan R. Landon | | | | Allan R. Landon | | | President and Chief FinancialOperating Officer and Treasurer | | | | | | | | By: | /s/ Richard C. Keene | | | | Richard C. Keene | | | Chief AccountingFinancial Officer |
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EXHIBIT INDEX Exhibit Number 10.1 | | Bank of Hawaii Corporation 2004 Stock and Incentive Compensation Plan (incorporated by reference from Appendix C to the Company’s Definitive Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Shareholders, as filed on March 18, 2004)* | | | | 10.2 | | Form of Retention Agreement dated May 3, 2004 with certain Managing Committee Members* | | | | 12 | | Statement Regarding Computation of Ratios | | | | 31.1 | | Rule 13a - 14(a) Certifications | | | | 31.2 | | Rule 13a - 14(a) Certifications | | | | 31.3 | | Rule 13a - 14(a) Certifications | | | | 32 | | Section 1350 Certification |
* Management contract or compensatory plan or arrangement.
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