Edgar Filing: BANK OF HAWAII CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the quarterly period ended March 31, 2010

or

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

Commission File Number: 1-6887

BANK OF HAWAII CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		99-0148992
(State of incorporation)		(I.R.S. Employer Identification No.)

130 Merchant Street, Honolulu, Hawaii		96813
(Address of principal executive offices)		(Zip Code)

1-888-643-3888

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Yes o No o

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

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Yes o No x

As of April 13, 2010, there were 48,041,730 shares of common stock outstanding.

Table of Contents

Bank of Hawaii Corporation

Form 10-Q

Index

			Page

Part I - Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statements of Income – Three months ended March 31, 2010 and 2009		2

		Consolidated Statements of Condition – March 31, 2010, December 31, 2009, and March 31, 2009		3

		Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2010 and 2009		4

		Consolidated Statements of Cash Flows – Three months ended March 31, 2010 and 2009		5

		Notes to Consolidated Financial Statements (Unaudited)		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42

	Item 4.	Controls and Procedures		42

Part II - Other Information

	Item 1A.	Risk Factors		42

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42

	Item 6.	Exhibits		42

Signatures			43

Table of Contents

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

			Three Months Ended
			March 31,
(dollars in thousands, except per share amounts)	2010			2009
Interest Income
Interest and Fees on Loans and Leases	$	77,271		$	86,592
Income on Investment Securities
Trading	—			594
Available-for-Sale	43,841			32,301
Held-to-Maturity	1,863			2,567
Deposits	13			10
Funds Sold	309			577
Other	277			276
Total Interest Income	123,574			122,917
Interest Expense
Deposits	8,307			17,025
Securities Sold Under Agreements to Repurchase	6,429			6,652
Funds Purchased	7			5
Long-Term Debt	1,178			2,173
Total Interest Expense	15,921			25,855
Net Interest Income	107,653			97,062
Provision for Credit Losses	20,711			24,887
Net Interest Income After Provision for Credit Losses	86,942			72,175
Noninterest Income
Trust and Asset Management	11,708			11,632
Mortgage Banking	3,464			8,678
Service Charges on Deposit Accounts	13,814			13,386
Fees, Exchange, and Other Service Charges	14,504			14,976
Investment Securities Gains, Net	20,021			56
Insurance	2,715			5,641
Other	5,556			15,996
Total Noninterest Income	71,782			70,365
Noninterest Expense
Salaries and Benefits	44,564			47,028
Net Occupancy	10,144			10,328
Net Equipment	4,558			4,316
Professional Fees	1,992			2,549
FDIC Insurance	3,100			1,814
Other	17,348			21,898
Total Noninterest Expense	81,706			87,933
Income Before Provision for Income Taxes	77,018			54,607
Provision for Income Taxes	24,282			18,567
Net Income	$	52,736		$	36,040
Basic Earnings Per Share	$	1.10		$	0.76
Diluted Earnings Per Share	$	1.09		$	0.75
Dividends Declared Per Share	$	0.45		$	0.45
Basic Weighted Average Shares	47,914,412			47,566,005
Diluted Weighted Average Shares	48,289,427			47,802,249

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

	March 31,			December 31,			March 31,
(dollars in thousands)	2010			2009			2009
Assets
Interest-Bearing Deposits	$	4,910		$	8,755		$	5,031
Funds Sold	269,410			291,546			895,595
Investment Securities
Available-for-Sale	5,447,239			5,330,834			3,106,608
Held-to-Maturity (Fair Value of $173,646; $186,668; and $233,633)	167,099			181,018			228,177
Loans Held for Sale	11,143			16,544			24,121
Loans and Leases	5,610,081			5,759,785			6,338,726
Allowance for Loan and Lease Losses	(146,358		)	(143,658		)	(134,416		)
Net Loans and Leases	5,463,723			5,616,127			6,204,310
Total Earning Assets	11,363,524			11,444,824			10,463,842
Cash and Noninterest-Bearing Deposits	355,398			254,766			299,393
Premises and Equipment	110,310			110,976			114,536
Customers’ Acceptances	677			1,386			822
Accrued Interest Receivable	42,180			45,334			36,928
Foreclosed Real Estate	3,192			3,132			346
Mortgage Servicing Rights	26,082			25,970			23,528
Goodwill	31,517			31,517			34,959
Other Assets	502,790			496,922			473,774
Total Assets	$	12,435,670		$	12,414,827		$	11,448,128

Liabilities
Deposits
Noninterest-Bearing Demand	$	2,194,280		$	2,252,083		$	1,970,041
Interest-Bearing Demand	1,669,586			1,609,413			1,926,576
Savings	4,515,597			4,405,969			3,905,709
Time	1,114,621			1,142,211			1,410,465
Total Deposits	9,494,084			9,409,676			9,212,791
Funds Purchased	8,888			8,888			9,665
Short-Term Borrowings	7,317			6,900			10,000
Securities Sold Under Agreements to Repurchase	1,529,047			1,618,717			844,283
Long-Term Debt	90,309			90,317			59,003
Banker’s Acceptances	677			1,386			822
Retirement Benefits Payable	36,895			37,435			54,450
Accrued Interest Payable	7,766			7,026			10,010
Taxes Payable and Deferred Taxes	224,112			229,140			258,505
Other Liabilities	97,203			109,369			154,664
Total Liabilities	11,496,298			11,518,854			10,614,193
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: March 31, 2010 - 57,027,543 / 48,040,830; December 31, 2009 - 57,028,239 / 48,018,943; and March 31, 2009 - 57,019,595 / 47,803,544)	570			569			569
Capital Surplus	494,653			494,318			491,352
Accumulated Other Comprehensive Income (Loss)	18,063			6,925			(1,319		)
Retained Earnings	874,305			843,521			802,195
Treasury Stock, at Cost (Shares: March 31, 2010 - 8,986,713; December 31, 2009 - 9,009,296; and March 31, 2009 - 9,216,051)	(448,219		)	(449,360		)	(458,862		)
Total Shareholders’ Equity	939,372			895,973			833,935
Total Liabilities and Shareholders’ Equity	$	12,435,670		$	12,414,827		$	11,448,128

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

									Accum.
									Other
									Compre-
									hensive									Compre-
				Common		Capital			Income			Retained			Treasury			hensive
(dollars in thousands)	Total			Stock		Surplus			(Loss)			Earnings			Stock			Income
Balance as of December 31, 2009	$	895,973		$	569	$	494,318		$	6,925		$	843,521		$	(449,360	)
Comprehensive Income:
Net Income	52,736			—		—			—			52,736			—			$	52,736
Other Comprehensive Income, Net of Tax:
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale	10,757			—		—			10,757			—			—			10,757
Amortization of Net Losses Related to Defined Benefit Plans	381			—		—			381			—			—			381
Total Comprehensive Income																		$	63,874
Share-Based Compensation	714			—		714			—			—			—
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits (52,481 shares)	1,785			1		(379		)	—			(320		)	2,483
Common Stock Repurchased (30,594 shares)	(1,342		)	—		—			—			—			(1,342		)
Cash Dividends Paid	(21,632		)	—		—			—			(21,632		)	—
Balance as of March 31, 2010	$	939,372		$	570	$	494,653		$	18,063		$	874,305		$	(448,219	)

Balance as of December 31, 2008	$	790,704		$	568	$	492,515		$	(28,888	)	$	787,924		$	(461,415	)
Comprehensive Income:
Net Income	36,040			—		—			—			36,040			—			$	36,040
Other Comprehensive Income, Net of Tax:
Change in Unrealized Gains and Losses on Investment Securities Available-for-Sale	27,243			—		—			27,243			—			—			27,243
Amortization of Net Losses Related to Defined Benefit Plans	326			—		—			326			—			—			326
Total Comprehensive Income																		$	63,609
Share-Based Compensation	235			—		235			—			—			—
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits (71,244 shares)	1,627			1		(1,398		)	—			(258		)	3,282
Common Stock Repurchased (21,071 shares)	(729		)	—		—			—			—			(729		)
Cash Dividends Paid	(21,511		)	—		—			—			(21,511		)	—
Balance as of March 31, 2009	$	833,935		$	569	$	491,352		$	(1,319	)	$	802,195		$	(458,862	)

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

			Three Months Ended
			March 31,
(dollars in thousands)	2010				2009
Operating Activities
Net Income	$	52,736			$	36,040
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses	20,711				24,887
Depreciation and Amortization	3,332				3,399
Amortization of Deferred Loan and Lease Fees	(623			)	(625		)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	10,799				1,211
Share-Based Compensation	714				235
Benefit Plan Contributions	(687			)	(421		)
Deferred Income Taxes	(5,780			)	(3,811		)
Net Gains on Investment Securities	(20,021			)	(56		)
Net Change in Trading Securities	—				91,500
Proceeds from Sales of Loans Held for Sale	117,261				398,376
Originations of Loans Held for Sale	(111,860			)	(400,957		)
Tax Benefits from Share-Based Compensation	(10			)	(17		)
Net Change in Other Assets and Other Liabilities	(22,495			)	41,129
Net Cash Provided by Operating Activities	44,077				190,890

Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities	351,199				243,329
Proceeds from Sales	483,588				21,791
Purchases	(921,953			)	(810,966		)
Investment Securities Held-to-Maturity:
Proceeds from Prepayments and Maturities	13,865				11,347
Net Change in Loans and Leases	132,316				177,913
Premises and Equipment, Net	(2,666			)	(1,814		)
Net Cash Provided by (Used in) Investing Activities	56,349				(358,400		)

Financing Activities
Net Change in Deposits	84,408				920,693
Net Change in Short-Term Borrowings	(89,253			)	(185,521		)
Repayments of Long-Term Debt	—				(143,971		)
Tax Benefits from Share-Based Compensation	10				17
Proceeds from Issuance of Common Stock	2,034				2,069
Repurchase of Common Stock	(1,342			)	(729		)
Cash Dividends Paid	(21,632			)	(21,511		)
Net Cash Provided by (Used In) Financing Activities	(25,775			)	571,047

Net Change in Cash and Cash Equivalents	74,651				403,537
Cash and Cash Equivalents at Beginning of Period	555,067				796,482
Cash and Cash Equivalents at End of Period	$	629,718			$	1,200,019

Supplemental Information
Cash Paid for Interest	$	15,182			$	29,682
Cash Paid for Income Taxes	37,016				1,390
Non-Cash Investing Activity:
Transfer from Loans to Foreclosed Real Estate	60				—

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

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Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the three months ended
March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Use of Estimates in the Preparation of Financial Statements

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

Fair Value Measurements and Disclosures

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition. See Note 10 to the Consolidated Financial Statements for the disclosures required by this ASU.

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.

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Note 2. Investment Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of the Company’s investment securities as of March 31, 2010, December 31, 2009, and March 31, 2009 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		Losses			Value
March 31, 2010
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	746,761	$	7,050	$	(958	)	$	752,853
Debt Securities Issued by States and Political Subdivisions	51,940		1,402		(16		)	53,326
Debt Securities Issued by U.S. Government-Sponsored Enterprises	751		33		—			784
Mortgage-Backed Securities Issued by
Government Agencies	4,265,067		44,846		(6,274		)	4,303,639
U.S. Government-Sponsored Enterprises	321,681		14,956		—			336,637
Total Mortgage-Backed Securities	4,586,748		59,802		(6,274		)	4,640,276
Total	$	5,386,200	$	68,287	$	(7,248	)	$	5,447,239
Held-to-Maturity:
Mortgage-Backed Securities Issued by
Government Agencies	$	55,834	$	2,379	$	—		$	58,213
U.S. Government-Sponsored Enterprises	111,265		4,168		—			115,433
Total	$	167,099	$	6,547	$	—		$	173,646

December 31, 2009
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	711,223	$	11,248	$	(1,679	)	$	720,792
Debt Securities Issued by States and Political Subdivisions	52,742		1,391		(17		)	54,116
Debt Securities Issued by U.S. Government-Sponsored Enterprises	751		41		—			792
Mortgage-Backed Securities Issued by
Government Agencies	4,015,816		26,900		(20,029		)	4,022,687
U.S. Government-Sponsored Enterprises	509,225		23,276		(54		)	532,447
Total Mortgage-Backed Securities	4,525,041		50,176		(20,083		)	4,555,134
Total	$	5,289,757	$	62,856	$	(21,779	)	$	5,330,834
Held-to-Maturity:
Mortgage-Backed Securities Issued by
Government Agencies	$	59,542	$	1,879	$	—		$	61,421
U.S. Government-Sponsored Enterprises	121,476		3,771		—			125,247
Total	$	181,018	$	5,650	$	—		$	186,668

March 31, 2009
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	566,606	$	1,898	$	(501	)	$	568,003
Debt Securities Issued by States and Political Subdivisions	50,482		1,196		(68		)	51,610
Debt Securities Issued by U.S. Government-Sponsored Enterprises	145,530		312		—			145,842
Mortgage-Backed Securities Issued by
Government Agencies	590,072		13,448		(1		)	603,519
U.S. Government-Sponsored Enterprises	1,413,795		46,662		(4		)	1,460,453
Private-Label Mortgage-Backed Securities	279,093		54		(27,068		)	252,079
Total Mortgage-Backed Securities	2,282,960		60,164		(27,073		)	2,316,051
Other Debt Securities	25,088		15		(1		)	25,102
Total	$	3,070,666	$	63,585	$	(27,643	)	$	3,106,608
Held-to-Maturity:
Mortgage-Backed Securities Issued by
Government Agencies	$	69,731	$	2,276	$	—		$	72,007
U.S. Government-Sponsored Enterprises	158,446		3,213		(33		)	161,626
Total	$	228,177	$	5,489	$	(33	)	$	233,633

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The table below presents an analysis of the contractual maturities of the Company’s investment securities as of March 31, 2010. Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

			Gross		Gross
	Amortized		Unrealized		Unrealized
(dollars in thousands)	Cost		Gains		Losses			Fair Value
Available-for-Sale:
Due in One Year or Less	$	22,304	$	87	$	—		$	22,391
Due After One Year Through Five Years	328,177		930		(283		)	328,824
Due After Five Years Through Ten Years	93,930		992		(14		)	94,908
Due After Ten Years	355,041		6,476		(677		)	360,840
	799,452		8,485		(974		)	806,963
Mortgage-Backed Securities Issued by
Government Agencies	4,265,067		44,846		(6,274		)	4,303,639
U.S. Government-Sponsored Enterprises	321,681		14,956		—			336,637
Total Mortgage-Backed Securities	4,586,748		59,802		(6,274		)	4,640,276
Total	$	5,386,200	$	68,287	$	(7,248	)	$	5,447,239

Held-to-Maturity:
Mortgage-Backed Securities Issued by
Government Agencies	$	55,834	$	2,379	$	—		$	58,213
U.S. Government-Sponsored Enterprises	111,265		4,168		—			115,433
Total	$	167,099	$	6,547	$	—		$	173,646

Investment securities pledged where the secured parties have the right to sell or repledge the investment securities had carrying values of $2.7 billion as of March 31, 2010 and December 31, 2009, and $2.3 billion as of March 31, 2009. These investment securities were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

Gross gains on the sales of investment securities were $20.0 million and $0.1 million for the three months ended March 31, 2010 and 2009, respectively. Gross losses on the sales of investment securities were not material for the three months ended March 31, 2010 and 2009. Realized gains and losses on investment securities were recorded in noninterest income using the specific identification method.

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The Company’s temporarily impaired investment securities as of March 31, 2010, December 31, 2009, and March 31, 2009 were as follows:

	Less Than 12 Months					12 Months or Longer					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
(dollars in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
March 31, 2010
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	205,860	$	(937	)	$	1,627	$	(21	)	$	207,487	$	(958	)
Debt Securities Issued by States and Political Subdivisions	875		(4		)	322		(12		)	1,197		(16		)
Mortgage-Backed Securities Issued by Government Agencies	1,079,640		(6,274		)	—		—			1,079,640		(6,274		)
Total Temporarily Impaired Investment Securities	$	1,286,375	$	(7,215	)	$	1,949	$	(33	)	$	1,288,324	$	(7,248	)

December 31, 2009
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	347,324	$	(1,656	)	$	1,703	$	(23	)	$	349,027	$	(1,679	)
Debt Securities Issued by States and Political Subdivisions	878		(5		)	322		(12		)	1,200		(17		)
Mortgage-Backed Securities Issued by Government Agencies	2,171,588		(20,029		)	—		—			2,171,588		(20,029		)
U.S. Government-Sponsored Enterprises	8,982		(54		)	—		—			8,982		(54		)
Total Mortgage-Backed Securities	2,180,570		(20,083		)	—		—			2,180,570		(20,083		)
Total Temporarily Impaired Investment Securities	$	2,528,772	$	(21,744	)	$	2,025	$	(35	)	$	2,530,797	$	(21,779	)

March 31, 2009
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	226,503	$	(454	)	$	1,847	$	(47	)	$	228,350	$	(501	)
Debt Securities Issued by States and Political Subdivisions	3,603		(48		)	314		(20		)	3,917		(68		)
Mortgage-Backed Securities Issued by Government Agencies	7,948		(1		)	—		—			7,948		(1		)
U.S. Government-Sponsored Enterprises	22,306		(37		)	—		—			22,306		(37		)
Private-Label Mortgage-Backed Securities	5,360		(1,873		)	235,859		(25,195		)	241,219		(27,068		)
Total Mortgage-Backed Securities	35,614		(1,911		)	235,859		(25,195		)	271,473		(27,106		)
Other Debt Securities	—		—			34		(1		)	34		(1		)
Total Temporarily Impaired Investment Securities	$	265,720	$	(2,413	)	$	238,054	$	(25,263	)	$	503,774	$	(27,676	)

The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2010, which were comprised of 69 securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

As of March 31, 2010, the gross unrealized losses reported for mortgage-backed securities relate to investment securities issued by the Government National Mortgage Association.

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Note 3. Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.1 billion as of March 31, 2010 and December 31, 2009, and $2.9 billion as of March 31, 2009. All of the Company’s residential mortgage loans sold to third parties is sold on a non-recourse basis. The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of the borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors. Servicing income, including late and ancillary fees, was $1.8 million and $1.6 million for the three months ended March 31, 2010 and 2009, respectively. Servicing income is recorded as a component of mortgage banking income in the Company’s Consolidated Statements of Income. The Company’s residential mortgage loan servicing portfolio is comprised primarily of fixed rate loans concentrated in Hawaii.

For the three months ended March 31, 2010 and 2009, the change in the fair value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

			Three Months Ended
			March 31,
(dollars in thousands)	2010				2009
Balance at Beginning of Period	$	15,332			$	19,553
Changes in Fair Value:
Due to Change in Valuation Assumptions 1	(93			)	(91		)
Due to Paydowns and Other 2	(432			)	(1,558		)
Total Changes in Fair Value of Mortgage Servicing Rights	(525			)	(1,649		)
Balance at End of Period	$	14,807			$	17,904

1 Principally represents changes in discount rates and loan repayment rate assumptions, mostly due to changes in interest rates.

2 Principally represents changes due to loan payoffs.

The Company established a new class of mortgage servicing rights, to be accounted for under the amortization method, beginning with servicing rights recognized on or after July 1, 2008. For the three months ended March 31, 2010 and 2009, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of a valuation allowance, was as follows:

			Three Months Ended
			March 31,
(dollars in thousands)	2010				2009
Balance at Beginning of Period	$	10,638			$	1,796
Servicing Rights that Resulted From Asset Transfers	945				3,923
Amortization	(308			)	(95		)
Balance at End of Period	$	11,275			$	5,624
Valuation Allowance:
Balance at Beginning of Period	$	—			$	292
Recoveries	—				(292		)
Balance at End of Period	$	—			$	—
Mortgage Servicing Rights Accounted for Under the Amortization Method, Net of a Valuation Allowance	$	11,275			$	5,624
Fair Value of Mortgage Servicing Rights Accounted for Under the Amortization Method
Beginning of Period	$	14,853			$	1,504
End of Period	$	16,453			$	6,158

The key assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of March 31, 2010 and 2009 were as follows:

		March 31,
	2010		2009
Weighted-Average Constant Prepayment Rate 1	13.99%		16.85%
Weighted-Average Life (in years)	5.75		4.55
Weighted-Average Note Rate	5.23%		5.54%
Weighted-Average Discount Rate 2	7.24%		6.44%

1 Represents annualized loan repayment rate assumption.

2 Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.

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A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of March 31, 2010 and 2009 is presented in the following table.

			March 31,
(dollars in thousands)	2010				2009
Constant Prepayment Rate
Decrease in fair value from 25 basis points (“bps”) adverse change	$	(385		)	$	(259	)
Decrease in fair value from 50 bps adverse change	(709			)	(517		)
Discount Rate
Decrease in fair value from 25 bps adverse change	(402			)	(280		)
Decrease in fair value from 50 bps adverse change	(795			)	(558		)

This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear. Also, the effect of changing one key assumption without changing other assumptions is not realistic.

Note 4. Securities Sold Under Agreements to Repurchase

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

As of March 31, 2010, the contractual maturities of the Company’s securities sold under agreements to repurchase were as follows:

(dollars in thousands)	Amount
Overnight	$	7,000
2 to 30 Days	658,247
31 to 90 Days	148,189
Over 90 Days	715,611
Total	$	1,529,047

Note 5. Accumulated Other Comprehensive Income (Loss)

The following table presents the change in accumulated other comprehensive income (loss) for the three months ended March 31, 2010 and 2009:

(dollars in thousands)	Before Tax Amount			Tax Effect			Net of Tax
March 31, 2010:
Net Unrealized Gains on Investment Securities
Available-for-Sale Arising During the Year	$	39,983		$	18,436		$	21,547
Reclassification of Net Gains on Investment Securities
Available-for-Sale Included in Net Income	(20,021		)	(9,231		)	(10,790		)
Change in Unrealized Gains and Losses on
Investment Securities Available-for-Sale	19,962			9,205			10,757
Amortization of Net Losses Related to Defined Benefit Plans	595			214			381
Change in Accumulated Other Comprehensive Income (Loss)	$	20,557		$	9,419		$	11,138

March 31, 2009:
Net Unrealized Gains on Investment Securities
Available-for-Sale Arising During the Year	$	42,679		$	15,399		$	27,280
Reclassification of Net Gains on Investment Securities
Available-for-Sale Included in Net Income	(56		)	(19		)	(37		)
Change in Unrealized Gains and Losses on
Investment Securities Available-for-Sale	42,623			15,380			27,243
Amortization of Net Losses Related to Defined Benefit Plans	509			183			326
Change in Accumulated Other Comprehensive Income (Loss)	$	43,132		$	15,563		$	27,569

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Note 6. Earnings Per Share

There were no adjustments to net income, the numerator, for purposes of computing basic earnings per share. The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010	2009
Denominator for Basic Earnings Per Share	47,914,412	47,566,005
Dilutive Effect of Stock Options	325,630	208,569
Dilutive Effect of Restricted Stock	49,385	27,675
Denominator for Diluted Earnings Per Share	48,289,427	47,802,249

For the three months ended March 31, 2010 and 2009, 233,924 and 472,572 shares of stock options and restricted stock, respectively, were outstanding but not included in the calculation of diluted earnings per share as they were antidilutive.

Note 7. Business Segments

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

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 the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions. Funds transfer pricing also serves to transfer interest rate risk to Treasury. However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

Retail Banking

Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, and installment loans. Deposit products include checking, savings, and time deposit accounts. Retail Banking also offers retail life insurance products and provides merchant services to its small business customers. Products and services from Retail Banking are delivered to customers through 71 Hawaii branch locations, 483 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.

Commercial Banking

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit and cash management products. Commercial lending, deposit, and cash management services are offered to middle-market and large companies in Hawaii. Commercial real estate mortgages focus on customers that include investors, developers, and builders domiciled in Hawaii. Commercial Banking also includes syndicated lending activities, international banking, and operations at the Bank’s 12 branches in the Pacific Islands.

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Investment Services

Investment Services includes private banking, trust services, asset management, and institutional investment advisory services. 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 assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services 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. This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.

Treasury

Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign exchange business. This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, and short- and long-term borrowings. The primary sources of noninterest income are from bank-owned life insurance and foreign exchange income related to customer driven currency requests from merchants and island visitors. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.

Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury provide a wide-range of support to the Company’s other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

Selected business segment financial information as of and for the three months ended March 31, 2010 and 2009 were as follows:

	Retail			Commercial			Investment			Treasury and			Consolidated
(dollars in thousands)	Banking			Banking			Services			Other			Total
Three Months Ended March 31, 2010
Net Interest Income	$	49,623		$	40,838		$	4,323		$	12,869		$	107,653
Provision for Credit Losses	15,356			5,141			215			(1		)	20,711
Net Interest Income After Provision for Credit Losses	34,267			35,697			4,108			12,870			86,942
Noninterest Income	23,466			10,019			15,027			23,270			71,782
Noninterest Expense	(42,333		)	(23,862		)	(14,045		)	(1,466		)	(81,706		)
Income Before Provision for Income Taxes	15,400			21,854			5,090			34,674			77,018
Provision for Income Taxes	(5,698		)	(7,892		)	(1,884		)	(8,808		)	(24,282		)
Net Income