BOH_2013.06.30_10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
ý              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
    ended June 30, 2013
 
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 ý  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 ý  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 ý
 
As of July 16, 2013, there were 44,591,814 shares of common stock outstanding.




Bank of Hawaii Corporation
Form 10-Q
Index
 
 
 
Page
 
 
 
Part I - Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(dollars in thousands, except per share amounts)
2013

 
2012

 
2013

 
2012

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
62,729

 
$
63,910

 
$
125,549

 
$
128,601

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
15,073

 
16,988

 
30,924

 
34,701

Held-to-Maturity
19,189

 
25,054

 
39,043

 
51,467

Deposits
1

 
1

 
4

 
3

Funds Sold
74

 
119

 
133

 
248

Other
285

 
281

 
569

 
561

Total Interest Income
97,351

 
106,353

 
196,222

 
215,581

Interest Expense
 

 
 

 
 

 
 

Deposits
2,579

 
3,219

 
5,225

 
6,692

Securities Sold Under Agreements to Repurchase
6,751

 
7,250

 
13,756

 
14,554

Funds Purchased
10

 
5

 
32

 
10

Long-Term Debt
671

 
498

 
1,309

 
996

Total Interest Expense
10,011

 
10,972

 
20,322

 
22,252

Net Interest Income
87,340

 
95,381

 
175,900

 
193,329

Provision for Credit Losses

 
628

 

 
979

Net Interest Income After Provision for Credit Losses
87,340

 
94,753

 
175,900

 
192,350

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
12,089

 
11,195

 
23,975

 
22,113

Mortgage Banking
5,820

 
7,581

 
12,231

 
12,631

Service Charges on Deposit Accounts
9,112

 
9,225

 
18,413

 
18,816

Fees, Exchange, and Other Service Charges
13,133

 
12,326

 
25,067

 
24,725

Investment Securities Losses, Net

 

 

 
(90
)
Insurance
2,393

 
2,399

 
4,718

 
4,677

Bank-Owned Life Insurance
1,335

 
1,739

 
2,632

 
3,220

Other
4,159

 
2,383

 
8,783

 
8,838

Total Noninterest Income
48,041

 
46,848

 
95,819

 
94,930

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
45,341

 
44,037

 
94,016

 
91,061

Net Occupancy
9,661

 
10,058

 
19,296

 
20,574

Net Equipment
4,380

 
4,669

 
8,957

 
10,495

Data Services
3,050

 
3,160

 
6,316

 
6,747

Professional Fees
2,391

 
2,386

 
4,617

 
4,518

FDIC Insurance
1,949

 
2,088

 
3,898

 
4,159

Other
14,409

 
14,349

 
28,468

 
28,400

Total Noninterest Expense
81,181

 
80,747

 
165,568

 
165,954

Income Before Provision for Income Taxes
54,200

 
60,854

 
106,151

 
121,326

Provision for Income Taxes
16,437

 
20,107

 
32,408

 
36,769

Net Income
$
37,763

 
$
40,747

 
$
73,743

 
$
84,557

Basic Earnings Per Share
$
0.85

 
$
0.90

 
$
1.66

 
$
1.86

Diluted Earnings Per Share
$
0.85

 
$
0.90

 
$
1.65

 
$
1.85

Dividends Declared Per Share
$
0.45

 
$
0.45

 
$
0.90

 
$
0.90

Basic Weighted Average Shares
44,493,069

 
45,221,293

 
44,518,629

 
45,465,910

Diluted Weighted Average Shares
44,608,497

 
45,347,368

 
44,644,348

 
45,610,489

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

2



Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
(dollars in thousands)
 
2013

 
2012

 
2013

 
2012

Net Income
 
$
37,763

 
$
40,747

 
$
73,743

 
$
84,557

Other Comprehensive Income (Loss), Net of Tax:
 
 

 
 

 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
 
(46,572
)
 
3,387

 
(56,213
)
 
(3,067
)
Defined Benefit Plans
 
201

 
153

 
279

 
306

Total Other Comprehensive Income (Loss)
 
(46,371
)
 
3,540

 
(55,934
)
 
(2,761
)
Comprehensive Income (Loss)
 
$
(8,608
)
 
$
44,287

 
$
17,809

 
$
81,796

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

3



Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)
June 30,
2013

 
December 31,
2012

Assets
 

 
 

Interest-Bearing Deposits
$
4,635

 
$
3,393

Funds Sold
329,922

 
185,682

Investment Securities
 

 
 

Available-for-Sale
2,815,408

 
3,367,557

     Held to Maturity (Fair Value of $4,036,197 and $3,687,676)
4,027,829

 
3,595,065

Loans Held for Sale
25,880

 
21,374

Loans and Leases
5,859,152

 
5,854,521

Allowance for Loan and Lease Losses
(124,575
)
 
(128,857
)
Net Loans and Leases
5,734,577

 
5,725,664

Total Earning Assets
12,938,251

 
12,898,735

Cash and Noninterest-Bearing Deposits
136,386

 
163,786

Premises and Equipment
105,752

 
105,005

Customers’ Acceptances
114

 
173

Accrued Interest Receivable
43,375

 
43,077

Foreclosed Real Estate
3,256

 
3,887

Mortgage Servicing Rights
27,631

 
25,240

Goodwill
31,517

 
31,517

Other Assets
447,136

 
456,952

Total Assets
$
13,733,418

 
$
13,728,372

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
3,396,835

 
$
3,367,185

Interest-Bearing Demand
2,269,196

 
2,163,473

Savings
4,433,042

 
4,399,316

Time
1,350,125

 
1,599,508

Total Deposits
11,449,198

 
11,529,482

Funds Purchased
9,983

 
11,296

Securities Sold Under Agreements to Repurchase
866,237

 
758,947

Long-Term Debt
174,727

 
128,055

Banker’s Acceptances
114

 
173

Retirement Benefits Payable
47,318

 
47,658

Accrued Interest Payable
4,399

 
4,776

Taxes Payable and Deferred Taxes
48,947

 
88,014

Other Liabilities
146,127

 
138,306

Total Liabilities
12,747,050

 
12,706,707

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 30, 2013 - 57,488,745 / 44,644,596
and December 31, 2012 - 57,319,352 / 44,754,835)
572

 
571

Capital Surplus
518,804

 
515,619

Accumulated Other Comprehensive Income (Loss)
(26,726
)
 
29,208

Retained Earnings
1,115,594

 
1,084,477

Treasury Stock, at Cost (Shares: June 30, 2013 - 12,844,149
and December 31, 2012 - 12,564,517)
(621,876
)
 
(608,210
)
Total Shareholders’ Equity
986,368

 
1,021,665

Total Liabilities and Shareholders’ Equity
$
13,733,418

 
$
13,728,372

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

4



Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollars in thousands)
Common
Shares Outstanding

 
Common Stock

 
Capital
Surplus

 
Accum.
Other
Compre-
hensive
Income
(Loss)

 
Retained Earnings

 
Treasury Stock

 
Total

Balance as of December 31, 2012
44,754,835

 
$
571

 
$
515,619

 
$
29,208

 
$
1,084,477

 
$
(608,210
)
 
$
1,021,665

Net Income

 

 

 

 
73,743

 

 
73,743

Other Comprehensive Loss

 

 

 
(55,934
)
 

 

 
(55,934
)
Share-Based Compensation

 

 
2,732

 

 

 

 
2,732

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
379,870

 
1

 
453

 

 
(2,235
)
 
10,294

 
8,513

Common Stock Repurchased
(490,109
)
 

 

 

 

 
(23,960
)
 
(23,960
)
Cash Dividends Paid ($0.90 per share)

 

 

 

 
(40,391
)
 

 
(40,391
)
Balance as of June 30, 2013
44,644,596

 
$
572

 
$
518,804

 
$
(26,726
)
 
$
1,115,594

 
$
(621,876
)
 
$
986,368

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2011
45,947,116

 
$
571

 
$
507,558

 
$
35,263

 
$
1,003,938

 
$
(544,663
)
 
$
1,002,667

Net Income

 

 

 

 
84,557

 

 
84,557

Other Comprehensive Loss

 

 

 
(2,761
)
 

 

 
(2,761
)
Share-Based Compensation

 

 
3,723

 

 

 

 
3,723

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
400,094

 

 
448

 

 
(2,758
)
 
10,684

 
8,374

Common Stock Repurchased
(1,098,933
)
 

 

 

 

 
(51,586
)
 
(51,586
)
Cash Dividends Paid ($0.90 per share)

 

 

 

 
(41,149
)
 

 
(41,149
)
Balance as of June 30, 2012
45,248,277

 
$
571

 
$
511,729

 
$
32,502

 
$
1,044,588

 
$
(585,565
)
 
$
1,003,825

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

5



Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
June 30,
(dollars in thousands)
2013

 
2012

Operating Activities
 

 
 

Net Income
$
73,743

 
$
84,557

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

 
 

Provision for Credit Losses

 
979

Depreciation and Amortization
6,106

 
6,883

Amortization of Deferred Loan and Lease Fees
(1,807
)
 
(1,548
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
31,996

 
28,147

Share-Based Compensation
2,732

 
3,723

Benefit Plan Contributions
(677
)
 
(5,574
)
Deferred Income Taxes
(4,650
)
 
(11,358
)
Net Gains on Sales of Loans and Leases
(13,938
)
 
(7,542
)
Net Losses on Investment Securities

 
90

Proceeds from Sales of Loans Held for Sale
445,293

 
198,197

Originations of Loans Held for Sale
(438,711
)
 
(189,219
)
Tax Benefits from Share-Based Compensation
(491
)
 
(623
)
Net Change in Other Assets and Other Liabilities
22,287

 
(11,086
)
Net Cash Provided by Operating Activities
121,883

 
95,626

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
567,569

 
468,489

Proceeds from Sales

 
34,831

Purchases
(373,053
)
 
(401,944
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
569,150

 
446,346

Purchases
(769,040
)
 
(540,472
)
Net Change in Loans and Leases
(11,483
)
 
(141,526
)
Premises and Equipment, Net
(6,853
)
 
(10,755
)
Net Cash Used in Investing Activities
(23,710
)
 
(145,031
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
(80,284
)
 
955,370

Net Change in Short-Term Borrowings
105,977

 
(857,380
)
Proceeds from Long-Term Debt
50,000

 

Tax Benefits from Share-Based Compensation
491

 
623

Proceeds from Issuance of Common Stock
8,076

 
7,858

Repurchase of Common Stock
(23,960
)
 
(51,586
)
Cash Dividends Paid
(40,391
)
 
(41,149
)
Net Cash Provided by Financing Activities
19,909

 
13,736

 
 
 
 
Net Change in Cash and Cash Equivalents
118,082

 
(35,669
)
Cash and Cash Equivalents at Beginning of Period
352,861

 
669,909

Cash and Cash Equivalents at End of Period
$
470,943

 
$
634,240

Supplemental Information
 

 
 

Cash Paid for Interest
$
21,281

 
$
23,152

Cash Paid for Income Taxes
33,554

 
41,775

Non-Cash Investing Activities:
 

 
 

Transfer from Investment Securities Available-For-Sale to Investment Securities Held-To-Maturity
254,779

 

Transfer from Loans to Foreclosed Real Estate
2,551

 
2,309

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

6



Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

Use of Estimates in the Preparation of Financial Statements

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

Investment Securities

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

Offsetting Assets and Liabilities

In December 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards ("IFRS"). However, as the FASB and International Accounting Standards Board were not able to reach a converged solution with regards to offsetting requirements, they each developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The provisions of ASU No. 2013-01 limit the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company's consolidated statements of income and condition. See Note 5 to the Consolidated Financial Statements for the disclosures required by ASU No. 2011-11 and ASU No. 2013-01.


7



Reclassifications Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also require that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities) and the income statement line item affected by the reclassification (e.g., realized gains (losses) on sales of investment securities). If a component is not required to be reclassified to net income in its entirety (e.g., amortization of defined benefit plan items), entities would instead cross reference to the related note to the financial statements for additional information (e.g., pension footnote). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the provisions of ASU No. 2013-02 only amended the disclosure requirements for accumulated other comprehensive income, the adoption had no impact on the Company's consolidated statements of income and condition. See Note 6 to the Consolidated Financial Statements for the disclosures required by ASU No. 2013-02.

8



Note 2.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of June 30, 2013 and December 31, 2012 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

June 30, 2013
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
570,944

 
$
15,125

 
$
(43
)
 
$
586,026

Debt Securities Issued by States and Political Subdivisions
565,781

 
9,189

 
(13,050
)
 
561,920

Debt Securities Issued by Corporations
280,438

 
1,336

 
(6,485
)
 
275,289

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
798,266

 
17,696

 
(635
)
 
815,327

    Residential - U.S. Government-Sponsored Enterprises
26,872

 
1,606

 

 
28,478

    Commercial - Government Agencies
575,246

 

 
(26,878
)
 
548,368

Total Mortgage-Backed Securities
1,400,384

 
19,302

 
(27,513
)
 
1,392,173

Total
$
2,817,547

 
$
44,952

 
$
(47,091
)
 
$
2,815,408

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
365,272

 
$
3,832

 
$
(2,796
)
 
$
366,308

Debt Securities Issued by States and Political Subdivisions
254,741

 
1,761

 

 
256,502

Debt Securities Issued by Corporations
113,621

 

 
(3,326
)
 
110,295

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,268,222

 
37,866

 
(30,497
)
 
3,275,591

    Residential - U.S. Government-Sponsored Enterprises
25,973

 
1,528

 

 
27,501

Total Mortgage-Backed Securities
3,294,195

 
39,394

 
(30,497
)
 
3,303,092

Total
$
4,027,829

 
$
44,987

 
$
(36,619
)
 
$
4,036,197

 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
855,070

 
$
14,936

 
$
(17
)
 
$
869,989

Debt Securities Issued by States and Political Subdivisions
753,207

 
30,159

 
(955
)
 
782,411

Debt Securities Issued by Corporations
82,450

 
1,984

 

 
84,434

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
1,041,669

 
27,283

 
(292
)
 
1,068,660

    Residential - U.S. Government-Sponsored Enterprises
35,234

 
2,064

 

 
37,298

    Commercial - Government Agencies
524,055

 
1,907

 
(1,197
)
 
524,765

Total Mortgage-Backed Securities
1,600,958

 
31,254

 
(1,489
)
 
1,630,723

Total
$
3,291,685

 
$
78,333

 
$
(2,461
)
 
$
3,367,557

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
190,168

 
$
5,198

 
$

 
$
195,366

Debt Securities Issued by Corporations
24,000

 
4

 

 
24,004

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,349,403

 
86,673

 
(1,366
)
 
3,434,710

    Residential - U.S. Government-Sponsored Enterprises
31,494

 
2,102

 

 
33,596

Total Mortgage-Backed Securities
3,380,897

 
88,775

 
(1,366
)
 
3,468,306

Total
$
3,595,065

 
$
93,977

 
$
(1,366
)
 
$
3,687,676


9




The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2013.  Mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
(dollars in thousands)
Amortized Cost

 
Fair Value

Available-for-Sale:
 

 
 

Due in One Year or Less
$
168,292

 
$
168,666

Due After One Year Through Five Years
256,637

 
260,614

Due After Five Years Through Ten Years
624,515

 
614,924

Due After Ten Years
367,719

 
379,031

 
1,417,163

 
1,423,235

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
798,266

 
815,327

    Residential - U.S. Government-Sponsored Enterprises
26,872

 
28,478

    Commercial - Government Agencies
575,246

 
548,368

Total Mortgage-Backed Securities
1,400,384

 
1,392,173

Total
$
2,817,547

 
$
2,815,408

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
70,241

 
$
70,603

Due After One Year Through Five Years
295,032

 
295,706

Due After Five Years Through Ten Years
94,830

 
95,553

Due After Ten Years
273,531

 
271,243

 
733,634

 
733,105

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
3,268,222

 
3,275,591

    Residential - U.S. Government-Sponsored Enterprises
25,973

 
27,501

Total Mortgage-Backed Securities
3,294,195

 
3,303,092

Total
$
4,027,829

 
$
4,036,197


Investment securities with carrying values of $2.7 billion and $2.9 billion as of June 30, 2013 and December 31, 2012, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.
  
There were no sales of investment securities for the three and six months ended June 30, 2013 and for the three months ended June 30, 2012. Gross realized gains on the sales of investment securities were $0.2 million and gross realized losses on the sales of investment securities were $0.3 million for the six months ended June 30, 2012.


10



The Company’s investment securities in an unrealized loss position, segregated by continuous length of impairment, were as follows:
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

June 30, 2013
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
2,706

 
$
(40
)
 
$
429

 
$
(3
)
 
$
3,135

 
$
(43
)
Debt Securities Issued by States
   and Political Subdivisions
352,120

 
(13,050
)
 

 

 
352,120

 
(13,050
)
Debt Securities Issued by Corporations
201,741

 
(6,485
)
 

 

 
201,741

 
(6,485
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
46,355

 
(179
)
 
12,288

 
(456
)
 
58,643

 
(635
)
    Commercial - Government Agencies
548,367

 
(26,878
)
 

 

 
548,367

 
(26,878
)
Total Mortgage-Backed Securities
594,722

 
(27,057
)
 
12,288

 
(456
)
 
607,010

 
(27,513
)
Total
$
1,151,289

 
$
(46,632
)
 
$
12,717

 
$
(459
)
 
$
1,164,006

 
$
(47,091
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
183,046

 
$
(2,796
)
 
$

 
$

 
$
183,046

 
$
(2,796
)
Debt Securities Issued by Corporations
88,295

 
(3,326
)
 

 

 
88,295

 
(3,326
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
1,513,576

 
(30,497
)
 

 

 
1,513,576

 
(30,497
)
Total
$
1,784,917

 
$
(36,619
)
 
$

 
$

 
$
1,784,917

 
$
(36,619
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
2,295

 
$
(14
)
 
$
564

 
$
(3
)
 
$
2,859

 
$
(17
)
Debt Securities Issued by States
     and Political Subdivisions
72,400

 
(955
)
 

 

 
72,400

 
(955
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
7,325

 
(57
)
 
22,389

 
(235
)
 
29,714

 
(292
)
     Commercial - Government Agencies
261,883

 
(1,197
)
 

 

 
261,883

 
(1,197
)
Total Mortgage-Backed Securities
269,208

 
(1,254
)
 
22,389

 
(235
)
 
291,597

 
(1,489
)
Total
$
343,903

 
$
(2,223
)
 
$
22,953

 
$
(238
)
 
$
366,856

 
$
(2,461
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
$
351,762

 
$
(1,366
)
 
$

 
$

 
$
351,762

 
$
(1,366
)
Total
$
351,762

 
$
(1,366
)
 
$

 
$

 
$
351,762

 
$
(1,366
)

The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2013, which was comprised of 247 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.  As of June 30, 2013 and December 31, 2012, the gross unrealized losses reported for mortgage-backed securities were related to investment securities issued by the Government National Mortgage Association. 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.


11



As of June 30, 2013, included in the Company's investment securities at fair value were securities issued by political subdivisions within the State of Hawaii of $569.9 million, representing 70% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 94% were credit-rated Aa2 or better by Moody's while the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Also, approximately 76% of the Company's Hawaii municipal bond holdings were general obligation issuances. As of June 30, 2013, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 5% of the total fair value of the Company's municipal debt securities.
As of June 30, 2013, the carrying value of the Company’s Federal Home Loan Bank and Federal Reserve Bank stock was as follows:
(dollars in thousands)
June 30,
2013

 
December 31,
2012

Federal Home Loan Bank Stock
$
59,109

 
$
60,200

Federal Reserve Bank Stock
19,055

 
18,952

Total
$
78,164

 
$
79,152


These securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution.  The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment.  Management considers these non-marketable equity securities to be long-term investments.  Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

Note 3.    Loans and Leases and the Allowance for Loan and Lease Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of June 30, 2013 and December 31, 2012:

(dollars in thousands)
June 30,
2013

 
December 31,
2012

Commercial
 

 
 

Commercial and Industrial
$
875,702

 
$
829,512

Commercial Mortgage
1,160,977

 
1,097,425

Construction
107,016

 
113,987

Lease Financing
257,067

 
274,969

Total Commercial
2,400,762

 
2,315,893

Consumer
 

 
 

Residential Mortgage
2,252,117

 
2,349,916

Home Equity
751,790

 
770,376

Automobile
233,475

 
209,832

Other 1
221,008

 
208,504

Total Consumer
3,458,390

 
3,538,628

Total Loans and Leases
$
5,859,152

 
$
5,854,521

1 
Comprised of other revolving credit, installment, and lease financing.
Most of the Company's lending activity is with customers located in the State of Hawaii. A substantial portion of the Company's real estate loans are secured by real estate in Hawaii.

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income, were $4.8 million and $2.3 million for the three months ended June 30, 2013 and 2012, respectively, and $12.4 million and $4.7 million for the six months ended June 30, 2013 and 2012, respectively.

12



Allowance for Loan and Lease Losses (the “Allowance”)

The following presents by portfolio segment, the activity in the Allowance for the three and six months ended June 30, 2013 and 2012.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of June 30, 2013 and 2012.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended June 30, 2013
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
73,416

 
$
53,462

 
$
126,878

Loans and Leases Charged-Off
(266
)
 
(4,438
)
 
(4,704
)
Recoveries on Loans and Leases Previously Charged-Off
470

 
1,931

 
2,401

Net Loans and Leases Charged-Off
204

 
(2,507
)
 
(2,303
)
Provision for Credit Losses
(3,423
)
 
3,423

 

Balance at End of Period
$
70,197

 
$
54,378

 
$
124,575

Six Months Ended June 30, 2013
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
72,704

 
$
56,153

 
$
128,857

Loans and Leases Charged-Off
(648
)
 
(9,355
)
 
(10,003
)
Recoveries on Loans and Leases Previously Charged-Off
1,267

 
4,454

 
5,721

Net Loans and Leases Charged-Off
619

 
(4,901
)
 
(4,282
)
Provision for Credit Losses
(3,126
)
 
3,126

 

Balance at End of Period
$
70,197

 
$
54,378

 
$
124,575

As of June 30, 2013
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
195

 
$
3,927

 
$
4,122

Collectively Evaluated for Impairment
70,002

 
50,451

 
120,453

Total
$
70,197

 
$
54,378

 
$
124,575

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
20,059

 
$
36,756

 
$
56,815

Collectively Evaluated for Impairment
2,380,703

 
3,421,634

 
5,802,337

Total
$
2,400,762

 
$
3,458,390

 
$
5,859,152

 
 
 
 
 
 
Three Months Ended June 30, 2012
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
78,174

 
$
57,432

 
$
135,606

Loans and Leases Charged-Off
(1,078
)
 
(4,858
)
 
(5,936
)
Recoveries on Loans and Leases Previously Charged-Off
545

 
1,600

 
2,145

Net Loans and Leases Charged-Off
(533
)
 
(3,258
)
 
(3,791
)
Provision for Credit Losses
371

 
257

 
628

Balance at End of Period
$
78,012

 
$
54,431

 
$
132,443

Six Months Ended June 30, 2012
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
80,562

 
$
58,044

 
$
138,606

Loans and Leases Charged-Off
(2,839
)
 
(10,856
)
 
(13,695
)
Recoveries on Loans and Leases Previously Charged-Off
2,574

 
3,979

 
6,553

Net Loans and Leases Charged-Off
(265
)
 
(6,877
)
 
(7,142
)
Provision for Credit Losses
(2,285
)
 
3,264

 
979

Balance at End of Period
$
78,012

 
$
54,431

 
$
132,443

As of June 30, 2012
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
54

 
$
4,774

 
$
4,828

Collectively Evaluated for Impairment
77,958

 
49,657

 
127,615

Total
$
78,012

 
$
54,431

 
$
132,443

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
14,131

 
$
32,687

 
$
46,818

Collectively Evaluated for Impairment
2,108,229

 
3,516,436

 
5,624,665

Total
$
2,122,360

 
$
3,549,123

 
$
5,671,483


13



Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner.  The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories.  Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation.  These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment.  Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively.  These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:

Pass:
Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

Special Mention:
Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

Classified:
Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner.


14



The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of June 30, 2013 and December 31, 2012.
 
June 30, 2013
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
822,965

 
$
1,086,806

 
$
90,439

 
$
230,545

 
$
2,230,755

Special Mention
9,736

 
25,044

 
13,542

 
25,696

 
74,018

Classified
43,001

 
49,127

 
3,035

 
826

 
95,989

Total
$
875,702

 
$
1,160,977

 
$
107,016

 
$
257,067

 
$
2,400,762

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,228,382

 
$
747,318

 
$
233,380

 
$
220,153

 
$
3,429,233

Classified
23,735

 
4,472

 
95

 
855

 
29,157

Total
$
2,252,117

 
$
751,790

 
$
233,475

 
$
221,008

 
$
3,458,390

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
5,859,152

 
December 31, 2012
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
779,654

 
$
1,018,128

 
$
96,058

 
$
247,401

 
$
2,141,241

Special Mention
22,759

 
23,848

 
15,839

 
26,540

 
88,986

Classified
27,099

 
55,449

 
2,090

 
1,028

 
85,666

Total
$
829,512

 
$
1,097,425

 
$
113,987

 
$
274,969

 
$
2,315,893

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,326,216

 
$
766,912

 
$
209,646

 
$
207,917

 
$
3,510,691

Classified
23,700

 
3,464

 
186

 
587

 
27,937

Total
$
2,349,916

 
$
770,376

 
$
209,832

 
$
208,504

 
$
3,538,628

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
5,854,521

1 
Comprised of other revolving credit, installment, and lease financing.

15



Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of June 30, 2013 and December 31, 2012.
(dollars in thousands)
30 - 59
Days
Past Due

 
60 - 89
Days
Past Due

 
Past Due
90 Days
or More

 
Non-
Accrual

 
Total
Past Due and
Non-Accrual

 
Current

 
Total
Loans and
Leases

 
Non-Accrual
Loans and
Leases that
are Current 2

As of June 30, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
467

 
$
1,255

 
$

 
$
4,909

 
$
6,631

 
$
869,071

 
$
875,702

 
$
4,332

Commercial Mortgage
422

 
742

 

 
2,772

 
3,936

 
1,157,041

 
1,160,977

 
1,938

Construction

 

 

 

 

 
107,016

 
107,016

 

Lease Financing

 

 

 
16

 
16

 
257,051

 
257,067