Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
x          Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
    ended September 30, 2016
 
or
 
o                 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from              to            
 
Commission File Number: 1-6887
 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
99-0148992
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
130 Merchant Street, Honolulu, Hawaii
 
96813
(Address of principal executive offices)
 
(Zip Code)
 1-888-643-3888
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
 
As of October 18, 2016, there were 42,692,883 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2016

 
2015

 
2016

 
2015

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
83,489

 
$
75,874

 
$
246,707

 
$
220,400

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
10,313

 
10,192

 
31,648

 
30,663

Held-to-Maturity
19,315

 
20,689

 
59,874

 
67,928

Deposits
1

 
2

 
7

 
7

Funds Sold
695

 
291

 
2,066

 
818

Other
166

 
312

 
531

 
924

Total Interest Income
113,979

 
107,360

 
340,833

 
320,740

Interest Expense
 

 
 

 
 

 
 

Deposits
3,232

 
2,410

 
9,199

 
7,183

Securities Sold Under Agreements to Repurchase
5,713

 
6,307

 
18,000

 
19,118

Funds Purchased
3

 
3

 
9

 
9

Other Debt
1,119

 
749

 
3,139

 
1,987

Total Interest Expense
10,067

 
9,469

 
30,347

 
28,297

Net Interest Income
103,912

 
97,891

 
310,486

 
292,443

Provision for Credit Losses
2,500

 

 
1,500

 

Net Interest Income After Provision for Credit Losses
101,412

 
97,891

 
308,986

 
292,443

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
11,008

 
11,907

 
34,971

 
36,442

Mortgage Banking
6,362

 
3,291

 
13,639

 
8,453

Service Charges on Deposit Accounts
8,524

 
8,669

 
25,117

 
25,409

Fees, Exchange, and Other Service Charges
14,023

 
13,340

 
41,445

 
39,589

Investment Securities Gains (Losses), Net
(328
)
 
24

 
10,540

 
10,341

Annuity and Insurance
1,653

 
1,721

 
5,560

 
5,650

Bank-Owned Life Insurance
1,911

 
1,609

 
5,010

 
5,431

Other
4,961

 
2,660

 
14,558

 
10,138

Total Noninterest Income
48,114

 
43,221

 
150,840

 
141,453

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
49,725

 
46,576

 
150,528

 
143,966

Net Occupancy
8,510

 
7,403

 
22,671

 
25,341

Net Equipment
4,913

 
4,804

 
15,387

 
14,918

Data Processing
3,620

 
3,920

 
11,543

 
11,366

Professional Fees
2,396

 
2,258

 
7,082

 
6,857

FDIC Insurance
2,104

 
2,139

 
6,600

 
6,347

Other
16,264

 
24,788

 
47,178

 
53,582

Total Noninterest Expense
87,532

 
91,888

 
260,989

 
262,377

Income Before Provision for Income Taxes
61,994

 
49,224

 
198,837

 
171,519

Provision for Income Taxes
18,501

 
14,948

 
60,889

 
53,647

Net Income
$
43,493

 
$
34,276

 
$
137,948

 
$
117,872

Basic Earnings Per Share
$
1.02

 
$
0.79

 
$
3.23

 
$
2.72

Diluted Earnings Per Share
$
1.02

 
$
0.79

 
$
3.21

 
$
2.71

Dividends Declared Per Share
$
0.48

 
$
0.45

 
$
1.41

 
$
1.35

Basic Weighted Average Shares
42,543,122

 
43,181,233

 
42,730,571

 
43,290,137

Diluted Weighted Average Shares
42,778,346

 
43,427,730

 
42,947,059

 
43,514,898

 
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 Comprehensive Income (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(dollars in thousands)
 
2016

 
2015

 
2016

 
2015

Net Income
 
$
43,493

 
$
34,276

 
$
137,948

 
$
117,872

Other Comprehensive Income (Loss), Net of Tax:
 
 

 
 

 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
 
(5,528
)
 
7,051

 
8,323

 
4,735

Defined Benefit Plans
 
140

 
219

 
422

 
659

Total Other Comprehensive Income (Loss)
 
(5,388
)
 
7,270

 
8,745

 
5,394

Comprehensive Income
 
$
38,105

 
$
41,546

 
$
146,693

 
$
123,266

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

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Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)
September 30,
2016

 
December 31,
2015

Assets
 

 
 

Interest-Bearing Deposits in Other Banks
$
4,181

 
$
4,130

Funds Sold
506,604

 
592,892

Investment Securities
 

 
 

Available-for-Sale
2,213,482

 
2,256,818

Held-to-Maturity (Fair Value of $3,893,542 and $4,006,412)
3,815,915

 
3,982,736

Loans Held for Sale
68,066

 
4,808

Loans and Leases
8,694,097

 
7,878,985

Allowance for Loan and Lease Losses
(104,033
)
 
(102,880
)
Net Loans and Leases
8,590,064

 
7,776,105

Total Earning Assets
15,198,312

 
14,617,489

Cash and Due From Banks
127,326

 
158,699

Premises and Equipment, Net
110,288

 
111,199

Accrued Interest Receivable
46,925

 
44,719

Foreclosed Real Estate
1,747

 
824

Mortgage Servicing Rights
20,991

 
23,002

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
272,637

 
268,175

Other Assets
204,900

 
199,392

Total Assets
$
16,014,643

 
$
15,455,016

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,437,963

 
$
4,286,331

Interest-Bearing Demand
2,777,095

 
2,761,930

Savings
5,306,880

 
5,025,191

Time
1,286,427

 
1,177,651

Total Deposits
13,808,365

 
13,251,103

Funds Purchased
9,616

 
7,333

Securities Sold Under Agreements to Repurchase
551,683

 
628,857

Other Debt
267,954

 
245,786

Retirement Benefits Payable
47,522

 
47,374

Accrued Interest Payable
6,115

 
5,032

Taxes Payable and Deferred Taxes
24,922

 
17,737

Other Liabilities
134,607

 
135,534

Total Liabilities
14,850,784

 
14,338,756

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2016 - 57,854,843 / 42,733,513
and December 31, 2015 - 57,749,071 / 43,282,153)
576

 
575

Capital Surplus
549,064

 
542,041

Accumulated Other Comprehensive Loss
(14,812
)
 
(23,557
)
Retained Earnings
1,393,231

 
1,316,260

Treasury Stock, at Cost (Shares: September 30, 2016 - 15,121,330
and December 31, 2015 - 14,466,918)
(764,200
)
 
(719,059
)
Total Shareholders’ Equity
1,163,859

 
1,116,260

Total Liabilities and Shareholders’ Equity
$
16,014,643

 
$
15,455,016

 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)
(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, 2015
43,282,153

 
$
575

 
$
542,041

 
$
(23,557
)
 
$
1,316,260

 
$
(719,059
)
 
$
1,116,260

Net Income

 

 

 

 
137,948

 

 
137,948

Other Comprehensive Income

 

 

 
8,745

 

 

 
8,745

Share-Based Compensation

 

 
5,020

 

 

 

 
5,020

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
224,018

 
1

 
2,003

 

 
(314
)
 
6,224

 
7,914

Common Stock Repurchased
(772,658
)
 

 

 

 

 
(51,365
)
 
(51,365
)
Cash Dividends Declared ($1.41 per share)

 

 

 

 
(60,663
)
 

 
(60,663
)
Balance as of September 30, 2016
42,733,513

 
$
576

 
$
549,064

 
$
(14,812
)
 
$
1,393,231

 
$
(764,200
)
 
$
1,163,859

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
43,724,208

 
$
574

 
$
531,932

 
$
(26,686
)
 
$
1,234,801

 
$
(685,535
)
 
$
1,055,086

Net Income

 

 

 

 
117,872

 

 
117,872

Other Comprehensive Income

 

 

 
5,394

 

 

 
5,394

Share-Based Compensation

 

 
5,698

 

 

 

 
5,698

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
246,851

 
1

 
1,482

 

 
(376
)
 
11,011

 
12,118

Common Stock Repurchased
(628,119
)
 

 

 

 

 
(38,933
)
 
(38,933
)
Cash Dividends Declared ($1.35 per share)

 

 

 

 
(58,881
)
 

 
(58,881
)
Balance as of September 30, 2015
43,342,940

 
$
575

 
$
539,112

 
$
(21,292
)
 
$
1,293,416

 
$
(713,457
)
 
$
1,098,354

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

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Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended
 
September 30,
(dollars in thousands)
2016

 
2015

Operating Activities
 

 
 

Net Income
$
137,948

 
$
117,872

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

 
 

Provision for Credit Losses
1,500

 

Impairment on Equipment Held for Sale

 
9,453

Depreciation and Amortization
9,734

 
9,541

Amortization of Deferred Loan and Lease Fees
(1,089
)
 
(1,282
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
33,234

 
38,753

Share-Based Compensation
5,020

 
5,698

Benefit Plan Contributions
(929
)
 
(1,413
)
Deferred Income Taxes
6,465

 
(10,618
)
Net Gains on Sales of Loans and Leases
(8,061
)
 
(2,510
)
Net Gains on Sales of Investment Securities
(10,540
)
 
(10,341
)
Proceeds from Sales of Loans Held for Sale
268,752

 
142,391

Originations of Loans Held for Sale
(323,837
)
 
(137,293
)
Tax Benefits from Share-Based Compensation
(916
)
 
(403
)
Net Change in Other Assets and Other Liabilities
(14,231
)
 
9,719

Net Cash Provided by Operating Activities
103,050

 
169,567

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
288,928

 
256,581

Proceeds from Sales
10,766

 
68,166

Purchases
(248,839
)
 
(317,458
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
545,133

 
715,776

Purchases
(394,547
)
 
(389,213
)
Net Change in Loans and Leases
(816,440
)
 
(800,482
)
Premises and Equipment, Net
(8,823
)
 
(8,673
)
Net Cash Used in Investing Activities
(623,822
)
 
(475,303
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
557,262

 
303,873

Net Change in Short-Term Borrowings
(74,891
)
 
(56,463
)
Proceeds from Long-Term Debt
75,000

 
100,000

Repayments of Long-Term Debt
(50,000
)
 

Tax Benefits from Share-Based Compensation
916

 
403

Proceeds from Issuance of Common Stock
6,903

 
7,244

Repurchase of Common Stock
(51,365
)
 
(38,933
)
Cash Dividends Paid
(60,663
)
 
(58,881
)
Net Cash Provided by Financing Activities
403,162

 
257,243

 
 
 
 
Net Change in Cash and Cash Equivalents
(117,610
)
 
(48,493
)
Cash and Cash Equivalents at Beginning of Period
755,721

 
535,576

Cash and Cash Equivalents at End of Period
$
638,111

 
$
487,083

Supplemental Information
 

 
 

Cash Paid for Interest
$
28,952

 
$
27,168

Cash Paid for Income Taxes
51,257

 
52,808

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
1,058

 
787

Transfers from Loans to Loans Held for Sale
143,918

 
93,539

 
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 Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  Bank of Hawaii Corporation and its subsidiaries (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands.  The accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”). 

The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period information has been reclassified to conform to the current period presentation. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.

The accompanying consolidated financial statements 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 and 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, 2015

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.

Variable Interest Entities

Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the variable interest entity ("VIE"). The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.

The Company has limited partnership interests in several low-income housing partnerships. These partnerships provide funds for the construction and operation of apartment complexes that provide affordable housing to low-income households. If these developments successfully attract a specified percentage of residents falling in that lower income range, state and/or federal income tax credits are made available to the partners. The tax credits are generally recognized over 10 years. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained.

Prior to January 1, 2015, the Company utilized the effective yield method whereby the Company recognized tax credits generally over 10 years and amortized the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the Company. On January 1, 2015, the Company adopted ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects" prospectively for new investments. ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. As permitted by ASU No. 2014-01, the Company elected to continue to utilize the effective yield method for investments made prior to January 1, 2015.

Unfunded commitments to fund these low-income housing partnerships were $22.4 million and $25.3 million as of September 30, 2016 and December 31, 2015, respectively. These unfunded commitments are unconditional and legally binding

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and are recorded in other liabilities in the consolidated statements of condition. See Note 5 Affordable Housing Projects Tax Credit Partnerships for more information.

The Company also has limited partnership interests in solar energy tax credit partnership investments. These partnerships develop, build, own and operate solar renewable energy projects. Over the course of these investments, the Company expects to receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Tax benefits associated with these investments are generally recognized over 6 years.
These entities meet the definition of a VIE; however, the Company is not the primary beneficiary of the entities, as the general partner has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. While the partnership agreements allow the limited partners, through a majority vote, to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause.

The investments in these entities are initially recorded at cost, which approximates the maximum exposure to loss as a result of the Company's involvement with these unconsolidated entities. The balance of the Company's investments in these entities was $78.0 million and $79.0 million as of September 30, 2016 and December 31, 2015, respectively, and is included in other assets in the consolidated statements of condition.

Accounting Standards Adopted in 2016

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The Company adopted ASU No. 2015-02 effective January 1, 2016. The adoption of ASU No. 2015-02 did not have a material impact on the Company's Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. The purpose of ASU 2015-05 is to clarify which fees paid in a cloud computing arrangement should be capitalized and which fees should be expensed as incurred. The Company prospectively adopted ASU No. 2015-05 effective January 1, 2016. The adoption of ASU No. 2015-05 did not have a material impact on the Company's Consolidated Financial Statements.

Accounting Standards Pending Adoption

In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in

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exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date" which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients.” The Company is currently evaluating the provisions of ASU No. 2014-09 and its related updates and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company's Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, "Leases." Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of

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ASU No. 2016-02 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company expects adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.


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Note 2.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2016 and December 31, 2015 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

September 30, 2016
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
421,460

 
$
2,999

 
$
(1,325
)
 
$
423,134

Debt Securities Issued by States and Political Subdivisions
669,062

 
28,026

 
(28
)
 
697,060

Debt Securities Issued by Corporations
273,057

 
36

 
(4,026
)
 
269,067

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
228,422

 
5,712

 
(762
)
 
233,372

    Residential - U.S. Government-Sponsored Enterprises
493,409

 
5,169

 
(71
)
 
498,507

    Commercial - Government Agencies
94,523

 

 
(2,181
)
 
92,342

Total Mortgage-Backed Securities
816,354

 
10,881

 
(3,014
)
 
824,221

Total
$
2,179,933

 
$
41,942

 
$
(8,393
)
 
$
2,213,482

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
530,167

 
$
4,076

 
$

 
$
534,243

Debt Securities Issued by States and Political Subdivisions
243,226

 
19,553

 

 
262,779

Debt Securities Issued by Corporations
139,569

 
2,106

 
(229
)
 
141,446

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
1,917,954

 
38,056

 
(3,845
)
 
1,952,165

    Residential - U.S. Government-Sponsored Enterprises
740,467

 
12,514

 
(87
)
 
752,894

    Commercial - Government Agencies
244,532

 
5,689

 
(206
)
 
250,015

Total Mortgage-Backed Securities
2,902,953

 
56,259


(4,138
)

2,955,074

Total
$
3,815,915

 
$
81,994

 
$
(4,367
)
 
$
3,893,542

 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
356,260

 
$
3,472

 
$
(838
)
 
$
358,894

Debt Securities Issued by States and Political Subdivisions
709,724

 
22,498

 
(304
)
 
731,918

Debt Securities Issued by Corporations
313,136

 
236

 
(4,502
)
 
308,870

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
310,966

 
6,546

 
(1,267
)
 
316,245

    Residential - U.S. Government-Sponsored Enterprises
442,760

 
1,368

 
(2,264
)
 
441,864

    Commercial - Government Agencies
103,227

 

 
(4,200
)
 
99,027

Total Mortgage-Backed Securities
856,953

 
7,914

 
(7,731
)
 
857,136

Total
$
2,236,073

 
$
34,120

 
$
(13,375
)
 
$
2,256,818

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
489,747

 
$
1,359

 
$
(1,139
)
 
$
489,967

Debt Securities Issued by States and Political Subdivisions
245,980

 
17,114

 

 
263,094

Debt Securities Issued by Corporations
151,301

 
368

 
(2,041
)
 
149,628

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,191,138

 
27,893

 
(19,067
)
 
2,199,964

    Residential - U.S. Government-Sponsored Enterprises
647,762

 
1,656

 
(2,616
)
 
646,802

    Commercial - Government Agencies
256,808

 
2,381

 
(2,232
)
 
256,957

Total Mortgage-Backed Securities
3,095,708

 
31,930

 
(23,915
)
 
3,103,723

Total
$
3,982,736

 
$
50,771

 
$
(27,095
)
 
$
4,006,412


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The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2016.  Debt securities issued by government agencies (Small Business Administration securities) and 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
$
28,664

 
$
28,814

Due After One Year Through Five Years
578,537

 
584,235

Due After Five Years Through Ten Years
292,485

 
307,096

Due After Ten Years
42,984

 
46,532

 
942,670

 
966,677

 
 
 
 
Debt Securities Issued by Government Agencies
420,909

 
422,584

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
228,422

 
233,372

    Residential - U.S. Government-Sponsored Enterprises
493,409

 
498,507

    Commercial - Government Agencies
94,523

 
92,342

Total Mortgage-Backed Securities
816,354

 
824,221

Total
$
2,179,933

 
$
2,213,482

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
104,990

 
$
105,116

Due After One Year Through Five Years
460,841

 
466,200

Due After Five Years Through Ten Years
276,259

 
289,962

Due After Ten Years
70,872

 
77,190

 
912,962

 
938,468

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
1,917,954

 
1,952,165

    Residential - U.S. Government-Sponsored Enterprises
740,467

 
752,894

    Commercial - Government Agencies
244,532

 
250,015

Total Mortgage-Backed Securities
2,902,953

 
2,955,074

Total
$
3,815,915

 
$
3,893,542


Investment securities with carrying values of $2.4 billion and $2.5 billion as of September 30, 2016 and December 31, 2015, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

The table below presents the gains and losses from the sales of investment securities for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2016

 
2015

 
2016

 
2015

Gross Gains on Sales of Investment Securities
$

 
$
1,504

 
$
11,180

 
$
11,821

Gross Losses on Sales of Investment Securities
(328
)
 
(1,480
)
 
(640
)
 
(1,480
)
Net Gains (Losses) on Sales of Investment Securities
$
(328
)
 
$
24

 
$
10,540

 
$
10,341


The losses during the three and nine months ended September 30, 2016 were due to fees paid to the counterparties of our prior Visa Class B share sale transactions.


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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

September 30, 2016
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
190,291

 
$
(841
)
 
$
33,670

 
$
(484
)
 
$
223,961

 
$
(1,325
)
Debt Securities Issued by States
   and Political Subdivisions
2,425

 
(4
)
 
6,745

 
(24
)
 
9,170

 
(28
)
Debt Securities Issued by Corporations
63,316

 
(1,695
)
 
172,662

 
(2,331
)
 
235,978

 
(4,026
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
8,300

 
(13
)
 
12,773

 
(749
)
 
21,073

 
(762
)
    Residential - U.S. Government-Sponsored Enterprises
39,245

 
(71
)
 

 

 
39,245

 
(71
)
    Commercial - Government Agencies
5,195

 
(80
)
 
87,147

 
(2,101
)
 
92,342

 
(2,181
)
Total Mortgage-Backed Securities
52,740

 
(164
)
 
99,920

 
(2,850
)
 
152,660

 
(3,014
)
Total
$
308,772

 
$
(2,704
)
 
$
312,997

 
$
(5,689
)
 
$
621,769

 
$
(8,393
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by Corporations
$
30,524

 
$
(7
)
 
$
16,751

 
$
(222
)
 
$
47,275

 
$
(229
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
193,359

 
(327
)
 
255,196

 
(3,518
)
 
448,555

 
(3,845
)
    Residential - U.S. Government-Sponsored Enterprises
20,489

 
(87
)
 

 

 
20,489

 
(87
)
    Commercial - Government Agencies
52,574

 
(110
)
 
18,923

 
(96
)
 
71,497

 
(206
)
Total Mortgage-Backed Securities
266,422

 
(524
)
 
274,119

 
(3,614
)
 
540,541

 
(4,138
)
Total
$
296,946

 
$
(531
)
 
$
290,870

 
$
(3,836
)
 
$
587,816

 
$
(4,367
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
144,260

 
$
(822
)
 
$
5,452

 
$
(16
)
 
$
149,712

 
$
(838
)
Debt Securities Issued by States
     and Political Subdivisions
72,248

 
(252
)
 
6,798

 
(52
)
 
79,046

 
(304
)
Debt Securities Issued by Corporations
101,269

 
(1,747
)
 
162,304

 
(2,755
)
 
263,573

 
(4,502
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
30,679

 
(130
)
 
9,117

 
(1,137
)
 
39,796

 
(1,267
)
     Residential - U.S. Government-Sponsored Enterprises
346,603

 
(2,264
)
 

 

 
346,603

 
(2,264
)
     Commercial - Government Agencies

 

 
99,026

 
(4,200
)
 
99,026

 
(4,200
)
Total Mortgage-Backed Securities
377,282

 
(2,394
)
 
108,143

 
(5,337
)
 
485,425

 
(7,731
)
Total
$
695,059

 
$
(5,215
)
 
$
282,697

 
$
(8,160
)
 
$
977,756

 
$
(13,375
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$
264,747

 
$
(1,139
)
 
$

 
$

 
$
264,747

 
$
(1,139
)
Debt Securities Issued by Corporations
28,218

 
(66
)
 
71,208

 
(1,975
)
 
99,426

 
(2,041
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
562,502

 
(5,828
)
 
414,207

 
(13,239
)
 
976,709

 
(19,067
)
     Residential - U.S. Government-Sponsored Enterprises
450,147

 
(2,616
)
 

 

 
450,147

 
(2,616
)
     Commercial - Government Agencies
74,040

 
(958
)
 
52,207

 
(1,274
)
 
126,247

 
(2,232
)
Total Mortgage-Backed Securities
1,086,689

 
(9,402
)
 
466,414

 
(14,513
)
 
1,553,103

 
(23,915
)
Total
$
1,379,654

 
$
(10,607
)
 
$
537,622

 
$
(16,488
)
 
$
1,917,276

 
$
(27,095
)


13

Table of Contents

The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2016, which were comprised of 120 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 September 30, 2016 and December 31, 2015, the gross unrealized losses were primarily related to investment securities issued by Ginnie Mae and corporate debt 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 basis, which may be at maturity.

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2016

 
2015

 
2016

 
2015

Taxable
$
24,558

 
$
25,569

 
$
76,112

 
$
82,638

Non-Taxable
5,070

 
5,312

 
15,410

 
15,953

Total Interest Income from Investment Securities
$
29,628

 
$
30,881

 
$
91,522

 
$
98,591


As of September 30, 2016, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $543.8 million, representing 57% 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. Of the Company's total Hawaii municipal bond holdings, 77% were general obligation issuances. As of September 30, 2016, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company's municipal debt securities.

As of September 30, 2016 and December 31, 2015, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:
(dollars in thousands)
September 30,
2016

 
December 31,
2015

Federal Home Loan Bank Stock
$
20,000

 
$
19,000

Federal Reserve Bank Stock
19,958

 
19,836

Total
$
39,958

 
$
38,836


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 recognizing temporary declines in value.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares. As of September 30, 2016, the conversion ratio was 1.6483.

During the first quarter of 2016, the Company recorded an $11.2 million net gain on the sale of 100,000 Visa Class B shares. Concurrent with every sale of Visa Class B shares, the Company has entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 184,814 Class B shares (304,629 Class A equivalents) that the Company owns are carried at a zero cost basis.


14

Table of Contents

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

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of September 30, 2016 and December 31, 2015:

(dollars in thousands)
September 30,
2016

 
December 31,
2015

Commercial
 

 
 

Commercial and Industrial
$
1,217,849

 
$
1,115,168

Commercial Mortgage
1,807,190

 
1,677,147

Construction
263,079

 
156,660

Lease Financing
201,436

 
204,877

Total Commercial
3,489,554

 
3,153,852

Consumer
 

 
 

Residential Mortgage
3,098,936

 
2,925,605

Home Equity
1,295,993

 
1,069,400

Automobile
437,659

 
381,735

Other 1
371,955

 
348,393

Total Consumer
5,204,543

 
4,725,133

Total Loans and Leases
$
8,694,097

 
$
7,878,985

1 
Comprised of other revolving credit, installment, and lease financing.
The majority 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 $3.6 million and $1.8 million for the three months ended September 30, 2016 and 2015, respectively, and $9.8 million and $4.1 million for the nine months ended September 30, 2016 and 2015, respectively.

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Table of Contents

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

The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2016 and 2015.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of September 30, 2016 and 2015.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended September 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
62,029

 
$
41,903

 
$
103,932

Loans and Leases Charged-Off
(209
)
 
(4,707
)
 
(4,916
)
Recoveries on Loans and Leases Previously Charged-Off
296

 
2,221

 
2,517

Net Loans and Leases Recovered (Charged-Off)
87

 
(2,486
)
 
(2,399
)
Provision for Credit Losses
442

 
2,058

 
2,500

Balance at End of Period
$
62,558

 
$
41,475

 
$
104,033

Nine Months Ended September 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
60,714

 
$
42,166

 
$
102,880

Loans and Leases Charged-Off
(670
)
 
(12,888
)
 
(13,558
)
Recoveries on Loans and Leases Previously Charged-Off
7,619

 
5,592

 
13,211

Net Loans and Leases Recovered (Charged-Off)
6,949

 
(7,296
)
 
(347
)
Provision for Credit Losses
(5,105
)
 
6,605

 
1,500

Balance at End of Period
$
62,558

 
$
41,475

 
$
104,033

As of September 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
11

 
$
3,436

 
$
3,447

Collectively Evaluated for Impairment
62,547

 
38,039

 
100,586

Total
$
62,558

 
$
41,475

 
$
104,033

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
21,793

 
$
38,450

 
$
60,243

Collectively Evaluated for Impairment
3,467,761

 
5,166,093

 
8,633,854

Total
$
3,489,554

 
$
5,204,543

 
$
8,694,097

 
 
 
 
 
 
Three Months Ended September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
67,005

 
$
39,001

 
$
106,006

Loans and Leases Charged-Off
(160
)
 
(4,233
)
 
(4,393
)
Recoveries on Loans and Leases Previously Charged-Off
504

 
1,921

 
2,425

Net Loans and Leases Recovered (Charged-Off)
344

 
(2,312
)
 
(1,968
)
Provision for Credit Losses
(2,708
)
 
2,708

 

Balance at End of Period
$
64,641

 
$
39,397

 
$
104,038

Nine Months Ended September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
64,551

 
$
44,137

 
$
108,688

Loans and Leases Charged-Off
(650
)
 
(11,327
)
 
(11,977
)
Recoveries on Loans and Leases Previously Charged-Off
1,726

 
5,601

 
7,327

Net Loans and Leases Recovered (Charged-Off)
1,076

 
(5,726
)
 
(4,650
)
Provision for Credit Losses
(986
)
 
986

 

Balance at End of Period
$
64,641

 
$
39,397

 
$
104,038

As of September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
1,977

 
$
3,336

 
$
5,313

Collectively Evaluated for Impairment
62,664

 
36,061

 
98,725

Total
$
64,641

 
$
39,397

 
$
104,038

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
29,016

 
$
39,013

 
$
68,029

Collectively Evaluated for Impairment
3,094,229

 
4,527,514

 
7,621,743

Total
$
3,123,245

 
$
4,566,527

 
$
7,689,772


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Table of Contents

Credit Quality Indicators

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

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

Pass:
Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. 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 generally 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.


17

Table of Contents

The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2016 and December 31, 2015.
 
September 30, 2016
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
1,164,869

 
$
1,707,003

 
$
250,918

 
$
200,701

 
$
3,323,491

Special Mention
20,880

 
60,080

 
10,625

 
6

 
91,591

Classified
32,100

 
40,107

 
1,536

 
729