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 September 30, 2014
 
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 October 21, 2014, there were 43,875,556 shares of common stock outstanding.

Bank of Hawaii Corporation
Form 10-Q
Index

 	 	 	
 	 	Page	
 	 	 	
Part I - Financial Information	 	
 	 	 	
Item 1.	Financial Statements (Unaudited)	 	
 	 	 	
 	Consolidated Statements of Income –
Three and nine months ended September 30, 2014 and 2013	2	
 	 	 	
 	Consolidated Statements of Comprehensive Income –
Three and nine months ended September 30, 2014 and 2013	3	
 	 	 	
 	Consolidated Statements of Condition –
September 30, 2014 and December 31, 2013	4	
 	 	 	
 	Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2014 and 2013	5	
 	 	 	
 	Consolidated Statements of Cash Flows –
Nine months ended September 30, 2014 and 2013	6	
 	 	 	
 	Notes to Consolidated Financial Statements (Unaudited)	7	
 	 	 	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46	
 	 	 	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	78	
 	 	 	
Item 4.	Controls and Procedures	78	
 	 	 	
Part II - Other Information	 	
 	 	 	
Item 1A.	Risk Factors	79	
 	 	 	
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79	
 	 	 	
Item 6.	Exhibits	79	
 	 	 	
Signatures	 	80	

1

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)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Interest Income	 	

 	 	 	
 	
Interest and Fees on Loans and Leases	$	68,089	
 	 	$	63,918	
 	 	$	197,433	
 	 	$	189,467	
 	
Income on Investment Securities	 	 	 	 	 	 	 	
Available-for-Sale	10,286	
 	 	12,038	
 	 	31,743	
 	 	42,962	
 	
Held-to-Maturity	26,067	
 	 	24,137	
 	 	80,894	
 	 	63,180	
 	
Deposits	3	
 	 	3	
 	 	7	
 	 	7	
 	
Funds Sold	176	
 	 	177	
 	 	481	
 	 	310	
 	
Other	302	
 	 	301	
 	 	906	
 	 	870	
 	
Total Interest Income	104,923	
 	 	100,574	
 	 	311,464	
 	 	296,796	
 	
Interest Expense	 	

 	 	 	
 	
Deposits	2,391	
 	 	2,500	
 	 	7,142	
 	 	7,725	
 	
Securities Sold Under Agreements to Repurchase	6,523	
 	 	6,551	
 	 	19,385	
 	 	20,307	
 	
Funds Purchased	3	
 	 	4	
 	 	10	
 	 	36	
 	
Long-Term Debt	627	
 	 	632	
 	 	1,903	
 	 	1,941	
 	
Total Interest Expense	9,544	
 	 	9,687	
 	 	28,440	
 	 	30,009	
 	
Net Interest Income	95,379	
 	 	90,887	
 	 	283,024	
 	 	266,787	
 	
Provision for Credit Losses	(2,665	)	 	—	
 	 	(4,864	)	 	—	
 	
Net Interest Income After Provision for Credit Losses	98,044	
 	 	90,887	
 	 	287,888	
 	 	266,787	
 	
Noninterest Income	 	

 	 	 	
 	
Trust and Asset Management	11,716	
 	 	11,717	
 	 	35,573	
 	 	35,692	
 	
Mortgage Banking	1,646	
 	 	4,132	
 	 	5,455	
 	 	16,363	
 	
Service Charges on Deposit Accounts	9,095	
 	 	9,385	
 	 	26,611	
 	 	27,798	
 	
Fees, Exchange, and Other Service Charges	13,390	
 	 	12,732	
 	 	39,699	
 	 	37,799	
 	
Investment Securities Gains, Net	1,858	
 	 	—	
 	 	6,097	
 	 	—	
 	
Insurance	2,348	
 	 	2,177	
 	 	6,401	
 	 	6,895	
 	
Bank-Owned Life Insurance	1,644	
 	 	1,365	
 	 	4,765	
 	 	3,997	
 	
Other	3,253	
 	 	3,618	
 	 	9,598	
 	 	12,401	
 	
Total Noninterest Income	44,950	
 	 	45,126	
 	 	134,199	
 	 	140,945	
 	
Noninterest Expense	 	

 	 	 	
 	
Salaries and Benefits	45,530	
 	 	46,552	
 	 	137,508	
 	 	140,568	
 	
Net Occupancy	9,334	
 	 	9,847	
 	 	28,005	
 	 	29,143	
 	
Net Equipment	4,473	
 	 	4,572	
 	 	13,745	
 	 	13,529	
 	
Data Processing	3,665	
 	 	3,697	
 	 	11,156	
 	 	10,013	
 	
Professional Fees	1,835	
 	 	2,119	
 	 	6,708	
 	 	6,736	
 	
FDIC Insurance	1,750	
 	 	1,913	
 	 	5,881	
 	 	5,811	
 	
Other	14,443	
 	 	14,277	
 	 	42,656	
 	 	42,745	
 	
Total Noninterest Expense	81,030	
 	 	82,977	
 	 	245,659	
 	 	248,545	
 	
Income Before Provision for Income Taxes	61,964	
 	 	53,036	
 	 	176,428	
 	 	159,187	
 	
Provision for Income Taxes	20,195	
 	 	15,332	
 	 	54,577	
 	 	47,740	
 	
Net Income	$	41,769	
 	 	$	37,704	
 	 	$	121,851	
 	 	$	111,447	
 	
Basic Earnings Per Share	$	0.95	
 	 	$	0.85	
 	 	$	2.77	
 	 	$	2.51	
 	
Diluted Earnings Per Share	$	0.95	
 	 	$	0.85	
 	 	$	2.75	
 	 	$	2.50	
 	
Dividends Declared Per Share	$	0.45	
 	 	$	0.45	
 	 	$	1.35	
 	 	$	1.35	
 	
Basic Weighted Average Shares	43,859,396	
 	 	44,267,356	
 	 	44,034,047	
 	 	44,433,967	
 	
Diluted Weighted Average Shares	44,088,553	
 	 	44,479,472	
 	 	44,250,033	
 	 	44,588,777	

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 (Unaudited)

 	 	Three Months Ended	 	Nine Months Ended	
 	 	September 30,	 	September 30,	
(dollars in thousands)	 	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Net Income	 	$	41,769	
 	 	$	37,704	
 	 	$	121,851	
 	 	$	111,447	
 	
Other Comprehensive Income (Loss), Net of Tax:	 	 	

 	 	 	
 	
Net Unrealized Gains (Losses) on Investment Securities	 	403	
 	 	(6,986	)	 	15,291	
 	 	(63,199	)	
Defined Benefit Plans	 	157	
 	 	202	
 	 	469	
 	 	481	
 	
Total Other Comprehensive Income (Loss)	 	560	
 	 	(6,784	)	 	15,760	
 	 	(62,718	)	
Comprehensive Income	 	$	42,329	
 	 	$	30,920	
 	 	$	137,611	
 	 	$	48,729	

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)	September 30,
2014	
 	 	December 31,
2013	
 	
Assets	 	

Interest-Bearing Deposits	$	3,883	
 	 	$	3,617	
 	
Funds Sold	377,303	
 	 	271,414	
 	
Investment Securities	 	

Available-for-Sale	2,220,913	
 	 	2,243,697	
 	
     Held-to-Maturity (Fair Value of $4,576,396 and $4,697,587)	4,557,614	
 	 	4,744,519	
 	
Loans Held for Sale	2,382	
 	 	6,435	
 	
Loans and Leases	6,606,350	
 	 	6,095,387	
 	
Allowance for Loan and Lease Losses	(110,362	)	 	(115,454	)	
Net Loans and Leases	6,495,988	
 	 	5,979,933	
 	
Total Earning Assets	13,658,083	
 	 	13,249,615	
 	
Cash and Noninterest-Bearing Deposits	172,386	
 	 	188,715	
 	
Premises and Equipment	107,560	
 	 	108,636	
 	
Accrued Interest Receivable	46,641	
 	 	43,930	
 	
Foreclosed Real Estate	3,562	
 	 	3,205	
 	
Mortgage Servicing Rights	25,559	
 	 	28,123	
 	
Goodwill	31,517	
 	 	31,517	
 	
Other Assets	464,858	
 	 	430,539	
 	
Total Assets	$	14,510,166	
 	 	$	14,084,280	

Liabilities	 	

Deposits	 	

Noninterest-Bearing Demand	$	3,824,544	
 	 	$	3,681,128	
 	
Interest-Bearing Demand	2,369,434	
 	 	2,355,608	
 	
Savings	4,738,364	
 	 	4,560,150	
 	
Time	1,429,099	
 	 	1,317,770	
 	
Total Deposits	12,361,441	
 	 	11,914,656	
 	
Funds Purchased	8,459	
 	 	9,982	
 	
Securities Sold Under Agreements to Repurchase	700,203	
 	 	770,049	
 	
Long-Term Debt	173,926	
 	 	174,706	
 	
Retirement Benefits Payable	35,152	
 	 	34,965	
 	
Accrued Interest Payable	6,086	
 	 	4,871	
 	
Taxes Payable and Deferred Taxes	42,468	
 	 	34,907	
 	
Other Liabilities	125,018	
 	 	128,168	
 	
Total Liabilities	13,452,753	
 	 	13,072,304	
 	
Shareholders’ Equity	 	

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2014 - 57,633,855 / 43,993,729
and December 31, 2013 - 57,480,846 / 44,490,385)	573	
 	 	572	
 	
Capital Surplus	529,530	
 	 	522,505	
 	
Accumulated Other Comprehensive Loss	(16,063	)	 	(31,823	)	
Retained Earnings	1,213,339	
 	 	1,151,754	
 	
Treasury Stock, at Cost (Shares: September 30, 2014 - 13,640,126
and December 31, 2013 - 12,990,461)	(669,966	)	 	(631,032	)	
Total Shareholders’ Equity	1,057,413	
 	 	1,011,976	
 	
Total Liabilities and Shareholders’ Equity	$	14,510,166	
 	 	$	14,084,280	
 	
 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, 2013	44,490,385	
 	 	$	572	
 	 	$	522,505	
 	 	$	(31,823	)	 	$	1,151,754	
 	 	$	(631,032	)	 	$	1,011,976	
 	
Net Income	—	
 	 	—	
 	 	—	
 	 	—	
 	 	121,851	
 	 	—	
 	 	121,851	
 	
Other Comprehensive Income	—	
 	 	—	
 	 	—	
 	 	15,760	
 	 	—	
 	 	—	
 	 	15,760	
 	
Share-Based Compensation	—	
 	 	—	
 	 	5,831	
 	 	—	
 	 	—	
 	 	—	
 	 	5,831	
 	
Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits	314,579	
 	 	1	
 	 	1,194	
 	 	—	
 	 	(318	)	 	7,976	
 	 	8,853	
 	
Common Stock Repurchased	(811,235	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	(46,910	)	 	(46,910	)	
Cash Dividends Declared ($1.35 per share)	—	
 	 	—	
 	 	—	
 	 	—	
 	 	(59,948	)	 	—	
 	 	(59,948	)	
Balance as of September 30, 2014	43,993,729	
 	 	$	573	
 	 	$	529,530	
 	 	$	(16,063	)	 	$	1,213,339	
 	 	$	(669,966	)	 	$	1,057,413	

Balance as of December 31, 2012	44,754,835	
 	 	$	571	
 	 	$	515,619	
 	 	$	29,208	
 	 	$	1,084,477	
 	 	$	(608,210	)	 	$	1,021,665	
 	
Net Income	—	
 	 	—	
 	 	—	
 	 	—	
 	 	111,447	
 	 	—	
 	 	111,447	
 	
Other Comprehensive Loss	—	
 	 	—	
 	 	—	
 	 	(62,718	)	 	—	
 	 	—	
 	 	(62,718	)	
Share-Based Compensation	—	
 	 	—	
 	 	4,226	
 	 	—	
 	 	—	
 	 	—	
 	 	4,226	
 	
Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits	444,951	
 	 	1	
 	 	665	
 	 	—	
 	 	(2,458	)	 	13,521	
 	 	11,729	
 	
Common Stock Repurchased	(660,539	)	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	(33,193	)	 	(33,193	)	
Cash Dividends Declared ($1.35 per share)	—	
 	 	—	
 	 	—	
 	 	—	
 	 	(60,470	)	 	—	
 	 	(60,470	)	
Balance as of September 30, 2013	44,539,247	
 	 	$	572	
 	 	$	520,510	
 	 	$	(33,510	)	 	$	1,132,996	
 	 	$	(627,882	)	 	$	992,686	
 	
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)

 	Nine Months Ended	
 	September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	
Operating Activities	 	

Net Income	$	121,851	
 	 	$	111,447	
 	
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:	 	

Provision for Credit Losses	(4,864	)	 	—	
 	
Depreciation and Amortization	9,280	
 	 	9,068	
 	
Amortization of Deferred Loan and Lease Fees	(1,341	)	 	(2,756	)	
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	37,592	
 	 	45,609	
 	
Share-Based Compensation	5,831	
 	 	4,226	
 	
Benefit Plan Contributions	(1,229	)	 	(949	)	
Deferred Income Taxes	(8,522	)	 	(8,762	)	
Net Gains on Sales of Loans and Leases	(2,285	)	 	(17,604	)	
Net Gains on Sales of Investment Securities	(6,097	)	 	—	
 	
Proceeds from Sales of Loans Held for Sale	64,545	
 	 	594,735	
 	
Originations of Loans Held for Sale	(58,448	)	 	(577,055	)	
Tax Benefits from Share-Based Compensation	(435	)	 	(592	)	
Net Change in Other Assets and Other Liabilities	(22,210	)	 	11,700	
 	
Net Cash Provided by Operating Activities	133,668	
 	 	169,067	

Investing Activities	 	

Investment Securities Available-for-Sale:	 	

Proceeds from Prepayments and Maturities	251,633	
 	 	794,899	
 	
Proceeds from Sales	14,609	
 	 	—	
 	
Purchases	(230,007	)	 	(403,373	)	
Investment Securities Held-to-Maturity:	 	

Proceeds from Prepayments and Maturities	586,037	
 	 	804,440	
 	
Purchases	(418,825	)	 	(1,293,784	)	
Net Change in Loans and Leases	(516,395	)	 	(159,403	)	
Premises and Equipment, Net	(8,204	)	 	(9,244	)	
Net Cash Used in Investing Activities	(321,152	)	 	(266,465	)	
 	 	 	 	
Financing Activities	 	

Net Change in Deposits	446,785	
 	 	78,652	
 	
Net Change in Short-Term Borrowings	(71,369	)	 	86,979	
 	
Proceeds from Long-Term Debt	—	
 	 	50,000	
 	
Tax Benefits from Share-Based Compensation	435	
 	 	592	
 	
Proceeds from Issuance of Common Stock	8,317	
 	 	11,193	
 	
Repurchase of Common Stock	(46,910	)	 	(33,193	)	
Cash Dividends Paid	(59,948	)	 	(60,470	)	
Net Cash Provided by Financing Activities	277,310	
 	 	133,753	

Net Change in Cash and Cash Equivalents	89,826	
 	 	36,355	
 	
Cash and Cash Equivalents at Beginning of Period	463,746	
 	 	352,861	
 	
Cash and Cash Equivalents at End of Period	$	553,572	
 	 	$	389,216	
 	
Supplemental Information	 	

Cash Paid for Interest	$	26,726	
 	 	$	28,163	
 	
Cash Paid for Income Taxes	46,369	
 	 	54,644	
 	
Non-Cash Investing Activities:	 	

Transfer from Investment Securities Available-For-Sale to Investment Securities Held-To-Maturity	—	
 	 	579,888	
 	
Transfer from Loans to Foreclosed Real Estate	3,377	
 	 	3,829	

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 (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands.  The Parent’s principal and only operating subsidiary is Bank of Hawaii (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

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

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

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  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, 2014.

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.

Accounting Standards Adopted in 2014

In July 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-11,  "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists."   The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. The Company adopted the provisions of ASU No. 2013-11 effective January 1, 2014. The adoption of ASU No. 2013-11 had no impact on the Company's Consolidated Financial Statements.

Accounting Standards Pending Adoption

In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." 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. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that used the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The Company currently accounts for such investments using the effective yield method and plans to continue to do so for these pre-existing investments after adopting ASU No. 2014-01 on January 1, 2015. The Company expects investments made after January 1, 2015 to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. The adoption of ASU No. 2014-01 is not expected to have a material impact on the Company's Consolidated Financial Statements.

7

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure."  The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) The borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both: (1) The amount of foreclosed residential real estate property held by the creditor; and (2) The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.

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 comprised 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 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 is effective for public entities for interim and annual periods beginning after December 15, 2016; early adoption is not permitted. 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. The Company is currently evaluating the provisions of ASU No. 2014-09 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 June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures."  The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual reporting periods beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual reporting periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. As of September 30, 2014, all of the Company's repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.

8

In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."  The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718,  Compensation - Stock Compensation , as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. However, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective for interim or annual reporting periods beginning after December 15, 2015; early adoption is permitted. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. As of September 30, 2014, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.”   The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-14 is not expected to have a material impact on the Company's Consolidated Financial Statements.

9

 
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, 2014 and December 31, 2013 were as follows:

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(dollars in thousands)	Amortized Cost	
 	 	Gross
Unrealized Gains	
 	 	Gross
Unrealized Losses	
 	 	Fair Value	
 	
September 30, 2014	 	

 	 	 	
 	
Available-for-Sale:	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	341,116	
 	 	$	6,400	
 	 	$	(106	)	 	$	347,410	
 	
Debt Securities Issued by States and Political Subdivisions	711,253	
 	 	21,568	
 	 	(1,695	)	 	731,126	
 	
Debt Securities Issued by Corporations	298,333	
 	 	717	
 	 	(5,972	)	 	293,078	
 	
Mortgage-Backed Securities:	 	

 	 	 	
 	
    Residential - Government Agencies	493,031	
 	 	12,351	
 	 	(1,284	)	 	504,098	
 	
    Residential - U.S. Government-Sponsored Enterprises	157,672	
 	 	1,449	
 	 	(128	)	 	158,993	
 	
    Commercial - Government Agencies	195,589	
 	 	—	
 	 	(9,381	)	 	186,208	
 	
Total Mortgage-Backed Securities	846,292	
 	 	13,800	
 	 	(10,793	)	 	849,299	
 	
Total	$	2,196,994	
 	 	$	42,485	
 	 	$	(18,566	)	 	$	2,220,913	
 	
Held-to-Maturity:	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	498,619	
 	 	$	1,918	
 	 	$	(2,578	)	 	$	497,959	
 	
Debt Securities Issued by States and Political Subdivisions	250,439	
 	 	16,738	
 	 	—	
 	 	267,177	
 	
Debt Securities Issued by Corporations	170,487	
 	 	169	
 	 	(3,207	)	 	167,449	
 	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	
 	
    Residential - Government Agencies	3,034,148	
 	 	44,125	
 	 	(32,699	)	 	3,045,574	
 	
    Residential - U.S. Government-Sponsored Enterprises	284,683	
 	 	1,507	
 	 	(448	)	 	285,742	
 	
    Commercial - Government Agencies	319,238	
 	 	69	
 	 	(6,812	)	 	312,495	
 	
Total Mortgage-Backed Securities	3,638,069	
 	 	45,701	
 	
 	(39,959	)	
 	3,643,811	
 	
Total	$	4,557,614	
 	 	$	64,526	
 	 	$	(45,744	)	 	$	4,576,396	

December 31, 2013	 	

 	 	 	
 	
Available-for-Sale:	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	390,873	
 	 	$	6,640	
 	 	$	(234	)	 	$	397,279	
 	
Debt Securities Issued by States and Political Subdivisions	691,861	
 	 	8,396	
 	 	(13,455	)	 	686,802	
 	
Debt Securities Issued by Corporations	280,172	
 	 	1,165	
 	 	(7,836	)	 	273,501	
 	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	
 	
    Residential - Government Agencies	641,227	
 	 	13,816	
 	 	(1,849	)	 	653,194	
 	
    Residential - U.S. Government-Sponsored Enterprises	21,865	
 	 	1,403	
 	 	—	
 	 	23,268	
 	
    Commercial - Government Agencies	219,859	
 	 	—	
 	 	(10,206	)	 	209,653	
 	
Total Mortgage-Backed Securities	882,951	
 	 	15,219	
 	 	(12,055	)	 	886,115	
 	
Total	$	2,245,857	
 	 	$	31,420	
 	 	$	(33,580	)	 	$	2,243,697	
 	
Held-to-Maturity:	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	433,987	
 	 	$	3,045	
 	 	$	(3,667	)	 	$	433,365	
 	
Debt Securities Issued by States and Political Subdivisions	253,039	
 	 	817	
 	 	(133	)	 	253,723	
 	
Debt Securities Issued by Corporations	190,181	
 	 	—	
 	 	(5,708	)	 	184,473	
 	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	
 	
    Residential - Government Agencies	3,523,343	
 	 	31,786	
 	 	(66,572	)	 	3,488,557	
 	
    Residential - U.S. Government-Sponsored Enterprises	21,602	
 	 	1,423	
 	 	—	
 	 	23,025	
 	
    Commercial - Government Agencies	322,367	
 	 	—	
 	 	(7,923	)	 	314,444	
 	
Total Mortgage-Backed Securities	3,867,312	
 	 	33,209	
 	 	(74,495	)	 	3,826,026	
 	
Total	$	4,744,519	
 	 	$	37,071	
 	 	$	(84,003	)	 	$	4,697,587	

10

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2014.  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	$	19,928	
 	 	$	20,091	
 	
Due After One Year Through Five Years	287,496	
 	 	292,869	
 	
Due After Five Years Through Ten Years	653,258	
 	 	657,028	
 	
Due After Ten Years	108,982	
 	 	115,734	
 	
 	1,069,664	
 	 	1,085,722	

Debt Securities Issued by Government Agencies	281,038	
 	 	285,892	
 	
Mortgage-Backed Securities:	 	

    Residential - Government Agencies	493,031	
 	 	504,098	
 	
    Residential - U.S. Government-Sponsored Enterprises	157,672	
 	 	158,993	
 	
    Commercial - Government Agencies	195,589	
 	 	186,208	
 	
Total Mortgage-Backed Securities	846,292	
 	 	849,299	
 	
Total	$	2,196,994	
 	 	$	2,220,913	

Held-to-Maturity:	 	

Due in One Year or Less	$	89,643	
 	 	$	91,049	
 	
Due After One Year Through Five Years	408,976	
 	 	406,911	
 	
Due After Five Years Through Ten Years	198,123	
 	 	204,053	
 	
Due After Ten Years	222,803	
 	 	230,572	
 	
 	919,545	
 	 	932,585	
 	
Mortgage-Backed Securities:	 	

    Residential - Government Agencies	3,034,148	
 	 	3,045,574	
 	
    Residential - U.S. Government-Sponsored Enterprises	284,683	
 	 	285,742	
 	
    Commercial - Government Agencies	319,238	
 	 	312,495	
 	
Total Mortgage-Backed Securities	3,638,069	
 	 	3,643,811	
 	
Total	$	4,557,614	
 	 	$	4,576,396	

Investment securities with carrying values of $2.7 billion and $2.6 billion as of September 30, 2014 and December 31, 2013, 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, 2014 and 2013. There were no sales of investment securities for the three and nine months ended September 30, 2013.

 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
Gross Gains on Sales of Investment Securities	$	1,858	
 	 	$	—	
 	 	$	6,097	
 	 	$	—	
 	
Gross Losses on Sales of Investment Securities	—	
 	 	—	
 	 	—	
 	 	—	
 	
Net Gains on Sales of Investment Securities	$	1,858	
 	 	$	—	
 	 	$	6,097	
 	 	$	—	

11

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, 2014	 	

 	 	 	

 	
Available-for-Sale:	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury
   and Government Agencies	$	615	
 	 	$	(1	)	 	$	14,066	
 	 	$	(105	)	 	$	14,681	
 	 	$	(106	)	
Debt Securities Issued by States
   and Political Subdivisions	37,690	
 	 	(60	)	 	124,512	
 	 	(1,635	)	 	162,202	
 	 	(1,695	)	
Debt Securities Issued by Corporations	49,084	
 	 	(916	)	 	203,105	
 	 	(5,056	)	 	252,189	
 	 	(5,972	)	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	 	

 	
 	
    Residential - Government Agencies	225	
 	 	(1	)	 	13,048	
 	 	(1,283	)	 	13,273	
 	 	(1,284	)	
    Residential - U.S. Government-Sponsored Enterprises	89,409	
 	 	(128	)	 	—	
 	 	—	
 	 	89,409	
 	 	(128	)	
    Commercial - Government Agencies	—	
 	 	—	
 	 	186,208	
 	 	(9,381	)	 	186,208	
 	 	(9,381	)	
Total Mortgage-Backed Securities	89,634	
 	 	(129	)	 	199,256	
 	 	(10,664	)	 	288,890	
 	 	(10,793	)	
Total	$	177,023	
 	 	$	(1,106	)	 	$	540,939	
 	 	$	(17,460	)	 	$	717,962	
 	 	$	(18,566	)	
Held-to-Maturity:	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury
   and Government Agencies	$	163,211	
 	 	$	(786	)	 	$	163,959	
 	 	$	(1,792	)	 	$	327,170	
 	 	$	(2,578	)	
Debt Securities Issued by Corporations	52,015	
 	 	(264	)	 	79,589	
 	 	(2,943	)	 	131,604	
 	 	(3,207	)	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	 	 	 	 	
    Residential - Government Agencies	317,928	
 	 	(2,379	)	 	938,218	
 	 	(30,320	)	 	1,256,146	
 	 	(32,699	)	
    Residential - U.S. Government-Sponsored Enterprises	182,312	
 	 	(448	)	 	—	
 	 	—	
 	 	182,312	
 	 	(448	)	
    Commercial - Government Agencies	89,680	
 	 	(614	)	 	217,580	
 	 	(6,198	)	 	307,260	
 	 	(6,812	)	
Total Mortgage-Backed Securities	589,920	
 	 	(3,441	)	 	1,155,798	
 	 	(36,518	)	 	1,745,718	
 	 	(39,959	)	
Total	$	805,146	
 	 	$	(4,491	)	 	$	1,399,346	
 	 	$	(41,253	)	 	$	2,204,492	
 	 	$	(45,744	)	
 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2013	 	

 	 	 	

 	
Available-for-Sale:	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury
     and Government Agencies	$	26,181	
 	 	$	(225	)	 	$	2,117	
 	 	$	(9	)	 	$	28,298	
 	 	$	(234	)	
Debt Securities Issued by States
     and Political Subdivisions	415,718	
 	 	(10,934	)	 	42,607	
 	 	(2,521	)	 	458,325	
 	 	(13,455	)	
Debt Securities Issued by Corporations	200,364	
 	 	(7,836	)	 	—	
 	 	—	
 	 	200,364	
 	 	(7,836	)	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	 	 	 	 	
     Residential - Government Agencies	76,744	
 	 	(781	)	 	10,027	
 	 	(1,068	)	 	86,771	
 	 	(1,849	)	
     Commercial - Government Agencies	164,478	
 	 	(7,935	)	 	45,175	
 	 	(2,271	)	 	209,653	
 	 	(10,206	)	
Total Mortgage-Backed Securities	241,222	
 	 	(8,716	)	 	55,202	
 	 	(3,339	)	 	296,424	
 	 	(12,055	)	
Total	$	883,485	
 	 	$	(27,711	)	 	$	99,926	
 	 	$	(5,869	)	 	$	983,411	
 	 	$	(33,580	)	
Held-to-Maturity:	 	 	 	 	 	 	 	 	 	 	 	
Debt Securities Issued by the U.S. Treasury
and Government Agencies	$	271,469	
 	 	$	(3,667	)	 	$	—	
 	 	$	—	
 	 	$	271,469	
 	 	$	(3,667	)	
Debt Securities Issued by States
and Political Subdivisions	52,026	
 	 	(133	)	 	—	
 	 	—	
 	 	52,026	
 	 	(133	)	
Debt Securities Issued by Corporations	163,736	
 	 	(4,278	)	 	20,736	
 	 	(1,430	)	 	184,472	
 	 	(5,708	)	
Mortgage-Backed Securities:	 	 	 	 	 	 	 	 	 	 	 	
     Residential - Government Agencies	1,767,086	
 	 	(54,067	)	 	190,939	
 	 	(12,505	)	 	1,958,025	
 	 	(66,572	)	
     Commercial - Government Agencies	224,277	
 	 	(4,753	)	 	90,167	
 	 	(3,170	)	 	314,444	
 	 	(7,923	)	
Total Mortgage-Backed Securities	1,991,363	
 	 	(58,820	)	 	281,106	
 	 	(15,675	)	 	2,272,469	
 	 	(74,495	)	
Total	$	2,478,594	
 	 	$	(66,898	)	 	$	301,842	
 	 	$	(17,105	)	 	$	2,780,436	
 	 	$	(84,003	)	

12

The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2014, which were comprised of 202 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, 2014 and December 31, 2013, the gross unrealized losses reported for mortgage-backed securities were primarily 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.

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2014 and 2013 were as follows:

 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Taxable	$	31,053	
 	 	$	31,552	
 	 	$	96,796	
 	 	$	92,806	
 	
Non-Taxable	5,300	
 	 	4,623	
 	 	15,841	
 	 	13,336	
 	
Total Interest Income from Investment Securities	$	36,353	
 	 	$	36,175	
 	 	$	112,637	
 	 	$	106,142	

As of September 30, 2014, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $583.8 million, representing 58% 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 September 30, 2014, 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, 2014, the carrying value of the Company’s Federal Home Loan Bank of Seattle ("FHLB Seattle") and Federal Reserve Bank stock was as follows:

(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Federal Home Loan Bank Stock	$	49,775	
 	 	$	58,021	
 	
Federal Reserve Bank Stock	19,299	
 	 	19,138	
 	
Total	$	69,074	
 	 	$	77,159	

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.

In September 2014, the FHLB Seattle and the Federal Home Loan Bank of Des Moines announced that they have entered into a definitive agreement to merge the two Banks. The merger agreement has been unanimously approved by the boards of directors of both Banks. The closing of the merger is subject to certain closing conditions, including approval by the Federal Housing Finance Agency and ratification by the member-owners of both Banks.

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 such as 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, 2014, the conversion ratio was 0.4121.

During the third quarter of 2014, the Company recorded a $1.9 million net gain on the sale of 23,000 Visa Class B shares. For the first nine months of 2014, the Company recorded a $5.8 million net gain on the sale of 68,500 Visa Class B shares.

13

Concurrent with these sales, the Company 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 covered litigation, the remaining 424,214 Class B shares (174,819 Class A equivalents) that the Company owns are carried at a zero cost basis.

14

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, 2014 and December 31, 2013:

 	 	 	 	 	 	 	 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Commercial	 	

Commercial and Industrial	$	991,157	
 	 	$	911,367	
 	
Commercial Mortgage	1,373,289	
 	 	1,247,510	
 	
Construction	132,097	
 	 	107,349	
 	
Lease Financing	232,381	
 	 	262,207	
 	
Total Commercial	2,728,924	
 	 	2,528,433	
 	
Consumer	 	

Residential Mortgage	2,444,989	
 	 	2,282,894	
 	
Home Equity	838,206	
 	 	773,385	
 	
Automobile	306,003	
 	 	255,986	
 	
Other 1	288,228	
 	 	254,689	
 	
Total Consumer	3,877,426	
 	 	3,566,954	
 	
Total Loans and Leases	$	6,606,350	
 	 	$	6,095,387	

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 $0.3 million and $2.0 million for the three months ended September 30, 2014 and 2013, respectively, and $1.6 million and $8.0 million for the nine months ended September 30, 2014 and 2013, respectively.

15

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, 2014 and 2013.  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, 2014 and 2013.

 	 	 	 	 	 	 	 	 	 	 	 	
(dollars in thousands)	Commercial	
 	 	Consumer	
 	 	Total	
 	
Three Months Ended September 30, 2014	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Balance at Beginning of Period	$	71,886	
 	 	$	41,952	
 	 	$	113,838	
 	
Loans and Leases Charged-Off	(229	)	 	(3,432	)	 	(3,661	)	
Recoveries on Loans and Leases Previously Charged-Off	1,202	
 	 	1,648	
 	 	2,850	
 	
Net Loans and Leases Recovered (Charged-Off)	973	
 	 	(1,784	)	 	(811	)	
Provision for Credit Losses	(6,619	)	 	3,954	
 	 	(2,665	)	
Balance at End of Period	$	66,240	
 	 	$	44,122	
 	 	$	110,362	
 	
Nine Months Ended September 30, 2014	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Balance at Beginning of Period	$	71,446	
 	 	$	44,008	
 	 	$	115,454	
 	
Loans and Leases Charged-Off	(1,863	)	 	(9,833	)	 	(11,696	)	
Recoveries on Loans and Leases Previously Charged-Off	4,299	
 	 	7,169	
 	 	11,468	
 	
Net Loans and Leases Recovered (Charged-Off)	2,436	
 	 	(2,664	)	 	(228	)	
Provision for Credit Losses	(7,642	)	 	2,778	
 	 	(4,864	)	
Balance at End of Period	$	66,240	
 	 	$	44,122	
 	 	$	110,362	
 	
As of September 30, 2014	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Individually Evaluated for Impairment	$	2,449	
 	 	$	3,653	
 	 	$	6,102	
 	
Collectively Evaluated for Impairment	63,791	
 	 	40,469	
 	 	104,260	
 	
Total	$	66,240	
 	 	$	44,122	
 	 	$	110,362	
 	
Recorded Investment in Loans and Leases:	 	

 	
Individually Evaluated for Impairment	$	26,061	
 	 	$	39,886	
 	 	$	65,947	
 	
Collectively Evaluated for Impairment	2,702,863	
 	 	3,837,540	
 	 	6,540,403	
 	
Total	$	2,728,924	
 	 	$	3,877,426	
 	 	$	6,606,350	

Three Months Ended September 30, 2013	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Balance at Beginning of Period	$	70,197	
 	 	$	54,378	
 	 	$	124,575	
 	
Loans and Leases Charged-Off	(623	)	 	(4,051	)	 	(4,674	)	
Recoveries on Loans and Leases Previously Charged-Off	1,039	
 	 	2,740	
 	 	3,779	
 	
Net Loans and Leases Recovered (Charged-Off)	416	
 	 	(1,311	)	 	(895	)	
Provision for Credit Losses	4,393	
 	 	(4,393	)	 	—	
 	
Balance at End of Period	$	75,006	
 	 	$	48,674	
 	 	$	123,680	
 	
Nine Months Ended September 30, 2013	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Balance at Beginning of Period	$	72,704	
 	 	$	56,153	
 	 	$	128,857	
 	
Loans and Leases Charged-Off	(1,271	)	 	(13,406	)	 	(14,677	)	
Recoveries on Loans and Leases Previously Charged-Off	2,306	
 	 	7,194	
 	 	9,500	
 	
Net Loans and Leases Recovered (Charged-Off)	1,035	
 	 	(6,212	)	 	(5,177	)	
Provision for Credit Losses	1,267	
 	 	(1,267	)	 	—	
 	
Balance at End of Period	$	75,006	
 	 	$	48,674	
 	 	$	123,680	
 	
As of September 30, 2013	 	

 	
Allowance for Loan and Lease Losses:	 	

 	
Individually Evaluated for Impairment	$	8,029	
 	 	$	3,472	
 	 	$	11,501	
 	
Collectively Evaluated for Impairment	66,977	
 	 	45,202	
 	 	112,179	
 	
Total	$	75,006	
 	 	$	48,674	
 	 	$	123,680	
 	
Recorded Investment in Loans and Leases:	 	

 	
Individually Evaluated for Impairment	$	35,149	
 	 	$	36,557	
 	 	$	71,706	
 	
Collectively Evaluated for Impairment	2,443,341	
 	 	3,491,595	
 	 	5,934,936	
 	
Total	$	2,478,490	
 	 	$	3,528,152	
 	 	$	6,006,642	

16

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.	

17

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, 2014 and December 31, 2013.

 	September 30, 2014	
(dollars in thousands)	Commercial
and Industrial	
 	 	Commercial
Mortgage	
 	 	Construction	
 	 	Lease
Financing	
 	 	Total
Commercial	
 	
Pass	$	943,401	
 	 	$	1,299,766	
 	 	$	130,267	
 	 	$	231,919	
 	 	$	2,605,353	
 	
Special Mention	14,150	
 	 	34,944	
 	 	—	
 	 	21	
 	 	49,115	
 	
Classified	33,606	
 	 	38,579	
 	 	1,830	
 	 	441	
 	 	74,456	
 	
Total	$	991,157	
 	 	$	1,373,289	
 	 	$	132,097	
 	 	$	232,381	
 	 	$	2,728,924	

(dollars in thousands)	Residential
Mortgage	
 	 	Home
Equity	
 	 	Automobile	
 	 	Other 1	
 	 	Total
Consumer	
 	
Pass	$	2,427,506	
 	 	$	833,987	
 	 	$	305,391	
 	 	$	287,587	
 	 	$	3,854,471	
 	
Classified	17,483	
 	 	4,219	
 	 	612	
 	 	641	
 	 	22,955	
 	
Total	$	2,444,989	
 	 	$	838,206	
 	 	$	306,003	
 	 	$	288,228	
 	 	$	3,877,426	
 	
Total Recorded Investment in Loans and Leases	 	 	

 	 	$	6,606,350	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	December 31, 2013	
(dollars in thousands)	Commercial
and Industrial	
 	 	Commercial
Mortgage	
 	 	Construction	
 	 	Lease
Financing	
 	 	Total
Commercial	
 	
Pass	$	867,813	
 	 	$	1,176,941	
 	 	$	104,377	
 	 	$	261,486	
 	 	$	2,410,617	
 	
Special Mention	5,854	
 	 	24,587	
 	 	—	
 	 	31	
 	 	30,472	
 	
Classified	37,700	
 	 	45,982	
 	 	2,972	
 	 	690	
 	 	87,344	
 	
Total	$	911,367	
 	 	$	1,247,510	
 	 	$	107,349	
 	 	$	262,207	
 	 	$	2,528,433	

(dollars in thousands)	Residential
Mortgage	
 	 	Home
Equity	
 	 	Automobile	
 	 	Other 1	
 	 	Total
Consumer	
 	
Pass	$	2,261,891	
 	 	$	769,051	
 	 	$	255,664	
 	 	$	253,910	
 	 	$	3,540,516	
 	
Classified	21,003	
 	 	4,334	
 	 	322	
 	 	779	
 	 	26,438	
 	
Total	$	2,282,894	
 	 	$	773,385	
 	 	$	255,986	
 	 	$	254,689	
 	 	$	3,566,954	
 	
Total Recorded Investment in Loans and Leases	 	 	

 	 	$	6,095,387	

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

18

Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of September 30, 2014 and December 31, 2013.

(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 September 30, 2014	 	

 	 	 	

 	 	 	

Commercial	 	

 	 	 	

 	 	 	

Commercial and Industrial	$	997	
 	 	$	775	
 	 	$	14	
 	 	$	8,952	
 	 	$	10,738	
 	 	$	980,419	
 	 	$	991,157	
 	 	$	3,061	
 	
Commercial Mortgage	—	
 	 	382	
 	 	—	
 	 	1,366	
 	 	1,748	
 	 	1,371,541	
 	 	1,373,289	
 	 	—	
 	
Construction	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	132,097	
 	 	132,097	
 	 	—	
 	
Lease Financing	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	232,381	
 	 	232,381	
 	 	—	
 	
Total Commercial	997	
 	 	1,157	
 	 	14	
 	 	10,318	
 	 	12,486	
 	 	2,716,438	
 	 	2,728,924	
 	 	3,061	
 	
Consumer	 	

 	 	 	

 	 	 	

Residential Mortgage	5,338	
 	 	1,391	
 	 	4,819	
 	 	16,756	
 	 	28,304	
 	 	2,416,685	
 	 	2,444,989	
 	 	3,433	
 	
Home Equity	3,669	
 	 	2,282	
 	 	2,816	
 	 	2,671	
 	 	11,438	
 	 	826,768	
 	 	838,206	
 	 	333	
 	
Automobile	6,476	
 	 	1,085	
 	 	612	
 	 	—	
 	 	8,173	
 	 	297,830	
 	 	306,003	
 	 	—	
 	
Other 1	2,285	
 	 	1,412	
 	 	842	
 	 	—	
 	 	4,539	
 	 	283,689	
 	 	288,228	
 	 	—	
 	
Total Consumer	17,768	
 	 	6,170	
 	 	9,089	
 	 	19,427	
 	 	52,454	
 	 	3,824,972	
 	 	3,877,426	
 	 	3,766	
 	
Total	$	18,765	
 	 	$	7,327	
 	 	$	9,103	
 	 	$	29,745	
 	 	$	64,940	
 	 	$	6,541,410	
 	 	$	6,606,350	
 	 	$	6,827	

As of December 31, 2013	 	

 	 	 	

 	 	 	

Commercial	 	

 	 	 	

 	 	 	

Commercial and Industrial	$	1,701	
 	 	$	1,962	
 	 	$	1,173	
 	 	$	11,929	
 	 	$	16,765	
 	 	$	894,602	
 	 	$	911,367	
 	 	$	3,603	
 	
Commercial Mortgage	932	
 	 	—	
 	 	—	
 	 	2,512	
 	 	3,444	
 	 	1,244,066	
 	 	1,247,510	
 	 	778	
 	
Construction	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	107,349	
 	 	107,349	
 	 	—	
 	
Lease Financing	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	262,207	
 	 	262,207	
 	 	—	
 	
Total Commercial	2,633	
 	 	1,962	
 	 	1,173	
 	 	14,441	
 	 	20,209	
 	 	2,508,224	
 	 	2,528,433	
 	 	4,381	
 	
Consumer	 	

 	 	 	

 	 	 	

Residential Mortgage	6,984	
 	 	4,746	
 	 	4,564	
 	 	20,264	
 	 	36,558	
 	 	2,246,336	
 	 	2,282,894	
 	 	5,883	
 	
Home Equity	3,926	
 	 	2,867	
 	 	3,009	
 	 	1,740	
 	 	11,542	
 	 	761,843	
 	 	773,385	
 	 	265	
 	
Automobile	4,688	
 	 	971	
 	 	322	
 	 	—	
 	 	5,981	
 	 	250,005	
 	 	255,986	
 	 	—	
 	
Other 1	2,426	
 	 	5,295	
 	 	790	
 	 	—	
 	 	8,511	
 	 	246,178	
 	 	254,689	
 	 	—	
 	
Total Consumer	18,024	
 	 	13,879	
 	 	8,685	
 	 	22,004	
 	 	62,592	
 	 	3,504,362	
 	 	3,566,954	
 	 	6,148	
 	
Total	$	20,657	
 	 	$	15,841	
 	 	$	9,858	
 	 	$	36,445	
 	 	$	82,801	
 	 	$	6,012,586	
 	 	$	6,095,387	
 	 	$	10,529	

1 	Comprised of other revolving credit, installment, and lease financing.	
 	 	
2 	Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.	

19

Impaired Loans

The following presents by class, information related to impaired loans as of September 30, 2014 and December 31, 2013.

 	 	 	 	 	 	 	 	 	 	 	 	
(dollars in thousands)	Recorded
 Investment	
 	 	Unpaid
 Principal
 Balance	
 	 	Related 
Allowance for 
Loan Losses	
 	
September 30, 2014	 	

 	
Impaired Loans with No Related Allowance Recorded:	 	

 	
Commercial	 	

 	
Commercial and Industrial	$	10,811	
 	 	$	16,061	
 	 	$	—	
 	
Commercial Mortgage	6,997	
 	 	6,997	
 	 	—	
 	
Construction	1,710	
 	 	1,710	
 	 	—	
 	
Total Commercial	19,518	
 	 	24,768	
 	 	—	
 	
Total Impaired Loans with No Related Allowance Recorded	$	19,518	
 	 	$	24,768	
 	 	$	—	

Impaired Loans with an Allowance Recorded:	 	

 	
Commercial	 	

 	
Commercial and Industrial	$	6,543	
 	 	$	13,143	
 	 	$	2,449	
 	
Total Commercial	6,543	
 	 	13,143	
 	 	2,449	
 	
Consumer	 	

 	
Residential Mortgage	32,586	
 	 	38,220	
 	 	3,539	
 	
Home Equity	1,022	
 	 	1,022	
 	 	18	
 	
Automobile	5,596	
 	 	5,596	
 	 	73	
 	
Other 1	682	
 	 	682	
 	 	23	
 	
Total Consumer	39,886	
 	 	45,520	
 	 	3,653	
 	
Total Impaired Loans with an Allowance Recorded	$	46,429	
 	 	$	58,663	
 	 	$	6,102	

Impaired Loans:	 	 	 	 	 	
Commercial	$	26,061	
 	 	$	37,911	
 	 	$	2,449	
 	
Consumer	39,886	
 	 	45,520	
 	 	3,653	
 	
Total Impaired Loans	$	65,947	
 	 	$	83,431	
 	 	$	6,102	

December 31, 2013	 	

 	
Impaired Loans with No Related Allowance Recorded:	 	

 	
Commercial	 	

 	
Commercial and Industrial	$	12,709	
 	 	$	17,967	
 	 	$	—	
 	
Commercial Mortgage	14,898	
 	 	14,898	
 	 	—	
 	
Construction	1,059	
 	 	1,064	
 	 	—	
 	
Total Commercial	28,666	
 	 	33,929	
 	 	—	
 	
Total Impaired Loans with No Related Allowance Recorded	$	28,666	
 	 	$	33,929	
 	 	$	—	

Impaired Loans with an Allowance Recorded:	 	

 	
Commercial	 	

 	
Commercial and Industrial	$	9,803	
 	 	$	16,403	
 	 	$	9,054	
 	
Total Commercial	9,803	
 	 	16,403	
 	 	9,054	
 	
Consumer	 	

 	
Residential Mortgage	32,338	
 	 	38,420	
 	 	3,619	
 	
Home Equity	796	
 	 	796	
 	 	13	
 	
Automobile	5,183	
 	 	5,183	
 	 	77	
 	
Other 1	329	
 	 	329	
 	 	13	
 	
Total Consumer	38,646	
 	 	44,728	
 	 	3,722	
 	
Total Impaired Loans with an Allowance Recorded	$	48,449	
 	 	$	61,131	
 	 	$	12,776	

Impaired Loans:	 	

 	
Commercial	$	38,469	
 	 	$	50,332	
 	 	$	9,054	
 	
Consumer	38,646	
 	 	44,728	
 	 	3,722	
 	
Total Impaired Loans	$	77,115	
 	 	$	95,060	
 	 	$	12,776	
 	
1 Comprised of other revolving credit and installment financing.

20

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2014 and 2013.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended
September 30, 2014	 	Three Months Ended
September 30, 2013	
(dollars in thousands)	Average Recorded
Investment	
 	 	Interest Income
Recognized	
 	 	Average Recorded
Investment	
 	 	Interest Income
Recognized	
 	
Impaired Loans with No Related Allowance Recorded:	 	 	

 	
Commercial	 	

 	 	 	
 	
Commercial and Industrial	$	10,161	
 	 	$	96	
 	 	$	9,796	
 	 	$	53	
 	
Commercial Mortgage	7,046	
 	 	56	
 	 	8,075	
 	 	54	
 	
Construction	2,024	
 	 	28	
 	 	532	
 	 	11	
 	
Total Commercial	19,231	
 	 	180	
 	 	18,403	
 	 	118	
 	
Consumer	 	 	 	 	 	 	 	
Other 1	9	
 	 	—	
 	 	—	
 	 	—	
 	
Total Consumer	9	
 	 	—	
 	 	—	
 	 	—	
 	
Total Impaired Loans with No Related Allowance Recorded	$	19,240	
 	 	$	180	
 	 	$	18,403	
 	 	$	118	

Impaired Loans with an Allowance Recorded:	 	

 	 	 	
 	
Commercial	 	

 	 	 	
 	
Commercial and Industrial	$	7,345	
 	 	$	25	
 	 	$	9,178	
 	 	$	28	
 	
Commercial Mortgage	—	
 	 	—	
 	 	24	
 	 	—	
 	
Total Commercial	7,345	
 	 	25	
 	 	9,202	
 	 	28	
 	
Consumer	 	

 	 	 	
 	
Residential Mortgage	31,989	
 	 	269	
 	 	31,390	
 	 	234	
 	
Home Equity	1,029	
 	 	13	
 	 	—	
 	 	—	
 	
Automobile	5,345	
 	 	114	
 	 	5,015	
 	 	117	
 	
Other 1	576	
 	 	12	
 	 	252	
 	 	3	
 	
Total Consumer	38,939	
 	 	408	
 	 	36,657	
 	 	354	
 	
Total Impaired Loans with an Allowance Recorded	$	46,284	
 	 	$	433	
 	 	$	45,859	
 	 	$	382	

Impaired Loans:	 	

 	 	 	
 	
Commercial	$	26,576	
 	 	$	205	
 	 	$	27,605	
 	 	$	146	
 	
Consumer	38,948	
 	 	408	
 	 	36,657	
 	 	354	
 	
Total Impaired Loans	$	65,524	
 	 	$	613	
 	 	$	64,262	
 	 	$	500	

 	Nine Months Ended
September 30, 2014	 	Nine Months Ended
September 30, 2013	
(dollars in thousands)	Average Recorded
Investment	
 	 	Interest Income
Recognized	
 	 	Average Recorded
Investment	
 	 	Interest Income
Recognized	
 	
Impaired Loans with No Related Allowance Recorded:	 	 	

 	
Commercial	 	

 	 	 	
 	
Commercial and Industrial	$	11,518	
 	 	$	254	
 	 	$	8,506	
 	 	$	53	
 	
Commercial Mortgage	9,041	
 	 	167	
 	 	5,743	
 	 	54	
 	
Construction	1,540	
 	 	66	
 	 	474	
 	 	11	
 	
Total Commercial	22,099	
 	 	487	
 	 	14,723	
 	 	118	
 	
Consumer	 	 	 	 	 	 	 	
Other 1	7	
 	 	—	
 	 	—	
 	 	—	
 	
Total Consumer	7	
 	 	—	
 	 	—	
 	 	—	
 	
Total Impaired Loans with No Related Allowance Recorded	$	22,106	
 	 	$	487	
 	 	$	14,723	
 	 	$	118	

Impaired Loans with an Allowance Recorded:	 	

 	 	 	
 	
Commercial	 	

 	 	 	
 	
Commercial and Industrial	$	8,260	
 	 	$	80	
 	 	$	5,593	
 	 	$	150	
 	
Commercial Mortgage	—	
 	 	—	
 	 	40	
 	 	51	
 	
Total Commercial	8,260	
 	 	80	
 	 	5,633	
 	 	201	
 	
Consumer	 	

 	 	 	
 	
Residential Mortgage	31,915	
 	 	749	
 	 	31,314	
 	 	554	
 	
Home Equity	952	
 	 	27	
 	 	—	
 	 	—	
 	
Automobile	5,235	
 	 	327	
 	 	5,241	
 	 	375	
 	
Other 1	471	
 	 	30	
 	 	266	
 	 	9	
 	
Total Consumer	38,573	
 	 	1,133	
 	 	36,821	
 	 	938	
 	
Total Impaired Loans with an Allowance Recorded	$	46,833	
 	 	$	1,213	
 	 	$	42,454	
 	 	$	1,139	

Impaired Loans:	 	

 	 	 	
 	
Commercial	$	30,359	
 	 	$	567	
 	 	$	20,356	
 	 	$	319	
 	
Consumer	38,580	
 	 	1,133	
 	 	36,821	
 	 	938	
 	
Total Impaired Loans	$	68,939	
 	 	$	1,700	
 	 	$	57,177	
 	 	$	1,257	

1 	Comprised of other revolving credit and installment financing.	

21

For the three and nine months ended September 30, 2014 and 2013, the amounts of interest income recognized by the Company within the periods that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status.  For the three and nine months ended September 30, 2014 and 2013, the amount of interest income recognized using a cash-basis method of accounting during the periods that the loans were impaired was not material.

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when the Company for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider.  Loans modified in a TDR were $56.1 million and $63.7 million as of September 30, 2014 and December 31, 2013, respectively.  As of September 30, 2014 and December 31, 2013, there were $0.1 million and $1.9 million, respectively, of available commitments under revolving credit lines that have been modified in a TDR.

The Company offers various types of concessions when modifying a loan or lease. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a co-borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Prior to November 2012, residential mortgage loans modified in a TDR were primarily comprised of loans where monthly payments were lowered to accommodate the borrowers' financial needs for a period of time, normally two years. During that time, the borrower's entire monthly payment was applied to principal. After the lowered monthly payment period ended, the borrower generally reverted back to paying principal and interest per the original terms with the maturity date adjusted accordingly. Effective November 2012, the Company revised its modification program to resemble the Federal Government's Home Affordable Modification Payment (“HAMP”) Tier 2 program. Under this modification program, the concessions generally include a lower interest rate and the loan being fully amortized for up to 40 years from the modification effective date. In some cases, the Company may forbear a portion of the unpaid principal balance with a balloon payment due upon maturity or pay-off of the loan. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Prior to September 2012, land loans modified in a TDR typically involved extending the balloon payment by one to three years, changing the monthly payments from interest-only to principal and interest, while leaving the interest rate unchanged. In September 2012, the land loan modification program was changed to offer an extension to term-out and fully amortize the loan over a period of up to 360 months. Home equity modifications are made infrequently and uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR may have the financial effect of increasing the specific Allowance associated with the loan.  An Allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.

22

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2014 and 2013.

 	Loans Modified as a TDR for the
Three Months Ended September 30, 2014	 	Loans Modified as a TDR for the
Three Months Ended September 30, 2013	
 	 	
 	 	Recorded	
 	 	Increase in	
 	 	 	
 	 	Recorded	
 	 	Increase in	
 	
Troubled Debt Restructurings	Number of	
 	 	Investment	
 	 	Allowance	
 	 	Number of	
 	 	Investment	
 	 	Allowance	
 	
(dollars in thousands)	Contracts	
 	(as of period end)1	 	(as of period end)	 	 	Contracts	
 	(as of period end)1	 	(as of period end)	 	
Commercial	 	

 	 	 	

 	
Commercial and Industrial	4	
 	 	$	1,203	
 	 	$	155	
 	 	18	
 	 	$	2,207	
 	 	$	1	
 	
Construction	—	
 	 	—	
 	 	—	
 	 	1	
 	 	1,064	
 	 	—	
 	
Total Commercial	4	
 	 	1,203	
 	 	155	
 	 	19	
 	 	3,271	
 	 	1	
 	
Consumer	 	

 	 	 	

 	
Residential Mortgage	6	
 	 	1,581	
 	 	56	
 	 	5	
 	 	1,533	
 	 	107	
 	
Automobile	35	
 	 	774	
 	 	10	
 	 	25	
 	 	353	
 	 	5	
 	
Other 2	35	
 	 	255	
 	 	8	
 	 	6	
 	 	74	
 	 	5	
 	
Total Consumer	76	
 	 	2,610	
 	 	74	
 	 	36	
 	 	1,960	
 	 	117	
 	
Total	80	
 	 	$	3,813	
 	 	$	229	
 	 	55	
 	 	$	5,231	
 	 	$	118	

 	Loans Modified as a TDR for the
Nine Months Ended September 30, 2014	 	Loans Modified as a TDR for the
Nine Months Ended September 30, 2013	
 	 	
 	 	Recorded	
 	 	Increase in	
 	 	 	
 	 	Recorded	
 	 	Increase in	
 	
Troubled Debt Restructurings	Number of	
 	 	Investment	
 	 	Allowance	
 	 	Number of	
 	 	Investment	
 	 	Allowance	
 	
(dollars in thousands)	Contracts	
 	(as of period end)1	 	(as of period end)	 	 	Contracts	
 	(as of period end)1	 	(as of period end)	 	
Commercial	 	

 	 	 	

 	
Commercial and Industrial	16	
 	 	$	5,416	
 	 	$	156	
 	 	33	
 	 	$	4,774	
 	 	$	621	
 	
Commercial Mortgage	1	
 	 	332	
 	 	—	
 	 	4	
 	 	5,476	
 	 	—	
 	
Construction	—	
 	 	—	
 	 	—	
 	 	1	
 	 	1,064	
 	 	—	
 	
Total Commercial	17	
 	 	5,748	
 	 	156	
 	 	38	
 	 	11,314	
 	 	621	
 	
Consumer	 	

 	 	 	

 	
Residential Mortgage	15	
 	 	4,886	
 	 	183	
 	 	17	
 	 	5,823	
 	 	880	
 	
Home Equity	2	
 	 	158	
 	 	3	
 	 	—	
 	 	—	
 	 	—	
 	
Automobile	112	
 	 	2,213	
 	 	29	
 	 	106	
 	 	1,276	
 	 	19	
 	
Other 2	53	
 	 	414	
 	 	13	
 	 	7	
 	 	77	
 	 	5	
 	
Total Consumer	182	
 	 	7,671	
 	 	228	
 	 	130	
 	 	7,176	
 	 	904	
 	
Total	199	
 	 	$	13,419	
 	 	$	384	
 	 	168	
 	 	$	18,490	
 	 	$	1,525	

1 	The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.	
 	 	
2 	Comprised of other revolving credit and installment financing.	

23

The following presents by class, all loans modified in a TDR that defaulted during the three and nine months ended September 30, 2014 and 2013, and within twelve months of their modification date.  A TDR is considered to be in default once it becomes 60 days or more past due following a modification.

 	Three Months Ended
September 30, 2014	 	Three Months Ended
September 30, 2013	
TDRs that Defaulted During the Period,	 	
 	 	Recorded	
 	 	Recorded	 	
Within Twelve Months of their Modification Date	Number of	
 	 	Investment	
 	 	Number of	
 	 	Investment	
 	
(dollars in thousands)	Contracts	
 	 	(as of period end)1	
 	 	Contracts	
 	 	(as of period end)1	
 	
Commercial	 	 	 	 	 	 	 	
Commercial and Industrial	1	
 	 	$	22	
 	 	—	
 	 	$	—	
 	
Total Commercial	1	
 	 	22	
 	 	—	
 	 	—	

Consumer	 	 	 	

 	
Automobile	5	
 	 	64	
 	 	3	
 	 	25	
 	
Other 2	1	
 	 	16	
 	 	—	
 	 	—	
 	
Total Consumer	6	
 	 	80	
 	
 	3	
 	 	25	
 	
Total	7	
 	 	$	102	
 	 	3	
 	 	$	25	

 	Nine Months Ended
September 30, 2014	 	Nine Months Ended
September 30, 2013	
TDRs that Defaulted During the Period,	 	
 	 	Recorded	
 	 	Recorded	 	
Within Twelve Months of their Modification Date	Number of	
 	 	Investment	
 	 	Number of	
 	 	Investment	
 	
(dollars in thousands)	Contracts	
 	 	(as of period end)1	
 	 	Contracts	
 	 	(as of period end)1	
 	
Commercial	 	 	 	 	 	 	 	
Commercial and Industrial	3	
 	 	$	723	
 	 	1	
 	 	$	492	
 	
Total Commercial	3	
 	 	723	
 	 	1	
 	 	492	

Consumer	 	

 	 	 	
 	
Residential Mortgage	2	
 	 	509	
 	 	—	
 	 	—	
 	
Automobile	7	
 	 	110	
 	 	9	
 	 	89	
 	
Other 2	3	
 	 	27	
 	 	—	
 	 	—	
 	
Total Consumer	12	
 	 	646	
 	 	9	
 	 	89	
 	
Total	15	
 	 	$	1,369	
 	 	10	
 	 	$	581	

1 	The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.	
 	 	
2 	Comprised of other revolving credit and installment financing.	
Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  The specific Allowance associated with the loan may be increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

Note 4.  Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $3.0 billion as of September 30, 2014 and $3.1 billion as of December 31, 2013.  Substantially all of these loans were originated by the Company and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset and are initially recorded at fair value (see Note 12 to the Consolidated Financial Statements for more information). Changes to the balance of mortgage servicing rights are recorded in mortgage banking income in the Company’s consolidated statements of income.

The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $2.0 million for the three months ended September 30, 2014 and 2013, and $6.0 million for the nine months ended September 30, 2014 and 2013.  Servicing income is recorded in mortgage banking income in the Company’s consolidated statements of income.  The Company’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawaii.

24

For the three and nine months ended September 30, 2014 and 2013, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Balance at Beginning of Period	$	2,960	
 	 	$	4,158	
 	 	$	3,826	
 	 	$	4,761	
 	
Change in Fair Value:	 	

 	 	 	
 	
Due to Change in Valuation Assumptions 1	(145	)	 	(68	)	 	(816	)	 	(4	)	
Due to Payoffs	(72	)	 	(271	)	 	(267	)	 	(938	)	
Total Changes in Fair Value of Mortgage Servicing Rights	(217	)	 	(339	)	 	(1,083	)	 	(942	)	
Balance at End of Period	$	2,743	
 	 	$	3,819	
 	 	$	2,743	
 	 	$	3,819	

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

For the three and nine months ended September 30, 2014 and 2013, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method, net of valuation allowance, was as follows:

 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Balance at Beginning of Period	$	23,437	
 	 	$	23,473	
 	 	$	24,297	
 	 	$	20,479	
 	
Servicing Rights that Resulted From Asset Transfers	100	
 	 	1,343	
 	 	664	
 	 	5,596	
 	
Amortization	(742	)	 	(620	)	 	(2,094	)	 	(1,879	)	
Valuation Allowance Provision	21	
 	 	—	
 	 	(51	)	 	—	
 	
Balance at End of Period	$	22,816	
 	 	$	24,196	
 	
 	$	22,816	
 	
 	$	24,196	

Valuation Allowance:	 	 	 	 	 	 	 	
Balance at Beginning of Period	$	(72	)	 	$	—	
 	 	$	—	
 	 	$	—	
 	
Valuation Allowance Provision	21	
 	 	—	
 	 	(51	)	 	—	
 	
Balance at End of Period	$	(51	)	 	$	—	
 	
 	$	(51	)	
 	$	—	

Fair Value of Mortgage Servicing Rights Accounted for
 Under the Amortization Method	 	

 	 	 	
 	
Beginning of Period	$	25,848	
 	 	$	28,442	
 	 	$	30,100	
 	 	$	23,143	
 	
End of Period	$	24,336	
 	 	$	28,693	
 	 	$	24,336	
 	 	$	28,693	

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2014 and December 31, 2013 were as follows:

 	September 30,
2014	
 	 	December 31, 2013	
 	
Weighted-Average Constant Prepayment Rate 1	11.07	%	 	7.98	%	
Weighted-Average Life (in years)	6.56	
 	 	8.04	
 	
Weighted-Average Note Rate	4.28	%	 	4.31	%	
Weighted-Average Discount Rate 2	10.17	%	 	9.70	%	
 	 	
1 	Represents annualized loan repayment rate assumption.	
 	 	
2 	Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.	
A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of September 30, 2014 and December 31, 2013 is presented in the following table.

(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Constant Prepayment Rate	 	

Decrease in fair value from 25 basis points (“bps”) adverse change	$	(276	)	 	$	(357	)	
Decrease in fair value from 50 bps adverse change	(552	)	 	(746	)	
Discount Rate	 	

Decrease in fair value from 25 bps adverse change	(275	)	 	(432	)	
Decrease in fair value from 50 bps adverse change	(545	)	 	(876	)	

25

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

Note 5. Balance Sheet Offsetting

Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated statements of condition (asset positions are included in other assets and liability positions are included in other liabilities). The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. The Company had net liability positions with its financial institution counterparties totaling $16.5 million and $20.7 million as of September 30, 2014 and December 31, 2013, respectively. The fair value of collateral posted by the Company for these net liability positions is shown in the table below. See Note 10 to the Consolidated Financial Statements for more information.
Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Company's consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement.

26

The following table presents the assets and liabilities subject to an enforceable master netting arrangement, or repurchase agreements, as of September 30, 2014 and December 31, 2013. The swap agreements we have with our commercial banking customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.

 	 	(i)	 	(ii)	 	(iii) = (i)-(ii)	 	(iv)	 	(v) = (iii)-(iv)	 	
 	 	Gross Amounts
Recognized in the
Statements
 of Condition	 	 Gross Amounts
Offset in the
Statements
 of Condition	 	 Net Amounts
Presented in the
Statements
 of Condition	 	 Gross Amounts Not Offset in the Statements of Condition	 	 	 	
(dollars in thousands)	 	 	 	 	 	 	 	Netting
Adjustments
per Master
Netting
Arrangements	 	Fair Value of Collateral
Pledged 1	 	 Net Amount	 	 	 	 	 	 	 	 	 	
September 30, 2014	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Swap Agreements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Institutional Counterparties	 	$	117	
 	 	$	—	
 	 	$	117	
 	 	$	117	
 	 	$	—	
 	 	$	—	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Swap Agreements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Institutional Counterparties	 	16,660	
 	 	—	
 	 	16,660	
 	 	117	
 	 	1,885	
 	 	14,658	

Repurchase Agreements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Private Institutions	 	600,000	
 	 	—	
 	 	600,000	
 	 	—	
 	 	600,000	
 	 	—	
 	 	 	 	 	 	 	 	 	 	
    Government Entities	 	100,203	
 	 	—	
 	 	100,203	
 	 	—	
 	 	100,203	
 	 	—	
 	 	 	 	 	 	 	 	 	 	
 	 	$	700,203	
 	 	$	—	
 	 	$	700,203	
 	 	$	—	
 	 	$	700,203	
 	 	$	—	

December 31, 2013	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Swap Agreements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Institutional Counterparties	 	$	155	
 	 	$	—	
 	 	$	155	
 	 	$	155	
 	 	$	—	
 	 	$	—	

Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Swap Agreements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Institutional Counterparties	 	20,853	
 	 	—	
 	 	20,853	
 	 	155	
 	 	2,288	
 	 	18,410	

 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	
Repurchase Agreements:	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    Private Institutions	 	600,000	
 	 	—	
 	 	600,000	
 	 	—	
 	 	600,000	
 	 	—	
 	 	 	 	 	 	 	 	 	 	
    Government Entities	 	170,049	
 	 	—	
 	 	170,049	
 	 	—	
 	 	170,049	
 	 	—	
 	 	 	 	 	 	 	 	 	 	
 	 	$	770,049	
 	 	$	—	
 	 	$	770,049	
 	 	$	—	
 	 	$	770,049	
 	 	$	—	
 	 	 	 	 	 	 	 	 	 	
1 The application of collateral cannot reduce the net amount below zero. Therefore, excess collateral is not reflected in this table. For repurchase agreements with private institutions, the fair value of investment securities pledged was $0.7 billion and $0.7 billion as of September 30, 2014 and December 31, 2013, respectively. For repurchase agreements with government entities, the investment securities pledged to each government entity collectively secure both deposits as well as repurchase agreements. The Company had government entity deposits totaling $1.3 billion and $1.2 billion as of September 30, 2014 and December 31, 2013, respectively. The investment securities pledged as of September 30, 2014 and December 31, 2013 had a fair value of $2.0 billion and $1.8 billion, respectively.

27

Note 6.  Accumulated Other Comprehensive Income (Loss)

The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013:

(dollars in thousands)	Before Tax	
 	 	Tax Effect	
 	 	Net of Tax	
 	
Three Months Ended September 30, 2014	 	

 	
Net Unrealized Gains on Investment Securities:	 	

 	
Net Unrealized Gains Arising During the Period	$	825	
 	 	$	325	
 	
 	$	500	
 	
Amounts Reclassified from Accumulated Other Comprehensive Income that Increase Net Income:	 	

 	
  Amortization of Unrealized Holding Gains on Held-to-Maturity Securities  1	(160	)	 	(63	)	 	(97	)	
Net Unrealized Gains on Investment Securities	665	
 	 	262	
 	 	403	
 	
Defined Benefit Plans:	 	

 	
Amortization of Net Actuarial Losses	339	
 	 	133	
 	 	206	
 	
Amortization of Prior Service Credit	(81	)	 	(32	)	 	(49	)	
Defined Benefit Plans, Net	258	
 	 	101	
 	 	157	
 	
Other Comprehensive Income	$	923	
 	 	$	363	
 	 	$	560	

Three Months Ended September 30, 2013	 	

 	
Net Unrealized Losses on Investment Securities:	 	

 	
Net Unrealized Losses Arising During the Period	$	(9,913	)	 	$	(3,909	)	 	$	(6,004	)	
Amounts Reclassified from Accumulated Other Comprehensive Income that Increase Net Income:	 	 	 	 	 	
  Amortization of Unrealized Holding Gains on Held-to-Maturity Securities  1	(1,621	)	 	(639	)	 	(982	)	
Net Unrealized Losses on Investment Securities	(11,534	)	 	(4,548	)	 	(6,986	)	
Defined Benefit Plans:	 	

 	
Amortization of Net Actuarial Losses	414	
 	 	163	
 	 	251	
 	
Amortization of Prior Service Credit	(81	)	 	(32	)	 	(49	)	
Defined Benefit Plans, Net	333	
 	 	131	
 	 	202	
 	
Other Comprehensive Loss	$	(11,201	)	 	$	(4,417	)	 	$	(6,784	)	
 	 	 	 	 	 	
Nine Months Ended September 30, 2014	 	

 	
Net Unrealized Gains on Investment Securities:	 	

 	
Net Unrealized Gains Arising During the Period	$	26,143	
 	 	$	10,313	
 	 	$	15,830	
 	
Amounts Reclassified from Accumulated Other Comprehensive Income that Increase Net Income:	 	 	 	 	 	
  Gain on Sale	(64	)	
 	(25	)	 	(39	)	
  Amortization of Unrealized Holding Gains on Held-to-Maturity Securities  1	(825	)	 	(325	)	 	(500	)	
Net Unrealized Gains on Investment Securities	25,254	
 	 	9,963	
 	 	15,291	
 	
Defined Benefit Plans:	 	

 	
Amortization of Net Actuarial Losses	1,016	
 	 	400	
 	 	616	
 	
Amortization of Prior Service Credit	(242	)	 	(95	)	 	(147	)	
Defined Benefit Plans, Net	774	
 	 	305	
 	 	469	
 	
Other Comprehensive Income	$	26,028	
 	 	$	10,268	
 	 	$	15,760	

Nine Months Ended September 30, 2013	 	

 	
Net Unrealized Losses on Investment Securities:	 	

 	
Net Unrealized Losses Arising During the Period	$	(96,420	)	 	$	(38,002	)	 	$	(58,418	)	
Amounts Reclassified from Accumulated Other Comprehensive Income that Increase Net Income:	 	 	 	 	 	
  Amortization of Unrealized Holding Gains on Held-to-Maturity Securities  1	(7,894	)	 	(3,113	)	 	(4,781	)	
Net Unrealized Losses on Investment Securities	(104,314	)	 	(41,115	)	 	(63,199	)	
Defined Benefit Plans:	 	

 	
Net Actuarial Losses Arising During the Period	(206	)	 	(81	)	 	(125	)	
Amortization of Net Actuarial Losses	1,241	
 	 	489	
 	 	752	
 	
Amortization of Prior Service Credit	(242	)	 	(96	)	 	(146	)	
Defined Benefit Plans, Net	793	
 	 	312	
 	 	481	
 	
Other Comprehensive Loss	$	(103,521	)	 	$	(40,803	)	 	$	(62,718	)	
 	 	
1 	The amount relates to the amortization/accretion of unrealized net gains and losses related to the Company's reclassification of available-for-sale investment securities to the held-to-maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.	

28

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2014 and 2013:

(dollars in thousands)	 	Investment Securities-Available-for-Sale	
 	 	Investment Securities-Held-to-Maturity	
 	 	Defined Benefit Plans	
 	 	Accumulated Other Comprehensive Income (Loss)	
 	
Three Months Ended September 30, 2014	 	 	 	 	 	 	 	 	
Balance at Beginning of Period	 	$	13,991	
 	 	$	(8,532	)	 	$	(22,082	)	 	$	(16,623	)	
Other Comprehensive Income Before Reclassifications	 	500	
 	 	—	
 	 	—	
 	 	500	
 	
Amounts Reclassified from Accumulated Other
        Comprehensive Loss	 	—	
 	 	(97	)	 	157	
 	 	60	
 	
Total Other Comprehensive Income (Loss)	 	500	
 	 	(97	)	 	157	
 	 	560	
 	
Balance at End of Period	 	$	14,491	
 	 	$	(8,629	)	 	$	(21,925	)	 	$	(16,063	)	
 	 	 	 	 	 	 	 	 	
Three Months Ended September 30, 2013	 	 	 	 	 	 	 	 	
Balance at Beginning of Period	 	$	(1,283	)	 	$	4,847	
 	 	$	(30,290	)	 	$	(26,726	)	
Other Comprehensive Loss Before Reclassifications	 	5,692	
 	 	(11,696	)	 	—	
 	 	(6,004	)	
Amounts Reclassified from Accumulated Other
        Comprehensive Loss	 	—	
 	 	(982	)	 	202	
 	 	(780	)	
Total Other Comprehensive Income (Loss)	 	5,692	
 	 	(12,678	)	 	202	
 	 	(6,784	)	
Balance at End of Period	 	$	4,409	
 	 	$	(7,831	)	 	$	(30,088	)	 	$	(33,510	)	
 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2014	 	 	 	 	 	 	 	 	
Balance at Beginning of Period	 	$	(1,300	)	 	$	(8,129	)	 	$	(22,394	)	 	$	(31,823	)	
Other Comprehensive Income Before Reclassifications	 	15,830	
 	 	—	
 	 	—	
 	 	15,830	
 	
Amounts Reclassified from Accumulated Other
        Comprehensive Loss	 	(39	)	 	(500	)	 	469	
 	 	(70	)	
Total Other Comprehensive Income (Loss)	 	15,791	
 	 	(500	)	 	469	
 	 	15,760	
 	
Balance at End of Period	 	$	14,491	
 	 	$	(8,629	)	 	$	(21,925	)	 	$	(16,063	)	
 	 	 	 	 	 	 	 	 	
Nine Months Ended September 30, 2013	 	 	 	 	 	 	 	 	
Balance at Beginning of Period	 	$	45,996	
 	 	$	13,781	
 	 	$	(30,569	)	 	$	29,208	
 	
Other Comprehensive Loss Before Reclassifications	 	(41,587	)	 	(16,831	)	 	(125	)	 	(58,543	)	
Amounts Reclassified from Accumulated Other
        Comprehensive Income	 	—	
 	 	(4,781	)	 	606	
 	 	(4,175	)	
Total Other Comprehensive Income (Loss)	 	(41,587	)	 	(21,612	)	 	481	
 	 	(62,718	)	
Balance at End of Period	 	$	4,409	
 	 	$	(7,831	)	 	$	(30,088	)	 	$	(33,510	)	

29

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013:

Details about Accumulated Other
Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) 1	 	Affected Line Item in the Statement Where Net Income Is Presented	
 	Three Months Ended September 30,	 	
(dollars in thousands)	2014	
 	2013	
 	 	
Amortization of Unrealized Holding Gains (Losses) on
     Investment Securities Held-to-Maturity	$	160	
 	$	1,621	
 	Interest Income	
 	(63	)	(639	)	Provision for Income Tax	
 	97	
 	982	
 	Net of Tax	
Sale of Investment Securities Available-for-Sale	—	
 	—	
 	Investment Securities Gains, Net	
 	—	
 	—	
 	Tax Expense	
 	—	
 	—	
 	Net of tax	
 	 	 	 	
Amortization of Defined Benefit Plan Items	 	 	 	
Prior Service Credit2	81	
 	81	
 	 	
Net Actuarial Losses2	(339	)	(414	)	 	
 	(258	)	(333	)	Total Before Tax	
 	101	
 	131	
 	Provision for Income Tax	
 	(157	)	(202	)	Net of Tax	
 	 	 	 	
Total Reclassifications for the Period	$	(60	)	$	780	
 	Net of Tax	
 	 	 	 	
Details about Accumulated Other
Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) 1	 	Affected Line Item in the Statement Where Net Income Is Presented	
 	Nine Months Ended September 30,	 	
(dollars in thousands)	2014	
 	2013	
 	 	
Amortization of Unrealized Holding Gains (Losses) on
     Investment Securities Held-to-Maturity	$	825	
 	$	7,894	
 	Interest Income	
 	(325	)	(3,113	)	Provision for Income Tax	
 	500	
 	4,781	
 	Net of Tax	
Sale of Investment Securities Available-for-Sale	64	
 	—	
 	Investment Securities Gains, Net	
 	(25	)	—	
 	Tax Expense	
 	39	
 	—	
 	Net of tax	
 	 	 	 	
Amortization of Defined Benefit Plan Items	 	 	 	
Prior Service Credit2	242	
 	242	
 	 	
Net Actuarial Losses2	(1,016	)	(1,241	)	 	
 	(774	)	(999	)	Total Before Tax	
 	305	
 	393	
 	Provision for Income Tax	
 	(469	)	(606	)	Net of Tax	
 	 	 	 	
Total Reclassifications for the Period	$	70	
 	$	4,175	
 	Net of Tax	
 	 	
1 	Amounts in parentheses indicate reductions to net income.	
 	 	
2 	These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost and are included in Salaries and Benefits on the consolidated statements of income (see Note 9 for additional details).	

30

Note 7.  Earnings Per Share

There were no adjustments to net income, the numerator, for purposes of computing earnings per share. The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share and antidilutive stock options and restricted stock outstanding for the three and nine months ended September 30, 2014 and 2013:

 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
 	2014	
 	 	2013	 	2014	
 	 	2013	
Denominator for Basic Earnings Per Share	43,859,396	
 	 	44,267,356	 	44,034,047	
 	 	44,433,967	
Dilutive Effect of Equity Based Awards	229,157	
 	 	212,116	 	215,986	
 	 	154,810	
Denominator for Diluted Earnings Per Share	44,088,553	
 	 	44,479,472	 	44,250,033	
 	 	44,588,777	
 	 	 	 	 	 	 	 	
Antidilutive Stock Options and Restricted Stock Outstanding	—	
 	 	24,101	 	—	
 	 	162,596	

Note 8.  Business Segments

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

The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to Treasury.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

The provision for credit losses reflects the actual net charge-offs of the business segments.  This may be adjusted periodically for changes in the risk profile of the business segment.  The amount of the consolidated provision for loan and lease losses is based on the methodology that we use to estimate our consolidated Allowance.  The residual provision for credit losses to arrive at the consolidated provision for credit losses is included in Treasury and Other.

Implicit in noninterest income and expense are allocations from support units to business units.  These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage.

The provision for income taxes is allocated to business segments using a 37% effective tax rate. However, the provision for income taxes for our Leasing business unit (included in the Commercial Banking segment) and Auto Leasing portfolio and Pacific Century Life Insurance business unit (both included in the Retail Banking segment) are assigned their actual effective tax rates due to the unique relationship that income taxes have with their products. The residual income tax expense or benefit to arrive at the consolidated effective tax rate is included in Treasury and Other.

Retail Banking

Retail Banking offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans, small business loans and leases, and credit cards.  Deposit products include checking, savings, and time deposit accounts.  Retail Banking also offers retail insurance products.  Products and services from Retail Banking are delivered to customers through 74 branch locations and 459 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.

31

Commercial Banking

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products.  Commercial lending and deposit products are offered to middle-market and large companies in Hawaii and the Pacific Islands.  Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii.  Commercial Banking also includes international banking and provides merchant services to its small business customers.

Investment Services

Investment Services includes private banking, trust services, investment management, and institutional investment advisory services.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust group assists individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals.  The investment management group manages portfolios utilizing a variety of investment products. Institutional client services offers investment advice to corporations, government entities, and foundations.  This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.

Treasury and Other

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

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

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Selected business segment financial information as of and for the three and nine months ended September 30, 2014 and 2013 were as follows:

(dollars in thousands)	Retail Banking	
 	 	Commercial Banking	
 	 	Investment Services	
 	 	Treasury
and Other	
 	 	Consolidated Total	
 	
Three Months Ended September 30, 2014	 	

 	 	 	

Net Interest Income	$	46,863	
 	 	$	31,533	
 	 	$	2,676	
 	 	$	14,307	
 	 	$	95,379	
 	
Provision for Credit Losses	1,853	
 	 	(834	)	 	(9	)	 	(3,675	)	 	(2,665	)	
Net Interest Income After Provision for Credit Losses	45,010	
 	 	32,367	
 	 	2,685	
 	 	17,982	
 	 	98,044	
 	
Noninterest Income	20,265	
 	 	5,692	
 	 	14,459	
 	 	4,534	
 	 	44,950	
 	
Noninterest Expense	(48,963	)	 	(16,190	)	 	(13,443	)	 	(2,434	)	 	(81,030	)	
Income Before Provision for Income Taxes	16,312	
 	 	21,869	
 	 	3,701	
 	 	20,082	
 	 	61,964	
 	
Provision for Income Taxes	(5,807	)	 	(7,669	)	 	(1,370	)	 	(5,349	)	 	(20,195	)	
Net Income	$	10,505	
 	 	$	14,200	
 	 	$	2,331	
 	 	$	14,733	
 	 	$	41,769	
 	
Total Assets as of September 30, 2014	$	3,936,206	
 	 	$	2,640,763	
 	 	$	192,739	
 	 	$	7,740,458	
 	 	$	14,510,166	

 	
 	
Three Months Ended September 30, 2013	 	

 	 	 	

 	
Net Interest Income	$	41,404	
 	 	$	25,119	
 	 	$	2,574	
 	 	$	21,790	
 	 	$	90,887	
 	
Provision for Credit Losses	1,629	
 	 	(691	)	 	(19	)	 	(919	)	 	—	
 	
Net Interest Income After Provision for Credit Losses	39,775	
 	 	25,810	
 	 	2,593	
 	 	22,709	
 	 	90,887	
 	
Noninterest Income	21,785	
 	 	6,411	
 	 	14,348	
 	 	2,582	
 	 	45,126	
 	
Noninterest Expense	(50,150	)	 	(15,746	)	 	(13,590	)	 	(3,491	)	 	(82,977	)	
Income Before Provision for Income Taxes	11,410	
 	 	16,475	
 	 	3,351	
 	 	21,800	
 	 	53,036	
 	
Provision for Income Taxes	(4,222	)	 	(5,666	)	 	(1,240	)	 	(4,204	)	 	(15,332	)	
Net Income	$	7,188	
 	 	$	10,809	
 	 	$	2,111	
 	 	$	17,596	
 	 	$	37,704	
 	
Total Assets as of September 30, 2013	$	3,611,412	
 	 	$	2,356,723	
 	 	$	199,556	
 	 	$	7,681,180	
 	 	$	13,848,871	

 	
 	
Nine Months Ended September 30, 2014	 	

 	 	 	

 	
Net Interest Income	$	134,776	
 	 	$	86,316	
 	 	$	7,895	
 	 	$	54,037	
 	 	$	283,024	
 	
Provision for Credit Losses	2,895	
 	 	(2,164	)	 	(303	)	 	(5,292	)	 	(4,864	)	
Net Interest Income After Provision for Credit Losses	131,881	
 	 	88,480	
 	 	8,198	
 	 	59,329	
 	 	287,888	
 	
Noninterest Income	59,890	
 	 	17,223	
 	 	43,206	
 	 	13,880	
 	 	134,199	
 	
Noninterest Expense	(147,737	)	 	(49,215	)	 	(40,842	)	 	(7,865	)	 	(245,659	)	
Income Before Provision for Income Taxes	44,034	
 	 	56,488	
 	 	10,562	
 	 	65,344	
 	 	176,428	
 	
Provision for Income Taxes	(16,017	)	 	(19,572	)	 	(3,908	)	 	(15,080	)	 	(54,577	)	
Net Income	$	28,017	
 	 	$	36,916	
 	 	$	6,654	
 	 	$	50,264	
 	 	$	121,851	
 	
Total Assets as of September 30, 2014	$	3,936,206	
 	 	$	2,640,763	
 	 	$	192,739	
 	 	$	7,740,458	
 	 	$	14,510,166	

 	
 	
Nine Months Ended September 30, 2013	 	

 	 	 	

 	
Net Interest Income	$	122,442	
 	 	$	73,975	
 	 	$	7,938	
 	 	$	62,432	
 	 	$	266,787	
 	
Provision for Credit Losses	6,775	
 	 	(1,501	)	 	(52	)	 	(5,222	)	 	—	
 	
Net Interest Income After Provision for Credit Losses	115,667	
 	 	75,476	
 	 	7,990	
 	 	67,654	
 	 	266,787	
 	
Noninterest Income	67,686	
 	 	20,382	
 	 	44,446	
 	 	8,431	
 	 	140,945	
 	
Noninterest Expense	(150,838	)	 	(47,957	)	 	(40,954	)	 	(8,796	)	 	(248,545	)	
Income Before Provision for Income Taxes	32,515	
 	 	47,901	
 	 	11,482	
 	 	67,289	
 	 	159,187	
 	
Provision for Income Taxes	(12,030	)	 	(16,413	)	 	(4,248	)	 	(15,049	)	 	(47,740	)	
Net Income	$	20,485	
 	 	$	31,488	
 	 	$	7,234	
 	 	$	52,240	
 	 	$	111,447	
 	
Total Assets as of September 30, 2013	$	3,611,412	
 	 	$	2,356,723	
 	 	$	199,556	
 	 	$	7,681,180	
 	 	$	13,848,871	

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Note 9.  Pension Plans and Postretirement Benefit Plan
Components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan are presented in the following table for the three and nine months ended September 30, 2014 and 2013.

 	Pension Benefits	 	Postretirement Benefits	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Three Months Ended September 30,	 	

 	 	 	
 	
Service Cost	$	—	
 	 	$	—	
 	 	$	157	
 	 	$	173	
 	
Interest Cost	1,242	
 	 	1,128	
 	 	348	
 	 	305	
 	
Expected Return on Plan Assets	(1,275	)	 	(1,313	)	 	—	
 	 	—	
 	
Amortization of:	 	

 	 	 	
 	
Prior Service Credit	—	
 	 	—	
 	 	(81	)	 	(81	)	
Net Actuarial Losses (Gains)	352	
 	 	414	
 	 	(13	)	 	—	
 	
Net Periodic Benefit Cost	$	319	
 	 	$	229	
 	 	$	411	
 	 	$	397	

Nine Months Ended September 30,	 	

 	 	 	
 	
Service Cost	$	—	
 	 	$	—	
 	 	$	471	
 	 	$	378	
 	
Interest Cost	3,727	
 	 	3,385	
 	 	1,043	
 	 	667	
 	
Expected Return on Plan Assets	(3,825	)	 	(3,939	)	 	—	
 	 	—	
 	
Amortization of:	 	

 	 	 	
 	
Prior Service Credit	—	
 	 	—	
 	 	(242	)	 	(242	)	
Net Actuarial Losses (Gains)	1,055	
 	 	1,241	
 	 	(39	)	 	—	
 	
Net Periodic Benefit Cost	$	957	
 	 	$	687	
 	 	$	1,233	
 	 	$	803	

The net periodic benefit cost for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the consolidated statements of income.  For the three and nine months ended September 30, 2014, the Company contributed $0.2 million and $0.4 million, respectively, to the pension plans and $0.3 million and $0.9 million, respectively, to the postretirement benefit plan.  The Company expects to contribute $0.5 million to the pension plans and $1.3 million to the postretirement benefit plan for the year ending December 31, 2014.

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Note 10.  Derivative Financial Instruments

The following table presents the Company’s derivative financial instruments, their fair values, and balance sheet location as of September 30, 2014 and December 31, 2013:

Derivative Financial Instruments	September 30, 2014	 	December 31, 2013	
Not Designated as Hedging Instruments 1	Asset	
 	 	Liability	
 	 	Asset	
 	 	Liability	
 	
(dollars in thousands)	Derivatives	
 	 	Derivatives	
 	 	Derivatives	
 	 	Derivatives	
 	
Interest Rate Lock Commitments	$	106	
 	 	$	—	
 	 	$	574	
 	 	$	38	
 	
Forward Commitments	—	
 	 	9	
 	 	215	
 	 	4	
 	
Interest Rate Swap Agreements	16,739	
 	 	16,777	
 	 	20,852	
 	 	21,009	
 	
Foreign Exchange Contracts	12	
 	 	765	
 	 	128	
 	 	900	
 	
Conversion Rate Swap Agreement	—	
 	 	123	
 	 	—	
 	 	—	
 	
Total	$	16,857	
 	 	$	17,674	
 	 	$	21,769	
 	 	$	21,951	

1 	Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the consolidated statements of condition.	

The following table presents the Company’s derivative financial instruments and the amount and location of the net gains and losses recognized in the consolidated statements of income for the three and nine months ended September 30, 2014 and 2013:

 	Location of	 	 	 	 	 	 	 	 	
Derivative Financial Instruments	Net Gains (Losses)	 	Three Months Ended	 	Nine Months Ended	
Not Designated as Hedging Instruments	Recognized in the	 	September 30,	 	September 30,	
(dollars in thousands)	Statements of Income	 	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Interest Rate Lock Commitments	Mortgage Banking	 	$	363	
 	 	$	2,672	
 	 	$	2,244	
 	 	$	5,248	
 	
Forward Commitments	Mortgage Banking	 	3	
 	 	15	
 	 	(483	)	 	7,677	
 	
Interest Rate Swap Agreements	Other Noninterest Income	 	12	
 	 	13	
 	 	126	
 	 	276	
 	
Foreign Exchange Contracts	Other Noninterest Income	 	756	
 	 	713	
 	 	2,199	
 	 	2,313	
 	
Conversion Rate Swap Agreement	Investment Securities Gains, Net	 	(123	)	 	—	
 	 	(123	)	 	—	
 	
Total	 	 	$	1,011	
 	 	$	3,413	
 	 	$	3,963	
 	 	$	15,514	

Management has received authorization from the Bank’s Board of Directors to use derivative financial instruments as an end-user in connection with the Bank's risk management activities and to accommodate the needs of the Bank's customers.  As with any financial instrument, derivative financial instruments have inherent risks.  Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices.  Market risks associated with derivative financial instruments are balanced with the expected returns to enhance earnings performance and shareholder value, while limiting the volatility of each.  The Company uses various processes to monitor its overall market risk exposure, including sensitivity analysis, value-at-risk calculations, and other methodologies.

Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle transactions in accordance with the underlying contractual terms.  Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional financial instruments.  The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty, adhering to the same credit approval process used for commercial lending activities.

As of September 30, 2014 and December 31, 2013, the Company did not designate any derivative financial instruments in formal hedging relationships.  The Company’s free-standing derivative financial instruments are required to be carried at their fair value on the Company’s consolidated statements of condition.  These financial instruments have been limited to interest rate lock commitments (“IRLCs”), forward commitments, interest rate swap agreements, foreign exchange contracts, and conversion rate swap agreements.

The Company enters into IRLCs for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance.  Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan.  To mitigate this risk, the Company utilizes forward commitments as economic hedges against the potential decreases in the values of the loans held for sale.  IRLCs and

35

forward commitments are free-standing derivatives which are carried at fair value with changes recorded in the mortgage banking component of noninterest income in the Company’s consolidated statements of income.

The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers.  The Company mitigates the risk of entering into these agreements by entering into equal and offsetting interest rate swap agreements with highly rated third party financial institutions.  The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated statements of condition. Fair value changes are recorded in other noninterest income in the Company’s consolidated statements of income.  The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  Collateral, usually in the form of marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds.  See Note 5 to the Consolidated Financial Statements for more information.

The Company’s interest rate swap agreements with institutional counterparties contain credit-risk-related contingent features tied to the Company’s debt ratings or capitalization levels.  Under these provisions, if the Company’s debt rating falls below investment grade or if the Company’s capitalization levels fall below stipulated thresholds, certain counterparties may require immediate and ongoing collateralization on interest rate swaps in net liability positions, or may require immediate settlement of the contracts.  As of September 30, 2014, the Company’s debt ratings and capital levels were in excess of these minimum requirements.

The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers.  The foreign exchange contracts are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Company’s consolidated statements of income.

In connection with sales of a portion of our Visa Class B restricted shares in 2014, the Company entered into a conversion rate swap agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio of Class B into Class A unrestricted common shares.  In the event of Visa increasing the conversion ratio, the buyer would be required to make payment to the Company.  This conversion rate swap agreement was valued at zero (i.e., no contingent liability recorded) as a drop in the conversion ratio was deemed by the Company to be neither probable nor reasonably estimable.  However, in September 2014, Visa announced a reduction of the conversion ratio from 0.4206 to 0.4121 effective September 24, 2014. As a result, the Company recorded a $0.1 million liability in September 2014 which represents the amount due to the buyer in October 2014.  See Note 2 to the Consolidated Financial Statements for more information.

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Note 11.  Commitments, Contingencies, and Guarantees
The Company’s credit commitments as of September 30, 2014 and December 31, 2013 were as follows:

(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Unfunded Commitments to Extend Credit	$	2,462,908	
 	 	$	2,314,892	
 	
Standby Letters of Credit	44,668	
 	 	58,207	
 	
Commercial Letters of Credit	20,600	
 	 	16,387	
 	
Total Credit Commitments	$	2,528,176	
 	 	$	2,389,486	

Unfunded Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

Standby and Commercial Letters of Credit

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party.  The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company.  The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit, and generally holds cash or deposits as collateral on those standby letters of credit for which collateral is deemed necessary.

Contingencies

The Company is subject to various pending and threatened legal proceedings arising out of the normal course of business or operations. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the most recent information available. On a case-by-case basis, reserves are established for those legal claims for which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. Based on information currently available, management believes that the eventual outcome of these other actions against the Company will not be materially in excess of such amounts accrued by the Company. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters may be material to the Company's consolidated statement of income.

Risks Related to Representation and Warranty Provisions

The Company sells residential mortgage loans in the secondary market primarily to the Federal National Mortgage Association ("Fannie Mae"). The Company also pools Federal Housing Administration (“FHA”) insured and U.S. Department of Veterans Affairs (“VA”) guaranteed residential mortgage loans for sale to the Government National Mortgage Corporation ("Ginnie Mae"). These pools of FHA-insured and VA-guaranteed residential mortgage loans are securitized by Ginnie Mae. The agreements under which the Company sells residential mortgage loans to Fannie Mae or Ginnie Mae and the insurance or guaranty agreements with FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters. As of September 30, 2014, the unpaid principal balance of residential mortgage loans sold by the Company was $2.8 billion. The agreements under which the Company sells residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, the Company may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met. Upon receipt of a repurchase request, the Company works with investors or insurers to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor or insurer and to determine if a contractually required repurchase event has

37

occurred. The Company manages the risk associated with potential repurchases or other forms of settlement through its underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the nine months ended September 30, 2014, the Company repurchased seven residential mortgage loans with an aggregate unpaid principal balance totaling $2.0 million as a result of the representation and warranty provisions contained in these contracts. Five loans were delinquent as to principal and interest at the time of repurchase, however, no losses were incurred related to these repurchases. As of September 30, 2014, there were no pending repurchase requests related to representation and warranty provisions.

Risks Relating to Residential Mortgage Loan Servicing Activities

In addition to servicing loans in the Company's portfolio, substantially all of the loans the Company sells to investors are sold with servicing rights retained. The Company also services loans originated by other mortgage loan originators. As servicer, the Company's primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales. Each agreement under which the Company acts as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if the Company commits a material breach of obligations as servicer, the Company may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the nine months ended September 30, 2014, there were no loans repurchased related to loan servicing activities. As of September 30, 2014, there was one pending repurchase request for $0.3 million related to loan servicing activities.

Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of September 30, 2014, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of September 30, 2014, 99% of the Company's residential mortgage loans serviced for investors were current. The Company maintains ongoing communications with investors and continues to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in the loans sold to investors.

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Note 12.  Fair Value of Assets and Liabilities

Fair Value Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.  GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1:	Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.  A contractually binding sales price also provides reliable evidence of fair value.	
 	 	
Level 2:	Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.	
 	 	
Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.	
Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements.  Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service.  This service provides pricing information by utilizing evaluated pricing models supported with market data information.  Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications.  Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury.  As quoted prices were available, unadjusted, for identical securities in active markets, these securities were classified as Level 1 measurements.  Level 2 investment securities were primarily comprised of debt securities issued by the Small Business Administration, states and municipalities, corporations, as well as mortgage-backed securities issued by government agencies and government-sponsored enterprises.  Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models.  In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

On a quarterly basis, management reviews the pricing information received from the Company’s third-party pricing service.  This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Company’s third-party pricing service.  Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets.  Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs to determine fair value.  As of September 30, 2014 and December 31, 2013, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.  On a quarterly basis, management also reviews a sample of securities priced by the Company’s third-party pricing service to review significant assumptions and valuation methodologies used.  Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.  The Company’s third-party pricing service has also established processes for us to submit inquiries regarding quoted prices.  Periodically, we will challenge the quoted prices provided by our third-party pricing service.  The Company’s third-party

39

pricing service will review the inputs to the evaluation in light of the new market data presented by us.  The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis.

Loans Held for Sale

The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active market with readily observable market data.  As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company stratifies its mortgage servicing portfolio on the basis of loan type.  The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income.  Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors.  Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other Assets

Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements.  Quoted prices for these investments, primarily in mutual funds, are available in active markets.  Thus, the Company’s investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.

Derivative Financial Instruments

Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate lock commitments (“IRLCs”), forward commitments, interest rate swap agreements, foreign exchange contracts, and Visa Class B to Class A shares conversion rate swap agreement.  The fair values of IRLCs are calculated based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market.  However, this value is adjusted by a factor which considers the likelihood that the loan in a locked position will ultimately close.  This factor, the closing ratio, is derived from the Bank’s internal data and is adjusted using significant management judgment.  As such, IRLCs are classified as Level 3 measurements.  Forward commitments are classified as Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period.  The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize Level 2 observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount, and stated interest rate.  In addition, the Company includes in its fair value calculation a credit factor adjustment which is based primarily on management judgment.  Thus, interest rate swap agreements are classified as a Level 3 measurement.  The fair values of foreign exchange contracts are calculated using the Bank’s multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with market data information such as the spot rates of specific currency and yield curves.  Foreign exchange contracts are classified as Level 2 measurements because while they are valued using the Bank’s multi-currency accounting system, significant management judgment or estimation is not required. The fair value of the Visa Class B restricted shares to Class A unrestricted common shares conversion rate swap agreement represents the amount owed by the Company to the buyer of the Visa Class B shares as a result of a reduction of the conversion ratio subsequent to the sales dates. This conversion rate swap agreement is classified as a Level 2 measurement.

The Company is exposed to credit risk if borrowers or counterparties fail to perform.  The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements.  The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings.  Credit risk associated with borrowers or counterparties as well as the Company’s non-performance risk is factored into the determination of the fair value of derivative financial instruments.

40

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 	Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities	
 	 	Significant
Other
Observable
Inputs	
 	 	Significant
Unobservable
Inputs	

(dollars in thousands)	(Level 1)	
 	 	(Level 2)	
 	 	(Level 3)	
 	 	Total	
 	
September 30, 2014	 	

 	 	 	
 	
Assets:	 	

 	 	 	
 	
Investment Securities Available-for-Sale	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury
      and Government Agencies	$	61,518	
 	 	$	285,892	
 	 	$	—	
 	 	$	347,410	
 	
Debt Securities Issued by States and Political Subdivisions	—	
 	 	731,126	
 	 	—	
 	 	731,126	
 	
Debt Securities Issued by Corporations	—	
 	 	293,078	
 	 	—	
 	 	293,078	
 	
Mortgage-Backed Securities:	 	

 	 	

  Residential - Government Agencies	—	
 	 	504,098	
 	 	—	
 	 	504,098	
 	
  Residential - U.S. Government-Sponsored Enterprises	—	
 	 	158,993	
 	 	—	
 	 	158,993	
 	
    Commercial - Government Agencies	—	
 	 	186,208	
 	 	—	
 	 	186,208	
 	
Total Mortgage-Backed Securities	—	
 	 	849,299	
 	 	—	
 	 	849,299	
 	
Total Investment Securities Available-for-Sale	61,518	
 	 	2,159,395	
 	
 	—	
 	 	2,220,913	
 	
Loans Held for Sale	—	
 	 	2,382	
 	 	—	
 	 	2,382	
 	
Mortgage Servicing Rights	—	
 	 	—	
 	 	2,743	
 	 	2,743	
 	
Other Assets	18,481	
 	 	—	
 	 	—	
 	 	18,481	
 	
Derivatives 1	—	
 	 	12	
 	 	16,845	
 	 	16,857	
 	
Total Assets Measured at Fair Value on a
Recurring Basis as of September 30, 2014	$	79,999	
 	 	$	2,161,789	
 	 	$	19,588	
 	 	$	2,261,376	

Liabilities:	 	

 	 	 	
 	
Derivatives 1	$	—	
 	 	$	897	
 	 	$	16,777	
 	 	$	17,674	
 	
Total Liabilities Measured at Fair Value on a
Recurring Basis as of September 30, 2014	$	—	
 	 	$	897	
 	
 	$	16,777	
 	 	$	17,674	

December 31, 2013	 	

 	 	 	
 	
Assets:	 	

 	 	 	
 	
Investment Securities Available-for-Sale	 	

 	 	 	
 	
Debt Securities Issued by the U.S. Treasury
      and Government Agencies	$	70,693	
 	 	$	326,586	
 	 	$	—	
 	 	$	397,279	
 	
Debt Securities Issued by States and Political Subdivisions	—	
 	 	686,802	
 	 	—	
 	 	686,802	
 	
Debt Securities Issued by Corporations	—	
 	 	273,501	
 	 	—	
 	 	273,501	
 	
Mortgage-Backed Securities:	 	

 	 	

  Residential - Government Agencies	—	
 	 	653,194	
 	 	—	
 	 	653,194	
 	
  Residential - U.S. Government-Sponsored Enterprises	—	
 	 	23,268	
 	 	—	
 	 	23,268	
 	
    Commercial - Government Agencies	—	
 	 	209,653	
 	 	—	
 	 	209,653	
 	
Total Mortgage-Backed Securities	—	
 	 	886,115	
 	
 	—	
 	
 	886,115	
 	
Total Investment Securities Available-for-Sale	70,693	
 	 	2,173,004	
 	
 	—	
 	 	2,243,697	
 	
Loans Held for Sale	—	
 	 	6,435	
 	 	—	
 	 	6,435	
 	
Mortgage Servicing Rights	—	
 	 	—	
 	 	3,826	
 	 	3,826	
 	
Other Assets	15,535	
 	 	—	
 	 	—	
 	 	15,535	
 	
Derivatives 1	—	
 	 	343	
 	 	21,426	
 	 	21,769	
 	
Total Assets Measured at Fair Value on a
Recurring Basis as of December 31, 2013	$	86,228	
 	 	$	2,179,782	
 	 	$	25,252	
 	 	$	2,291,262	

 	
 	
Liabilities:	 	

 	 	

Derivatives 1	$	—	
 	 	$	904	
 	 	$	21,047	
 	 	$	21,951	
 	
Total Liabilities Measured at Fair Value on a
Recurring Basis as of December 31, 2013	$	—	
 	 	$	904	
 	
 	$	21,047	
 	 	$	21,951	

1 	The fair value of each class of derivatives is shown in Note 10 to the Consolidated Financial Statements.	

41

For the three and nine months ended September 30, 2014 and 2013, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

(dollars in thousands)	Mortgage
Servicing Rights 1	
 	 	Net Derivative
Assets and
Liabilities 2	
 	
Three Months Ended September 30, 2014	 	

Balance as of July 1, 2014	$	2,960	
 	 	$	107	
 	
Realized and Unrealized Net Gains (Losses):	 	

Included in Net Income	(217	)	 	369	
 	
Transfers to Loans Held for Sale	—	
 	 	(408	)	
Balance as of September 30, 2014	$	2,743	
 	 	$	68	
 	
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2014	$	(145	)	 	$	68	

Three Months Ended September 30, 2013	 	

Balance as of July 1, 2013	$	4,158	
 	 	$	(384	)	
Realized and Unrealized Net Gains (Losses):	 	

Included in Net Income	(339	)	 	2,686	
 	
Transfers to Loans Held for Sale	—	
 	 	(260	)	
Balance as of September 30, 2013	$	3,819	
 	 	$	2,042	
 	
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2013	$	(68	)	 	$	2,042	

Nine Months Ended September 30, 2014	 	

Balance as of January 1, 2014	$	3,826	
 	 	$	379	
 	
Realized and Unrealized Net Gains (Losses):	 	

Included in Net Income	(1,083	)	 	2,363	
 	
Transfers to Loans Held for Sale	—	
 	 	(2,674	)	
Balance as of September 30, 2014	$	2,743	
 	 	$	68	
 	
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2014	$	(816	)	 	$	68	

Nine Months Ended September 30, 2013	 	

Balance as of January 1, 2013	$	4,761	
 	 	$	9,940	
 	
Realized and Unrealized Net Gains (Losses):	 	

Included in Net Income	(942	)	 	5,324	
 	
Transfers to Loans Held for Sale	—	
 	 	(13,222	)	
Balance as of September 30, 2013	$	3,819	
 	 	$	2,042	
 	
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2013	$	(4	)	 	$	2,042	

1 	Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s consolidated statements of income.	
 	 	
2 	Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Company’s consolidated statements of income.	

42

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2014 and December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

 	 	 	 	Significant Unobservable Inputs
(weighted-average)	 	Fair Value	
(dollars in thousands)	 	Valuation
 Technique	 	Description	 	Sept. 30,
2014	
 	 	Dec. 31,
2013	
 	 	Sept. 30,
2014	
 	 	Dec. 31,
2013	
 	
Mortgage Servicing Rights	 	Discounted Cash Flow	 	Constant Prepayment Rate  1	 	11.07	%	 	7.98	%	 	$	27,079	
 	 	$	33,926	
 	
 	 	 	 	Discount Rate 2	 	10.17	%	 	9.70	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Derivative Assets and Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Rate Lock Commitments	 	Pricing Model	 	Closing Ratio	 	92.07	%	 	93.76	%	 	$	106	
 	 	$	536	
 	
Interest Rate Swap Agreements	 	Discounted Cash Flow	 	Credit Factor	 	0.23	%	 	0.74	%	 	$	(38	)	 	$	(157	)	
 	 	
1 	Represents annualized loan repayment rate assumption.	
 	 	
2 	Derived from multiple interest rate scenarios that incorporate a spread to the London Interbank Offered Rate swap curve and market volatilities.	
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are the weighted-average constant prepayment rate and weighted-average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.  Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other.

The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company’s Treasury Division enters observable and unobservable inputs into the model to arrive at an estimated fair value.  To assess the reasonableness of the fair value measurement, the Treasury Division performs a back-test by applying the model to historical prepayment data.  The fair value and constant prepayment rate are also compared to forward-looking estimates to assess reasonableness.  The Treasury Division also compares the fair value of the Company’s mortgage servicing rights to a value calculated by an independent third-party.  Discussions are held with members from the Treasury, Mortgage Banking, and Controllers Divisions, along with the independent third-party to discuss and reconcile the fair value estimates and key assumptions used by the respective parties in arriving at those estimates.  A subcommittee of the Company’s Asset/Liability Management Committee is responsible for providing oversight over the valuation methodology and key assumptions.

The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close.  Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate.  Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will increase the gain or loss.  The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock.  The closing ratio is computed by our secondary marketing system using historical data and the ratio is periodically reviewed by the Company’s Secondary Marketing Department of the Mortgage Banking Division for reasonableness.

The unobservable input used in the fair value measurement of the Company’s interest rate swap agreements is the credit factor.  This factor represents the risk that a counterparty is either unable or unwilling to settle a transaction in accordance with the underlying contractual terms.  A significant increase (decrease) in the credit factor could result in a significantly lower (higher) fair value measurement.  The credit factor is determined by the Treasury Division based on the risk rating assigned to each counterparty in which the Company holds a net asset position.  The Company’s Credit Policy Committee periodically reviews and approves the Expected Default Frequency of the Economic Capital Model for Credit Risk.  The Expected Default Frequency is used as the credit factor for interest rate swap agreements.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.  As of September 30, 2014, the Company's mortgage servicing rights accounted for under the amortization method were reduced by a valuation allowance of $0.1 million to a reported carrying value of $22.8 million. This reduction was primarily due to changes in certain key assumptions used to estimate fair value. As previously mentioned, all of the Company's mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation. As of December 31,

43

2013, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.

Fair Value Option

The Company elected the fair value option for all residential mortgage loans held for sale originated on or after October 1, 2011.  This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to economically hedge them without having to apply complex hedge accounting requirements.  As noted above, the fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.

The following table reflects the difference between the aggregate fair value and the aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of September 30, 2014 and December 31, 2013.

(dollars in thousands)	Aggregate Fair Value	
 	 	Aggregate Unpaid Principal	 	 	Aggregate Fair Value
Less Aggregate
 Unpaid Principal	 	
September 30, 2014	 	

 	
Loans Held for Sale	$	2,382	
 	 	 	$	2,245	
 	 	 	$	137	

December 31, 2013	 	

 	
Loans Held for Sale	$	6,435	
 	 	 	$	6,284	
 	 	 	$	151	
 	
Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  For the three and nine months ended September 30, 2014 and 2013, the net gains or losses from the change in fair value of the Company’s residential mortgage loans held for sale were not material.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Investment Securities Held-to-Maturity

The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service.  Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury as quoted prices were available, unadjusted, for identical securities in active markets.  If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models.  In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

Loans

The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate and loan quality categories.  Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time Deposits

The fair values of the Company’s time deposits were estimated using discounted cash flow analyses.  The discount rates used were based on rates currently offered for deposits with similar remaining maturities.  The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

44

Securities Sold Under Agreements to Repurchase

The fair value of the Company’s securities sold under agreements to repurchase was calculated using discounted cash flow analyses, applying discount rates currently offered for new agreements with similar remaining maturities and considering the Company’s non-performance risk.

Long-Term Debt

The fair value of the Company’s long-term debt was calculated using a discounted cash flow approach and applying discount rates currently offered for new notes with similar remaining maturities and considering the Company’s non-performance risk.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2014 and December 31, 2013.  This table excludes financial instruments for which the carrying amount approximates fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as 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.  For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 	 	 	 	 	Fair Value Measurements	
 	Carrying	
 	 	 	 	Quoted Prices
 in Active
 Markets for
Identical
 Assets or
Liabilities	
 	 	Significant
Other
Observable
Inputs	
 	 	Significant
Unobservable
Inputs	
 	
(dollars in thousands)	Amount	
 	 	Fair Value	
 	 	(Level 1)	
 	 	(Level 2)	
 	 	(Level 3)	
 	
September 30, 2014	 	

 	 	 	

Financial Instruments - Assets	 	

 	 	 	

Investment Securities Held-to-Maturity	$	4,557,614	
 	 	$	4,576,396	
 	 	$	497,959	
 	 	$	4,078,437	
 	 	$	—	
 	
Loans1	6,244,799	
 	 	6,814,547	
 	 	—	
 	 	—	
 	 	6,814,547	

 	
 	 	 	 	 	 	 	
Financial Instruments - Liabilities	 	

 	 	 	

 	
Time Deposits	1,429,099	
 	 	1,431,945	
 	 	—	
 	 	1,431,945	
 	 	—	
 	
Securities Sold Under Agreements to Repurchase	700,203	
 	 	769,114	
 	 	—	
 	 	769,114	
 	 	—	
 	
Long-Term Debt2	163,005	
 	 	163,910	
 	 	—	
 	 	163,910	
 	 	—	

 	
 	 	 	 	 	 	 	
December 31, 2013	 	

 	 	 	

 	
Financial Instruments - Assets	 	

 	 	 	

 	
Investment Securities Held-to-Maturity	$	4,744,519	
 	 	$	4,697,587	
 	 	$	433,365	
 	 	$	4,264,222	
 	 	$	—	
 	
Loans1	5,707,133	
 	 	6,062,147	
 	 	—	
 	 	—	
 	 	6,062,147	

Financial Instruments - Liabilities	 	

 	 	 	

 	
Time Deposits	1,317,770	
 	 	1,322,967	
 	 	—	
 	 	1,322,967	
 	 	—	
 	
Securities Sold Under Agreements to Repurchase	770,049	
 	 	846,193	
 	 	—	
 	 	846,193	
 	 	—	
 	
Long-Term Debt2	165,877	
 	 	167,049	
 	 	—	
 	 	167,049	
 	 	—	

1 	Net of unearned income and the Allowance.	
 	 	
2 	Excludes capitalized lease obligations.	

45

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

Forward-Looking Statements

This report contains forward-looking statements concerning, among other things, the economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally; 3) competitive pressures in the markets for financial services and products; 4) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"); 5) changes in fiscal and monetary policies of the markets in which we operate; 6) the increased cost of maintaining or the Company's ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments; 13) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 14) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 15) changes to the amount and timing of proposed common stock repurchases; and 16) natural disasters, public unrest or adverse weather, public health, and other conditions impacting us and our customers' operations. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. For a detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, refer to the section entitled “Risk Factors” in Part II of this report and Part I of our Annual Report on Form 10-K for the year ended December 31, 2013, and subsequent periodic and current reports, filed with the U.S. Securities and Exchange Commission (the “SEC”). Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We undertake no obligation to update forward-looking statements to reflect later events or circumstances.

Overview

Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  The Parent’s principal and only operating subsidiary is Bank of Hawaii (the “Bank”).

The Bank, directly and through its subsidiaries, provides a broad range of financial services to businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands.  References to “we,” “our,” “us,” or the “Company” refer to the Parent and its subsidiaries that are consolidated for financial reporting purposes.

Our business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders.
Hawaii Economy

General economic conditions in Hawaii continued to remain positive during the third quarter of 2014 due to an expanding construction industry, stable tourism, low unemployment, and a strong real estate market.  For the first eight months of 2014, total visitor spending increased 2.1% while total visitor arrivals remained relatively unchanged compared to the same period in 2013. The statewide seasonally-adjusted unemployment rate was at 4.2% in September 2014, compared to 5.9% nationally. For the first nine months of 2014, the volume of single-family home sales on Oahu increased 1.6%, while the volume of condominium sales on Oahu decreased 0.4% compared with the same period in 2013.  The median price of single-family home sales on Oahu increased 4.6%, while the median price of condominium sales on Oahu increased 5.4% for the first nine months of 2014 compared to the same period in 2013. As of September 30, 2014, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.9 months and 3.3 months, respectively.

46

Earnings Summary

Net income for the third quarter of 2014 was $41.8 million, an increase of $4.1 million or 11% compared to the same period in 2013.  Diluted earnings per share was $0.95 for the third quarter of 2014, an increase of $0.10 or 12% compared to the same period in 2013.  Our higher earnings for the third quarter of 2014 were primarily due to the following:
 	 	
•	Net interest income for the third quarter of 2014 was $95.4 million, an increase of $4.5 million or 5% compared to the same period in 2013.  Our net interest margin was 2.85% in the third quarter of 2014, an increase of 2 basis points compared to the same period in 2013.  This increase was primarily due to continued loan growth and lower premium amortization in our investment securities portfolio.	
 	 	
•	We recorded a negative provision for credit losses of $2.7 million in the third quarter of 2014 compared to no provision during the same period in 2013. The negative provision was primarily due to a reduction in a specific reserve related to one commercial client.	
 	 	
•	Net gains on sales of investment securities totaled $1.9 million in the third quarter of 2014 compared to no sales of investment securities in the same period in 2013. The net gain resulted entirely from the sale of 23,000 Visa Class B shares. The Company received these Class B shares in 2008 as part of Visa's initial public offering and are transferable only under limited circumstances until they can be converted to the publicly traded Class A shares. We also contributed 5,700 Visa Class B shares to the Bank of Hawaii Foundation in the third quarter of 2014. The contribution had no impact on noninterest expense; however, the contribution favorably impacted our effective tax rate for the period.	
 	 	
•	Noninterest expense for the third quarter of 2014 was $81.0 million, a decrease of $1.9 million or 2% compared to the same period in 2013 due primarily to lower expenses in salaries and benefits and net occupancy expense. Our efficiency ratio was 57.74% for the third quarter of 2014 compared to 61.01% for the same period in 2013.	
The impact of these items was partially offset by a $2.5 million or 60% decrease in mortgage banking income in the third quarter of 2014 compared to the same period in 2013. This decrease was primarily due to lower mortgage application and production volume as refinancing activity declined. Also contributing to the decrease was our decision to add more conforming saleable loans to our portfolio in 2014 which reduced our gains on sales of residential mortgage loans.
Net income for the first nine months of 2014 was $121.9 million, an increase of $10.4 million or 9% compared to the same period in 2013.  Diluted earnings per share was $2.75 for the first nine months of 2014, an increase of $0.25 or 10% compared to the same period in 2013.  Our higher earnings for the first nine months of 2014 were primarily due to the following:
 	 	
•	Net interest income for the first nine months of 2014 was $283.0 million, an increase of $16.2 million or 6% compared to the same period in 2013.  Our net interest margin was 2.86% for the first nine months of 2014, an increase of 5 basis points compared to the same period in 2013.  This increase was primarily due to continued loan growth and lower premium amortization in our investment securities portfolio.	

•	Net gains on sales of investment securities totaled $6.1 million for the first nine months of 2014 compared to no sales of investment securities in the same period in 2013. The net gain was primarily due to a $5.8 million net gain on the sale of 68,500 Visa Class B shares. We also contributed 16,900 Visa Class B shares to the Bank of Hawaii Foundation during the first nine months of 2014. The contribution had no impact on noninterest expense; however, the contribution favorably impacted our effective tax rate for the period.	
 	 	
•	We recorded a negative provision for credit losses of $4.9 million for the first nine months of 2014 compared to no provision during the same period in 2013. The negative provision reflects the continued strength of our credit risk profile, several large commercial loan recoveries during the first nine months of 2014, as well as the reduction in the specific reserve related to one commercial client during the third quarter of 2014 as noted above.	
 	 	
•	Noninterest expense for the first nine months of 2014 was $245.7 million, a decrease of $2.9 million or 1% compared to the same period in 2013 due primarily to lower expenses in salaries and benefits and net occupancy expense. Our efficiency ratio was 58.88% for the first nine months of 2014 compared to 60.96% for the same period in 2013.	
The impact of these items was partially offset by a $10.9 million or 67% decrease in mortgage banking income for the first nine months of 2014 compared to the same period in 2013. This decrease was primarily due to lower mortgage application and production volume as refinancing activity declined. Also contributing to the decrease was our decision to add more conforming saleable loans to our portfolio in 2014 which reduced our gains on sales of residential mortgage loans. Other noninterest income decreased by $2.8 million or 23% for the first nine months of 2014 compared to the same period in 2013. This decrease was primarily due to a $2.0 million decrease in gains on sales of leased assets, resulting mainly from gains related to the sale of equipment leases in the first nine months of 2013, combined with lower mutual fund commissions.

47

We continued our efforts to maintain a strong balance sheet during the third quarter of 2014, with adequate reserves for credit losses, and high levels of liquidity and capital. In particular:
 	 	
•	The allowance for loan and lease losses (the “Allowance”) was $110.4 million as of September 30, 2014, a decrease of $5.1 million or 4% from December 31, 2013.  The Allowance represents 1.67% of total loans and leases outstanding as of September 30, 2014 and 1.89% of total loans and leases outstanding as of December 31, 2013. The decrease was commensurate with the Company's credit risk profile, loan portfolio growth and composition, and a healthy Hawaii economy.	
 	 	
•	We continued to invest excess liquidity in high-grade investment securities.  As of September 30, 2014, the total carrying value of our investment securities portfolio was $6.8 billion, a decrease of $209.7 million or 3% compared to December 31, 2013. During the first nine months of 2014, we continued to reduce our positions in mortgage-backed securities issued by Ginnie Mae. We re-invested these proceeds, in part, into mortgage-backed securities issued by Fannie Mae and Freddie Mac.	
 	 	
•	Total deposits were $12.4 billion as of September 30, 2014, an increase of $446.8 million or 4% from December 31, 2013 primarily due to an increase in core deposits.	
 	 	
•	Total shareholders’ equity was $1.1 billion as of September 30, 2014, an increase of $45.4 million or 4% from December 31, 2013.  We continued to return capital to our shareholders in the form of share repurchases and dividends.  During the first nine months of 2014, we repurchased 811,235 shares of our common stock at a total cost of $46.9 million under our share repurchase program and from employees and/or directors in connection with stock swaps and income tax withholdings related to the vesting of restricted stock. We also paid cash dividends of $59.9 million during the first nine months of 2014.	
During the second quarter of 2014 and in connection with an FDIC assessment review, the Company revised its capital ratios effectively increasing its capital adequacy dating back to 2010.  The revision related primarily to the amount of accumulated other comprehensive income related to benefit plans.  The Company concluded that the amounts were not material, however revised its capital ratios for all comparative periods presented.

48

Our financial highlights are presented in Table 1.

Financial Highlights	 	 	 	 	 	 	Table 1	
 	
 	Three Months Ended	 	Nine Months Ended	
 	September 30,	 	September 30,	
(dollars in thousands, except per share amounts)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
For the Period:	 	

 	 	 	
 	
Operating Results	 	

 	 	 	
 	
Net Interest Income	$	95,379	
 	 	$	90,887	
 	 	$	283,024	
 	 	$	266,787	
 	
Provision for Credit Losses	(2,665	)	 	—	
 	 	(4,864	)	 	—	
 	
Total Noninterest Income	44,950	
 	 	45,126	
 	 	134,199	
 	 	140,945	
 	
Total Noninterest Expense	81,030	
 	 	82,977	
 	 	245,659	
 	 	248,545	
 	
Net Income	41,769	
 	 	37,704	
 	 	121,851	
 	 	111,447	
 	
Basic Earnings Per Share	0.95	
 	 	0.85	
 	 	2.77	
 	 	2.51	
 	
Diluted Earnings Per Share	0.95	
 	 	0.85	
 	 	2.75	
 	 	2.50	
 	
Dividends Declared Per Share	0.45	
 	 	0.45	
 	 	1.35	
 	 	1.35	

Performance Ratios	 	

 	 	 	
 	
Return on Average Assets	1.15	%	 	1.09	%	 	1.15	%	 	1.09	%	
Return on Average Shareholders’ Equity	15.57	
 	 	15.02	
 	 	15.53	
 	 	14.59	
 	
Efficiency Ratio 1	57.74	
 	 	61.01	
 	 	58.88	
 	 	60.96	
 	
Net Interest Margin 2	2.85	
 	 	2.83	
 	 	2.86	
 	 	2.81	
 	
Dividend Payout Ratio 3	47.37	
 	 	52.94	
 	 	48.74	
 	 	53.78	
 	
Average Shareholders’ Equity to Average Assets	7.41	
 	 	7.23	
 	 	7.38	
 	 	7.49	

Average Balances	 	

 	 	 	
 	
Average Loans and Leases	$	6,488,780	
 	 	$	5,892,888	
 	 	$	6,290,548	
 	 	$	5,826,424	
 	
Average Assets	14,372,375	
 	 	13,769,699	
 	 	14,221,143	
 	 	13,633,907	
 	
Average Deposits	12,200,654	
 	 	11,479,185	
 	 	12,016,485	
 	 	11,337,792	
 	
Average Shareholders’ Equity	1,064,589	
 	 	995,661	
 	 	1,048,924	
 	 	1,021,480	

Market Price Per Share of Common Stock	 	

 	 	 	
 	
Closing	$	56.81	
 	 	$	54.45	
 	 	$	56.81	
 	 	$	54.45	
 	
High	60.75	
 	 	57.13	
 	 	61.73	
 	 	57.13	
 	
Low	55.55	
 	 	50.50	
 	 	53.45	
 	 	44.88	

 	September 30,
2014	
 	 	December 31,
2013	
 	 	 	 	 	
As of Period End:	 	

Balance Sheet Totals	 	

Loans and Leases	$	6,606,350	
 	 	$	6,095,387	
 	 	 	 	 	
Total Assets	14,510,166	
 	 	14,084,280	
 	 	 	 	 	
Total Deposits	12,361,441	
 	 	11,914,656	
 	 	 	 	 	
Long-Term Debt	173,926	
 	 	174,706	
 	 	 	 	 	
Total Shareholders’ Equity	1,057,413	
 	 	1,011,976	

Asset Quality	 	

Allowance for Loan and Lease Losses	$	110,362	
 	 	$	115,454	
 	 	 	 	 	
Non-Performing Assets	33,307	
 	 	39,650	

Financial Ratios	 	

Allowance to Loans and Leases Outstanding	1.67	%	 	1.89	%	 	 	 	 	
Tier 1 Capital Ratio 4	15.32	
 	 	16.05	
 	 	 	 	 	
Total Capital Ratio 4	16.57	
 	 	17.31	
 	 	 	 	 	
Tier 1 Leverage Ratio 4	7.19	
 	 	7.24	
 	 	 	 	 	
Total Shareholders’ Equity to Total Assets	7.29	
 	 	7.19	
 	 	 	 	 	
Tangible Common Equity to Tangible Assets 5	7.09	
 	 	6.98	
 	 	 	 	 	
Tangible Common Equity to Risk-Weighted Assets 4, 5	15.23	
 	 	15.67	

Non-Financial Data	 	

Full-Time Equivalent Employees	2,170	
 	 	2,196	
 	 	 	 	 	
Branches	74	
 	 	74	
 	 	 	 	 	
ATMs	459	
 	 	466	

1 	Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).	
 	 	
2 	Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.	
 	 	
3 	Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.	
 	 	
4 	Financial ratios as of December 31, 2013 were revised to conform to the current period calculation.	
 	 	
5 	Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures.  See the “Use of Non-GAAP Financial Measures” section below.	

49

Use of Non-GAAP Financial Measures

The ratios “tangible common equity to tangible assets” and “tangible common equity to risk-weighted assets” are Non-GAAP financial measures.  The Company believes these measurements are useful for investors, regulators, management and others to evaluate the Company's capital adequacy relative to that of other financial institutions.  Although these Non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.  Table 2 provides a reconciliation of these Non-GAAP financial measures with their most closely related GAAP measures.

 	 	 	 	 	 	 	 	
GAAP to Non-GAAP Reconciliation	 	
 	 	Table 2	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Total Shareholders’ Equity	$	1,057,413	
 	 	$	1,011,976	
 	
Less: Goodwill	31,517	
 	 	31,517	
 	
Tangible Common Equity	$	1,025,896	
 	 	$	980,459	

Total Assets	$	14,510,166	
 	 	$	14,084,280	
 	
Less: Goodwill	31,517	
 	 	31,517	
 	
Tangible Assets	$	14,478,649	
 	 	$	14,052,763	
 	
Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements 1	$	6,737,853	
 	 	$	6,258,178	

Total Shareholders’ Equity to Total Assets	7.29	%	 	7.19	%	
Tangible Common Equity to Tangible Assets (Non-GAAP)	7.09	%	 	6.98	%	
 	 	 	 	
Tier 1 Capital Ratio 1	15.32	%	 	16.05	%	
Tangible Common Equity to Risk-Weighted Assets (Non-GAAP) 1	15.23	%	 	15.67	%	
1 Risk-Weighted Assets, Tier 1 Capital Ratio, and Tangible Common Equity to Risk-Weighted Assets as of December 31, 2013 were revised to conform to the current period calculation.

50

Analysis of Statements of Income

Average balances, related income and expenses, and resulting yields and rates are presented in Table 3.  An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 4.  

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Average Balances and Interest Rates - Taxable-Equivalent Basis	 	 	 	 	 	 	 	 	 	Table 3	 	
 	Three Months Ended	 	Three Months Ended	 	Nine Months Ended	 	Nine Months Ended	
 	September 30, 2014	 	September 30, 2013	 	September 30, 2014	 	September 30, 2013	
 	Average	
 	 	Income/	
 	 	Yield/	
 	 	Average	
 	 	Income/	
 	 	Yield/	
 	 	Average	
 	 	Income/	
 	 	Yield/	
 	 	Average	
 	 	Income/	
 	 	Yield/	
 	
(dollars in millions)	Balance	
 	 	Expense	
 	 	Rate	
 	 	Balance	
 	 	Expense	
 	 	Rate	
 	 	Balance	
 	 	Expense	
 	 	Rate	
 	 	Balance	
 	 	Expense	
 	 	Rate	
 	
Earning Assets	 	

 	 	 	

 	 	 	

 	 	 	 	 	 	 	
 	
Interest-Bearing Deposits	$	4.1	
 	 	$	—	
 	 	0.24	%	 	$	4.3	
 	 	$	—	
 	 	0.30	%	 	$	4.6	
 	 	$	—	
 	 	0.20	%	 	$	4.2	
 	 	$	—	
 	 	0.22	%	
Funds Sold	326.2	
 	 	0.2	
 	 	0.21	
 	 	335.3	
 	 	0.2	
 	 	0.21	
 	 	301.9	
 	 	0.5	
 	 	0.21	
 	 	220.7	
 	 	0.3	
 	 	0.19	
 	
Investment Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-Sale	2,212.0	
 	 	12.3	
 	 	2.22	
 	 	2,495.9	
 	 	13.7	
 	 	2.18	
 	 	2,221.6	
 	 	37.6	
 	 	2.26	
 	 	3,007.0	
 	 	49.2	
 	 	2.18	
 	
Held-to-Maturity	4,641.1	
 	 	26.9	
 	 	2.32	
 	 	4,385.5	
 	 	25.0	
 	 	2.28	
 	 	4,716.9	
 	 	83.5	
 	 	2.36	
 	 	3,895.6	
 	 	64.1	
 	 	2.19	
 	
Loans Held for Sale	2.0	
 	 	—	
 	 	4.03	
 	 	16.7	
 	 	0.2	
 	 	4.42	
 	 	3.3	
 	 	0.1	
 	 	4.43	
 	 	19.3	
 	 	0.6	
 	 	4.05	
 	
Loans and Leases 1	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial and Industrial	980.8	
 	 	8.9	
 	 	3.61	
 	 	877.3	
 	 	7.7	
 	 	3.49	
 	 	951.8	
 	 	24.8	
 	 	3.48	
 	 	852.1	
 	 	23.1	
 	 	3.62	
 	
Commercial Mortgage	1,350.6	
 	 	13.3	
 	 	3.89	
 	 	1,164.9	
 	 	12.1	
 	 	4.12	
 	 	1,301.3	
 	 	38.6	
 	 	3.97	
 	 	1,124.6	
 	 	34.5	
 	 	4.10	
 	
Construction	126.2	
 	 	1.3	
 	 	4.20	
 	 	120.1	
 	 	1.4	
 	 	4.71	
 	 	109.0	
 	 	3.6	
 	 	4.35	
 	 	114.4	
 	 	4.1	
 	 	4.79	
 	
Commercial Lease Financing	235.1	
 	 	2.0	
 	 	3.33	
 	 	253.0	
 	 	1.5	
 	 	2.32	
 	 	240.6	
 	 	5.1	
 	 	2.81	
 	 	263.6	
 	 	4.7	
 	 	2.36	
 	
Residential Mortgage	2,396.7	
 	 	25.3	
 	 	4.22	
 	 	2,255.9	
 	 	25.3	
 	 	4.49	
 	 	2,336.1	
 	 	75.1	
 	 	4.29	
 	 	2,273.0	
 	 	76.8	
 	 	4.51	
 	
Home Equity	823.3	
 	 	8.1	
 	 	3.92	
 	 	757.6	
 	 	7.9	
 	 	4.13	
 	 	803.8	
 	 	23.7	
 	 	3.94	
 	 	759.4	
 	 	23.6	
 	 	4.14	
 	
Automobile	296.6	
 	 	4.0	
 	 	5.29	
 	 	240.6	
 	 	3.3	
 	 	5.43	
 	 	280.3	
 	 	11.2	
 	 	5.33	
 	 	226.6	
 	 	9.3	
 	 	5.51	
 	
Other 2	279.5	
 	 	5.2	
 	 	7.45	
 	 	223.5	
 	 	4.6	
 	 	8.23	
 	 	267.6	
 	 	15.3	
 	 	7.66	
 	 	212.7	
 	 	13.1	
 	 	8.26	
 	
Total Loans and Leases	6,488.8	
 	 	68.1	
 	 	4.18	
 	 	5,892.9	
 	 	63.8	
 	 	4.31	
 	 	6,290.5	
 	 	197.4	
 	 	4.19	
 	 	5,826.4	
 	 	189.2	
 	 	4.34	
 	
Other	71.4	
 	 	0.3	
 	 	1.69	
 	 	78.1	
 	 	0.3	
 	 	1.54	
 	 	74.1	
 	 	0.9	
 	 	1.63	
 	 	78.6	
 	 	0.9	
 	 	1.48	
 	
Total Earning Assets 3	13,745.6	
 	 	107.8	
 	 	3.13	
 	 	13,208.7	
 	 	103.2	
 	 	3.11	
 	 	13,612.9	
 	 	320.0	
 	 	3.14	
 	 	13,051.8	
 	 	304.3	
 	 	3.11	
 	
Cash and Noninterest-Bearing Deposits	152.4	
 	 	 	 	 	 	140.3	
 	 	 	 	 	 	144.5	
 	 	 	 	 	 	139.7	
 	 	 	 	 	
Other Assets	474.4	
 	 	 	 	 	 	420.7	
 	 	 	 	 	 	463.7	
 	 	 	 	 	 	442.4	
 	 	 	 	 	
Total Assets	$	14,372.4	
 	 	 	 	 	 	$	13,769.7	
 	 	 	 	 	 	$	14,221.1	
 	 	 	 	 	 	$	13,633.9	

Interest-Bearing Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	

 	 	 	 	 	 	 	
Interest-Bearing Deposits	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Demand	$	2,417.4	
 	 	$	0.2	
 	 	0.03	%	 	$	2,147.8	
 	 	$	0.1	
 	 	0.03	%	 	$	2,367.8	
 	 	$	0.5	
 	 	0.03	%	 	$	2,105.1	
 	 	$	0.4	
 	 	0.03	%	
Savings	4,591.4	
 	 	1.0	
 	 	0.09	
 	 	4,485.3	
 	 	1.0	
 	 	0.09	
 	 	4,549.4	
 	 	2.9	
 	 	0.09	
 	 	4,448.5	
 	 	3.0	
 	 	0.09	
 	
Time	1,440.1	
 	 	1.2	
 	 	0.34	
 	 	1,401.5	
 	 	1.4	
 	 	0.38	
 	 	1,440.1	
 	 	3.7	
 	 	0.35	
 	 	1,431.6	
 	 	4.3	
 	 	0.41	
 	
Total Interest-Bearing Deposits	8,448.9	
 	 	2.4	
 	 	0.11	
 	 	8,034.6	
 	 	2.5	
 	 	0.12	
 	 	8,357.3	
 	 	7.1	
 	 	0.11	
 	 	7,985.2	
 	 	7.7	
 	 	0.13	
 	
Short-Term Borrowings	9.3	
 	 	—	
 	 	0.14	
 	 	11.7	
 	 	—	
 	 	0.14	
 	 	9.5	
 	 	—	
 	 	0.14	
 	 	32.9	
 	 	—	
 	 	0.14	
 	
Securities Sold Under Agreements to Repurchase	715.6	
 	 	6.5	
 	 	3.57	
 	 	847.2	
 	 	6.6	
 	 	3.03	
 	 	766.4	
 	 	19.4	
 	 	3.34	
 	 	801.5	
 	 	20.3	
 	 	3.34	
 	
Long-Term Debt	173.8	
 	 	0.6	
 	 	1.44	
 	 	174.7	
 	 	0.6	
 	 	1.44	
 	 	174.6	
 	 	1.9	
 	 	1.45	
 	 	169.7	
 	 	2.0	
 	 	1.53	
 	
Total Interest-Bearing Liabilities	9,347.6	
 	 	9.5	
 	 	0.40	
 	 	9,068.2	
 	 	9.7	
 	 	0.42	
 	 	9,307.8	
 	 	28.4	
 	 	0.40	
 	 	8,989.3	
 	 	30.0	
 	 	0.44	
 	
Net Interest Income	 	 	$	98.3	
 	 	 	 	 	 	$	93.5	
 	 	 	 	 	 	$	291.6	
 	 	 	 	 	 	$	274.3	
 	 	 	
Interest Rate Spread	 	 	 	 	2.73	%	 	 	 	 	 	2.69	%	 	 	 	 	 	2.74	%	 	 	 	 	 	2.67	%	
Net Interest Margin	 	 	 	 	2.85	%	 	 	 	 	 	2.83	%	 	 	 	 	 	2.86	%	 	 	 	 	 	2.81	%	
Noninterest-Bearing Demand Deposits	3,751.8	
 	 	 	 	 	 	3,444.6	
 	 	 	 	 	 	3,659.2	
 	 	 	 	 	 	3,352.6	
 	 	 	 	 	
Other Liabilities	208.4	
 	 	 	 	 	 	261.2	
 	 	 	 	 	 	205.2	
 	 	 	 	 	 	270.5	
 	 	 	 	 	
Shareholders’ Equity	1,064.6	
 	 	 	 	 	 	995.7	
 	 	 	 	 	 	1,048.9	
 	 	 	 	 	 	1,021.5	
 	 	 	 	 	
Total Liabilities and Shareholders’ Equity	$	14,372.4	
 	 	 	 	 	 	$	13,769.7	
 	 	 	 	 	 	$	14,221.1	
 	 	 	 	 	 	$	13,633.9	

1 	Non-performing loans and leases are included in the respective average loan and lease balances.  Income, if any, on such loans and leases is recognized on a cash basis.	
 	 	
2 	Comprised of other consumer revolving credit, installment, and consumer lease financing.	
 	 	
3 	Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 35%, of $2.9 million and $2.6 million for the three months ended September 30, 2014 and 2013, respectively, and $8.6 million and $7.5 million for the nine months ended September 30, 2014 and 2013, respectively.	

51

 	
 	 	 	 	 	 	 	 	 	 	 	 	
Analysis of Change in Net Interest Income - Taxable-Equivalent Basis	 	Table 4	
 	
 	Nine Months Ended September 30, 2014
Compared to September 30, 2013	
(dollars in millions)	Volume 1	
 	 	Rate 1	
 	 	Total	
 	
Change in Interest Income:	 	

 	
Funds Sold	$	0.1	
 	 	$	0.1	
 	 	$	0.2	
 	
Investment Securities	 	 	 	 	 	
 	
Available-for-Sale	(13.3	)	 	1.7	
 	 	(11.6	)	
Held-to-Maturity	14.3	
 	 	5.1	
 	 	19.4	
 	
Loans Held for Sale	(0.5	)	 	—	
 	 	(0.5	)	
Loans and Leases	 	 	 	 	

Commercial and Industrial	2.6	
 	 	(0.9	)	 	1.7	
 	
Commercial Mortgage	5.3	
 	 	(1.2	)	 	4.1	
 	
Construction	(0.2	)	 	(0.3	)	 	(0.5	)	
Commercial Lease Financing	(0.4	)	 	0.8	
 	 	0.4	
 	
Residential Mortgage	2.1	
 	 	(3.8	)	 	(1.7	)	
Home Equity	1.3	
 	 	(1.2	)	 	0.1	
 	
Automobile	2.2	
 	 	(0.3	)	 	1.9	
 	
Other 2	3.2	
 	 	(1.0	)	 	2.2	
 	
Total Loans and Leases	16.1	
 	 	(7.9	)	 	8.2	
 	
Other	(0.1	)	 	0.1	
 	 	—	
 	
Total Change in Interest Income	16.6	
 	 	(0.9	)	 	15.7	

Change in Interest Expense:	 	 	 	 	 	
 	
Interest-Bearing Deposits	 	 	 	 	 	
 	
Demand	0.1	
 	 	—	
 	 	0.1	
 	
Savings	—	
 	 	(0.1	)	 	(0.1	)	
Time	—	
 	 	(0.6	)	 	(0.6	)	
Total Interest-Bearing Deposits	0.1	
 	 	(0.7	)	 	(0.6	)	
Securities Sold Under Agreements to Repurchase	(0.9	)	 	—	
 	 	(0.9	)	
Long-Term Debt	0.1	
 	 	(0.2	)	 	(0.1	)	
Total Change in Interest Expense	(0.7	)	 	(0.9	)	 	(1.6	)	

 	
Change in Net Interest Income	$	17.3	
 	 	$	—	
 	 	$	17.3	

1 	The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.	
 	 	
2 	Comprised of other consumer revolving credit, installment, and consumer lease financing.	

Net Interest Income
Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities.  Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.
Net interest income was $95.4 million in the third quarter of 2014, an increase of $4.5 million or 5% compared to the same period in 2013. On a taxable-equivalent basis, net interest income was $98.3 million in the third quarter of 2014, an increase of $4.8 million or 5% compared to the same period in 2013. Net interest margin was 2.85% for the third quarter of 2014, an increase of two basis points compared to the same period in 2013. Net interest income was $283.0 million for the first nine months of 2014, an increase of $16.2 million or 6% compared to the same period in 2013. On a taxable-equivalent basis, net interest income was $291.6 million for the first nine months of 2014, an increase of $17.3 million or 6% compared to the same period in 2013. Net interest margin was 2.86% for first nine months of 2014, an increase of five basis points compared to the same period in 2013. The higher margins in 2014 were primarily due to our loans and leases, which generally have higher yields than investment securities, comprising a larger percentage of our earnings assets compared to the same periods in 2013. In addition, the yields on investment securities have improved due in part to lower premium amortization.
Yields on our earning assets increased by two basis points in the third quarter and by three basis points in the first nine months of 2014 compared to the same periods in 2013. Yields on our investment securities portfolio increased by four basis points in the third quarter of 2014 and by 14 basis points in the first nine months of 2014 compared to the same periods in 2013. These increases were due in part to lower premium amortization. This was partially offset by yields on our loans and leases which

52

decreased by 13 basis points in the third quarter of 2014 and by 15 basis points in the first nine months of 2014 compared to the same periods in 2013, with lower yields in nearly every category of loans and leases. Yields on our residential mortgage portfolio decreased by 27 basis points in the third quarter of 2014 and by 22 basis points in the first nine months of 2014 compared to the same periods in 2013 primarily due to continued payoff activity of higher rate mortgage loans. Also contributing to the increase in our net interest margin in the third quarter and for the first nine months of 2014 compared to the same periods in 2013 were slightly lower funding costs due to marginally lower rates paid on our time deposits. Average rates on our securities sold under agreements to repurchase increased by 54 basis points in the third quarter of 2014 compared to the same period in 2013 primarily due to local government entities transferring much of their funds previously invested in short-term (and therefore low-yielding) repurchase agreements into public time deposits, leaving the balance in our repurchase agreements consisting mainly of those with private entities. These agreements with private entities have longer terms at relatively higher interest rates.
Average balances of our earning assets increased by $536.9 million or 4% in the third quarter of 2014 and by $561.1 million or 4% in the first nine months of 2014 compared to the same periods in 2013 primarily due to increase in the average balances of our loans and leases. Average balances of our loans and leases increased by $595.9 million in the third quarter of 2014 and by $464.1 million in the first nine months of 2014 compared to the same periods in 2013 primarily due to higher average balances in our commercial mortgage, commercial and industrial, and residential mortgage loan portfolios. The average balance of our commercial mortgage loan portfolio increased by $185.7 million in the third quarter of 2014 and by $176.7 million in the first nine months of 2014 compared to the same periods in 2013 primarily due to increased demand from new and existing customers as both investors and owner occupants looked to refinance and/or acquire new real estate assets, reflective of the strong Hawaii real estate market. The average balance of our commercial and industrial loan portfolio increased by $103.5 million in the third quarter of 2014 and by $99.7 million in the first nine months of 2014 compared to the same periods in 2013 primarily due to continued increase in corporate demand for funding from new and existing customers. The average balance of our residential mortgage loan portfolio increased by $140.8 million in the third quarter of 2014 and by $63.1 million in the first nine months of 2014 compared to the same periods in 2013 primarily due to our decision to add more conforming saleable loans in our portfolio.
Average balances of our interest-bearing liabilities increased by $279.4 million or 3% in the third quarter of 2014 and by $318.4 million or 4% in the first nine months of 2014 compared to the same periods in 2013 primarily due to our efforts to grow our relationship checking and savings deposit products.

Provision for Credit Losses

The provision for credit losses (the "Provision") reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance.  We maintain the Allowance at levels adequate to cover our estimate of probable credit losses as of the end of the reporting period.  The Allowance is determined through detailed quarterly analyses of the loan and lease portfolio.  The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of credit quality.  Additional factors that are considered in determining the amount of the Allowance are the level of net charge-offs, non-performing assets, risk rating migration, as well as changes in our portfolio size and composition.  We recorded a negative provision of $2.7 million in the third quarter of 2014 and a negative provision of $4.9 million for the first nine months of 2014 compared to no Provision recorded in the third quarter of 2013 or for the first nine months of 2013. The negative provision for the third quarter of 2014 was primarily due to a reduction in a specific reserve related to one commercial client. The negative provision for the first nine months of 2014 reflects the continued strength of our credit risk profile, several large commercial loan recoveries, as well as a reduction in a specific reserve related to one commercial client during the third quarter of 2014 as noted above. For further discussion on the Allowance, see the “Corporate Risk Profile - Reserve for Credit Losses” section in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

53

Noninterest Income

Noninterest income decreased by $0.2 million or less than 1% in the third quarter of 2014 and by $6.7 million or 5% for the first nine months of 2014 compared to the same periods in 2013.

Table 5 presents the components of noninterest income.

Noninterest Income	 	 	 	 	 	 	 	 	 	 	Table 5	
 	
 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	Change	
 	 	2014	
 	 	2013	
 	 	Change	
 	
Trust and Asset Management	$	11,716	
 	 	$	11,717	
 	 	$	(1	)	 	$	35,573	
 	 	$	35,692	
 	 	$	(119	)	
Mortgage Banking	1,646	
 	 	4,132	
 	 	(2,486	)	 	5,455	
 	 	16,363	
 	 	(10,908	)	
Service Charges on Deposit Accounts	9,095	
 	 	9,385	
 	 	(290	)	 	26,611	
 	 	27,798	
 	 	(1,187	)	
Fees, Exchange, and Other Service Charges	13,390	
 	 	12,732	
 	 	658	
 	 	39,699	
 	 	37,799	
 	 	1,900	
 	
Investment Securities Gains, Net	1,858	
 	 	—	
 	 	1,858	
 	 	6,097	
 	 	—	
 	 	6,097	
 	
Insurance	2,348	
 	 	2,177	
 	 	171	
 	 	6,401	
 	 	6,895	
 	 	(494	)	
Bank-Owned Life Insurance	1,644	
 	 	1,365	
 	 	279	
 	 	4,765	
 	 	3,997	
 	 	768	
 	
Other Income	3,253	
 	 	3,618	
 	 	(365	)	 	9,598	
 	 	12,401	
 	 	(2,803	)	
Total Noninterest Income	$	44,950	
 	 	$	45,126	
 	 	$	(176	)	 	$	134,199	
 	 	$	140,945	
 	 	$	(6,746	)	

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets.  These fees are largely based upon the market value of the assets we manage and the fee rate charged to customers.  Total trust assets under administration were $10.5 billion as of September 30, 2014, $10.4 billion as of December 31, 2013 and $10.1 billion as of September 30, 2013.  Trust and asset management income remained relatively unchanged in the third quarter of 2014 and for the first nine months of 2014 compared to the same periods in 2013.

Mortgage banking income is highly influenced by mortgage interest rates and the housing market.  Mortgage banking income decreased by $2.5 million or 60% in the third quarter of 2014 and by $10.9 million or 67% for the first nine months of 2014 compared to the same periods in 2013. This decrease was primarily due to lower mortgage application and production volume as refinancing activity declined. Also contributing to the decrease was our decision to add more conforming saleable loans to our portfolio in 2014 which reduced our gains on sales of residential mortgage loans.

Service charges on deposit accounts decreased by $0.3 million or 3% in the third quarter of 2014 compared to the same period in 2013.  This decrease was primarily due to a $0.2 million decrease in account analysis fees on business checking accounts combined with a $0.1 million decrease in overdraft fees. Service charges on deposit accounts decreased by $1.2 million or 4% for the first nine months of 2014 compared to the same period in 2013. This decrease was primarily due to a $0.7 million decrease in overdraft fees resulting mainly from Company policy changes as well as higher customer deposit balances, combined with a $0.4 million decrease in account analysis fees.

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, fees from ATMs, merchant service activity, and other loan fees and service charges.  Fees, exchange, and other service charges increased by $0.7 million or 5% in the third quarter of 2014 compared to the same period in 2013. This increase was primarily due to a $1.1 million increase in commissions and fees related to our credit card business. This increase was partially offset by a $0.3 million decrease in debit card income and a $0.2 million decrease in merchant income. Fees, exchange, and other service charges increased by $1.9 million or 5% for the first nine months of 2014 compared to the same period in 2013. This increase was primarily due to a $2.7 million increase in commissions and fees related to our credit card business. This increase was partially offset by a $0.6 million decrease in other loan fees comprised mainly of large prepayment penalty fees and syndication and administration fees recorded in the second quarter of 2013.

Net gains on sales of investment securities totaled $1.9 million in the third quarter of 2014 and $6.1 million for the first nine months of 2014. These gains were primarily due to sales of Visa Class B shares (23,000 shares sold in the third quarter of 2014; 68,500 shares sold in the first nine months of 2014). We received these Class B shares in 2008 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 shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members such as 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. Concurrent with the sale of these Visa Class B shares, we entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. In September 2014, Visa announced a reduction of the conversion ratio from 0.4206

54

to 0.4121 effective September 24, 2014. As a result, the Company accrued $0.1 million in September 2014 for the amount due to the buyer in October 2014. Based on the existing transfer restriction and the uncertainty of the covered litigation, the remaining 424,214 Visa Class B shares (174,818 Class A equivalents) that we own are carried at a zero cost basis. We also contributed 5,700 and 16,900 Visa Class B shares to the Bank of Hawaii Foundation in the third quarter and the first nine months of 2014, respectively.

Insurance income increased by $0.2 million or 8% in the third quarter of 2014 compared to the same period in 2013 primarily due to slightly higher sales of our variable annuity products. Insurance income decreased by $0.5 million or 7% for the first nine months of 2014 compared to the same period in 2013 primarily due to lower sales of our variable annuity products. In general, variable annuity product sales have been affected by the Company's implementation of additional due-diligence and business practice enhancements to align with desired risk management and industry-wide regulatory scrutiny regarding the sale of these products.

Bank-owned life insurance increased by $0.3 million or 20% in the third quarter of 2014 and by $0.8 million or 19% for the first nine months of 2014 compared to the same periods in 2013.  These increases were primarily due to new policies during the second quarter of 2014 combined with improved yields. In addition, we received $0.3 million in death benefits in 2014.

Other noninterest income decreased by $0.4 million or 10% in the third quarter of 2014 compared to the same period in 2013. This decrease was primarily due to a $0.5 million decrease in the gain on sale of leased assets. Other noninterest income decreased by $2.8 million or 23% for the first nine months of 2014 compared to the same period in 2013. This decrease was primarily due to a $2.0 million decrease in gains on sales of leased assets resulting mainly from sales of equipment leases in the first nine months of 2013. In addition, mutual fund commissions decreased by $0.4 million. We also recognized an additional $0.2 million in fees during the second quarter of 2013 related to our customer interest rate swap derivative program.

55

Noninterest Expense

Noninterest expense decreased by $1.9 million or 2% in the third quarter of 2014 and by $2.9 million or 1% for the first nine months of 2014 compared to the same periods in 2013.

Table 6 presents the components of noninterest expense.

Noninterest Expense	 	 	 	 	 	 	 	 	 	 	Table 6	
 	
 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	Change	
 	 	2014	
 	 	2013	
 	 	Change	
 	
Salaries	$	28,990	
 	 	$	28,985	
 	 	$	5	
 	 	$	85,448	
 	 	$	86,753	
 	 	$	(1,305	)	
Incentive Compensation	4,242	
 	 	4,242	
 	 	—	
 	 	12,832	
 	 	11,887	
 	 	945	
 	
Share-Based Compensation	2,226	
 	 	1,333	
 	 	893	
 	 	6,466	
 	 	3,774	
 	 	2,692	
 	
Commission Expense	1,283	
 	 	1,888	
 	 	(605	)	 	3,448	
 	 	5,652	
 	 	(2,204	)	
Retirement and Other Benefits	4,056	
 	 	4,144	
 	 	(88	)	 	12,853	
 	 	12,106	
 	 	747	
 	
Payroll Taxes	2,162	
 	 	2,335	
 	 	(173	)	 	7,909	
 	 	9,151	
 	 	(1,242	)	
Medical, Dental, and Life Insurance	2,557	
 	 	1,872	
 	 	685	
 	 	7,902	
 	 	7,153	
 	 	749	
 	
Separation Expense	14	
 	 	1,753	
 	 	(1,739	)	 	650	
 	 	4,092	
 	 	(3,442	)	
Total Salaries and Benefits	45,530	
 	 	46,552	
 	
 	(1,022	)	
 	137,508	
 	
 	140,568	
 	
 	(3,060	)	
Net Occupancy	9,334	
 	 	9,847	
 	 	(513	)	 	28,005	
 	 	29,143	
 	 	(1,138	)	
Net Equipment	4,473	
 	 	4,572	
 	 	(99	)	 	13,745	
 	 	13,529	
 	 	216	
 	
Data Processing	3,665	
 	 	3,697	
 	 	(32	)	 	11,156	
 	 	10,013	
 	 	1,143	
 	
Professional Fees	1,835	
 	 	2,119	
 	 	(284	)	 	6,708	
 	 	6,736	
 	 	(28	)	
FDIC Insurance	1,750	
 	 	1,913	
 	 	(163	)	 	5,881	
 	 	5,811	
 	 	70	
 	
Other Expense:	 	 	 	 	

Delivery and Postage Services	2,063	
 	 	2,052	
 	 	11	
 	 	6,678	
 	 	6,317	
 	 	361	
 	
Mileage Program Travel	1,407	
 	 	1,464	
 	 	(57	)	 	4,228	
 	 	4,725	
 	 	(497	)	
Merchant Transaction and Card Processing Fees	1,033	
 	 	1,131	
 	 	(98	)	 	3,277	
 	 	3,483	
 	 	(206	)	
Advertising	1,433	
 	 	939	
 	 	494	
 	 	3,867	
 	 	3,564	
 	 	303	
 	
Other	8,507	
 	 	8,691	
 	 	(184	)	 	24,606	
 	 	24,656	
 	 	(50	)	
Total Other Expense	14,443	
 	 	14,277	
 	 	166	
 	 	42,656	
 	 	42,745	
 	 	(89	)	
Total Noninterest Expense	$	81,030	
 	 	$	82,977	
 	 	$	(1,947	)	 	$	245,659	
 	 	$	248,545	
 	 	$	(2,886	)	

Salaries and benefits expense decreased by $1.0 million or 2% in the third quarter of 2014 compared to the same period in 2013 primarily due to a $1.7 million decrease in separation expense. Commission expense decreased by $0.6 million primarily due to a reduction in mortgage banking production volume as refinancing activity declined. These decreases were partially offset by a $0.9 million increase in share-based compensation primarily due to an increase in restricted stock and restricted stock unit grants. Medical, dental, and life insurance expense increased by $0.7 million primarily due to a reserve credit adjustment recorded in the third quarter of 2013. Salaries and benefits expense decreased by $3.1 million or 2% for the first nine months of 2014 compared to the same period in 2013 primarily due to a $3.4 million decrease in separation expense. Commission expense decreased by $2.2 million primarily due to a reduction in mortgage banking production volume as refinancing activity declined. These decreases were partially offset by a $2.7 million increase in share-based compensation primarily due to an increase in restricted stock and restricted stock unit grants.
 
Net occupancy expense decreased by $0.5 million or 5% in the third quarter of 2014 and by $1.1 million or 4% for the first nine months of 2014 compared to the same periods in 2013. These decreases were primarily due to higher sublease revenue combined with lower rental expense.

Data processing expense remained relatively unchanged in the third quarter of 2014 and increased by $1.1 million or 11% for the first nine months of 2014 compared to the same periods in 2013. The year-to-date increase was primarily due to fees related to additional services, including services for security enhancements for our online banking service.

Other noninterest expense increased by $0.2 million or 1% in the third quarter of 2014 compared to the same period in 2013 primarily due to a $0.5 million increase in advertising expense combined with a $0.4 million increase in amortization expense related to our solar energy partnership investments. These increases were largely offset by a $0.6 million decrease in operational losses, which include losses as a result of bank error, fraud, items processing, or theft. Other noninterest expense decreased slightly during the first nine months of 2014 compared to the same period in 2013. Contributing to the decrease was a $0.6 million decrease in our provision for unfunded commitments, combined with a $0.5 decrease in our credit card mileage

56

program travel expense. These decreases were largely offset by a $0.8 increase in amortization expense related to our solar energy partnership investments.

Provision for Income Taxes

Table 7 presents our provision for income taxes and effective tax rates.

Provision for Income Taxes and Effective Tax Rates	 	 	 	 	 	 	Table 7	
 	
 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Provision for Income Taxes	$	20,195	
 	 	$	15,332	
 	 	$	54,577	
 	 	$	47,740	
 	
Effective Tax Rates	32.59	%	 	28.91	%	 	30.93	%	 	29.99	%	

Our higher effective tax rate for the third quarter of 2014 compared to the same period in 2013 was primarily due to a $2.0 million release of reserves in 2013 related to the closing of a state audit for prior years.  Our higher effective tax rate for the first nine months of 2014 compared to the same period in 2013 was primarily due to a $3.1 million release of reserves in 2013 related to the closing of a state audit for prior years. This was partially offset by a $1.2 million release of reserves in the first nine months of 2014 related to a settlement with the State of Hawaii related to prior year tax issues.

57

Analysis of Statements of Condition

Investment Securities

The carrying value of our investment securities portfolio was $6.8 billion as of September 30, 2014, a decrease of $209.7 million or 3% compared to December 31, 2013. As of September 30, 2014, our investment securities portfolio was comprised of securities with an average base duration of approximately 3.5 years.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed.  These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

During the first nine months of 2014, we continued to reduce our positions in mortgage-backed securities issued by Ginnie Mae. We re-invested these proceeds, in part, into mortgage-backed securities issued by Fannie Mae and Freddie Mac. As of September 30, 2014, our portfolio of Ginnie Mae mortgage-backed securities was primarily comprised of securities issued in 2008 or later. As of September 30, 2014, the credit ratings of these mortgage-backed securities were all AAA-rated, with a low probability of a change in ratings in the near future. As of September 30, 2014, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 2.9 years.

Gross unrealized gains in our investment securities portfolio were $107.0 million as of September 30, 2014 and $68.5 million as of December 31, 2013.  Gross unrealized losses on our temporarily impaired investment securities were $64.3 million as of September 30, 2014 and $117.6 million as of December 31, 2013.  This decrease in our gross unrealized loss positions on our temporarily impaired investment securities was primarily due to market interest rates declining during 2014. The gross unrealized loss positions were primarily related to mortgage-backed securities issued by Ginnie Mae and corporate bonds. See Note 2 to the Consolidated Financial Statements for more information.

As of September 30, 2014, included in our investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $583.8 million, representing 58% 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 our Hawaii municipal bond holdings were general obligation issuances. As of September 30, 2014, 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 our municipal debt securities.

58

Loans and Leases

Table 8 presents the composition of our loan and lease portfolio by major categories.

 	 	 	 	 	 	 	 	
Loan and Lease Portfolio Balances	 	Table 8	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Commercial	 	

Commercial and Industrial	$	991,157	
 	 	$	911,367	
 	
Commercial Mortgage	1,373,289	
 	 	1,247,510	
 	
Construction	132,097	
 	 	107,349	
 	
Lease Financing	232,381	
 	 	262,207	
 	
Total Commercial	2,728,924	
 	 	2,528,433	
 	
Consumer	 	

Residential Mortgage	2,444,989	
 	 	2,282,894	
 	
Home Equity	838,206	
 	 	773,385	
 	
Automobile	306,003	
 	 	255,986	
 	
Other 1	288,228	
 	 	254,689	
 	
Total Consumer	3,877,426	
 	 	3,566,954	
 	
Total Loans and Leases	$	6,606,350	
 	 	$	6,095,387	

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

Total loans and leases as of September 30, 2014 increased by $511.0 million or 8% from December 31, 2013 due to growth in both our commercial and consumer lending portfolios.

Commercial loans and leases as of September 30, 2014 increased by $200.5 million or 8% from December 31, 2013.  Commercial and industrial loans increased by $79.8 million or 9% from December 31, 2013 due to an increase in corporate demand for funding from new and existing customers. Commercial mortgage loans increased by $125.8 million or 10% from December 31, 2013 primarily due to increased demand from new and existing customers as both investors and owner occupants looked to refinance and/or acquire new real estate assets, reflective of the strong Hawaii real estate market. Also contributing to the increase in commercial mortgage loans was the transfer of construction loans upon project completion into the commercial mortgage loan portfolio. Construction loans increased by $24.7 million or 23% from December 31, 2013 primarily due to increased activity in construction projects such as condominiums and low-income housing. The increase in construction loans was partially offset by the aforementioned loans transferred to the commercial mortgage loan portfolio. Lease financing decreased by $29.8 million or 11% from December 31, 2013 primarily due to a lessee exercising its early buy-out option on an aircraft leveraged lease in the first quarter of 2014.

Consumer loans and leases as of September 30, 2014 increased by $310.5 million or 9% from December 31, 2013.  Residential mortgage loans increased by $162.1 million or 7% from December 31, 2013 primarily due to our decision to retain additional conforming saleable loans in our portfolio. Home equity loans increased by $64.8 million or 8% from December 31, 2013 due to paydowns slowing and increased line utilization.  Automobile loans increased by $50.0 million or 20% from December 31, 2013 due to increased customer demand combined with market share gains. Other consumer loans increased by $33.5 million or 13% from December 31, 2013 due to growth in our consumer credit card balances, other revolving credits, and installment loans.

59

Table 9 presents the composition of our loan and lease portfolio by geographic area and by major categories.

Geographic Distribution of Loan and Lease Portfolio	 	Table 9	
 	
(dollars in thousands)	Hawaii	
 	 	U.S. Mainland 1	
 	 	Guam	
 	 	Other Pacific Islands	
 	 	Foreign 2 	
 	 	Total	
 	
September 30, 2014	 	

 	 	 	

 	
Commercial	 	

 	 	 	

 	
Commercial and Industrial	$	876,741	
 	 	$	61,854	
 	 	$	50,674	
 	 	$	911	
 	 	$	977	
 	 	$	991,157	
 	
Commercial Mortgage	1,255,187	
 	 	25,009	
 	 	93,093	
 	 	—	
 	 	—	
 	 	1,373,289	
 	
Construction	132,097	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	132,097	
 	
Lease Financing	45,681	
 	 	180,906	
 	 	962	
 	 	—	
 	 	4,832	
 	 	232,381	
 	
Total Commercial	2,309,706	
 	 	267,769	
 	 	144,729	
 	 	911	
 	 	5,809	
 	 	2,728,924	
 	
Consumer	 	

 	 	 	

 	
Residential Mortgage	2,331,663	
 	 	—	
 	 	110,160	
 	 	3,166	
 	 	—	
 	 	2,444,989	
 	
Home Equity	804,396	
 	 	4,185	
 	 	27,913	
 	 	1,712	
 	 	—	
 	 	838,206	
 	
Automobile	234,412	
 	 	455	
 	 	66,325	
 	 	4,811	
 	 	—	
 	 	306,003	
 	
Other 3	217,010	
 	 	—	
 	 	32,214	
 	 	38,997	
 	 	7	
 	 	288,228	
 	
Total Consumer	3,587,481	
 	 	4,640	
 	 	236,612	
 	 	48,686	
 	 	7	
 	 	3,877,426	
 	
Total Loans and Leases	$	5,897,187	
 	 	$	272,409	
 	 	$	381,341	
 	 	$	49,597	
 	 	$	5,816	
 	 	$	6,606,350	

December 31, 2013	 	

 	 	 	

 	
Commercial	 	

 	 	 	

 	
Commercial and Industrial	$	818,770	
 	 	$	40,596	
 	 	$	48,436	
 	 	$	1,436	
 	 	$	2,129	
 	 	$	911,367	
 	
Commercial Mortgage	1,127,772	
 	 	36,962	
 	 	82,776	
 	 	—	
 	 	—	
 	 	1,247,510	
 	
Construction	97,535	
 	 	—	
 	 	9,814	
 	 	—	
 	 	—	
 	 	107,349	
 	
Lease Financing	45,627	
 	 	191,159	
 	 	3,334	
 	 	—	
 	 	22,087	
 	 	262,207	
 	
Total Commercial	2,089,704	
 	 	268,717	
 	 	144,360	
 	 	1,436	
 	 	24,216	
 	 	2,528,433	
 	
Consumer	 	

 	 	 	

 	
Residential Mortgage	2,161,092	
 	 	—	
 	 	117,975	
 	 	3,827	
 	 	—	
 	 	2,282,894	
 	
Home Equity	744,014	
 	 	5,389	
 	 	22,126	
 	 	1,856	
 	 	—	
 	 	773,385	
 	
Automobile	192,026	
 	 	1,442	
 	 	58,332	
 	 	4,186	
 	 	—	
 	 	255,986	
 	
Other 3	187,107	
 	 	—	
 	 	29,402	
 	 	38,177	
 	 	3	
 	 	254,689	
 	
Total Consumer	3,284,239	
 	 	6,831	
 	 	227,835	
 	 	48,046	
 	 	3	
 	 	3,566,954	
 	
Total Loans and Leases	$	5,373,943	
 	 	$	275,548	
 	 	$	372,195	
 	 	$	49,482	
 	 	$	24,219	
 	 	$	6,095,387	

1 	For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located.  For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower’s business operations are conducted.	
 	 	
2 	Loans classified as Foreign represent those which are recorded in the Company’s international business units.  Lease financings classified as Foreign represent those with air transportation carriers based outside the United States.	
 	 	
3 	Comprised of other revolving credit, installment, and lease financing.	

Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes leveraged lease financing and participation in Shared National Credits.  Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.

Our Hawaii loan and lease portfolio increased by $523.2 million or 10% from December 31, 2013, reflective of a healthy Hawaii economy. Our portfolio of foreign loans and leases decreased by $18.4 million or 76% from December 31, 2013 primarily due to the previously noted early buy-out of an aircraft leveraged lease.

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Other Assets

Table 10 presents the major components of other assets.

Other Assets	 	
 	 	Table 10	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Bank-Owned Life Insurance	$	261,862	
 	 	$	223,246	
 	
Federal Home Loan Bank and Federal Reserve Bank Stock	69,074	
 	 	77,159	
 	
Derivative Financial Instruments	16,857	
 	 	21,769	
 	
Low-Income Housing and Other Equity Investments	57,995	
 	 	48,931	
 	
Deferred Compensation Plan Assets	18,481	
 	 	15,535	
 	
Prepaid Expenses	9,390	
 	 	6,098	
 	
Accounts Receivable	13,682	
 	 	13,479	
 	
State Tax Deposits	—	
 	 	6,069	
 	
Other	17,517	
 	 	18,253	
 	
Total Other Assets	$	464,858	
 	 	$	430,539	

Other assets increased by $34.3 million or 8% from December 31, 2013. This increase was primarily due to a $38.6 million increase in bank-owned life insurance, mainly resulting from new policies purchased during the second quarter of 2014. Also contributing to the increase was a $9.1 million increase in commitments to fund low-income housing and solar energy partnership investments. This was partially offset by an $8.2 million redemption of a portion of our FHLB stock and a $6.1 million decrease in state tax deposits due to the settlement of prior year tax issues.

Deposits

Table 11 presents the composition of our deposits by major customer categories.

Deposits	 	
 	 	Table 11	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Consumer	$	5,972,435	
 	 	$	5,829,352	
 	
Commercial	5,070,080	
 	 	4,814,076	
 	
Public and Other	1,318,926	
 	 	1,271,228	
 	
Total Deposits	$	12,361,441	
 	 	$	11,914,656	

Total deposits were $12.4 billion as of September 30, 2014, an increase of $446.8 million or 4% from December 31, 2013.  This increase was primarily due to a $256.0 million increase in commercial deposits, mainly reflecting core deposit growth. In addition, consumer deposits increased by $143.1 million, mainly reflecting core deposit growth primarily resulting from our efforts to grow our relationship checking and savings deposit products. Also contributing to the increase is a $128.7 million increase in public time deposits mainly due to local government entities shifting funds from repurchase agreements.

Table 12 presents the composition of our savings deposits.

Savings Deposits	 	
 	 	Table 12	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Money Market	$	1,727,442	
 	 	$	1,654,435	
 	
Regular Savings	3,010,922	
 	 	2,905,715	
 	
Total Savings Deposits	$	4,738,364	
 	 	$	4,560,150	

61

Securities Sold Under Agreements to Repurchase

Table 13 presents the composition of our securities sold under agreements to repurchase.

Securities Sold Under Agreements to Repurchase	 	Table 13	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Government Entities	$	100,203	
 	 	$	170,049	
 	
Private Institutions	600,000	
 	 	600,000	
 	
Total Securities Sold Under Agreements to Repurchase	$	700,203	
 	 	$	770,049	

Securities sold under agreements to repurchase as of September 30, 2014 decreased by $69.8 million or 9% from December 31, 2013.  This decrease was due in part to local government entities shifting funds to time deposits. As of September 30, 2014, the weighted-average maturity was 330 days for our repurchase agreements with government entities and 4.7 years for our repurchase agreements with private institutions. Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by the private institution or in some cases by either the private institution or the Company. If all such agreements were to terminate at the earliest possible date, the weighted average maturity for our repurchase agreements with private institutions would decrease to 3.3 years.  As of September 30, 2014, the weighted-average interest rate for outstanding agreements with government entities and private institutions was 0.27% and 4.21%, respectively, with all rates being fixed. Each of our repurchase agreements are accounted for as a collateralized financing arrangement (i.e., a secured borrowing) and not as a sale and subsequent repurchase of securities. 

Long-Term Debt

Long-term debt was $173.9 million as of September 30, 2014, relatively unchanged from December 31, 2013. This balance was mainly comprised of $150.0 million in FHLB advances with a stated interest rate of 0.60% and maturity dates in 2015 and 2016. These advances were primarily for asset/liability management purposes. As of September 30, 2014, our remaining line of credit with the FHLB was $1.3 billion.

62

Analysis of Business Segments

Our business segments are defined as Retail Banking, Commercial Banking, Investment Services, and Treasury and Other.

Table 14 summarizes net income from our business segments.  Additional information about segment performance is presented in Note 8 to the Consolidated Financial Statements.

Business Segment Net Income	 	 	 	 	 	 	Table 14	
 	
 	Three Months Ended
September 30,	 	Nine Months Ended
September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Retail Banking	$	10,505	
 	 	$	7,188	
 	 	$	28,017	
 	 	$	20,485	
 	
Commercial Banking	14,200	
 	 	10,809	
 	 	36,916	
 	 	31,488	
 	
Investment Services	2,331	
 	 	2,111	
 	 	6,654	
 	 	7,234	
 	
Total	27,036	
 	 	20,108	
 	
 	71,587	
 	
 	59,207	
 	
Treasury and Other	14,733	
 	 	17,596	
 	 	50,264	
 	 	52,240	
 	
Consolidated Total	$	41,769	
 	 	$	37,704	
 	
 	$	121,851	
 	
 	$	111,447	

Retail Banking

Net income increased by $3.3 million or 46% in the third quarter of 2014 compared to the same period in 2013 primarily due to an increase in net interest income and a decrease in noninterest expense. This was partially offset by a decrease in noninterest income and an increase in the Provision. The increase in net interest income was primarily due to higher average balances in the loan portfolio and higher margins and higher average balances in the deposit portfolio. The decrease in noninterest expense was primarily due to lower commission expense as a result of a reduction in mortgage banking production volume as refinancing activity declined. The decrease in noninterest income was primarily due to lower mortgage banking income which was also due to lower mortgage application and production volume, as well as our decision to add more conforming saleable loans to our portfolio in 2014 which reduced our gains on sales of residential mortgage loans. This decrease was partially offset by higher commissions and fees income related to our credit card business. The increase in the Provision was primarily due to a decrease in loan recoveries.

Net income increased by $7.5 million or 37% for the first nine months of 2014 compared to the same period in 2013 primarily due to an increase in net interest income, as well as decreases in the Provision and noninterest expense. This was partially offset by a decrease in noninterest income. The increase in net interest income was primarily due to higher margins and higher average balances in both the loan and deposit portfolios. The decrease in the Provision was primarily due to lower net charge-offs of loans and leases in the segment combined with improving credit trends and the underlying risk profile of the loan portfolio. The decrease in noninterest expense was primarily due to lower commission expense as a result of a reduction in mortgage banking production volume as refinancing activity declined. This decrease was partially offset by higher commissions and fees income related to our credit card business. The decrease in noninterest income was primarily due to lower mortgage banking income which was also due to lower mortgage application and production volume, as well as our decision to add more conforming saleable loans to the portfolio in 2014 which reduced our gains on sales of residential mortgage loans.

Commercial Banking

Net income increased by $3.4 million or 31% in the third quarter of 2014 and by $5.4 million or 17% for the first nine months of 2014 compared to the same periods in 2013 primarily due to an increase in net interest income and a decrease in the Provision. This was partially offset by a decrease in noninterest income and an increase in noninterest expense. The increase in net interest income was primarily due to higher volume in both the lending and deposit portfolios, and partially due to higher earnings credits on the segment’s deposit portfolio. The decrease in the Provision was due to the higher net recovery of loans and leases in the current period. The decrease in noninterest income was primarily due to lower nonrecurring loan fees and net gains on the sale of leased assets. The increase in noninterest expense was primarily due to higher allocated expenses.

Investment Services

Net income increased by $0.2 million or 10% in the third quarter of 2014 compared to the same period in 2013 primarily due to increases in net interest income and noninterest income and to a decrease in noninterest expense. The increase in net interest income was partially due to higher volume and higher earnings credits on the segment’s deposit portfolio. The increase in

63

noninterest income was primarily due to higher annuity income in the segment’s full service brokerage. The decrease in noninterest expense was primarily due to lower operating expenses.

Net income decreased by $0.6 million or 8% for the first nine months of 2014 compared to the same period in 2013 primarily due to a decrease in noninterest income, partially offset by decreases in the Provision and noninterest expense. The decrease in noninterest income was primarily due to lower annuity, mutual fund and securities income in the segment’s full service brokerage. The decrease in the Provision was due to the higher net recovery of loans in the current period. The decrease in noninterest expense was due to lower salaries expense, partially offset by an increase in allocated expense.

Treasury and Other
Net income decreased by $2.9 million or 16% in the third quarter of 2014 compared to the same period in 2013 primarily due to a decrease in net interest income, partially offset by a decrease in the Provision, an increase in noninterest income and a decrease in noninterest expense.  The Provision in this business segment represents the residual provision for credit losses to arrive at the total Provision for the Company. The decrease in net interest income was primarily due to higher deposit funding costs. The increase in noninterest income was due to a $1.9 million net gain on sale of 23,000 Visa Class B shares. The decrease in noninterest expense was due to higher separation expense in 2013.

Net income decreased by $2.0 million or 4% for the first nine months of 2014 compared to the same period in 2013 primarily due to a decrease in net interest income, partially offset by an increase in noninterest income. The decrease in net interest income was primarily due to higher deposit funding costs. The increase in noninterest income was due to the sale of 68,500 Visa Class B shares which resulted in a $5.8 million net gain for the first nine months of 2014.

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

64

Corporate Risk Profile

Credit Risk

As of September 30, 2014, our overall credit risk profile reflects a Hawaii economy which remains strong, with decreasing levels of higher risk loans and leases, non-performing assets, and lower credit losses. The underlying risk profile of our lending portfolio continued to remain strong in the third quarter of 2014.

Although asset quality has improved over the past several years, we remain vigilant in light of uncertainties in the U.S. economy as well as concerns related to specific segments of our lending portfolio that present a higher risk profile.  As of September 30, 2014, the higher risk segments within our loan and lease portfolio were concentrated in residential land loans, home equity loans, and air transportation leases.  In addition, loans and leases based on Hawaiian Islands other than Oahu (the “neighbor islands”) may present a higher risk profile as the neighbor islands have continued to experience higher levels of unemployment and have shown signs of slower economic recovery when compared to Oahu.

We continue to monitor our loan and lease portfolio to identify higher risk segments.  We also actively manage exposures with deteriorating asset quality to reduce levels of potential loss exposure and have systematically built our reserves and capital base to address both anticipated and unforeseen issues.  Risk management activities have included curtailing activities in some higher risk segments.  We have also conducted detailed analysis of portfolio segments and stress tested those segments to ensure that reserve and capital levels are appropriate.  We perform frequent loan and lease-level risk monitoring and risk rating reviews which provide opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.

Table 15 presents balances in our loan and lease portfolio which demonstrate a higher risk profile.

Higher Risk Loans and Leases Outstanding	 	Table 15	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Residential Land Loans	$	9,117	
 	 	$	11,922	
 	
Home Equity Loans	9,914	
 	 	12,594	
 	
Air Transportation Leases	21,668	
 	 	26,152	
 	
Total	$	40,699	
 	 	$	50,668	

As of September 30, 2014, our higher risk loans and leases outstanding decreased by $10.0 million or 20% from December 31, 2013.

Residential land loans consist of consumer loans secured by unimproved lots.  These loans often represent higher risk due to the volatility in the value of the underlying collateral.  Our residential land loan portfolio was $9.1 million as of September 30, 2014, of which $7.7 million were related to properties on the neighbor islands. Residential land loans are collectively evaluated for impairment in connection with the evaluation of our residential mortgage portfolio.  As of September 30, 2014, there was a nominal Allowance associated with our residential land loan portfolio. As of September 30, 2014, $0.8 million of our residential land loans were on non-accrual status and we have previously recorded partial charge-offs of $0.9 million on these loans.

The higher risk segment within our Hawaii home equity lending portfolio was $9.9 million or 1% of our total home equity loans outstanding as of September 30, 2014, a decrease of $2.7 million or 21% from December 31, 2013. This decrease was primarily due to an improvement in credit scores. The higher risk segment within our Hawaii home equity portfolio includes those loans originated in 2005 or later, with current monitoring credit scores below 600, and with original loan-to-value (“LTV”) ratios greater than 70%.  Higher risk loans in our Hawaii home equity portfolio are collectively evaluated for impairment in connection with the evaluation of our entire home equity portfolio.  As of September 30, 2014, there was no specific Allowance associated with our higher risk home equity loans.  These loans had a 90 day past due delinquency ratio of 7% and $0.5 million in gross charge-offs were recorded during the first nine months of 2014.

We consider all of our air transportation leases to be of higher risk due to the volatile financial profile of the industry.  Domestic air transportation carriers continue to demonstrate a higher risk profile due to fuel costs, pension plan obligations, consumer demand, and marginal pricing power.  Carriers are migrating to newer generations of more fuel efficient fleets which are negatively impacting older generation aircraft valuations.  We believe that these risks could place additional pressure on the financial health of air transportation carriers for the foreseeable future. Outstanding credit exposure related to our air

65

transportation leases was $21.7 million as of September 30, 2014, a decrease of $4.5 million or 17% from December 31, 2013. As of September 30, 2014, included in our commercial leasing portfolio were three leveraged leases on aircraft that were originated in the 1990's. As of September 30, 2014, the Allowance associated with our air transportation leases was $0.5 million, a decrease of $2.1 million from December 31, 2013 due to ongoing assessments of industry conditions. For the first nine months of 2014, there were no delinquencies in our air transportation lease portfolio and no charge-offs were recorded.

66

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

Table 16 presents information on non-performing assets (“NPAs”) and accruing loans and leases past due 90 days or more.

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More	 	 	Table 16	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Non-Performing Assets	 	

Non-Accrual Loans and Leases	 	

Commercial	 	

Commercial and Industrial	$	8,952	
 	 	$	11,929	
 	
Commercial Mortgage	1,366	
 	 	2,512	
 	
Total Commercial	10,318	
 	 	14,441	
 	
Consumer	 	 	 	
Residential Mortgage	16,756	
 	 	20,264	
 	
Home Equity	2,671	
 	 	1,740	
 	
Total Consumer	19,427	
 	 	22,004	
 	
Total Non-Accrual Loans and Leases	29,745	
 	 	36,445	
 	
Foreclosed Real Estate	3,562	
 	 	3,205	
 	
Total Non-Performing Assets	$	33,307	
 	 	$	39,650	

Accruing Loans and Leases Past Due 90 Days or More	 	 	 	
Commercial	 	 	 	
Commercial and Industrial	$	14	
 	 	$	1,173	
 	
Total Commercial	14	
 	 	1,173	
 	
Consumer	 	 	 	
Residential Mortgage	4,819	
 	 	4,564	
 	
Home Equity	2,816	
 	 	3,009	
 	
Automobile	612	
 	 	322	
 	
Other 1	842	
 	 	790	
 	
Total Consumer	9,089	
 	 	8,685	
 	
Total Accruing Loans and Leases Past Due 90 Days or More	$	9,103	
 	 	$	9,858	
 	
Restructured Loans on Accrual Status and Not Past Due 90 Days or More	$	45,169	
 	 	$	51,123	
 	
Total Loans and Leases	$	6,606,350	
 	 	$	6,095,387	
 	
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases	0.45	%	 	0.60	%	
Ratio of Non-Performing Assets to Total Loans and Leases and Foreclosed Real Estate	0.50	%	 	0.65	%	
Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases
   and Commercial Foreclosed Real Estate	0.42	%	 	0.61	%	
Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases
   and Consumer Foreclosed Real Estate	0.56	%	 	0.68	%	
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days
   or More to Total Loans and Leases and Foreclosed Real Estate	0.64	%	 	0.81	%	
Changes in Non-Performing Assets	 	

Balance as of December 31, 2013	$	39,650	

Additions	7,854	

Reductions	 	 	 	
 	
Payments	(6,989	)	 	 	
 	
Return to Accrual Status	(3,472	)	 	 	
 	
Sales of Foreclosed Real Estate	(2,968	)	 	 	
 	
Charge-offs/Write-downs	(768	)	 	 	
 	
Total Reductions	(14,197	)	 	 	
 	
Balance as of September 30, 2014	$	33,307	

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

67

NPAs consist of non-accrual loans and leases, and foreclosed real estate.  Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.

Total NPAs were $33.3 million as of September 30, 2014, a decrease of $6.3 million or 16% from December 31, 2013.  The ratio of our NPAs to total loans and leases and foreclosed real estate was 0.50% as of September 30, 2014 and 0.65% as of December 31, 2013.

Commercial and industrial non-accrual loans decreased by $3.0 million or 25% from December 31, 2013 due to paydowns and the charge off of one loan. As of September 30, 2014, two commercial borrowers comprised 88% of the non-accrual balance in this category.  We have individually evaluated all of our commercial and industrial non-accrual loans for impairment and have recorded partial charge-offs totaling $11.9 million on three of these loans.

Commercial mortgage non-accrual loans decreased by $1.1 million or 46% from December 31, 2013 due to payments received. Two loans were paid-off in the first nine months of 2014. We have individually evaluated all three remaining commercial mortgage non-accrual loans for impairment and have recorded no charge-offs.

The largest component of our NPAs continues to be residential mortgage loans. Residential mortgage non-accrual loans decreased by $3.5 million or 17% from December 31, 2013 primarily due to $5.4 million in paydowns and $2.5 million returning to accrual status. This decrease was partially offset by $4.5 million in additions.  Residential mortgage non-accrual loans remain at elevated levels due mainly to the lengthy judiciary foreclosure process.  As of September 30, 2014, our residential mortgage non-accrual loans were comprised of 44 loans with a weighted average current LTV ratio of 70%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans.  Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure.  On an ongoing basis, properties are appraised as required by market conditions and applicable regulations.  Foreclosed real estate increased by $0.4 million or 11% from December 31, 2013.  During the first nine months of 2014, eight residential properties were transferred to foreclosed real estate and eight residential properties were sold. As of September 30, 2014, foreclosed real estate was comprised of one commercial property and five Hawaii residential properties.

Loans and Leases Past Due 90 Days or More and Still Accruing Interest

Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection.  Loans and leases past due 90 days or more and still accruing interest were $9.1 million as of September 30, 2014, a $0.8 million or 8% decrease from December 31, 2013.  This decrease was primarily reflected in our commercial and industrial portfolio, partially offset by an increase in our automobile and residential mortgage portfolios.

Impaired Loans

Impaired loans are defined as loans for which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement.  Included in impaired loans are all classes of commercial non-accruing loans (except lease financing and small business loans), all loans modified in a TDR (including accruing TDRs), and other loans where we believe that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans exclude lease financing and smaller balance homogeneous loans (consumer and small business non-accruing loans) that are collectively evaluated for impairment.  Impaired loans were $65.9 million as of September 30, 2014 and $77.1 million as of December 31, 2013, and had a related Allowance of $6.1 million as of September 30, 2014 and $12.8 million as of December 31, 2013.  This decrease in impaired loans was primarily due to the full repayment of a customer’s commercial mortgage and commercial and industrial loans during the first quarter of 2014. This decrease in the related Allowance was primarily due to the reduction in the specific reserve related to one commercial client in the third quarter of 2014. As of September 30, 2014, we have recorded charge-offs of $17.5 million related to our total impaired loans.  Our impaired loans are considered in management's assessment of the overall adequacy of the Allowance.

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Table 17 presents information on loans with terms that have been modified in a TDR.

Loans Modified in a Troubled Debt Restructuring	 	 	Table 17	
 	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	
Commercial	 	 	 	
Commercial and Industrial	$	8,886	
 	 	$	11,563	
 	
Commercial Mortgage	5,631	
 	 	12,386	
 	
Construction	1,709	
 	 	1,059	
 	
Total Commercial	16,226	
 	 	25,008	
 	
Consumer	 	 	 	
Residential Mortgage	32,586	
 	 	32,339	
 	
Home Equity	1,022	
 	 	795	
 	
Automobile	5,596	
 	 	5,183	
 	
Other 1	682	
 	 	329	
 	
Total Consumer	39,886	
 	 	38,646	
 	
Total	$	56,112	
 	 	$	63,654	

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

Loans modified in a TDR decreased by $7.5 million or 12% from December 31, 2013. Commercial TDRs decreased primarily due to the full repayment of a customer’s commercial mortgage and commercial and industrial loans during the first quarter of 2014.

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Reserve for Credit Losses

Table 18 presents the activity in our reserve for credit losses.

Reserve for Credit Losses	 	 	 	 	 	 	Table 18	
 	
 	Three Months Ended	 	Nine Months Ended	
 	September 30,	 	September 30,	
(dollars in thousands)	2014	
 	 	2013	
 	 	2014	
 	 	2013	
 	
Balance at Beginning of Period	$	119,725	
 	 	$	130,494	
 	 	$	121,521	
 	 	$	134,276	
 	
Loans and Leases Charged-Off	 	 	 	 	 	 	 	
Commercial	 	 	 	 	 	 	 	
Commercial and Industrial	(229	)	 	(607	)	 	(1,797	)	 	(1,255	)	
Lease Financing	—	
 	 	(16	)	 	(66	)	 	(16	)	
Consumer	 	 	 	 	 	 	 	
Residential Mortgage	(22	)	 	(405	)	 	(674	)	 	(1,828	)	
Home Equity	(475	)	 	(1,106	)	 	(1,379	)	 	(4,499	)	
Automobile	(957	)	 	(457	)	 	(2,585	)	 	(1,461	)	
Other 1	(1,978	)	 	(2,083	)	 	(5,195	)	 	(5,618	)	
Total Loans and Leases Charged-Off	(3,661	)	 	(4,674	)	 	(11,696	)	 	(14,677	)	
Recoveries on Loans and Leases Previously Charged-Off	 	

 	 	 	
 	
Commercial	 	

 	 	 	
 	
Commercial and Industrial	1,177	
 	 	498	
 	 	4,229	
 	 	1,373	
 	
Commercial Mortgage	14	
 	 	519	
 	 	43	
 	 	543	
 	
Construction	8	
 	 	11	
 	 	21	
 	 	357	
 	
Lease Financing	3	
 	 	11	
 	 	6	
 	 	33	
 	
Consumer	 	 	 	 	 	 	 	
Residential Mortgage	299	
 	 	1,290	
 	 	2,906	
 	 	2,712	
 	
Home Equity	531	
 	 	614	
 	 	1,433	
 	 	1,697	
 	
Automobile	322	
 	 	348	
 	 	1,110	
 	 	1,265	
 	
Other 1	496	
 	 	488	
 	 	1,720	
 	 	1,520	
 	
Total Recoveries on Loans and Leases Previously Charged-Off	2,850	
 	 	3,779	
 	 	11,468	
 	 	9,500	
 	
Net Loans and Leases Charged-Off	(811	)	 	(895	)	 	(228	)	 	(5,177	)	
Provision for Credit Losses	(2,665	)	 	—	
 	 	(4,864	)	 	—	
 	
Provision for Unfunded Commitments	—	
 	 	148	
 	 	(180	)	 	648	
 	
Balance at End of Period 2	$	116,249	
 	 	$	129,747	
 	 	$	116,249	
 	 	$	129,747	

Components	 	

 	 	 	
 	
Allowance for Loan and Lease Losses	$	110,362	
 	 	$	123,680	
 	 	$	110,362	
 	 	$	123,680	
 	
Reserve for Unfunded Commitments	5,887	
 	 	6,067	
 	 	5,887	
 	 	6,067	
 	
Total Reserve for Credit Losses	$	116,249	
 	 	$	129,747	
 	 	$	116,249	
 	 	$	129,747	

Average Loans and Leases Outstanding	$	6,488,780	
 	 	$	5,892,888	
 	 	$	6,290,548	
 	 	$	5,826,424	

Ratio of Net Loans and Leases Charged-Off to
   Average Loans and Leases Outstanding (annualized)	0.05	%	 	0.06	%	 	—	%	 	0.12	%	
Ratio of Allowance for Loan and Lease Losses to
   Loans and Leases Outstanding	1.67	%	 	2.06	%	 	1.67	%	 	2.06	%	
 	 	
1 	Comprised of other revolving credit, installment, and lease financing.	
 	 	
2 	Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the consolidated statements of condition.	

We maintain a reserve for credit losses that consists of two components, the Allowance and a reserve for unfunded commitments (the “Unfunded Reserve”).  The reserve for credit losses provides for the risk of credit losses inherent in the loan and lease portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.  The level of the Allowance is adjusted by recording an expense or recovery through the Provision.  The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.

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Allowance for Loan and Lease Losses

As of September 30, 2014, the Allowance was $110.4 million or 1.67% of total loans and leases outstanding, compared with an Allowance of $115.5 million or 1.89% of total loans and leases outstanding as of December 31, 2013.  The decrease in the Allowance was commensurate with the Company's strong credit risk profile and a healthy Hawaii economy.

Net charge-offs on loans and leases were $0.8 million or 0.05% of total average loans and leases, on an annualized basis, in the third quarter of 2014 compared to net charge-offs of $0.9 million or 0.06% of total average loans and leases, on an annualized basis, in the third quarter of 2013. Net charge-offs on loans and leases were $0.2 million or less than 0.01% of total average loans and leases, on an annualized basis, in the first nine months of 2014 compared to net charge-offs of $5.2 million or 0.12% of total average loans and leases, on an annualized basis, in the first nine months of 2013. Net recoveries in our commercial portfolios were $2.4 million in the first nine months of 2014 compared to $1.0 million for the same period in 2013, while net charge-offs in our consumer portfolios were $2.7 million for the first nine months of 2014 compared to $6.2 million for the same period in 2013. These favorable variances were primarily due to recoveries related to two commercial and industrial loans and three residential mortgage loans during the second and third quarters of 2014. The reduction in the Allowance was also due to the reduction in the specific reserve related to one commercial client in the third quarter of 2014.

Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of September 30, 2014, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.

The Reserve for Unfunded Commitments

The Unfunded Reserve was $5.9 million as of September 30, 2014, a decrease of $0.2 million from December 31, 2013. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities.

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Market Risk
 
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Our market risk management process involves measuring, monitoring, controlling, and mitigating risks that can significantly impact our statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.

Our primary market risk exposure is interest rate risk.

Interest Rate Risk

The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from our core business activities of extending loans and accepting deposits. Our investment securities portfolio is also subject to significant interest rate risk.  

Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments. Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Bank (the “FRB”).  The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.  The nature and impact of future changes in monetary policies are generally not predictable.

In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates.  The ALCO, which is comprised of members of executive management, utilizes several techniques to manage interest rate risk, which include:
 	 	
•	adjusting the balance sheet mix or altering the interest rate characteristics of assets and liabilities;	
 	 	
•	changing product pricing strategies;	
 	 	
•	modifying characteristics of the investment securities portfolio; and	
 	 	
•	using derivative financial instruments.	

Our use of derivative financial instruments, as detailed in Note 10 to the Consolidated Financial Statements, has generally been limited.  This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO.  We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, we may use different techniques to manage interest rate risk.

A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model that attempts to capture the dynamic nature of the balance sheet.  The model is used to estimate and measure the balance sheet sensitivity to changes in interest rates.  These estimates are based on assumptions about the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits.  While such assumptions are inherently uncertain, we believe that our assumptions are reasonable. 

72

We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates.  Table 19
presents, for the twelve months subsequent to September 30, 2014 and December 31, 2013, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario.  The base case scenario assumes the balance sheet and interest rates are generally unchanged.  Based on our net interest income simulation as of September 30, 2014, net interest income sensitivity to changes in interest rates for the twelve months subsequent to September 30, 2014 was slightly more sensitive compared to the sensitivity profile for the twelve months subsequent to December 31, 2013.  As a result of our strategy to maintain a relatively short investment portfolio duration, net interest income is expected to increase as interest rates rise. 

Net Interest Income Sensitivity Profile	 	 	 	Table 19	
 	
 	Impact on Future Annual Net Interest Income	
(dollars in thousands)	September 30, 2014	 	December 31, 2013	
Gradual Change in Interest Rates (basis points)	 	 	 	 	 	 	 	
 	
+200	$	4,164	
 	 	1.1	 %	 	$	2,580	
 	 	0.7	 %	
+100	1,837	
 	 	0.5	 %	 	1,000	
 	 	0.3	 %	
-100	(4,746	)	 	-1.2	 %	 	(4,086	)	 	-1.1	 %	
 	 	 	 	 	 	 	 	
Immediate Change in Interest Rates (basis points)	 	 	 	 	 	 	 	
+200	$	13,965	
 	 	3.7	 %	 	$	11,113	
 	 	2.9	 %	
+100	6,831	
 	 	1.8	 %	 	4,874	
 	 	1.3	 %	
-100	(18,737	)	 	-4.9	 %	 	(15,014	)	 	-4.0	 %	
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated.  These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time.  Conversely, if the yield curve should steepen, net interest income may increase.

Other Market Risks

In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions.  Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk.  These transactions are primarily executed on behalf of customers.  Our trust and asset management income are at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities.  Also, our share-based compensation expense is dependent on the fair value of our stock options, restricted stock units, and restricted stock at the date of grant.  The fair value of stock options, restricted stock units, and restricted stock is impacted by the market price of the Parent’s common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.

Liquidity Risk Management

The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancings, deposit growth, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity.  Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities.  We have immediate liquid resources in cash and noninterest-bearing deposits and funds sold.  The potential sources of short-term liquidity include interest-bearing deposits as well as the ability to sell certain assets including available-for-sale investment securities.  Short-term liquidity is further enhanced by our ability to sell loans in the secondary market and to secure borrowings from the FRB and FHLB.  Short-term liquidity is also generated from securities sold under agreements to repurchase and funds purchased. Deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding.  Additional funding is available through the issuance of long-term debt. 

Maturities and payments on outstanding loans also provide a steady flow of funds. Additionally, as of September 30, 2014, investment securities with a carrying value of $109.8 million were due to contractually mature in one year or less. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRB. As of September 30,

73

2014, we could have borrowed an additional $1.3 billion from the FHLB and an additional $640.3 million from the FRB based on the amount of collateral pledged.

We continued to maintain a strong liquidity position throughout the first nine months of 2014.  As of September 30, 2014, cash and cash equivalents were $553.6 million, the carrying value of our available-for-sale investment securities was $2.2 billion, and total deposits were $12.4 billion.  As of September 30, 2014, we continued to maintain our excess liquidity primarily in mortgage-backed securities issued by Ginnie Mae, municipal bond holdings, and in debt securities issued by the U.S. Treasury.  As of September 30, 2014, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 2.9 years.

Capital Management

We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory "well-capitalized" thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation to ensure capital adequacy.  As of September 30, 2014, the Company and the Bank were considered “well capitalized” under this regulatory framework.  The Company’s regulatory capital ratios are presented in Table 20 below.  There have been no conditions or events since September 30, 2014 that management believes have changed either the Company’s or the Bank’s capital classifications.

As of September 30, 2014, shareholders' equity was $1.1 billion, an increase of $45.4 million or 4% from December 31, 2013. For the first nine months of 2014, net income of $121.9 million, common stock issuances of $8.9 million, shared-based compensation of $5.8 million and other comprehensive income of $15.8 million were partially offset by cash dividends paid of $59.9 million, and common stock repurchased of $46.9 million. In the first nine months of 2014, included in the amount of common stock repurchased were 775,785 shares repurchased under our share repurchase program. These shares were repurchased at an average cost per share of $57.70 and a total cost of $44.8 million. From the beginning of our share repurchase program in July 2001 through September 30, 2014, we repurchased a total of 51.7 million shares of common stock and returned a total of $1.91 billion to our shareholders at an average cost of $36.86 per share. As of September 30, 2014, remaining buyback authority under our share repurchase program was $89.2 million of the total $2.0 billion repurchase amount authorized by our Board of Directors. From October 1, 2014 through October 21, 2014, the Parent repurchased an additional 120,000 shares of common stock at an average cost of $55.45 per share for a total of $6.7 million.  Remaining buyback authority under our share repurchase program was $82.6 million as of October 21, 2014.  The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.

In October 2014, the Parent’s Board of Directors declared a quarterly cash dividend of $0.45 per share on the Parent’s outstanding shares.  The dividend will be payable on December 12, 2014 to shareholders of record at the close of business on November 28, 2014.

During the second quarter of 2014 and in connection with an FDIC assessment review, the Company revised its capital ratios effectively increasing its capital adequacy dating back to 2010.  The revision related primarily to the amount of accumulated other comprehensive income related to benefit plans.  The Company concluded that the amounts were not material, however revised its capital ratios for all comparative periods presented.

We continue to evaluate the potential impact that regulatory rules may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act. See the “Regulatory Initiatives Affecting the Banking Industry" section below for further discussion on the potential impact that these regulatory rules may have on our liquidity and capital requirements.

74

Table 20 presents our regulatory capital and ratios as of September 30, 2014 and December 31, 2013.

Regulatory Capital and Ratios	 	 	Table 20	
(dollars in thousands)	September 30,
2014	
 	 	December 31,
2013	
 	 	
Regulatory Capital	 	 	 	 	
Shareholders’ Equity	$	1,057,412	
 	 	$	1,011,976	
 	 	
Less:	Goodwill	31,517	
 	 	31,517	
 	 	
 	Defined Benefit Plans Adjustment	(21,926	)	 	(22,394	)	 	
 	Net Unrealized Gains (Losses) on Investment Securities	14,491	
 	 	(1,300	)	 	
 	Other	1,290	
 	 	(137	)	 	
Tier 1 Capital	1,032,040	
 	 	1,004,290	
 	 	
Allowable Reserve for Credit Losses	84,619	
 	 	78,762	
 	 	
Total Regulatory Capital 1	$	1,116,659	
 	 	$	1,083,052	

Risk-Weighted Assets 1	$	6,737,853	
 	 	$	6,258,178	

Key Regulatory Capital Ratios 1	 	

Tier 1 Capital Ratio	15.32	
 	%	16.05	
 	%	
Total Capital Ratio	16.57	
 	 	17.31	
 	 	
Tier 1 Leverage Ratio	7.19	
 	 	7.24	

1 	Total Regulatory Capital, Risk-Weighted Assets, and Regulatory Capital Ratios as of December 31, 2013 were revised to conform to the current period calculation.	

75

Regulatory Initiatives Affecting the Banking Industry

Basel III

On July 2, 2013, the FRB approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. On April 8, 2014, the FDIC adopted as final its interim final rule, which is identical in substance to the final rules issued by the FRB in July 2013.

The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule and should be fully phased-in by January 1, 2019. Management believes that the Company's capital levels will remain characterized as "well-capitalized" under the new rules. The final rules were approved by the FRB and the FDIC in July 2013 and April 2014, respectively.

On September 3, 2014, the FRB, the FDIC, and the Office of the Comptroller of the Currency finalized the Liquidity Coverage Ratio (“LCR”), which would require banks to hold highly liquid assets relative to cash outflows over a 30-day period during a stressed scenario. The LCR will generally apply to banking organizations with over $50.0 billion in assets, and therefore, should not impact the Company.

The Company is mindful of the pending development of the net stable funding ratio and short-term wholesale funding requirements, and other potential liquidity risk management and reporting requirements. Management will continue to monitor these developments and their potential impact to the Company's liquidity requirements.

Stress Testing

The Dodd-Frank Act also requires federal banking agencies to issue regulations that require banks with total consolidated assets of more than $10.0 billion to conduct and publish self-administered annual stress tests to assess the potential impact of different scenarios on the consolidated earnings and capital of each bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. On October 9, 2012, the FRB published final rules implementing the stress testing requirements for banks, such as the Company, with total consolidated assets of more than $10.0 billion but less than $50.0 billion, but delayed the initial stress test until the fall of 2013 (utilizing data as of September 30, 2013).  The final stress testing rules set forth the timing and type of stress test activities, as well as rules governing controls, oversight and disclosure.

On July 30, 2013, the FRB, OCC, and FDIC proposed supervisory guidance for these stress tests. The joint proposed guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also emphasizes the importance of stress testing as an ongoing risk management practice. Comments on this joint proposed guidance were due in September 2013. Additionally, under an interim final rule adopted by the FRB on September 24, 2013, the Company must incorporate the more stringent Basel III capital rules into its stress tests, but has been given a one-year transition period until October 2014 to begin that incorporation.

We submitted our initial stress testing results, utilizing data as of September 30, 2013, to the FRB on March 31, 2014.  In addition, we are also required to make our first stress test-related public disclosure between June 15 and June 30, 2015 by disclosing summary results of our stress testing utilizing data as of September 30, 2014.

Debit Card Interchange Fees

On July 31, 2013, a U.S. District Court judge declared invalid provisions of the rule issued by the FRB under the Durbin Amendment of the Dodd-Frank Act, regarding the amount of the debit card interchange fee cap and the network non-exclusivity provisions, which was effective October 1, 2011. The court ruled that the FRB, when determining the amount of the fee cap, erred in using criteria outside the scope Congress intended to determine the fee cap, thereby causing the fee cap to

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be set higher than warranted. The court also ruled that the Durbin Amendment required merchants to be given a choice between multiple unaffiliated networks (signature and PIN networks) for each debit card transaction, as opposed to the FRB’s rule allowing debit card networks and issuers to make only one network available for each type of debit transaction. In September 2013, the U.S. District Court judge agreed to the FRB’s request to leave the existing rules in place until an appeals court rules on the case.

On March 21, 2014, a panel of the U.S. Court of Appeals for the District of Columbia (the "Court") overturned the U.S. District Court’s opinion. The Court concluded that the FRB “reasonably interpreted the Durbin Amendment” to allow issuers to recover certain costs that are incremental to the authorization, clearing, and settlement (“ACS”) costs. Finding that the FRB’s interpretation was reasonable, the Court then analyzed whether the FRB reasonably concluded that issuers could recover the four specific costs challenged by the merchants:  fixed ACS costs, network processing fees, fraud losses and transaction monitoring costs. The Court acknowledged that such a task was not “an exact science” and involved policy determinations in which the FRB had “expertise” as to which the FRB was entitled to “special deference.” The Court remanded one issue relating to recovery of fraud-monitoring costs back to the FRB, asking it to articulate a reasonable justification for determining that transaction monitoring costs fell outside of the costs associated with fraud prevention. The Court also rejected the merchants’ argument that the Durbin Amendment “unambiguously” required that there be multiple unaffiliated network routing options for each debit card transaction. The Court ruled that the FRB’s final rule does exactly what Congress contemplated, which is that under the rule, issuers and networks are prohibited from restricting the number of payment card networks on which an electronic debit transaction may be processed to only affiliated networks. On August 18, 2014, some of the trade associations and retailers filed an appeal with the U.S. Supreme Court seeking review of the decision of the Court. Management will continue to monitor the developments related to this matter and any potential impact on the Company's statements of income.

Operational Risk

Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, and the risk of cyber security attacks.  We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business.  The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. Operational risk is inherent in all business activities, and management of this risk is important to the achievement of Company goals and objectives.

Our Operating Risk Committee (the “ORC”) provides oversight and assesses the most significant operational risks facing the Company.  We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units. Our internal audit department also validates the system of internal controls through ongoing risk-based audit procedures and reports on the effectiveness of internal controls to executive management and the Audit and Risk Committee of the Board of Directors.

We continuously strive to strengthen our system of internal controls to improve the oversight of operational risk.  While our internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur.  On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to our systems of internal controls. 

Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations

Off-Balance Sheet Arrangements

We hold interests in several unconsolidated variable interest entities (“VIEs”).  These unconsolidated VIEs are primarily low-income housing partnerships.  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 VIE.  We have determined that the Company is not the primary beneficiary of these entities.  As a result, we do not consolidate these VIEs.

Credit Commitments and Contractual Obligations

Our credit commitments and contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

See the “Market Risk” section of MD&A.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2014.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2014 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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Part II - Other Information

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

The Parent’s repurchases of its common stock during the third quarter of 2014 were as follows:

Issuer Purchases of Equity Securities	 	 	 	 	

Period	Total Number of Shares Purchased   1	
 	 	Average Price Paid Per Share	
 	 	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	
 	 	Approximate Dollar Value
 of Shares that May Yet Be
 Purchased Under the
 Plans or Programs 2	 	
July 1 - 31, 2014	58,560	
 	 	$	57.49	
 	 	57,000	
 	 	 	$	105,720,888	
 	
August 1 - 31, 2014	137,977	
 	 	57.50	
 	 	137,000	
 	 	 	97,844,343	
 	
September 1 - 30, 2014	146,920	
 	 	58.70	
 	 	146,920	
 	 	 	89,220,749	
 	
Total	343,457	
 	 	$	58.01	
 	 	340,920	

1 	During the third quarter of 2014, 2,537 shares were purchased from employees and/or directors in connection with shares purchased for a deferred compensation plan and income tax withholdings related to the vesting of restricted stock.  These shares were not purchased as part of the publicly announced program.  The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.	
 	 	
2 	The share repurchase program was first announced in July 2001.  As of September 30, 2014, $89.2 million remained of the total $2.0 billion total repurchase amount authorized by the Parent’s Board of Directors under the share repurchase program. The program has no set expiration or termination date.	

Item 6. Exhibits

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	October 27, 2014	 	Bank of Hawaii Corporation	
 	 	 	 	
 	 	By:	/s/ Peter S. Ho	
 	 	 	Peter S. Ho	
 	 	 	Chairman of the Board,	
 	 	 	Chief Executive Officer, and	
 	 	 	President	
 	 	 	 	
 	 	By:	/s/ Kent T. Lucien	
 	 	 	Kent T. Lucien	
 	 	 	Chief Financial Officer	

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Exhibit Index

Exhibit Number	 	
 	 	
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002	
 	 	
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002	
 	 	
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	
101	Interactive Data File	

Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended,
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Peter S. Ho, certify that:
 	 	
1.	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 	 	
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 	 	
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit and risk committee of the registrant’s board of directors:	
 	 	
a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

 	 	 	
Date:	October 27, 2014	/s/ Peter S. Ho	
 	 	Peter S. Ho	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer, and	
 	 	President	

Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended,
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Kent T. Lucien, certify that:
 	 	
1.	I have reviewed this quarterly report on Form 10-Q of Bank of Hawaii Corporation;	
 	 	
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	 	
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	 	
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 	 	
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 	 	
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit and risk committee of the registrant’s board of directors:	
 	 	
a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

 	 	 	
Date:	October 27, 2014	/s/ Kent T. Lucien	
 	 	Kent T. Lucien	
 	 	Chief Financial Officer	

Exhibit 32
 
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
We hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Bank of Hawaii Corporation (the "Company") for the quarter ended September 30, 2014 (the “Report”):
 	 	
•	fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and	
 	 	
•	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Bank of Hawaii Corporation.	

 	 	 	
Date:	October 27, 2014	/s/ Peter S. Ho	
 	 	Peter S. Ho	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer, and	
 	 	President	

 	 	/s/ Kent T. Lucien	
 	 	Kent T. Lucien	
 	 	Chief Financial Officer	
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.