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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, 2015
 
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 20, 2015, there were 43,291,544 shares of common stock outstanding.



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

1


Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2015

 
2014

 
2015

 
2014

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
75,874

 
$
68,089

 
$
220,400

 
$
197,433

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
10,192

 
10,286

 
30,663

 
31,743

Held-to-Maturity
20,689

 
26,067

 
67,928

 
80,894

Deposits
2

 
3

 
7

 
7

Funds Sold
291

 
176

 
818

 
481

Other
312

 
302

 
924

 
906

Total Interest Income
107,360

 
104,923

 
320,740

 
311,464

Interest Expense
 

 
 

 
 

 
 

Deposits
2,410

 
2,391

 
7,183

 
7,142

Securities Sold Under Agreements to Repurchase
6,307

 
6,523

 
19,118

 
19,385

Funds Purchased
3

 
3

 
9

 
10

Other Debt
749

 
627

 
1,987

 
1,903

Total Interest Expense
9,469

 
9,544

 
28,297

 
28,440

Net Interest Income
97,891

 
95,379

 
292,443

 
283,024

Provision for Credit Losses

 
(2,665
)
 

 
(4,864
)
Net Interest Income After Provision for Credit Losses
97,891

 
98,044

 
292,443

 
287,888

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
11,907

 
11,716

 
36,442

 
35,573

Mortgage Banking
3,291

 
1,646

 
8,453

 
5,455

Service Charges on Deposit Accounts
8,669

 
9,095

 
25,409

 
26,611

Fees, Exchange, and Other Service Charges
13,340

 
13,390

 
39,589

 
39,699

Investment Securities Gains, Net
24

 
1,858

 
10,341

 
6,097

Annuity and Insurance
1,721

 
2,348

 
5,650

 
6,401

Bank-Owned Life Insurance
1,609

 
1,644

 
5,431

 
4,765

Other
2,660

 
3,253

 
10,138

 
9,598

Total Noninterest Income
43,221

 
44,950

 
141,453

 
134,199

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
46,576

 
45,530

 
143,966

 
137,508

Net Occupancy
7,403

 
9,334

 
25,341

 
28,005

Net Equipment
4,804

 
4,473

 
14,918

 
13,745

Data Processing
3,920

 
3,665

 
11,366

 
11,156

Professional Fees
2,258

 
1,835

 
6,857

 
6,708

FDIC Insurance
2,139

 
1,750

 
6,347

 
5,881

Other
24,788

 
14,443

 
53,582

 
42,656

Total Noninterest Expense
91,888

 
81,030

 
262,377

 
245,659

Income Before Provision for Income Taxes
49,224

 
61,964

 
171,519

 
176,428

Provision for Income Taxes
14,948

 
20,195

 
53,647

 
54,577

Net Income
$
34,276

 
$
41,769

 
$
117,872

 
$
121,851

Basic Earnings Per Share
$
0.79

 
$
0.95

 
$
2.72

 
$
2.77

Diluted Earnings Per Share
$
0.79

 
$
0.95

 
$
2.71

 
$
2.75

Dividends Declared Per Share
$
0.45

 
$
0.45

 
$
1.35

 
$
1.35

Basic Weighted Average Shares
43,181,233

 
43,859,396

 
43,290,137

 
44,034,047

Diluted Weighted Average Shares
43,427,730

 
44,088,553

 
43,514,898

 
44,250,033

 
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)
 
2015

 
2014

 
2015

 
2014

Net Income
 
$
34,276

 
$
41,769

 
$
117,872

 
$
121,851

Other Comprehensive Income, Net of Tax:
 
 

 
 

 
 

 
 

Net Unrealized Gains on Investment Securities
 
7,051

 
403

 
4,735

 
15,291

Defined Benefit Plans
 
219

 
157

 
659

 
469

Total Other Comprehensive Income
 
7,270

 
560

 
5,394

 
15,760

Comprehensive Income
 
$
41,546

 
$
42,329

 
$
123,266

 
$
137,611

 
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,
2015

 
December 31,
2014

Assets
 

 
 

Interest-Bearing Deposits in Other Banks
$
3,609

 
$
2,873

Funds Sold
274,873

 
360,577

Investment Securities
 

 
 

Available-for-Sale
2,279,722

 
2,289,190

Held-to-Maturity (Fair Value of $4,181,613 and $4,504,495)
4,121,768

 
4,466,679

Loans Held for Sale
3,222

 
5,136

Loans and Leases
7,689,772

 
6,897,589

Allowance for Loan and Lease Losses
(104,038
)
 
(108,688
)
Net Loans and Leases
7,585,734

 
6,788,901

Total Earning Assets
14,268,928

 
13,913,356

Cash and Due From Banks
208,601

 
172,126

Premises and Equipment, Net
108,987

 
109,854

Accrued Interest Receivable
47,512

 
44,654

Foreclosed Real Estate
1,392

 
2,311

Mortgage Servicing Rights
23,301

 
24,695

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
266,568

 
262,807

Other Assets
207,317

 
225,888

Total Assets
$
15,164,123

 
$
14,787,208

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,102,713

 
$
3,832,943

Interest-Bearing Demand
2,631,542

 
2,559,570

Savings
5,016,462

 
4,806,575

Time
1,186,245

 
1,434,001

Total Deposits
12,936,962

 
12,633,089

Funds Purchased
8,459

 
8,459

Securities Sold Under Agreements to Repurchase
632,138

 
688,601

Other Debt
270,801

 
173,912

Retirement Benefits Payable
54,978

 
55,477

Accrued Interest Payable
5,869

 
5,148

Taxes Payable and Deferred Taxes
25,294

 
27,777

Other Liabilities
131,268

 
139,659

Total Liabilities
14,065,769

 
13,732,122

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2015 - 57,749,071 / 43,342,940
and December 31, 2014 - 57,634,755 / 43,724,208)
575

 
574

Capital Surplus
539,112

 
531,932

Accumulated Other Comprehensive Loss
(21,292
)
 
(26,686
)
Retained Earnings
1,293,416

 
1,234,801

Treasury Stock, at Cost (Shares: September 30, 2015 - 14,406,131
and December 31, 2014 - 13,910,547)
(713,457
)
 
(685,535
)
Total Shareholders’ Equity
1,098,354

 
1,055,086

Total Liabilities and Shareholders’ Equity
$
15,164,123

 
$
14,787,208

 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, 2014
43,724,208

 
$
574

 
$
531,932

 
$
(26,686
)
 
$
1,234,801

 
$
(685,535
)
 
$
1,055,086

Net Income

 

 

 

 
117,872

 

 
117,872

Other Comprehensive Income

 

 

 
5,394

 

 

 
5,394

Share-Based Compensation

 

 
5,698

 

 

 

 
5,698

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

 
1

 
1,482

 

 
(376
)
 
11,011

 
12,118

Common Stock Repurchased
(628,119
)
 

 

 

 

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

 

 

 

 
(58,881
)
 

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

 
$
575

 
$
539,112

 
$
(21,292
)
 
$
1,293,416

 
$
(713,457
)
 
$
1,098,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

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)
2015

 
2014

Operating Activities
 

 
 

Net Income
$
117,872

 
$
121,851

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

 
 

Provision for Credit Losses

 
(4,864
)
Impairment on Equipment Held for Sale
9,453

 

Depreciation and Amortization
9,541

 
9,280

Amortization of Deferred Loan and Lease Fees
(1,282
)
 
(1,341
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
38,753

 
37,592

Share-Based Compensation
5,698

 
5,831

Benefit Plan Contributions
(1,413
)
 
(1,229
)
Deferred Income Taxes
(10,618
)
 
(8,522
)
Net Gains on Sales of Loans and Leases
(2,510
)
 
(2,285
)
Net Gains on Sales of Investment Securities
(10,341
)
 
(6,097
)
Proceeds from Sales of Loans Held for Sale
142,391

 
64,545

Originations of Loans Held for Sale
(137,293
)
 
(58,448
)
Tax Benefits from Share-Based Compensation
(403
)
 
(435
)
Net Change in Other Assets and Other Liabilities
9,719

 
(22,210
)
Net Cash Provided by Operating Activities
169,567

 
133,668

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
256,581

 
251,633

Proceeds from Sales
68,166

 
14,609

Purchases
(317,458
)
 
(230,007
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
715,776

 
586,037

Purchases
(389,213
)
 
(418,825
)
Net Change in Loans and Leases
(800,482
)
 
(516,395
)
Premises and Equipment, Net
(8,673
)
 
(8,204
)
Net Cash Used in Investing Activities
(475,303
)
 
(321,152
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
303,873

 
446,785

Net Change in Short-Term Borrowings
(56,463
)
 
(71,369
)
Proceeds from Long-Term Debt
100,000

 

Tax Benefits from Share-Based Compensation
403

 
435

Proceeds from Issuance of Common Stock
7,244

 
8,317

Repurchase of Common Stock
(38,933
)
 
(46,910
)
Cash Dividends Paid
(58,881
)
 
(59,948
)
Net Cash Provided by Financing Activities
257,243

 
277,310

 
 
 
 
Net Change in Cash and Cash Equivalents
(48,493
)
 
89,826

Cash and Cash Equivalents at Beginning of Period
535,576

 
463,746

Cash and Cash Equivalents at End of Period
$
487,083

 
$
553,572

Supplemental Information
 

 
 

Cash Paid for Interest
$
27,168

 
$
26,726

Cash Paid for Income Taxes
52,808

 
46,369

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
787

 
3,377

Transfers from Loans to Loans Held for Sale
93,539

 

 
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 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, 2014.  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, 2015.

Use of Estimates in the Preparation of Financial Statements

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

Accounting Standards Adopted in 2015

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 (see Note 5 to the Consolidated Financial Statements). The Company adopted ASU No. 2014-01 effective January 1, 2015. 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. Prior to adoption of ASU No. 2014-01, the Company accounted for such investments using the effective yield method and continued to do so for these pre-existing investments after adopting ASU No. 2014-01. The Company expects future investments to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. There were no new investments being amortized since the adoption of ASU No. 2014-01 on January 1, 2015, and therefore, the adoption of ASU No. 2014-01 has not had a material impact on the Company's Consolidated Financial Statements.

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

7


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. The Company adopted ASU No. 2014-04 effective January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact 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, effective June 30, 2015, about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings (see Note 6 to the Consolidated Financial Statements). The Company adopted the amendments in this ASU effective January 1, 2015. As of September 30, 2015, 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 did not have a material impact on the Company's Consolidated Financial Statements.

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. 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. The Company adopted ASU No. 2014-12 effective January 1, 2015. As of September 30, 2015, 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 did not 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 and 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. The Company adopted ASU No. 2014-14 effective January 1, 2015. The adoption of ASU No. 2014-14 did not have a material impact on the Company's Consolidated Financial Statements.

Accounting Standards Pending Adoption

In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which

8


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 was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date" which defers the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). 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 February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of ASU No. 2015-02 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s current method of accounting for fees paid in a cloud computing arrangement is consistent with the accounting guidance provided by ASU No. 2015-05. Therefore, the adoption of ASU No. 2015-05 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, 2015 and December 31, 2014 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

September 30, 2015
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
363,780

 
$
5,042

 
$
(165
)
 
$
368,657

Debt Securities Issued by States and Political Subdivisions
715,515

 
22,107

 
(412
)
 
737,210

Debt Securities Issued by Corporations
313,166

 
390

 
(2,995
)
 
310,561

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
341,457

 
8,244

 
(1,232
)
 
348,469

    Residential - U.S. Government-Sponsored Enterprises
407,568

 
4,693

 

 
412,261

    Commercial - Government Agencies
105,735

 

 
(3,171
)
 
102,564

Total Mortgage-Backed Securities
854,760

 
12,937

 
(4,403
)
 
863,294

Total
$
2,247,221

 
$
40,476

 
$
(7,975
)
 
$
2,279,722

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
499,731

 
$
4,613

 
$

 
$
504,344

Debt Securities Issued by States and Political Subdivisions
246,884

 
15,917

 

 
262,801

Debt Securities Issued by Corporations
155,175

 
1,691

 
(823
)
 
156,043

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,335,710

 
39,593

 
(11,588
)
 
2,363,715

    Residential - U.S. Government-Sponsored Enterprises
619,545

 
6,864

 
(4
)
 
626,405

    Commercial - Government Agencies
264,723

 
4,321

 
(739
)
 
268,305

Total Mortgage-Backed Securities
3,219,978

 
50,778


(12,331
)

3,258,425

Total
$
4,121,768

 
$
72,999

 
$
(13,154
)
 
$
4,181,613

 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
325,365

 
$
5,933

 
$
(40
)
 
$
331,258

Debt Securities Issued by States and Political Subdivisions
723,474

 
21,941

 
(1,445
)
 
743,970

Debt Securities Issued by Corporations
298,272

 
546

 
(3,985
)
 
294,833

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
452,493

 
10,986

 
(1,043
)
 
462,436

    Residential - U.S. Government-Sponsored Enterprises
276,390

 
2,262

 
(191
)
 
278,461

    Commercial - Government Agencies
186,813

 

 
(8,581
)
 
178,232

Total Mortgage-Backed Securities
915,696

 
13,248

 
(9,815
)
 
919,129

Total
$
2,262,807

 
$
41,668

 
$
(15,285
)
 
$
2,289,190

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
498,767

 
$
2,008

 
$
(1,159
)
 
$
499,616

Debt Securities Issued by States and Political Subdivisions
249,559

 
15,459

 

 
265,018

Debt Securities Issued by Corporations
166,686

 
109

 
(3,442
)
 
163,353

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,862,369

 
45,407

 
(20,636
)
 
2,887,140

    Residential - U.S. Government-Sponsored Enterprises
379,365

 
3,635

 
(15
)
 
382,985

    Commercial - Government Agencies
309,933

 
241

 
(3,791
)
 
306,383

Total Mortgage-Backed Securities
3,551,667

 
49,283

 
(24,442
)
 
3,576,508

Total
$
4,466,679

 
$
66,859

 
$
(29,043
)
 
$
4,504,495


10



The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2015.  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
$
128,506

 
$
129,124

Due After One Year Through Five Years
450,881

 
454,110

Due After Five Years Through Ten Years
436,542

 
447,542

Due After Ten Years
73,243

 
77,701

 
1,089,172

 
1,108,477

 
 
 
 
Debt Securities Issued by Government Agencies
303,289

 
307,951

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
341,457

 
348,469

    Residential - U.S. Government-Sponsored Enterprises
407,568

 
412,261

    Commercial - Government Agencies
105,735

 
102,564

Total Mortgage-Backed Securities
854,760

 
863,294

Total
$
2,247,221

 
$
2,279,722

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
9,994

 
$
10,008

Due After One Year Through Five Years
500,499

 
505,481

Due After Five Years Through Ten Years
286,833

 
295,665

Due After Ten Years
104,464

 
112,034

 
901,790

 
923,188

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
2,335,710

 
2,363,715

    Residential - U.S. Government-Sponsored Enterprises
619,545

 
626,405

    Commercial - Government Agencies
264,723

 
268,305

Total Mortgage-Backed Securities
3,219,978

 
3,258,425

Total
$
4,121,768

 
$
4,181,613


Investment securities with carrying values of $2.5 billion and $2.8 billion as of September 30, 2015 and December 31, 2014, 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, 2015 and 2014.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2015

 
2014

 
2015

 
2014
Gross Gains on Sales of Investment Securities
$
1,504

 
$
1,858

 
$
11,821

 
$
6,097

Gross Losses on Sales of Investment Securities
(1,480
)
 

 
(1,480
)
 

Net Gains on Sales of Investment Securities
$
24

 
$
1,858

 
$
10,341

 
$
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, 2015
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
33,551

 
$
(156
)
 
$
5,072

 
$
(9
)
 
$
38,623

 
$
(165
)
Debt Securities Issued by States
   and Political Subdivisions
55,896

 
(412
)
 

 

 
55,896

 
(412
)
Debt Securities Issued by Corporations
101,626

 
(1,392
)
 
143,489

 
(1,603
)
 
245,115

 
(2,995
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
34,152

 
(115
)
 
9,832

 
(1,117
)
 
43,984

 
(1,232
)
    Commercial - Government Agencies

 

 
102,564

 
(3,171
)
 
102,564

 
(3,171
)
Total Mortgage-Backed Securities
34,152

 
(115
)
 
112,396

 
(4,288
)
 
146,548

 
(4,403
)
Total
$
225,225

 
$
(2,075
)
 
$
260,957

 
$
(5,900
)
 
$
486,182

 
$
(7,975
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by Corporations
$

 
$

 
$
74,246

 
$
(823
)
 
$
74,246

 
$
(823
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
380,442

 
(2,777
)
 
440,675

 
(8,811
)
 
821,117

 
(11,588
)
    Residential - U.S. Government-Sponsored Enterprises
14,425

 
(4
)
 

 

 
14,425

 
(4
)
    Commercial - Government Agencies
27,251

 
(359
)
 
55,578

 
(380
)
 
82,829

 
(739
)
Total Mortgage-Backed Securities
422,118

 
(3,140
)
 
496,253

 
(9,191
)
 
918,371

 
(12,331
)
Total
$
422,118

 
$
(3,140
)
 
$
570,499

 
$
(10,014
)
 
$
992,617

 
$
(13,154
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
1,729

 
$
(2
)
 
$
5,546

 
$
(38
)
 
$
7,275

 
$
(40
)
Debt Securities Issued by States
     and Political Subdivisions
78,068

 
(305
)
 
94,543

 
(1,140
)
 
172,611

 
(1,445
)
Debt Securities Issued by Corporations
73,829

 
(1,171
)
 
180,335

 
(2,814
)
 
254,164

 
(3,985
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
3,025

 
(8
)
 
12,215

 
(1,035
)
 
15,240

 
(1,043
)
     Residential - U.S. Government-Sponsored Enterprises
103,824

 
(191
)
 

 

 
103,824

 
(191
)
     Commercial - Government Agencies

 

 
178,232

 
(8,581
)
 
178,232

 
(8,581
)
Total Mortgage-Backed Securities
106,849

 
(199
)
 
190,447

 
(9,616
)
 
297,296

 
(9,815
)
Total
$
260,475

 
$
(1,677
)
 
$
470,871

 
$
(13,608
)
 
$
731,346

 
$
(15,285
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$
70,016

 
$
(134
)
 
$
144,222

 
$
(1,025
)
 
$
214,238

 
$
(1,159
)
Debt Securities Issued by Corporations
46,196

 
(349
)
 
82,109

 
(3,093
)
 
128,305

 
(3,442
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
280,967

 
(1,207
)
 
845,911

 
(19,429
)
 
1,126,878

 
(20,636
)
     Residential - U.S. Government-Sponsored Enterprises
45,754

 
(15
)
 

 

 
45,754

 
(15
)
     Commercial - Government Agencies
124,594

 
(179
)
 
171,091

 
(3,612
)
 
295,685

 
(3,791
)
Total Mortgage-Backed Securities
451,315

 
(1,401
)
 
1,017,002

 
(23,041
)
 
1,468,317

 
(24,442
)
Total
$
567,527

 
$
(1,884
)
 
$
1,243,333

 
$
(27,159
)
 
$
1,810,860

 
$
(29,043
)


12


The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2015, which were comprised of 125 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, 2015 and December 31, 2014, 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 basis, which may be at maturity.

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(dollars in thousands)
2015

 
2014

 
2015

 
2014

Taxable
$
25,569

 
$
31,053

 
$
82,638

 
$
96,796

Non-Taxable
5,312

 
5,300

 
15,953

 
15,841

Total Interest Income from Investment Securities
$
30,881

 
$
36,353

 
$
98,591

 
$
112,637


As of September 30, 2015, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $579.0 million, representing 58% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 91% were credit-rated Aa2 or better by Moody's while most of the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Of the Company's total Hawaii municipal bond holdings, 77% were general obligation issuances. As of September 30, 2015, 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, 2015 and December 31, 2014, the carrying value of the Company’s Federal Home Loan Bank of Des Moines (“FHLB Des Moines”) stock and Federal Reserve Bank stock was as follows:
(dollars in thousands)
September 30,
2015

 
December 31,
2014

Federal Home Loan Bank Stock
$
20,000

 
$
47,075

Federal Reserve Bank Stock
19,836

 
19,299

Total
$
39,836

 
$
66,374


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.

Effective May 31, 2015, FHLB Des Moines completed its previously announced merger with the Federal Home Loan Bank of Seattle (“FHLB Seattle”). The continuing bank, FHLB Des Moines, remains headquartered in Des Moines with a western regional office in Seattle. Prior to the merger, the Company held stock in FHLB Seattle. Pursuant to the terms of the Merger Agreement, each share of FHLB Seattle stock was converted into one share of FHLB Des Moines stock. In addition, upon the merger, the Company's excess FHLB stock was redeemed and the Company’s membership effectively transferred to FHLB Des Moines.  The merger did not have a material impact on the Company's Consolidated Financial Statements or the Company's dealings with the continuing bank.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares. As of September 30, 2015, the conversion ratio was 1.6483.

13



During the first nine months of 2015, the Company recorded a $10.1 million net gain on the sale of 95,000 Visa Class B shares. 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 outcome of the Visa litigation mentioned above, the remaining 288,714 Class B shares (475,887 Class A equivalents) that the Company owns are carried at a zero cost basis. The Company also contributed 13,800 Visa Class B restricted shares to the Bank of Hawaii Foundation during the first nine months of 2015. The contribution had no impact on noninterest expense; however, the contribution favorably impacted our effective tax rate in 2015.

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, 2015 and December 31, 2014:

(dollars in thousands)
September 30,
2015

 
December 31,
2014

Commercial
 

 
 

Commercial and Industrial
$
1,169,817

 
$
1,055,243

Commercial Mortgage
1,622,119

 
1,437,513

Construction
129,254

 
109,183

Lease Financing
202,055

 
226,189

Total Commercial
3,123,245

 
2,828,128

Consumer
 

 
 

Residential Mortgage
2,875,605

 
2,571,090

Home Equity
993,817

 
866,688

Automobile
367,640

 
323,848

Other 1
329,465

 
307,835

Total Consumer
4,566,527

 
4,069,461

Total Loans and Leases
$
7,689,772

 
$
6,897,589

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

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $1.8 million and $0.3 million for the three months ended September 30, 2015 and 2014, respectively, and $4.1 million and $1.6 million for the nine months ended September 30, 2015 and 2014, respectively.

14


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, 2015 and 2014.  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, 2015 and 2014.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
67,005

 
$
39,001

 
$
106,006

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

 
1,921

 
2,425

Net Loans and Leases Recovered (Charged-Off)
344

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

 

Balance at End of Period
$
64,641

 
$
39,397

 
$
104,038

Nine Months Ended September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
64,551

 
$
44,137

 
$
108,688

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

 
5,601

 
7,327

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

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

 

Balance at End of Period
$
64,641

 
$
39,397

 
$
104,038

As of September 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
1,977

 
$
3,336

 
$
5,313

Collectively Evaluated for Impairment
62,664

 
36,061

 
98,725

Total
$
64,641

 
$
39,397

 
$
104,038

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
29,016

 
$
39,013

 
$
68,029

Collectively Evaluated for Impairment
3,094,229

 
4,527,514

 
7,621,743

Total
$
3,123,245

 
$
4,566,527

 
$
7,689,772

 
 
 
 
 
 
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


15


Credit Quality Indicators

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

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

Pass:
Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

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

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


16


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, 2015 and December 31, 2014.
 
September 30, 2015
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
1,122,454

 
$
1,551,159

 
$
127,541

 
$
201,473

 
$
3,002,627

Special Mention
20,726

 
31,145

 
88

 
85

 
52,044

Classified