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EX-10.2 - EXHIBIT 10.2 - BANK OF HAWAII CORPboh_20160630xex102.htm
EX-10.1 - EXHIBIT 10.1 - BANK OF HAWAII CORPboh_20160630xex101.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
ý              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
    ended June 30, 2016
 
or
 
o                 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from              to            
 
Commission File Number: 1-6887
 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
99-0148992
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
130 Merchant Street, Honolulu, Hawaii
 
96813
(Address of principal executive offices)
 
(Zip Code)
 1-888-643-3888
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No ý
 
As of July 19, 2016, there were 42,866,947 shares of common stock outstanding.



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

1


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

 
2015

 
2016

 
2015

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
82,323

 
$
73,565

 
$
163,218

 
$
144,526

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
10,521

 
10,273

 
21,335

 
20,471

Held-to-Maturity
20,168

 
22,832

 
40,559

 
47,239

Deposits
2

 
2

 
6

 
5

Funds Sold
618

 
268

 
1,371

 
527

Other
153

 
310

 
365

 
612

Total Interest Income
113,785

 
107,250

 
226,854

 
213,380

Interest Expense
 

 
 

 
 

 
 

Deposits
3,081

 
2,405

 
5,967

 
4,773

Securities Sold Under Agreements to Repurchase
6,134

 
6,440

 
12,287

 
12,811

Funds Purchased
3

 
3

 
6

 
6

Other Debt
1,017

 
620

 
2,020

 
1,238

Total Interest Expense
10,235

 
9,468

 
20,280

 
18,828

Net Interest Income
103,550

 
97,782

 
206,574

 
194,552

Provision for Credit Losses
1,000

 

 
(1,000
)
 

Net Interest Income After Provision for Credit Losses
102,550

 
97,782

 
207,574

 
194,552

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
12,707

 
12,355

 
23,963

 
24,535

Mortgage Banking
4,088

 
3,469

 
7,277

 
5,162

Service Charges on Deposit Accounts
8,150

 
8,203

 
16,593

 
16,740

Fees, Exchange, and Other Service Charges
13,978

 
13,352

 
27,422

 
26,249

Investment Securities Gains (Losses), Net
(312
)
 
86

 
10,868

 
10,317

Annuity and Insurance
2,006

 
1,885

 
3,907

 
3,929

Bank-Owned Life Insurance
1,551

 
2,088

 
3,099

 
3,822

Other
4,351

 
4,487

 
9,597

 
7,478

Total Noninterest Income
46,519

 
45,925

 
102,726

 
98,232

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
50,289

 
47,610

 
100,803

 
97,390

Net Occupancy
7,158

 
8,605

 
14,161

 
17,938

Net Equipment
5,065

 
4,826

 
10,474

 
10,114

Data Processing
3,972

 
3,673

 
7,923

 
7,446

Professional Fees
2,047

 
2,265

 
4,686

 
4,599

FDIC Insurance
2,144

 
2,068

 
4,496

 
4,208

Other
15,396

 
14,527

 
30,914

 
28,794

Total Noninterest Expense
86,071

 
83,574

 
173,457

 
170,489

Income Before Provision for Income Taxes
62,998

 
60,133

 
136,843

 
122,295

Provision for Income Taxes
18,753

 
18,979

 
42,388

 
38,699

Net Income
$
44,245

 
$
41,154

 
$
94,455

 
$
83,596

Basic Earnings Per Share
$
1.04

 
$
0.95

 
$
2.21

 
$
1.93

Diluted Earnings Per Share
$
1.03

 
$
0.95

 
$
2.19

 
$
1.92

Dividends Declared Per Share
$
0.48

 
$
0.45

 
$
0.93

 
$
0.90

Basic Weighted Average Shares
42,729,731

 
43,305,813

 
42,825,369

 
43,345,667

Diluted Weighted Average Shares
42,942,960

 
43,518,349

 
43,033,199

 
43,558,664

 
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
 
Six Months Ended
 
 
June 30,
 
June 30,
(dollars in thousands)
 
2016

 
2015

 
2016

 
2015

Net Income
 
$
44,245

 
$
41,154

 
$
94,455

 
$
83,596

Other Comprehensive Income (Loss), Net of Tax:
 
 

 
 

 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
 
5,157

 
(7,610
)
 
13,851

 
(2,316
)
Defined Benefit Plans
 
141

 
220

 
282

 
440

Total Other Comprehensive Income (Loss)
 
5,298

 
(7,390
)
 
14,133

 
(1,876
)
Comprehensive Income
 
$
49,543

 
$
33,764

 
$
108,588

 
$
81,720

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

3


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

 
December 31,
2015

Assets
 

 
 

Interest-Bearing Deposits in Other Banks
$
3,819

 
$
4,130

Funds Sold
615,395

 
592,892

Investment Securities
 

 
 

Available-for-Sale
2,299,638

 
2,256,818

Held-to-Maturity (Fair Value of $3,890,220 and $4,006,412)
3,798,200

 
3,982,736

Loans Held for Sale
105,824

 
4,808

Loans and Leases
8,331,469

 
7,878,985

Allowance for Loan and Lease Losses
(103,932
)
 
(102,880
)
Net Loans and Leases
8,227,537

 
7,776,105

Total Earning Assets
15,050,413

 
14,617,489

Cash and Due From Banks
133,836

 
158,699

Premises and Equipment, Net
109,832

 
111,199

Accrued Interest Receivable
45,709

 
44,719

Foreclosed Real Estate
1,728

 
824

Mortgage Servicing Rights
19,631

 
23,002

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
271,274

 
268,175

Other Assets
196,961

 
199,392

Total Assets
$
15,860,901

 
$
15,455,016

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,383,496

 
$
4,286,331

Interest-Bearing Demand
2,838,744

 
2,761,930

Savings
5,165,808

 
5,025,191

Time
1,255,759

 
1,177,651

Total Deposits
13,643,807

 
13,251,103

Funds Purchased
7,333

 
7,333

Securities Sold Under Agreements to Repurchase
586,785

 
628,857

Other Debt
267,970

 
245,786

Retirement Benefits Payable
47,438

 
47,374

Accrued Interest Payable
5,532

 
5,032

Taxes Payable and Deferred Taxes
20,979

 
17,737

Other Liabilities
123,838

 
135,534

Total Liabilities
14,703,682

 
14,338,756

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 30, 2016 - 57,856,419 / 42,916,163
and December 31, 2015 - 57,749,071 / 43,282,153)
576

 
575

Capital Surplus
546,928

 
542,041

Accumulated Other Comprehensive Loss
(9,424
)
 
(23,557
)
Retained Earnings
1,370,308

 
1,316,260

Treasury Stock, at Cost (Shares: June 30, 2016 - 14,940,256
and December 31, 2015 - 14,466,918)
(751,169
)
 
(719,059
)
Total Shareholders’ Equity
1,157,219

 
1,116,260

Total Liabilities and Shareholders’ Equity
$
15,860,901

 
$
15,455,016

 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, 2015
43,282,153

 
$
575

 
$
542,041

 
$
(23,557
)
 
$
1,316,260

 
$
(719,059
)
 
$
1,116,260

Net Income

 

 

 

 
94,455

 

 
94,455

Other Comprehensive Income

 

 

 
14,133

 

 

 
14,133

Share-Based Compensation

 

 
3,314

 

 

 

 
3,314

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
201,445

 
1

 
1,573

 

 
(277
)
 
4,900

 
6,197

Common Stock Repurchased
(567,435
)
 

 

 

 

 
(37,010
)
 
(37,010
)
Cash Dividends Declared ($0.93 per share)

 

 

 

 
(40,130
)
 

 
(40,130
)
Balance as of June 30, 2016
42,916,163

 
$
576

 
$
546,928

 
$
(9,424
)
 
$
1,370,308

 
$
(751,169
)
 
$
1,157,219

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

 
$
574

 
$
531,932

 
$
(26,686
)
 
$
1,234,801

 
$
(685,535
)
 
$
1,055,086

Net Income

 

 

 

 
83,596

 

 
83,596

Other Comprehensive Loss

 

 

 
(1,876
)
 

 

 
(1,876
)
Share-Based Compensation

 

 
3,731

 

 

 

 
3,731

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
213,289

 
1

 
1,119

 

 
(408
)
 
5,394

 
6,106

Common Stock Repurchased
(402,477
)
 

 

 

 

 
(24,387
)
 
(24,387
)
Cash Dividends Declared ($0.90 per share)

 

 

 

 
(39,317
)
 

 
(39,317
)
Balance as of June 30, 2015
43,535,020

 
$
575

 
$
536,782

 
$
(28,562
)
 
$
1,278,672

 
$
(704,528
)
 
$
1,082,939

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

5


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

 
2015

Operating Activities
 

 
 

Net Income
$
94,455

 
$
83,596

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

 
 

Provision for Credit Losses
(1,000
)
 

Depreciation and Amortization
6,596

 
6,386

Amortization of Deferred Loan and Lease Fees
(773
)
 
(1,076
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
22,277

 
25,314

Share-Based Compensation
3,314

 
3,731

Benefit Plan Contributions
(655
)
 
(1,072
)
Deferred Income Taxes
(5,354
)
 
(4,803
)
Net Gains on Sales of Loans and Leases
(4,095
)
 
(1,967
)
Net Gains on Sales of Investment Securities
(10,868
)
 
(10,317
)
Proceeds from Sales of Loans Held for Sale
87,035

 
69,856

Originations of Loans Held for Sale
(181,939
)
 
(81,374
)
Tax Benefits from Share-Based Compensation
(884
)
 
(356
)
Net Change in Other Assets and Other Liabilities
(11,839
)
 
28,133

Net Cash (Used in) Provided by Operating Activities
(3,730
)
 
116,051

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
166,334

 
174,152

Proceeds from Sales
11,094

 
10,384

Purchases
(197,696
)
 
(177,532
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
352,035

 
410,311

Purchases
(178,347
)
 
(154,681
)
Net Change in Loans and Leases
(451,812
)
 
(535,834
)
Premises and Equipment, Net
(5,229
)
 
(4,971
)
Net Cash Used in Investing Activities
(303,621
)
 
(278,171
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
392,704

 
457,606

Net Change in Short-Term Borrowings
(42,072
)
 
(16,291
)
Proceeds from Long-Term Debt
75,000

 

Repayments of Long-Term Debt
(50,000
)
 

Tax Benefits from Share-Based Compensation
884

 
356

Proceeds from Issuance of Common Stock
5,304

 
5,469

Repurchase of Common Stock
(37,010
)
 
(24,387
)
Cash Dividends Paid
(40,130
)
 
(39,317
)
Net Cash Provided by Financing Activities
304,680

 
383,436

 
 
 
 
Net Change in Cash and Cash Equivalents
(2,671
)
 
221,316

Cash and Cash Equivalents at Beginning of Period
755,721

 
535,576

Cash and Cash Equivalents at End of Period
$
753,050

 
$
756,892

Supplemental Information
 

 
 

Cash Paid for Interest
$
19,469

 
$
18,313

Cash Paid for Income Taxes
42,229

 
34,339

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
1,040

 
83

Transfers from Loans to Loans Held for Sale
103,575

 
61,526

 
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 accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”). 

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

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015

Use of Estimates in the Preparation of Financial Statements

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

Variable Interest Entities

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

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

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

Unfunded commitments to fund these low-income housing partnerships were $19.7 million and $25.3 million as of June 30, 2016 and December 31, 2015, respectively. These unfunded commitments are unconditional and legally binding and are

7


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

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

The investments in these entities are initially recorded at cost, which approximates the maximum exposure to loss as a result of the Company's involvement with these unconsolidated entities. The balance of the Company's investments in these entities was $73.0 million and $79.0 million as of June 30, 2016 and December 31, 2015, respectively, and is included in other assets in the consolidated statements of condition.

Accounting Standards Adopted in 2016

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

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

Accounting Standards Pending Adoption

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

8


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

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

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

9


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

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

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


10


Note 2.  Investment Securities

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

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

June 30, 2016
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
435,890

 
$
3,334

 
$
(783
)
 
$
438,441

Debt Securities Issued by States and Political Subdivisions
677,673

 
31,826

 
(32
)
 
709,467

Debt Securities Issued by Corporations
313,077

 
211

 
(4,315
)
 
308,973

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
252,491

 
6,506

 
(854
)
 
258,143

    Residential - U.S. Government-Sponsored Enterprises
481,378

 
8,784

 

 
490,162

    Commercial - Government Agencies
96,161

 
8

 
(1,717
)
 
94,452

Total Mortgage-Backed Securities
830,030

 
15,298

 
(2,571
)
 
842,757

Total
$
2,256,670

 
$
50,669

 
$
(7,701
)
 
$
2,299,638

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
489,766

 
$
5,918

 
$

 
$
495,684

Debt Securities Issued by States and Political Subdivisions
244,151

 
21,280

 

 
265,431

Debt Securities Issued by Corporations
143,498

 
3,203

 
(101
)
 
146,600

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
1,933,286

 
43,424

 
(3,107
)
 
1,973,603

    Residential - U.S. Government-Sponsored Enterprises
740,826

 
14,496

 

 
755,322

    Commercial - Government Agencies
246,673

 
7,034

 
(127
)
 
253,580

Total Mortgage-Backed Securities
2,920,785

 
64,954


(3,234
)

2,982,505

Total
$
3,798,200

 
$
95,355

 
$
(3,335
)
 
$
3,890,220

 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

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

 
$
3,472

 
$
(838
)
 
$
358,894

Debt Securities Issued by States and Political Subdivisions
709,724

 
22,498

 
(304
)
 
731,918

Debt Securities Issued by Corporations
313,136

 
236

 
(4,502
)
 
308,870

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
310,966

 
6,546

 
(1,267
)
 
316,245

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

 
1,368

 
(2,264
)
 
441,864

    Commercial - Government Agencies
103,227

 

 
(4,200
)
 
99,027

Total Mortgage-Backed Securities
856,953

 
7,914

 
(7,731
)
 
857,136

Total
$
2,236,073

 
$
34,120

 
$
(13,375
)
 
$
2,256,818

Held-to-Maturity:
 

 
 

 
 

 
 

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

 
$
1,359

 
$
(1,139
)
 
$
489,967

Debt Securities Issued by States and Political Subdivisions
245,980

 
17,114

 

 
263,094

Debt Securities Issued by Corporations
151,301

 
368

 
(2,041
)
 
149,628

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,191,138

 
27,893

 
(19,067
)
 
2,199,964

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

 
1,656

 
(2,616
)
 
646,802

    Commercial - Government Agencies
256,808

 
2,381

 
(2,232
)
 
256,957

Total Mortgage-Backed Securities
3,095,708

 
31,930

 
(23,915
)
 
3,103,723

Total
$
3,982,736

 
$
50,771

 
$
(27,095
)
 
$
4,006,412


11



The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2016.  Debt securities issued by government agencies (Small Business Administration securities) and mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
(dollars in thousands)
Amortized Cost

 
Fair Value

Available-for-Sale:
 

 
 

Due in One Year or Less
$
68,513

 
$
68,727

Due After One Year Through Five Years
492,175

 
498,828

Due After Five Years Through Ten Years
380,577

 
397,253

Due After Ten Years
50,030

 
54,179

 
991,295

 
1,018,987

 
 
 
 
Debt Securities Issued by Government Agencies
435,345

 
437,894

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
252,491

 
258,143

    Residential - U.S. Government-Sponsored Enterprises
481,378

 
490,162

    Commercial - Government Agencies
96,161

 
94,452

Total Mortgage-Backed Securities
830,030

 
842,757

Total
$
2,256,670

 
$
2,299,638

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
29,982

 
$
30,055

Due After One Year Through Five Years
492,193

 
499,765

Due After Five Years Through Ten Years
284,109

 
299,933

Due After Ten Years
71,131

 
77,962

 
877,415

 
907,715

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
1,933,286

 
1,973,603

    Residential - U.S. Government-Sponsored Enterprises
740,826

 
755,322

    Commercial - Government Agencies
246,673

 
253,580

Total Mortgage-Backed Securities
2,920,785

 
2,982,505

Total
$
3,798,200

 
$
3,890,220


Investment securities with carrying values of $2.6 billion and $2.5 billion as of June 30, 2016 and December 31, 2015, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

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

 
2015

 
2016

 
2015

Gross Gains on Sales of Investment Securities
$

 
$
86

 
$
11,180

 
$
10,317

Gross Losses on Sales of Investment Securities
(312
)
 

 
(312
)
 

Net Gains (Losses) on Sales of Investment Securities
$
(312
)
 
$
86

 
$
10,868

 
$
10,317


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

12


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

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

June 30, 2016
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
174,593

 
$
(591
)
 
$
26,033

 
$
(192
)
 
$
200,626

 
$
(783
)
Debt Securities Issued by States
   and Political Subdivisions
202

 

 
6,766

 
(32
)
 
6,968

 
(32
)
Debt Securities Issued by Corporations
24,038

 
(962
)
 
196,640

 
(3,353
)
 
220,678

 
(4,315
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
6,297

 
(9
)
 
8,263

 
(845
)
 
14,560

 
(854
)
    Commercial - Government Agencies

 

 
89,157

 
(1,717
)
 
89,157

 
(1,717
)
Total Mortgage-Backed Securities
6,297

 
(9
)
 
97,420

 
(2,562
)
 
103,717

 
(2,571
)
Total
$
205,130

 
$
(1,562
)
 
$
326,859

 
$
(6,139
)
 
$
531,989

 
$
(7,701
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by Corporations
$

 
$

 
$
17,353

 
$
(101
)
 
$
17,353

 
$
(101
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
14,309

 
(19
)
 
308,795

 
(3,088
)
 
323,104

 
(3,107
)
    Commercial - Government Agencies

 

 
19,201

 
(127
)
 
19,201

 
(127
)
Total Mortgage-Backed Securities
14,309

 
(19
)
 
327,996

 
(3,215
)
 
342,305

 
(3,234
)
Total
$
14,309

 
$
(19
)
 
$
345,349

 
$
(3,316
)
 
$
359,658

 
$
(3,335
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

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

 
$
(822
)
 
$
5,452

 
$
(16
)
 
$
149,712

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

 
(252
)
 
6,798

 
(52
)
 
79,046

 
(304
)
Debt Securities Issued by Corporations
101,269

 
(1,747
)
 
162,304

 
(2,755
)
 
263,573

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

 
(130
)
 
9,117

 
(1,137
)
 
39,796

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

 
(2,264
)
 

 

 
346,603

 
(2,264
)
     Commercial - Government Agencies

 

 
99,026

 
(4,200
)
 
99,026

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

 
(2,394
)
 
108,143

 
(5,337
)
 
485,425

 
(7,731
)
Total
$
695,059

 
$
(5,215
)
 
$
282,697

 
$
(8,160
)
 
$
977,756

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

 
$
(1,139
)
 
$

 
$

 
$
264,747

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

 
(66
)
 
71,208

 
(1,975
)
 
99,426

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

 
(5,828
)
 
414,207

 
(13,239
)
 
976,709

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

 
(2,616
)
 

 

 
450,147

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

 
(958
)
 
52,207

 
(1,274
)
 
126,247

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

 
(9,402
)
 
466,414

 
(14,513
)
 
1,553,103

 
(23,915
)
Total
$
1,379,654

 
$
(10,607
)
 
$
537,622

 
$
(16,488
)
 
$
1,917,276

 
$
(27,095
)


13


The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2016, which were comprised of 83 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  As of June 30, 2016 and December 31, 2015, the gross unrealized losses were primarily related to investment securities issued by Ginnie Mae and corporate debt securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

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

 
2015

 
2016

 
2015

Taxable
$
25,567

 
$
27,776

 
$
51,554

 
$
57,068

Non-Taxable
5,122

 
5,329

 
10,340

 
10,642

Total Interest Income from Investment Securities
$
30,689

 
$
33,105

 
$
61,894

 
$
67,710


As of June 30, 2016, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $554.2 million, representing 57% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 94% were credit-rated Aa2 or better by Moody's while the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Of the Company's total Hawaii municipal bond holdings, 76% were general obligation issuances. As of June 30, 2016, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company's municipal debt securities.

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

 
December 31,
2015

Federal Home Loan Bank Stock
$
20,000

 
$
19,000

Federal Reserve Bank Stock
19,958

 
19,836

Total
$
39,958

 
$
38,836


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

Visa Class B Restricted Shares

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

During the first quarter of 2016, the Company recorded an $11.2 million net gain on the sale of 100,000 Visa Class B shares. Concurrent with every sale of Visa Class B shares, the Company has entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 188,714 Class B shares (311,057 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 June 30, 2016 and December 31, 2015:

(dollars in thousands)
June 30,
2016

 
December 31,
2015

Commercial
 

 
 

Commercial and Industrial
$
1,174,879

 
$
1,115,168

Commercial Mortgage
1,712,271

 
1,677,147

Construction
226,062

 
156,660

Lease Financing
192,630

 
204,877

Total Commercial
3,305,842

 
3,153,852

Consumer
 

 
 

Residential Mortgage
3,032,981

 
2,925,605

Home Equity
1,213,154

 
1,069,400

Automobile
417,017

 
381,735

Other 1
362,475

 
348,393

Total Consumer
5,025,627

 
4,725,133

Total Loans and Leases
$
8,331,469

 
$
7,878,985

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

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $4.4 million and $1.8 million for the three months ended June 30, 2016 and 2015, respectively, and $6.2 million and $2.3 million for the six months ended June 30, 2016 and 2015, 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 six months ended June 30, 2016 and 2015.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of June 30, 2016 and 2015.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended June 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
61,810

 
$
42,867

 
$
104,677

Loans and Leases Charged-Off
(204
)
 
(3,551
)
 
(3,755
)
Recoveries on Loans and Leases Previously Charged-Off
418

 
1,592

 
2,010

Net Loans and Leases Recovered (Charged-Off)
214

 
(1,959
)
 
(1,745
)
Provision for Credit Losses
5

 
995

 
1,000

Balance at End of Period
$
62,029

 
$
41,903

 
$
103,932

Six Months Ended June 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
60,714

 
$
42,166

 
$
102,880

Loans and Leases Charged-Off
(461
)
 
(8,181
)
 
(8,642
)
Recoveries on Loans and Leases Previously Charged-Off
7,323

 
3,371

 
10,694

Net Loans and Leases Recovered (Charged-Off)
6,862

 
(4,810
)
 
2,052

Provision for Credit Losses
(5,547
)
 
4,547

 
(1,000
)
Balance at End of Period
$
62,029

 
$
41,903

 
$
103,932

As of June 30, 2016
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
7

 
$
3,195

 
$
3,202

Collectively Evaluated for Impairment
62,022

 
38,708

 
100,730

Total
$
62,029

 
$
41,903

 
$
103,932

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
22,271

 
$
38,691

 
$
60,962

Collectively Evaluated for Impairment
3,283,571

 
4,986,936

 
8,270,507

Total
$
3,305,842

 
$
5,025,627

 
$
8,331,469

 
 
 
 
 
 
Three Months Ended June 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
65,834

 
$
41,627

 
$
107,461

Loans and Leases Charged-Off
(255
)
 
(3,241
)
 
(3,496
)
Recoveries on Loans and Leases Previously Charged-Off
486

 
1,555

 
2,041

Net Loans and Leases Recovered (Charged-Off)
231

 
(1,686
)
 
(1,455
)
Provision for Credit Losses
940

 
(940
)
 

Balance at End of Period
$
67,005

 
$
39,001

 
$
106,006

Six Months Ended June 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
64,551

 
$
44,137

 
$
108,688

Loans and Leases Charged-Off
(490
)
 
(7,094
)
 
(7,584
)
Recoveries on Loans and Leases Previously Charged-Off
1,222

 
3,680

 
4,902

Net Loans and Leases Recovered (Charged-Off)
732

 
(3,414
)
 
(2,682
)
Provision for Credit Losses
1,722

 
(1,722
)
 

Balance at End of Period
$
67,005

 
$
39,001

 
$
106,006

As of June 30, 2015
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
2,160

 
$
3,405

 
$
5,565

Collectively Evaluated for Impairment
64,845

 
35,596

 
100,441

Total
$
67,005

 
$
39,001

 
$
106,006

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
27,512

 
$
39,267

 
$
66,779

Collectively Evaluated for Impairment
3,015,259

 
4,346,400

 
7,361,659

Total
$
3,042,771

 
$
4,385,667

 
$
7,428,438


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, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

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

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


17


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

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
1,124,700