BOH_2015.06.30_10Q
Table of Contents

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, 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 July 21, 2015, there were 43,501,279 shares of common stock outstanding.

1

Table of Contents

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

1

Table of Contents

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)
2015

 
2014

 
2015

 
2014

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
73,565

 
$
65,818

 
$
144,526

 
$
129,344

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
10,273

 
10,697

 
20,471

 
21,457

Held-to-Maturity
22,832

 
26,938

 
47,239

 
54,827

Deposits
2

 
1

 
5

 
4

Funds Sold
268

 
168

 
527

 
305

Other
310

 
302

 
612

 
604

Total Interest Income
107,250

 
103,924

 
213,380

 
206,541

Interest Expense
 

 
 

 
 

 
 

Deposits
2,405

 
2,393

 
4,773

 
4,751

Securities Sold Under Agreements to Repurchase
6,440

 
6,465

 
12,811

 
12,862

Funds Purchased
3

 
4

 
6

 
7

Other Debt
620

 
650

 
1,238

 
1,276

Total Interest Expense
9,468

 
9,512

 
18,828

 
18,896

Net Interest Income
97,782

 
94,412

 
194,552

 
187,645

Provision for Credit Losses

 
(2,199
)
 

 
(2,199
)
Net Interest Income After Provision for Credit Losses
97,782

 
96,611

 
194,552

 
189,844

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
12,355

 
12,005

 
24,535

 
23,857

Mortgage Banking
3,469

 
1,804

 
5,162

 
3,809

Service Charges on Deposit Accounts
8,203

 
8,638

 
16,740

 
17,516

Fees, Exchange, and Other Service Charges
13,352

 
13,370

 
26,249

 
26,309

Investment Securities Gains, Net
86

 
2,079

 
10,317

 
4,239

Annuity and Insurance
1,885

 
1,930

 
3,929

 
4,053

Bank-Owned Life Insurance
2,088

 
1,519

 
3,822

 
3,121

Other
4,487

 
3,136

 
7,478

 
6,345

Total Noninterest Income
45,925

 
44,481

 
98,232

 
89,249

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
47,610

 
45,081

 
97,390

 
91,978

Net Occupancy
8,605

 
9,254

 
17,938

 
18,671

Net Equipment
4,826

 
4,669

 
10,114

 
9,272

Data Processing
3,673

 
3,842

 
7,446

 
7,491

Professional Fees
2,265

 
2,613

 
4,599

 
4,873

FDIC Insurance
2,068

 
2,055

 
4,208

 
4,131

Other
14,527

 
13,568

 
28,794

 
28,213

Total Noninterest Expense
83,574

 
81,082

 
170,489

 
164,629

Income Before Provision for Income Taxes
60,133

 
60,010

 
122,295

 
114,464

Provision for Income Taxes
18,979

 
18,520

 
38,699

 
34,382

Net Income
$
41,154

 
$
41,490

 
$
83,596

 
$
80,082

Basic Earnings Per Share
$
0.95

 
$
0.94

 
$
1.93

 
$
1.81

Diluted Earnings Per Share
$
0.95

 
$
0.94

 
$
1.92

 
$
1.81

Dividends Declared Per Share
$
0.45

 
$
0.45

 
$
0.90

 
$
0.90

Basic Weighted Average Shares
43,305,813

 
44,053,899

 
43,345,667

 
44,123,030

Diluted Weighted Average Shares
43,518,349

 
44,246,431

 
43,558,664

 
44,332,838

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

2

Table of Contents

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)
 
2015

 
2014

 
2015

 
2014

Net Income
 
$
41,154

 
$
41,490

 
$
83,596

 
$
80,082

Other Comprehensive Income (Loss), Net of Tax:
 
 

 
 

 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
 
(7,610
)
 
8,617

 
(2,316
)
 
14,888

Defined Benefit Plans
 
220

 
156

 
440

 
312

Total Other Comprehensive Income (Loss)
 
(7,390
)
 
8,773

 
(1,876
)
 
15,200

Comprehensive Income
 
$
33,764

 
$
50,263

 
$
81,720

 
$
95,282

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

3

Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)
June 30,
2015

 
December 31,
2014

Assets
 

 
 

Interest-Bearing Deposits in Other Banks
$
3,420

 
$
2,873

Funds Sold
602,598

 
360,577

Investment Securities
 

 
 

Available-for-Sale
2,275,361

 
2,289,190

Held-to-Maturity (Fair Value of $4,240,732 and $4,504,495)
4,199,121

 
4,466,679

Loans Held for Sale
18,483

 
5,136

Loans and Leases
7,428,438

 
6,897,589

Allowance for Loan and Lease Losses
(106,006
)
 
(108,688
)
Net Loans and Leases
7,322,432

 
6,788,901

Total Earning Assets
14,421,415

 
13,913,356

Cash and Due From Banks
150,874

 
172,126

Premises and Equipment, Net
108,439

 
109,854

Accrued Interest Receivable
44,475

 
44,654

Foreclosed Real Estate
1,989

 
2,311

Mortgage Servicing Rights
23,426

 
24,695

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
265,133

 
262,807

Other Assets
200,775

 
225,888

Total Assets
$
15,248,043

 
$
14,787,208

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,156,847

 
$
3,832,943

Interest-Bearing Demand
2,699,517

 
2,559,570

Savings
5,044,711

 
4,806,575

Time
1,189,620

 
1,434,001

Total Deposits
13,090,695

 
12,633,089

Funds Purchased
8,459

 
8,459

Securities Sold Under Agreements to Repurchase
672,310

 
688,601

Other Debt
170,816

 
173,912

Retirement Benefits Payable
55,181

 
55,477

Accrued Interest Payable
5,254

 
5,148

Taxes Payable and Deferred Taxes
26,244

 
27,777

Other Liabilities
136,145

 
139,659

Total Liabilities
14,165,104

 
13,732,122

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 30 2015 - 57,745,324 / 43,535,020
and December 31, 2014 - 57,634,755 / 43,724,208)
575

 
574

Capital Surplus
536,782

 
531,932

Accumulated Other Comprehensive Loss
(28,562
)
 
(26,686
)
Retained Earnings
1,278,672

 
1,234,801

Treasury Stock, at Cost (Shares: June 30, 2015 - 14,210,304
and December 31, 2014 - 13,910,547)
(704,528
)
 
(685,535
)
Total Shareholders’ Equity
1,082,939

 
1,055,086

Total Liabilities and Shareholders’ Equity
$
15,248,043

 
$
14,787,208

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

4

Table of Contents

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

 

 

 

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
44,490,385

 
$
572

 
$
522,505

 
$
(31,823
)
 
$
1,151,754

 
$
(631,032
)
 
$
1,011,976

Net Income

 

 

 

 
80,082

 

 
80,082

Other Comprehensive Income

 

 

 
15,200

 

 

 
15,200

Share-Based Compensation

 

 
3,820

 

 

 

 
3,820

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
274,621

 
1

 
959

 

 
(279
)
 
6,074

 
6,755

Common Stock Repurchased
(467,778
)
 

 

 

 

 
(26,987
)
 
(26,987
)
Cash Dividends Declared ($0.90 per share)

 

 

 

 
(40,045
)
 

 
(40,045
)
Balance as of June 30, 2014
44,297,228

 
$
573

 
$
527,284

 
$
(16,623
)
 
$
1,191,512

 
$
(651,945
)
 
$
1,050,801

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

5

Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
June 30,
(dollars in thousands)
2015

 
2014

Operating Activities
 

 
 

Net Income
$
83,596

 
$
80,082

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

 
 

Provision for Credit Losses

 
(2,199
)
Depreciation and Amortization
6,386

 
6,172

Amortization of Deferred Loan and Lease Fees
(1,076
)
 
(938
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
25,314

 
24,886

Share-Based Compensation
3,731

 
3,820

Benefit Plan Contributions
(1,072
)
 
(892
)
Deferred Income Taxes
(4,803
)
 
(222
)
Net Gains on Sales of Loans and Leases
(1,967
)
 
(1,650
)
Net Gains on Sales of Investment Securities
(10,317
)
 
(4,239
)
Proceeds from Sales of Loans Held for Sale
69,856

 
57,411

Originations of Loans Held for Sale
(81,374
)
 
(52,947
)
Tax Benefits from Share-Based Compensation
(356
)
 
(405
)
Net Change in Other Assets and Other Liabilities
28,133

 
(35,031
)
Net Cash Provided by Operating Activities
116,051

 
73,848

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
174,152

 
165,023

Proceeds from Sales
10,384

 
12,750

Purchases
(177,532
)
 
(126,791
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
410,311

 
374,734

Purchases
(154,681
)
 
(347,876
)
Net Change in Loans and Leases
(535,834
)
 
(336,068
)
Premises and Equipment, Net
(4,971
)
 
(5,651
)
Net Cash Used in Investing Activities
(278,171
)
 
(263,879
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
457,606

 
755,378

Net Change in Short-Term Borrowings
(16,291
)
 
(25,938
)
Tax Benefits from Share-Based Compensation
356

 
405

Proceeds from Issuance of Common Stock
5,469

 
6,249

Repurchase of Common Stock
(24,387
)
 
(26,987
)
Cash Dividends Paid
(39,317
)
 
(40,045
)
Net Cash Provided by Financing Activities
383,436

 
669,062

 
 
 
 
Net Change in Cash and Cash Equivalents
221,316

 
479,031

Cash and Cash Equivalents at Beginning of Period
535,576

 
463,746

Cash and Cash Equivalents at End of Period
$
756,892

 
$
942,777

Supplemental Information
 

 
 

Cash Paid for Interest
$
18,313

 
$
18,170

Cash Paid for Income Taxes
34,339

 
27,696

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
83

 
3,311

Transfers from Loans to Loans Held for Sale
61,526

 

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

6

Table of Contents

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

7

Table of Contents

recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. 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 for the current reporting period of 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 June 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 June 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 or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. 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

8

Table of Contents

revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) Remove inconsistencies and weaknesses in revenue requirements; (2) Provide a more robust framework for addressing revenue issues; (3) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) Provide more useful information to users of financial statements through improved disclosure requirements; and (5) Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. However, in July 2015, the FASB voted to approve deferring 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

Table of Contents

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, 2015 and December 31, 2014 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

June 30, 2015
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
365,844

 
$
5,048

 
$
(127
)
 
$
370,765

Debt Securities Issued by States and Political Subdivisions
731,724

 
18,911

 
(1,776
)
 
748,859

Debt Securities Issued by Corporations
313,196

 
421

 
(3,756
)
 
309,861

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
379,489

 
9,085

 
(1,211
)
 
387,363

    Residential - U.S. Government-Sponsored Enterprises
303,170

 
2,304

 
(703
)
 
304,771

    Commercial - Government Agencies
159,862

 

 
(6,120
)
 
153,742

Total Mortgage-Backed Securities
842,521

 
11,389

 
(8,034
)
 
845,876

Total
$
2,253,285

 
$
35,769

 
$
(13,693
)
 
$
2,275,361

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
559,587

 
$
3,401

 
$
(177
)
 
$
562,811

Debt Securities Issued by States and Political Subdivisions
247,783

 
13,173

 

 
260,956

Debt Securities Issued by Corporations
159,031

 
1,202

 
(1,408
)
 
158,825

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,517,442

 
38,545

 
(15,600
)
 
2,540,387

    Residential - U.S. Government-Sponsored Enterprises
417,478

 
2,749

 
(80
)
 
420,147

    Commercial - Government Agencies
297,800

 
1,970

 
(2,164
)
 
297,606

Total Mortgage-Backed Securities
3,232,720

 
43,264


(17,844
)

3,258,140

Total
$
4,199,121

 
$
61,040

 
$
(19,429
)
 
$
4,240,732

 
 
 
 
 
 
 
 
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

Table of Contents


The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 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
$
85,358

 
$
85,907

Due After One Year Through Five Years
436,379

 
437,170

Due After Five Years Through Ten Years
490,364

 
497,559

Due After Ten Years
93,204

 
99,012

 
1,105,305

 
1,119,648

 
 
 
 
Debt Securities Issued by Government Agencies
305,459

 
309,837

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
379,489

 
387,363

    Residential - U.S. Government-Sponsored Enterprises
303,170

 
304,771

    Commercial - Government Agencies
159,862

 
153,742

Total Mortgage-Backed Securities
842,521

 
845,876

Total
$
2,253,285

 
$
2,275,361

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
79,884

 
$
80,195

Due After One Year Through Five Years
490,508

 
493,749

Due After Five Years Through Ten Years
270,234

 
275,890

Due After Ten Years
125,775

 
132,758

 
966,401

 
982,592

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
2,517,442

 
2,540,387

    Residential - U.S. Government-Sponsored Enterprises
417,478

 
420,147

    Commercial - Government Agencies
297,800

 
297,606

Total Mortgage-Backed Securities
3,232,720

 
3,258,140

Total
$
4,199,121

 
$
4,240,732


Investment securities with carrying values of $2.7 billion and $2.8 billion as of June 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 six months ended June 30, 2015 and 2014.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2015

 
2014

 
2015

 
2014
Gross Gains on Sales of Investment Securities
$
86

 
$
2,079

 
$
10,317

 
$
4,239

Gross Losses on Sales of Investment Securities

 

 

 

Net Gains on Sales of Investment Securities
$
86

 
$
2,079

 
$
10,317

 
$
4,239




11

Table of Contents

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, 2015
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
58,296

 
$
(102
)
 
$
5,178

 
$
(25
)
 
$
63,474

 
$
(127
)
Debt Securities Issued by States
   and Political Subdivisions
193,853

 
(1,776
)
 

 

 
193,853

 
(1,776
)
Debt Securities Issued by Corporations
126,177

 
(1,843
)
 
143,190

 
(1,913
)
 
269,367

 
(3,756
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
17,450

 
(10
)
 
10,508

 
(1,201
)
 
27,958

 
(1,211
)
    Residential - U.S. Government-Sponsored Enterprises
141,971

 
(703
)
 

 

 
141,971

 
(703
)
    Commercial - Government Agencies

 

 
153,743

 
(6,120
)
 
153,743

 
(6,120
)
Total Mortgage-Backed Securities
159,421

 
(713
)
 
164,251

 
(7,321
)
 
323,672

 
(8,034
)
Total
$
537,747

 
$
(4,434
)
 
$
312,619

 
$
(9,259
)
 
$
850,366

 
$
(13,693
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
60,215

 
$
(101
)
 
$
30,169

 
$
(76
)
 
$
90,384

 
$
(177
)
Debt Securities Issued by Corporations
4,204

 
(1
)
 
75,540

 
(1,407
)
 
79,744

 
(1,408
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
482,495

 
(3,675
)
 
469,731

 
(11,925
)
 
952,226

 
(15,600
)
    Residential - U.S. Government-Sponsored Enterprises
86,791

 
(80
)
 

 

 
86,791

 
(80
)
    Commercial - Government Agencies
110,069

 
(994
)
 
56,238

 
(1,170
)
 
166,307

 
(2,164
)
Total Mortgage-Backed Securities
679,355

 
(4,749
)
 
525,969

 
(13,095
)
 
1,205,324

 
(17,844
)
Total
$
743,774

 
$
(4,851
)
 
$
631,678

 
$
(14,578
)
 
$
1,375,452

 
$
(19,429
)
 
 
 
 
 
 
 
 
 
 
 
 
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

Table of Contents

The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2015, which were comprised of 175 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, 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 six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2015

 
2014

 
2015

 
2014

Taxable
$
27,776

 
$
32,316

 
$
57,068

 
$
65,743

Non-Taxable
5,329

 
5,319

 
10,642

 
10,541

Total Interest Income from Investment Securities
$
33,105

 
$
37,635

 
$
67,710

 
$
76,284


As of June 30, 2015, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $590.4 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. Approximately 77% of the Company's Hawaii municipal bond holdings were general obligation issuances. As of June 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 June 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)
June 30,
2015

 
December 31,
2014

Federal Home Loan Bank Stock
$
16,000

 
$
47,075

Federal Reserve Bank Stock
19,418

 
19,299

Total
$
35,418

 
$
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 June 30, 2015, the conversion ratio was 1.6483.

13

Table of Contents


During the first six 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 293,214 Class B shares (483,305 Class A equivalents) that the Company owns are carried at a zero cost basis. The Company also contributed 9,300 Visa Class B restricted shares to the Bank of Hawaii Foundation during the first six 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 June 30, 2015 and December 31, 2014:

(dollars in thousands)
June 30,
2015

 
December 31,
2014

Commercial
 

 
 

Commercial and Industrial
$
1,173,259

 
$
1,055,243

Commercial Mortgage
1,528,685

 
1,437,513

Construction
118,714

 
109,183

Lease Financing
222,113

 
226,189

Total Commercial
3,042,771

 
2,828,128

Consumer
 

 
 

Residential Mortgage
2,787,847

 
2,571,090

Home Equity
931,191

 
866,688

Automobile
352,128

 
323,848

Other 1
314,501

 
307,835

Total Consumer
4,385,667

 
4,069,461

Total Loans and Leases
$
7,428,438

 
$
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 $0.6 million for the three months ended June 30, 2015 and 2014, respectively, and $2.3 million and $1.3 million for the six months ended June 30, 2015 and 2014, respectively.

14

Table of Contents

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

The following presents by portfolio segment, the activity in the Allowance for the three and six months ended June 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 June 30, 2015 and 2014.

(dollars in thousands)
Commercial

 
Consumer

 
Total

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

 
 
 
 
 
 
Three Months Ended June 30, 2014
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
71,390

 
$
42,736

 
$
114,126

Loans and Leases Charged-Off
(815
)
 
(3,182
)
 
(3,997
)
Recoveries on Loans and Leases Previously Charged-Off
2,156

 
3,752

 
5,908

Net Loans and Leases Recovered (Charged-Off)
1,341

 
570

 
1,911

Provision for Credit Losses
(845
)
 
(1,354
)
 
(2,199
)
Balance at End of Period
$
71,886

 
$
41,952

 
$
113,838

Six Months Ended June 30, 2014
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
71,446

 
$
44,008

 
$
115,454

Loans and Leases Charged-Off
(1,634
)
 
(6,401
)
 
(8,035
)
Recoveries on Loans and Leases Previously Charged-Off
3,097

 
5,521

 
8,618

Net Loans and Leases Recovered (Charged-Off)
1,463

 
(880
)
 
583

Provision for Credit Losses
(1,023
)
 
(1,176
)
 
(2,199
)
Balance at End of Period
$
71,886

 
$
41,952

 
$
113,838

As of June 30, 2014
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
8,693

 
$
3,332

 
$
12,025

Collectively Evaluated for Impairment
63,193

 
38,620

 
101,813

Total
$
71,886

 
$
41,952

 
$
113,838

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
27,089

 
$
38,007

 
$
65,096

Collectively Evaluated for Impairment
2,666,419

 
3,694,838

 
6,361,257

Total
$
2,693,508

 
$
3,732,845

 
$
6,426,353


15

Table of Contents

Credit Quality Indicators

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

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

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

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

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


16

Table of Contents

The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of June 30, 2015 and December 31, 2014.
 
June 30, 2015
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
1,119,752

 
$
1,461,791

 
$
116,971

 
$
221,647

 
$
2,920,161

Special Mention
16,460

 
24,289

 

 
83

 
40,832

Classified
37,047

 
42,605

 
1,743

 
383

 
81,778

Total
$
1,173,259

 
$
1,528,685

 
$
118,714

 
$
222,113

 
$
3,042,771

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,772,013

 
$
926,305

 
$
351,806

 
$
313,723

 
$
4,363,847

Classified
15,834

 
4,886

 
322

 
778

 
21,820

Total
$
2,787,847

 
$
931,19