BOH_2013.03.31_10Q


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 March 31, 2013
 
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 April 15, 2013, there were 44,842,111 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
 
March 31,
(dollars in thousands, except per share amounts)
2013

 
2012

Interest Income
 

 
 

Interest and Fees on Loans and Leases
$
62,820

 
$
64,691

Income on Investment Securities
 
 
 
Available-for-Sale
15,851

 
17,713

Held-to-Maturity
19,854

 
26,413

Deposits
3

 
2

Funds Sold
59

 
129

Other
284

 
280

Total Interest Income
98,871

 
109,228

Interest Expense
 

 
 

Deposits
2,646

 
3,473

Securities Sold Under Agreements to Repurchase
7,005

 
7,304

Funds Purchased
22

 
5

Long-Term Debt
638

 
498

Total Interest Expense
10,311

 
11,280

Net Interest Income
88,560

 
97,948

Provision for Credit Losses
—

 
351

Net Interest Income After Provision for Credit Losses
88,560

 
97,597

Noninterest Income
 

 
 

Trust and Asset Management
11,886

 
10,918

Mortgage Banking
6,411

 
5,050

Service Charges on Deposit Accounts
9,301

 
9,591

Fees, Exchange, and Other Service Charges
11,934

 
12,399

Investment Securities Losses, Net
—

 
(90
)
Insurance
2,325

 
2,278

Other
5,921

 
7,936

Total Noninterest Income
47,778

 
48,082

Noninterest Expense
 

 
 

Salaries and Benefits
48,675

 
47,024

Net Occupancy
9,635

 
10,516

Net Equipment
4,577

 
5,826

Professional Fees
2,226

 
2,132

FDIC Insurance
1,949

 
2,071

Other
17,325

 
17,638

Total Noninterest Expense
84,387

 
85,207

Income Before Provision for Income Taxes
51,951

 
60,472

Provision for Income Taxes
15,971

 
16,662

Net Income
$
35,980

 
$
43,810

Basic Earnings Per Share
$
0.81

 
$
0.96

Diluted Earnings Per Share
$
0.81

 
$
0.95

Dividends Declared Per Share
$
0.45

 
$
0.45

Basic Weighted Average Shares
44,545,092

 
45,709,936

Diluted Weighted Average Shares
44,686,632

 
45,875,238

 
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
 
March 31,
(dollars in thousands)
 
2013

 
 
2012

Net Income
 
$
35,980

 
 
$
43,810

Other Comprehensive Loss, Net of Tax:
 
 

 
 
 

Net Unrealized Losses on Investment Securities
 
(9,641
)
 
 
(6,454
)
Defined Benefit Plans
 
78

 
 
153

Total Other Comprehensive Loss
 
(9,563
)
 
 
(6,301
)
Comprehensive Income
 
$
26,417

 
 
$
37,509

 
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)
March 31,
2013

 
December 31,
2012

Assets
 

 
 

Interest-Bearing Deposits
$
4,840

 
$
3,393

Funds Sold
130,734

 
185,682

Investment Securities
 

 
 

Available-for-Sale
3,290,850

 
3,367,557

Held to Maturity (Fair Value of $3,679,208 and $3,687,676)
3,597,810

 
3,595,065

Loans Held for Sale
24,015

 
21,374

Loans and Leases
5,782,969

 
5,854,521

Allowance for Loan and Lease Losses
(126,878
)
 
(128,857
)
Net Loans and Leases
5,656,091

 
5,725,664

Total Earning Assets
12,704,340

 
12,898,735

Cash and Noninterest-Bearing Deposits
147,796

 
163,786

Premises and Equipment
104,844

 
105,005

Customers’ Acceptances
152

 
173

Accrued Interest Receivable
46,183

 
43,077

Foreclosed Real Estate
3,318

 
3,887

Mortgage Servicing Rights
26,540

 
25,240

Goodwill
31,517

 
31,517

Other Assets
460,977

 
456,952

Total Assets
$
13,525,667

 
$
13,728,372

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
3,336,406

 
$
3,367,185

Interest-Bearing Demand
2,127,550

 
2,163,473

Savings
4,451,143

 
4,399,316

Time
1,336,761

 
1,599,508

Total Deposits
11,251,860

 
11,529,482

Funds Purchased
66,296

 
11,296

Securities Sold Under Agreements to Repurchase
748,718

 
758,947

Long-Term Debt
177,427

 
128,055

Banker’s Acceptances
152

 
173

Retirement Benefits Payable
47,423

 
47,658

Accrued Interest Payable
5,772

 
4,776

Taxes Payable and Deferred Taxes
93,906

 
88,014

Other Liabilities
108,009

 
138,306

Total Liabilities
12,499,563

 
12,706,707

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: March 31, 2013 - 57,465,782 / 44,861,335
and December 31, 2012 - 57,319,352 / 44,754,835)
572

 
571

Capital Surplus
517,327

 
515,619

Accumulated Other Comprehensive Income
19,645

 
29,208

Retained Earnings
1,098,674

 
1,084,477

Treasury Stock, at Cost (Shares: March 31, 2013 - 12,604,447
and December 31, 2012 - 12,564,517)
(610,114
)
 
(608,210
)
Total Shareholders’ Equity
1,026,104

 
1,021,665

Total Liabilities and Shareholders’ Equity
$
13,525,667

 
$
13,728,372

 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

 
Retained Earnings

 
Treasury Stock

 
Total

Balance as of December 31, 2012
44,754,835

 
$
571

 
$
515,619

 
$
29,208

 
$
1,084,477

 
$
(608,210
)
 
$
1,021,665

Net Income
—

 
—

 
—

 
—

 
35,980

 
—

 
35,980

Other Comprehensive Loss
—

 
—

 
—

 
(9,563
)
 
—

 
—

 
(9,563
)
Share-Based Compensation
—

 
—

 
1,280

 
—

 
—

 
—

 
1,280

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
277,927

 
1

 
428

 
—

 
(1,553
)
 
6,395

 
5,271

Common Stock Repurchased
(171,427
)
 
—

 
—

 
—

 
—

 
(8,299
)
 
(8,299
)
Cash Dividends Paid ($0.45 per share)
—

 
—

 
—

 
—

 
(20,230
)
 
—

 
(20,230
)
Balance as of March 31, 2013
44,861,335

 
$
572

 
$
517,327

 
$
19,645

 
$
1,098,674

 
$
(610,114
)
 
$
1,026,104

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2011
45,947,116

 
$
571

 
$
507,558

 
$
35,263

 
$
1,003,938

 
$
(544,663
)
 
$
1,002,667

Net Income
—

 
—

 
—

 
—

 
43,810

 
—

 
43,810

Other Comprehensive Loss
—

 
—

 
—

 
(6,301
)
 
—

 
—

 
(6,301
)
Share-Based Compensation
—

 
—

 
1,831

 
—

 
—

 
—

 
1,831

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
326,174

 
—

 
471

 
—

 
(2,317
)
 
7,735

 
5,889

Common Stock Repurchased
(667,409
)
 
—

 
—

 
—

 
—

 
(31,304
)
 
(31,304
)
Cash Dividends Paid ($0.45 per share)
—

 
—

 
—

 
—

 
(20,695
)
 
—

 
(20,695
)
Balance as of March 31, 2012
45,605,881

 
$
571

 
$
509,860

 
$
28,962

 
$
1,024,736

 
$
(568,232
)
 
$
995,897

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)
 
Three Months Ended
 
March 31,
(dollars in thousands)
2013

 
2012

Operating Activities
 

 
 

Net Income
$
35,980

 
$
43,810

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

 
 

Provision for Credit Losses
—

 
351

Depreciation and Amortization
3,107

 
3,503

Amortization of Deferred Loan and Lease Fees
(753
)
 
(757
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
15,848

 
13,474

Share-Based Compensation
1,280

 
1,831

Benefit Plan Contributions
(345
)
 
(5,246
)
Deferred Income Taxes
134

 
(7,300
)
Net Gains on Sales of Loans and Leases
(8,586
)
 
(5,131
)
Net Losses on Investment Securities
—

 
90

Proceeds from Sales of Loans Held for Sale
231,026

 
100,161

Originations of Loans Held for Sale
(226,325
)
 
(89,471
)
Tax Benefits from Share-Based Compensation
(451
)
 
(559
)
Net Change in Other Assets and Other Liabilities
(23,036
)
 
(5,082
)
Net Cash Provided by Operating Activities
27,879

 
49,674

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
302,190

 
251,471

Proceeds from Sales
—

 
34,831

Purchases
(246,146
)
 
(317,058
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
283,023

 
211,085

Purchases
(296,836
)
 
(343,443
)
Net Change in Loans and Leases
69,411

 
(61,502
)
Premises and Equipment, Net
(2,946
)
 
(6,496
)
Net Cash Provided by (Used in) Investing Activities
108,696

 
(231,112
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
(277,622
)
 
28,547

Net Change in Short-Term Borrowings
44,771

 
(100,119
)
Proceeds from Long-Term Debt
50,000

 
—

Tax Benefits from Share-Based Compensation
451

 
559

Proceeds from Issuance of Common Stock
4,863

 
5,432

Repurchase of Common Stock
(8,299
)
 
(31,304
)
Cash Dividends Paid
(20,230
)
 
(20,695
)
Net Cash Used in Financing Activities
(206,066
)
 
(117,580
)
 
 
 
 
Net Change in Cash and Cash Equivalents
(69,491
)
 
(299,018
)
Cash and Cash Equivalents at Beginning of Period
352,861

 
669,909

Cash and Cash Equivalents at End of Period
$
283,370

 
$
370,891

Supplemental Information
 

 
 

Cash Paid for Interest
$
9,316

 
$
10,292

Cash Paid for Income Taxes
2,693

 
2,410

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
1,356

 
1,023

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

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

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

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  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, 2013.

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.

Investment Securities

Realized gains and losses are recorded in noninterest income using the specific identification method.

Offsetting Assets and Liabilities

In December 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This project began as an attempt to converge the offsetting requirements under U.S. GAAP and International Financial Reporting Standards ("IFRS"). However, as the FASB and International Accounting Standards Board were not able to reach a converged solution with regards to offsetting requirements, they each developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The provisions of ASU No. 2013-01 limits the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company's consolidated statements of income and condition. See Note 5 to the Consolidated Financial Statements for the disclosures required by ASU No. 2011-11 and ASU No. 2013-01.


7


Reclassifications Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities) and the income statement line item affected by the reclassification (e.g., realized gains (losses) on sales of investment securities). If a component is not required to be reclassified to net income in its entirety (e.g., amortization of defined benefit plan items), entities would instead cross reference to the related note to the financial statements for additional information (e.g., pension footnote). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Company provided these required disclosures in the notes to the Consolidated Financial Statements, the adoption of ASU No. 2013-02 had no impact on the Company's consolidated statements of income and condition. See Note 6 to the Consolidated Financial Statements for the disclosures required by ASU No. 2013-02.

8


Note 2.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of March 31, 2013 and December 31, 2012 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

March 31, 2013
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
709,315

 
$
15,059

 
$
(15
)
 
$
724,359

Debt Securities Issued by States and Political Subdivisions
799,521

 
25,942

 
(2,227
)
 
823,236

Debt Securities Issued by Corporations
187,399

 
1,991

 
(834
)
 
188,556

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
919,419

 
25,337

 
(394
)
 
944,362

    Residential - U.S. Government-Sponsored Enterprises
31,538

 
1,860

 
—

 
33,398

    Commercial - Government Agencies
580,362

 
1,301

 
(4,724
)
 
576,939

Total Mortgage-Backed Securities
1,531,319

 
28,498

 
(5,118
)
 
1,554,699

Total
$
3,227,554

 
$
71,490

 
$
(8,194
)
 
$
3,290,850

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
285,139

 
$
5,207

 
$
—

 
$
290,346

Debt Securities Issued by Corporations
23,544

 
—

 
(172
)
 
23,372

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,260,767

 
76,752

 
(2,229
)
 
3,335,290

    Residential - U.S. Government-Sponsored Enterprises
28,360

 
1,840

 
—

 
30,200

Total Mortgage-Backed Securities
3,289,127

 
78,592

 
(2,229
)
 
3,365,490

Total
$
3,597,810

 
$
83,799

 
$
(2,401
)
 
$
3,679,208

 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
855,070

 
$
14,936

 
$
(17
)
 
$
869,989

Debt Securities Issued by States and Political Subdivisions
753,207

 
30,159

 
(955
)
 
782,411

Debt Securities Issued by Corporations
82,450

 
1,984

 
—

 
84,434

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
1,041,669

 
27,283

 
(292
)
 
1,068,660

    Residential - U.S. Government-Sponsored Enterprises
35,234

 
2,064

 
—

 
37,298

    Commercial - Government Agencies
524,055

 
1,907

 
(1,197
)
 
524,765

Total Mortgage-Backed Securities
1,600,958

 
31,254

 
(1,489
)
 
1,630,723

Total
$
3,291,685

 
$
78,333

 
$
(2,461
)
 
$
3,367,557

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
190,168

 
$
5,198

 
$
—

 
$
195,366

Debt Securities Issued by Corporations
24,000

 
4

 
—

 
24,004

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,349,403

 
86,673

 
(1,366
)
 
3,434,710

    Residential - U.S. Government-Sponsored Enterprises
31,494

 
2,102

 
—

 
33,596

Total Mortgage-Backed Securities
3,380,897

 
88,775

 
(1,366
)
 
3,468,306

Total
$
3,595,065

 
$
93,977

 
$
(1,366
)
 
$
3,687,676


9


The table below presents an analysis of the contractual maturities of the Company’s investment securities as of March 31, 2013.  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
$
288,391

 
$
289,275

Due After One Year Through Five Years
194,296

 
201,181

Due After Five Years Through Ten Years
643,116

 
653,907

Due After Ten Years
570,432

 
591,788

 
1,696,235

 
1,736,151

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
919,419

 
944,362

    Residential - U.S. Government-Sponsored Enterprises
31,538

 
33,398

    Commercial - Government Agencies
580,362

 
576,939

Total Mortgage-Backed Securities
1,531,319

 
1,554,699

Total
$
3,227,554

 
$
3,290,850

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
60,160

 
$
60,543

Due After One Year Through Five Years
224,979

 
229,803

Due After Ten Years
23,544

 
23,372

 
308,683

 
313,718

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
3,260,767

 
3,335,290

    Residential - U.S. Government-Sponsored Enterprises
28,360

 
30,200

Total Mortgage-Backed Securities
3,289,127

 
3,365,490

Total
$
3,597,810

 
$
3,679,208


Investment securities with carrying values of $2.5 billion and $2.9 billion as of March 31, 2013 and December 31, 2012, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.
  
There were no sales of investment securities for the three months ended March 31, 2013. Gross realized gains on the sales of investment securities were $0.2 million and gross realized losses on the sales of investment securities were $0.3 million for the three months ended March 31, 2012.


10


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

March 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
2,205

 
$
(12
)
 
$
490

 
$
(3
)
 
$
2,695

 
$
(15
)
Debt Securities Issued by States
     and Political Subdivisions
244,042

 
(2,227
)
 
100

 
—

 
244,142

 
(2,227
)
Debt Securities Issued by Corporations
104,234

 
(834
)
 
—

 
—

 
104,234

 
(834
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


     Residential - Government Agencies
11,788

 
(46
)
 
17,623

 
(348
)
 
29,411

 
(394
)
     Commercial - Government Agencies
454,656

 
(4,724
)
 
—

 
—

 
454,656

 
(4,724
)
Total Mortgage-Backed Securities
466,444

 
(4,770
)
 
17,623

 
(348
)
 
484,067

 
(5,118
)
Total
$
816,925

 
$
(7,843
)
 
$
18,213

 
$
(351
)
 
$
835,138

 
$
(8,194
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by Corporations
$
23,372

 
$
(172
)
 
$
—

 
$
—

 
$
23,372

 
$
(172
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
423,581

 
(2,207
)
 
11,430

 
(22
)
 
435,011

 
(2,229
)
Total
$
446,953

 
$
(2,379
)
 
$
11,430

 
$
(22
)
 
$
458,383

 
$
(2,401
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
2,295

 
$
(14
)
 
$
564

 
$
(3
)
 
$
2,859

 
$
(17
)
Debt Securities Issued by States
     and Political Subdivisions
72,400

 
(955
)
 
—

 
—

 
72,400

 
(955
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
7,325

 
(57
)
 
22,389

 
(235
)
 
29,714

 
(292
)
     Commercial - Government Agencies
261,883

 
(1,197
)
 
—

 
—

 
261,883

 
(1,197
)
Total Mortgage-Backed Securities
269,208

 
(1,254
)
 
22,389

 
(235
)
 
291,597

 
(1,489
)
Total
$
343,903

 
$
(2,223
)
 
$
22,953

 
$
(238
)
 
$
366,856

 
$
(2,461
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
$
351,762

 
$
(1,366
)
 
$
—

 
$
—

 
$
351,762

 
$
(1,366
)
Total
$
351,762

 
$
(1,366
)
 
$
—

 
$
—

 
$
351,762

 
$
(1,366
)

The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2013, which was comprised of 85 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 March 31, 2013 and December 31, 2012, the gross unrealized losses reported for mortgage-backed securities were related to investment securities issued by the Government National Mortgage Association. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.


11


As of March 31, 2013, the carrying value of the Company’s Federal Home Loan Bank and Federal Reserve Bank stock was$59.7 million and $19.0 million, respectively.  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 by recognizing temporary declines in value.

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 March 31, 2013 and December 31, 2012:

(dollars in thousands)
March 31,
2013

 
December 31,
2012

Commercial
 

 
 

Commercial and Industrial
$
834,801

 
$
829,512

Commercial Mortgage
1,104,718

 
1,097,425

Construction
117,797

 
113,987

Lease Financing
269,107

 
274,969

Total Commercial
2,326,423

 
2,315,893

Consumer
 

 
 

Residential Mortgage
2,275,209

 
2,349,916

Home Equity
757,877

 
770,376

Automobile
220,362

 
209,832

Other 1
203,098

 
208,504

Total Consumer
3,456,546

 
3,538,628

Total Loans and Leases
$
5,782,969

 
$
5,854,521

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

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income, were $7.5 million and $2.4 million for the three months ended March 31, 2013 and 2012, respectively.




12


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

The following presents by portfolio segment, the activity in the Allowance for the three months ended March 31, 2013 and 2012.  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 March 31, 2013 and 2012.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended March 31, 2013
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
72,704

 
$
56,153

 
$
128,857

Loans and Leases Charged-Off
(382
)
 
(4,917
)
 
(5,299
)
Recoveries on Loans and Leases Previously Charged-Off
797

 
2,523

 
3,320

Net Loans and Leases Charged-Off
415

 
(2,394
)
 
(1,979
)
Provision for Credit Losses
297

 
(297
)
 
—

Balance at End of Period
$
73,416

 
$
53,462

 
$
126,878

As of March 31, 2013
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
177

 
$
3,526

 
$
3,703

Collectively Evaluated for Impairment
73,239

 
49,936

 
123,175

Total
$
73,416

 
$
53,462

 
$
126,878

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
13,115

 
$
36,470

 
$
49,585

Collectively Evaluated for Impairment
2,313,308

 
3,420,076

 
5,733,384

Total
$
2,326,423

 
$
3,456,546

 
$
5,782,969

 
 
 
 
 
 
Three Months Ended March 31, 2012
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
80,562

 
$
58,044

 
$
138,606

Loans and Leases Charged-Off
(1,761
)
 
(5,998
)
 
(7,759
)
Recoveries on Loans and Leases Previously Charged-Off
2,029

 
2,379

 
4,408

Net Loans and Leases Charged-Off
268

 
(3,619
)
 
(3,351
)
Provision for Credit Losses
(2,656
)
 
3,007

 
351

Balance at End of Period
$
78,174

 
$
57,432

 
$
135,606

As of March 31, 2012
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
83

 
$
4,100

 
$
4,183

Collectively Evaluated for Impairment
78,091

 
53,332

 
131,423

Total
$
78,174

 
$
57,432

 
$
135,606

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
13,989

 
$
29,987

 
$
43,976

Collectively Evaluated for Impairment
2,118,969

 
3,435,987

 
5,554,956

Total
$
2,132,958

 
$
3,465,974

 
$
5,598,932


13


Credit Quality Indicators

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

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

Pass:
Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

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

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


14


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 March 31, 2013 and December 31, 2012.
 
March 31, 2013
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
786,309

 
$
1,024,172

 
$
101,057

 
$
242,098

 
$
2,153,636

Special Mention
8,367

 
27,218

 
13,673

 
26,122

 
75,380

Classified
40,125

 
53,328

 
3,067

 
887

 
97,407

Total
$
834,801

 
$
1,104,718

 
$
117,797

 
$
269,107

 
$
2,326,423

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,248,884

 
$
752,053

 
$
220,121

 
$
202,422

 
$
3,423,480

Classified
26,325

 
5,824

 
241

 
676

 
33,066

Total
$
2,275,209

 
$
757,877

 
$
220,362

 
$
203,098

 
$
3,456,546

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
5,782,969

 
December 31, 2012
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
779,654

 
$
1,018,128

 
$
96,058

 
$
247,401

 
$
2,141,241

Special Mention
22,759

 
23,848

 
15,839

 
26,540

 
88,986

Classified
27,099

 
55,449

 
2,090

 
1,028

 
85,666

Total
$
829,512

 
$
1,097,425

 
$
113,987

 
$
274,969

 
$
2,315,893

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,326,216

 
$
766,912

 
$
209,646

 
$
207,917

 
$
3,510,691

Classified
23,700

 
3,464

 
186

 
587

 
27,937

Total
$
2,349,916

 
$
770,376

 
$
209,832

 
$
208,504

 
$
3,538,628

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
5,854,521

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

15


Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of March 31, 2013 and December 31, 2012.
(dollars in thousands)
30 - 59
Days
Past Due

 
60 - 89
Days
Past Due

 
Past Due
90 Days
or More

 
Non-
Accrual

 
Total
Past Due and
Non-Accrual

 
Current

 
Total
Loans and
Leases

 
Non-Accrual
Loans and
Leases that
are Current 2

As of March 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
2,195

 
$
9,691

 
$
230

 
$
5,033

 
$
17,149

 
$
817,652

 
$
834,801

 
$
4,462

Commercial Mortgage
179

 
—

 
—

 
2,910

 
3,089

 
1,101,629

 
1,104,718

 
2,064

Construction
—

 
—

 
—

 
—

 
—

 
117,797

 
117,797

 
—

Lease Financing
—

 
—

 
—

 
—

 
—

 
269,107

 
269,107

 
—

Total Commercial
2,374

 
9,691

 
230

 
7,943

 
20,238

 
2,306,185

 
2,326,423

 
6,526

Consumer
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential Mortgage
12,502

 
2,210

 
5,967

 
24,700

 
45,379

 
2,229,830

 
2,275,209

 
5,909

Home Equity
6,398

 
2,697

 
4,538

 
2,413

 
16,046

 
741,831

 
757,877

 
331

Automobile
3,162

 
335

 
241

 
—

 
3,738

 
216,624

 
220,362

 
—

Other 1
2,483

 
1,171

 
676

 
—

 
4,330

 
198,768

 
203,098

 
—

Total Consumer
24,545

 
6,413

 
11,422

 
27,113

 
69,493

 
3,387,053

 
3,456,546

 
6,240

Total
$
26,919

 
$
16,104

 
$
11,652

 
$
35,056

 
$
89,731

 
$
5,693,238

 
$
5,782,969

 
$
12,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
806

 
$
10,382

 
$
27

 
$
5,534

 
$
16,749

 
$
812,763

 
$
829,512

 
$
4,963

Commercial Mortgage
188

 
542

 
—

 
3,030

 
3,760

 
1,093,665

 
1,097,425

 
1,810

Construction
—

 
—

 
—

 
833

 
833

 
113,154

 
113,987

 
833

Lease Financing
—

 
—

 
—

 
—

 
—

 
274,969

 
274,969

 
—

Total Commercial
994

 
10,924

 
27

 
9,397

 
21,342

 
2,294,551

 
2,315,893

 
7,606

Consumer
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential Mortgage
6,891

 
5,433

 
6,908

 
21,725

 
40,957

 
2,308,959

 
2,349,916

 
4,941

Home Equity
6,768

 
3,267

 
2,701

 
2,074

 
14,810

 
755,566

 
770,376

 
191

Automobile
3,758

 
586

 
186

 
—

 
4,530

 
205,302

 
209,832

 
—

Other 1
2,144

 
1,093

 
587

 
—

 
3,824

 
204,680

 
208,504

 
—

Total Consumer
19,561

 
10,379

 
10,382

 
23,799

 
64,121

 
3,474,507

 
3,538,628

 
5,132

Total
$
20,555

 
$
21,303

 
$
10,409

 
$
33,196

 
$
85,463

 
$
5,769,058

 
$
5,854,521

 
$
12,738

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

16


Impaired Loans

The following presents by class, information related to impaired loans as of March 31, 2013 and December 31, 2012.
(dollars in thousands)
Recorded
 Investment

 
Unpaid
 Principal
 Balance

 
Related 
Allowance for 
Loan Losses

March 31, 2013
 

 
 

 
 

Impaired Loans with No Related Allowance Recorded:
 

 
 

 
 

Commercial
 

 
 

 
 

Commercial and Industrial
$
6,967