BOH_2014.03.31_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, 2014
 
or
 
o                 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from              to            
 
Commission File Number: 1-6887
 
BANK OF HAWAII CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
99-0148992
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
130 Merchant Street, Honolulu, Hawaii
 
96813
(Address of principal executive offices)
 
(Zip Code)
 1-888-643-3888
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No ý
 
As of April 15, 2014, there were 44,429,905 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)
2014

 
2013

Interest Income
 

 
 

Interest and Fees on Loans and Leases
$
63,526

 
$
62,820

Income on Investment Securities
 
 
 
Available-for-Sale
10,760

 
15,851

Held-to-Maturity
27,889

 
19,854

Deposits
3

 
3

Funds Sold
137

 
59

Other
302

 
284

Total Interest Income
102,617

 
98,871

Interest Expense
 

 
 

Deposits
2,358

 
2,646

Securities Sold Under Agreements to Repurchase
6,397

 
7,005

Funds Purchased
3

 
22

Long-Term Debt
626

 
638

Total Interest Expense
9,384

 
10,311

Net Interest Income
93,233

 
88,560

Provision for Credit Losses
—

 
—

Net Interest Income After Provision for Credit Losses
93,233

 
88,560

Noninterest Income
 

 
 

Trust and Asset Management
11,852

 
11,886

Mortgage Banking
2,005

 
6,411

Service Charges on Deposit Accounts
8,878

 
9,301

Fees, Exchange, and Other Service Charges
12,939

 
11,934

Investment Securities Gains, Net
2,160

 
—

Insurance
2,123

 
2,325

Bank-Owned Life Insurance
1,602

 
1,297

Other
3,209

 
4,624

Total Noninterest Income
44,768

 
47,778

Noninterest Expense
 

 
 

Salaries and Benefits
46,897

 
48,675

Net Occupancy
9,417

 
9,635

Net Equipment
4,603

 
4,577

Data Processing
3,649

 
3,266

Professional Fees
2,260

 
2,226

FDIC Insurance
2,076

 
1,949

Other
14,645

 
14,059

Total Noninterest Expense
83,547

 
84,387

Income Before Provision for Income Taxes
54,454

 
51,951

Provision for Income Taxes
15,862

 
15,971

Net Income
$
38,592

 
$
35,980

Basic Earnings Per Share
$
0.87

 
$
0.81

Diluted Earnings Per Share
$
0.87

 
$
0.81

Dividends Declared Per Share
$
0.45

 
$
0.45

Basic Weighted Average Shares
44,193,267

 
44,545,092

Diluted Weighted Average Shares
44,420,349

 
44,686,632

 
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)
 
2014

 
2013

Net Income
 
$
38,592

 
$
35,980

Other Comprehensive Income (Loss), Net of Tax:
 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
 
6,271

 
(9,641
)
Defined Benefit Plans
 
156

 
78

Total Other Comprehensive Income (Loss)
 
6,427

 
(9,563
)
Comprehensive Income
 
$
45,019

 
$
26,417

 
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,
2014

 
December 31,
2013

Assets
 

 
 

Interest-Bearing Deposits
$
4,085

 
$
3,617

Funds Sold
382,154

 
271,414

Investment Securities
 

 
 

Available-for-Sale
2,188,064

 
2,243,697

     Held to Maturity (Fair Value of $4,774,032 and $4,697,587)
4,777,494

 
4,744,519

Loans Held for Sale
2,437

 
6,435

Loans and Leases
6,209,857

 
6,095,387

Allowance for Loan and Lease Losses
(114,126
)
 
(115,454
)
Net Loans and Leases
6,095,731

 
5,979,933

Total Earning Assets
13,449,965

 
13,249,615

Cash and Noninterest-Bearing Deposits
159,079

 
188,715

Premises and Equipment
107,323

 
108,636

Accrued Interest Receivable
46,431

 
43,930

Foreclosed Real Estate
3,450

 
3,205

Mortgage Servicing Rights
27,378

 
28,123

Goodwill
31,517

 
31,517

Other Assets
437,975

 
430,539

Total Assets
$
14,263,118

 
$
14,084,280

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
3,679,410

 
$
3,681,128

Interest-Bearing Demand
2,378,414

 
2,355,608

Savings
4,515,026

 
4,560,150

Time
1,471,623

 
1,317,770

Total Deposits
12,044,473

 
11,914,656

Funds Purchased
9,982

 
9,982

Short-Term Borrowings
375

 
—

Securities Sold Under Agreements to Repurchase
797,213

 
770,049

Long-Term Debt
174,695

 
174,706

Retirement Benefits Payable
35,111

 
34,965

Accrued Interest Payable
5,743

 
4,871

Taxes Payable and Deferred Taxes
45,811

 
34,907

Other Liabilities
120,811

 
128,168

Total Liabilities
13,234,214

 
13,072,304

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: March 31, 2014 - 57,620,212 / 44,467,593
and December 31, 2013 - 57,480,846 / 44,490,385)
573

 
572

Capital Surplus
524,912

 
522,505

Accumulated Other Comprehensive Loss
(25,396
)
 
(31,823
)
Retained Earnings
1,170,068

 
1,151,754

Treasury Stock, at Cost (Shares: March 31, 2014 - 13,152,619
and December 31, 2013 - 12,990,461)
(641,253
)
 
(631,032
)
Total Shareholders’ Equity
1,028,904

 
1,011,976

Total Liabilities and Shareholders’ Equity
$
14,263,118

 
$
14,084,280

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

4

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
(dollars in thousands)
Common
Shares Outstanding

 
Common Stock

 
Capital
Surplus

 
Accum.
Other
Compre-
hensive
Income
(Loss)

 
Retained Earnings

 
Treasury Stock

 
Total

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

 
$
572

 
$
522,505

 
$
(31,823
)
 
$
1,151,754

 
$
(631,032
)
 
$
1,011,976

Net Income
—

 
—

 
—

 
—

 
38,592

 
—

 
38,592

Other Comprehensive Income
—

 
—

 
—

 
6,427

 
—

 
—

 
6,427

Share-Based Compensation
—

 
—

 
1,808

 
—

 
—

 
—

 
1,808

Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits
222,762

 
1

 
599

 
—

 
(205
)
 
4,063

 
4,458

Common Stock Repurchased
(245,554
)
 
—

 
—

 
—

 
—

 
(14,284
)
 
(14,284
)
Cash Dividends Paid ($0.45 per share)
—

 
—

 
—

 
—

 
(20,073
)
 
—

 
(20,073
)
Balance as of March 31, 2014
44,467,593

 
$
573

 
$
524,912

 
$
(25,396
)
 
$
1,170,068

 
$
(641,253
)
 
$
1,028,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

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)
2014

 
2013

Operating Activities
 

 
 

Net Income
$
38,592

 
$
35,980

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

 
 

Depreciation and Amortization
3,085

 
3,107

Amortization of Deferred Loan and Lease Fees
(482
)
 
(753
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
12,157

 
15,848

Share-Based Compensation
1,808

 
1,280

Benefit Plan Contributions
(326
)
 
(345
)
Deferred Income Taxes
4,482

 
134

Net Gains on Sales of Loans and Leases
(821
)
 
(8,586
)
Net Gains on Investment Securities
(2,160
)
 
—

Proceeds from Sales of Loans Held for Sale
39,206

 
231,026

Originations of Loans Held for Sale
(34,390
)
 
(226,325
)
Tax Benefits from Share-Based Compensation
(353
)
 
(451
)
Net Change in Other Assets and Other Liabilities
(11,557
)
 
(23,036
)
Net Cash Provided by Operating Activities
49,241

 
27,879

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Prepayments and Maturities
82,737

 
302,190

Proceeds from Sales
10,735

 
—

Purchases
(31,268
)
 
(246,146
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
177,352

 
283,023

Purchases
(216,533
)
 
(296,836
)
Net Change in Loans and Leases
(116,377
)
 
69,411

Premises and Equipment, Net
(1,772
)
 
(2,946
)
Net Cash Provided by (Used in) Investing Activities
(95,126
)
 
108,696

 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
129,817

 
(277,622
)
Net Change in Short-Term Borrowings
27,539

 
44,771

Proceeds from Long-Term Debt
—

 
50,000

Tax Benefits from Share-Based Compensation
353

 
451

Proceeds from Issuance of Common Stock
4,105

 
4,863

Repurchase of Common Stock
(14,284
)
 
(8,299
)
Cash Dividends Paid
(20,073
)
 
(20,230
)
Net Cash Provided by (Used in) Financing Activities
127,457

 
(206,066
)
 
 
 
 
Net Change in Cash and Cash Equivalents
81,572

 
(69,491
)
Cash and Cash Equivalents at Beginning of Period
463,746

 
352,861

Cash and Cash Equivalents at End of Period
$
545,318

 
$
283,370

Supplemental Information
 

 
 

Cash Paid for Interest
$
8,512

 
$
9,316

Cash Paid for Income Taxes
1,353

 
6,038

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
982

 
1,356

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

6

Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Use of Estimates in the Preparation of Financial Statements

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

Accounting Standards Adopted in 2014

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

Accounting Standards Pending Adoption

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


7

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

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, 2014 and December 31, 2013 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

March 31, 2014
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
368,033

 
$
6,079

 
$
(133
)
 
$
373,979

Debt Securities Issued by States and Political Subdivisions
718,801

 
11,457

 
(7,139
)
 
723,119

Debt Securities Issued by Corporations
265,040

 
1,103

 
(6,582
)
 
259,561

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
592,588

 
13,743

 
(1,348
)
 
604,983

    Residential - U.S. Government-Sponsored Enterprises
20,034

 
1,374

 
—

 
21,408

    Commercial - Government Agencies
215,033

 
—

 
(10,019
)
 
205,014

Total Mortgage-Backed Securities
827,655

 
15,117

 
(11,367
)
 
831,405

Total
$
2,179,529

 
$
33,756

 
$
(25,221
)
 
$
2,188,064

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
498,540

 
$
2,776

 
$
(3,463
)
 
$
497,853

Debt Securities Issued by States and Political Subdivisions
252,179

 
6,507

 
—

 
258,686

Debt Securities Issued by Corporations
178,032

 
5

 
(4,631
)
 
173,406

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,408,764

 
41,169

 
(39,502
)
 
3,410,431

    Residential - U.S. Government-Sponsored Enterprises
118,555

 
1,335

 
(508
)
 
119,382

    Commercial - Government Agencies
321,424

 
—

 
(7,150
)
 
314,274

Total Mortgage-Backed Securities
3,848,743

 
42,504


(47,160
)

3,844,087

Total
$
4,777,494

 
$
51,792

 
$
(55,254
)
 
$
4,774,032

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
390,873

 
$
6,640

 
$
(234
)
 
$
397,279

Debt Securities Issued by States and Political Subdivisions
691,861

 
8,396

 
(13,455
)
 
686,802

Debt Securities Issued by Corporations
280,172

 
1,165

 
(7,836
)
 
273,501

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
641,227

 
13,816

 
(1,849
)
 
653,194

    Residential - U.S. Government-Sponsored Enterprises
21,865

 
1,403

 
—

 
23,268

    Commercial - Government Agencies
219,859

 
—

 
(10,206
)
 
209,653

Total Mortgage-Backed Securities
882,951

 
15,219

 
(12,055
)
 
886,115

Total
$
2,245,857

 
$
31,420

 
$
(33,580
)
 
$
2,243,697

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
433,987

 
$
3,045

 
$
(3,667
)
 
$
433,365

Debt Securities Issued by States and Political Subdivisions
253,039

 
817

 
(133
)
 
253,723

Debt Securities Issued by Corporations
190,181

 
—

 
(5,708
)
 
184,473

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
3,523,343

 
31,786

 
(66,572
)
 
3,488,557

    Residential - U.S. Government-Sponsored Enterprises
21,602

 
1,423

 
—

 
23,025

    Commercial - Government Agencies
322,367

 
—

 
(7,923
)
 
314,444

Total Mortgage-Backed Securities
3,867,312

 
33,209

 
(74,495
)
 
3,826,026

Total
$
4,744,519

 
$
37,071

 
$
(84,003
)
 
$
4,697,587


9


The table below presents an analysis of the contractual maturities of the Company’s investment securities as of March 31, 2014.  Debt securities issued by government agencies (Small Business Administration securities) and mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
(dollars in thousands)
Amortized Cost

 
Fair Value

Available-for-Sale:
 

 
 

Due in One Year or Less
$
29,156

 
$
29,470

Due After One Year Through Five Years
271,563

 
276,009

Due After Five Years Through Ten Years
625,824

 
619,099

Due After Ten Years
117,173

 
119,934

 
1,043,716

 
1,044,512

 
 
 
 
Debt Securities Issued by Government Agencies
308,158

 
312,147

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
592,588

 
604,983

    Residential - U.S. Government-Sponsored Enterprises
20,034

 
21,408

    Commercial - Government Agencies
215,033

 
205,014

Total Mortgage-Backed Securities
827,655

 
831,405

Total
$
2,179,529

 
$
2,188,064

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
30,130

 
$
30,381

Due After One Year Through Five Years
468,410

 
467,472

Due After Five Years Through Ten Years
164,682

 
166,977

Due After Ten Years
265,529

 
265,115

 
928,751

 
929,945

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
3,408,764

 
3,410,431

    Residential - U.S. Government-Sponsored Enterprises
118,555

 
119,382

    Commercial - Government Agencies
321,424

 
314,274

Total Mortgage-Backed Securities
3,848,743

 
3,844,087

Total
$
4,777,494

 
$
4,774,032


Investment securities with carrying values of $2.7 billion and $2.6 billion as of March 31, 2014 and December 31, 2013, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

The table below presents the gains and losses from the sales of investment securities in the first quarter of 2014. There were no sales of investment securities in the first quarter of 2013.
 
Three Months Ended
March 31,
(dollars in thousands)
2014

 
2013

Gross Gains on Sales of Investment Securities
$
2,160

 
$
—

Gross Losses on Sales of Investment Securities
—

 
—

Net Gains on Sales of Investment Securities
$
2,160

 
$
—




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, 2014
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
17,833

 
$
(123
)
 
$
1,900

 
$
(10
)
 
$
19,733

 
$
(133
)
Debt Securities Issued by States
   and Political Subdivisions
307,060

 
(5,215
)
 
42,806

 
(1,924
)
 
349,866

 
(7,139
)
Debt Securities Issued by Corporations
125,147

 
(2,989
)
 
76,459

 
(3,593
)
 
201,606

 
(6,582
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
15,852

 
(496
)
 
9,449

 
(852
)
 
25,301

 
(1,348
)
    Commercial - Government Agencies
57,123

 
(1,729
)
 
147,891

 
(8,290
)
 
205,014

 
(10,019
)
Total Mortgage-Backed Securities
72,975

 
(2,225
)
 
157,340

 
(9,142
)
 
230,315

 
(11,367
)
Total
$
523,015

 
$
(10,552
)
 
$
278,505

 
$
(14,669
)
 
$
801,520

 
$
(25,221
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
336,285

 
$
(3,463
)
 
$
—

 
$
—

 
$
336,285

 
$
(3,463
)
Debt Securities Issued by Corporations
143,607

 
(3,348
)
 
20,419

 
(1,283
)
 
164,026

 
(4,631
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
1,347,544

 
(29,120
)
 
203,201

 
(10,382
)
 
1,550,745

 
(39,502
)
    Residential - U.S. Government-Sponsored
       Enterprises
97,848

 
(508
)
 
—

 
—

 
97,848

 
(508
)
    Commercial - Government Agencies
117,174

 
(1,365
)
 
197,100

 
(5,785
)
 
314,274

 
(7,150
)
Total Mortgage-Backed Securities
1,562,566

 
(30,993
)
 
400,301

 
(16,167
)
 
1,962,867

 
(47,160
)
Total
$
2,042,458

 
$
(37,804
)
 
$
420,720

 
$
(17,450
)
 
$
2,463,178

 
$
(55,254
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
26,181

 
$
(225
)
 
$
2,117

 
$
(9
)
 
$
28,298

 
$
(234
)
Debt Securities Issued by States
     and Political Subdivisions
415,718

 
(10,934
)
 
42,607

 
(2,521
)
 
458,325

 
(13,455
)
Debt Securities Issued by Corporations
200,364

 
(7,836
)
 
—

 
—

 
200,364

 
(7,836
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
76,744

 
(781
)
 
10,027

 
(1,068
)
 
86,771

 
(1,849
)
     Commercial - Government Agencies
164,478

 
(7,935
)
 
45,175

 
(2,271
)
 
209,653

 
(10,206
)
Total Mortgage-Backed Securities
241,222

 
(8,716
)
 
55,202

 
(3,339
)
 
296,424

 
(12,055
)
Total
$
883,485

 
$
(27,711
)
 
$
99,926

 
$
(5,869
)
 
$
983,411

 
$
(33,580
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$
271,469

 
$
(3,667
)
 
$
—

 
$
—

 
$
271,469

 
$
(3,667
)
Debt Securities Issued by States
and Political Subdivisions
52,026

 
(133
)
 
—

 
—

 
52,026

 
(133
)
Debt Securities Issued by Corporations
163,736

 
(4,278
)
 
20,736

 
(1,430
)
 
184,472

 
(5,708
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
1,767,086

 
(54,067
)
 
190,939

 
(12,505
)
 
1,958,025

 
(66,572
)
     Commercial - Government Agencies
224,277

 
(4,753
)
 
90,167

 
(3,170
)
 
314,444

 
(7,923
)
Total Mortgage-Backed Securities
1,991,363

 
(58,820
)
 
281,106

 
(15,675
)
 
2,272,469

 
(74,495
)
Total
$
2,478,594

 
$
(66,898
)
 
$
301,842

 
$
(17,105
)
 
$
2,780,436

 
$
(84,003
)


11

The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2014, which was comprised of 261 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, 2014 and December 31, 2013, the gross unrealized losses reported for mortgage-backed securities were primarily related to investment securities issued by the Government National Mortgage Association. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Interest income from taxable and non-taxable investment securities for the three months ended March 31, 2014 and 2013 were as follows:
 
Three Months Ended
March 31,
(dollars in thousands)
2014

 
2013

Taxable
$
33,427

 
$
31,421

Non-Taxable
5,222

 
4,284

Total Interest Income from Investment Securities
$
38,649

 
$
35,705


As of March 31, 2014, included in the Company's investment securities at fair value were securities issued by political subdivisions within the State of Hawaii of $570.3 million, representing 58% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 94% were credit-rated Aa2 or better by Moody's while the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Also, approximately 76% of the Company's Hawaii municipal bond holdings were general obligation issuances. As of March 31, 2014, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company's municipal debt securities.

As of March 31, 2014, the carrying value of the Company’s Federal Home Loan Bank and Federal Reserve Bank stock was as follows:
(dollars in thousands)
March 31,
2014

 
December 31,
2013

Federal Home Loan Bank Stock
$
55,254

 
$
58,021

Federal Reserve Bank Stock
19,138

 
19,138

Total
$
74,392

 
$
77,159


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

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members such as the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares (conversion ratio is currently 0.4206).

During the first quarter of 2014, the Company recorded a $2.0 million gain on the sale of 22,000 Visa Class B shares (9,253 Class A equivalents). Concurrent with this sale, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the covered litigation, the remaining 482,114 Class B shares (202,777 Class A equivalents) that the Company owns are carried at a zero cost basis.


12

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, 2014 and December 31, 2013:

(dollars in thousands)
March 31,
2014

 
December 31,
2013

Commercial
 

 
 

Commercial and Industrial
$
955,599

 
$
911,367

Commercial Mortgage
1,284,181

 
1,247,510

Construction
91,452

 
107,349

Lease Financing
240,931

 
262,207

Total Commercial
2,572,163

 
2,528,433

Consumer
 

 
 

Residential Mortgage
2,305,153

 
2,282,894

Home Equity
797,341

 
773,385

Automobile
273,553

 
255,986

Other 1
261,647

 
254,689

Total Consumer
3,637,694

 
3,566,954

Total Loans and Leases
$
6,209,857

 
$
6,095,387

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

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income, were $0.7 million and $3.3 million for the three months ended March 31, 2014 and 2013, respectively.


13

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, 2014 and 2013.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of March 31, 2014 and 2013.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended March 31, 2014
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
71,446

 
$
44,008

 
$
115,454

Loans and Leases Charged-Off
(819
)
 
(3,219
)
 
(4,038
)
Recoveries on Loans and Leases Previously Charged-Off
941

 
1,769

 
2,710

Net Loans and Leases Charged-Off
122

 
(1,450
)
 
(1,328
)
Provision for Credit Losses
(178
)
 
178

 
—

Balance at End of Period
$
71,390

 
$
42,736

 
$
114,126

As of March 31, 2014
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
8,903

 
$
3,699

 
$
12,602

Collectively Evaluated for Impairment
62,487

 
39,037

 
101,524

Total
$
71,390

 
$
42,736

 
$
114,126

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
29,815

 
$
37,780

 
$
67,595

Collectively Evaluated for Impairment
2,542,348

 
3,599,914

 
6,142,262

Total
$
2,572,163

 
$
3,637,694

 
$
6,209,857

 
 
 
 
 
 
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


14

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.


15

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, 2014 and December 31, 2013.
 
March 31, 2014
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
910,763

 
$
1,220,428

 
$
88,514

 
$
240,249

 
$
2,459,954

Special Mention
13,078

 
25,615

 
—

 
27

 
38,720

Classified
31,758

 
38,138

 
2,938

 
655

 
73,489

Total
$
955,599

 
$
1,284,181

 
$
91,452

 
$
240,931

 
$
2,572,163

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,284,971

 
$
793,924

 
$
273,207

 
$
261,128

 
$
3,613,230

Classified
20,182

 
3,417

 
346

 
519

 
24,464

Total
$
2,305,153

 
$
797,341

 
$
273,553

 
$
261,647

 
$
3,637,694

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
6,209,857

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

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial

Pass
$
867,813

 
$
1,176,941

 
$
104,377

 
$
261,486

 
$
2,410,617

Special Mention
5,854

 
24,587

 
—

 
31

 
30,472

Classified
37,700

 
45,982

 
2,972

 
690

 
87,344

Total
$
911,367

 
$
1,247,510

 
$
107,349

 
$
262,207

 
$
2,528,433

 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 
Automobile

 
Other 1

 
Total
Consumer

Pass
$
2,261,891

 
$
769,051

 
$
255,664

 
$
253,910

 
$
3,540,516

Classified
21,003

 
4,334

 
322

 
779

 
26,438

Total
$
2,282,894

 
$
773,385

 
$
255,986

 
$
254,689

 
$
3,566,954

Total Recorded Investment in Loans and Leases
 
 

 
 

 
 

 
$
6,095,387

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

16

Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of March 31, 2014 and December 31, 2013.
(dollars in thousands)
30 - 59
Days
Past Due

 
60 - 89
Days
Past Due

 
Past Due
90 Days
or More

 
Non-
Accrual

 
Total
Past Due and
Non-Accrual

 
Current

 
Total
Loans and
Leases

 
Non-Accrual
Loans and
Leases that
are Current 2

As of March 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and Industrial
$
1,740

 
$
244

 
$
150

 
$
11,239

 
$
13,373

 
$
942,226

 
$
955,599

 
$
10,008

Commercial Mortgage
1,130

 
279

 
—

 
1,421

 
2,830

 
1,281,351

 
1,284,181

 
30

Construction
—

 
—

 
—

 
—

 
—

 
91,452

 
91,452

 
—

Lease Financing
—

 
—

 
—

 
—

 
—

 
240,931

 
240,931

 
—

Total Commercial
2,870

 
523

 
150

 
12,660

 
16,203

 
2,555,960

 
2,572,163

 
10,038

Consumer
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential Mortgage
8,438

 
2,788

 
5,729

 
19,003

 
35,958

 
2,269,195

 
2,305,153

 
5,594

Home Equity
6,102

 
2,431

 
2,845

 
1,935

 
13,313

 
784,028

 
797,341

 
117

Automobile
3,753

 
524

 
346

 
—

 
4,623

 
268,930

 
273,553

 
—

Other 1
2,173

 
1,282

 
644

 
—

 
4,099

 
257,548

 
261,647

 
—

Total Consumer
20,466

 
7,025

 
9,564

 
20,938

 
57,993

 
3,579,701

 
3,637,694

 
5,711

Total
$
23,336

 
$
7,548

 
$
9,714

 
$
33,598

 
$
74,196

 
$
6,135,661

 
$
6,209,857

 
$
15,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial