Edgar Filing: BANK OF HAWAII CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period

ended September 30, 2017

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 x 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 x

As of October 17, 2017, there were 42,478,643 shares of common stock outstanding.

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Bank of Hawaii Corporation

Form 10-Q

Index



		Page

Part I - Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Income – Three and nine months ended September 30, 2017 and 2016	2

	Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2017 and 2016	3

	Consolidated Statements of Condition – September 30, 2017 and December 31, 2016	4

	Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2017 and 2016	5

	Consolidated Statements of Cash Flows – Nine months ended September 30, 2017 and 2016	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81

Item 4.	Controls and Procedures	81

Part II - Other Information

Item 1A.	Risk Factors	82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 6.	Exhibits	82

Signatures		83

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share amounts)	2017			2016			2017		2016
Interest Income
Interest and Fees on Loans and Leases	$	94,621		$	83,489		$	273,467	$	246,707
Income on Investment Securities
Available-for-Sale	11,987			10,313			34,906		31,648
Held-to-Maturity	20,334			19,315			59,958		59,874
Deposits	5			1			12		7
Funds Sold	1,579			695			3,165		2,066
Other	235			166			673		531
Total Interest Income	128,761			113,979			372,181		340,833
Interest Expense
Deposits	6,663			3,232			15,352		9,199
Securities Sold Under Agreements to Repurchase	4,664			5,713			14,928		18,000
Funds Purchased	—			3			42		9
Short-Term Borrowings	—			—			64		—
Other Debt	1,117			1,119			3,327		3,139
Total Interest Expense	12,444			10,067			33,713		30,347
Net Interest Income	116,317			103,912			338,468		310,486
Provision for Credit Losses	4,000			2,500			12,650		1,500
Net Interest Income After Provision for Credit Losses	112,317			101,412			325,818		308,986
Noninterest Income
Trust and Asset Management	11,050			11,008			34,325		34,971
Mortgage Banking	3,237			6,362			10,356		13,639
Service Charges on Deposit Accounts	8,188			8,524			24,522		25,117
Fees, Exchange, and Other Service Charges	13,764			14,023			41,061		41,445
Investment Securities Gains (Losses), Net	(566		)	(328		)	11,047		10,540
Annuity and Insurance	1,429			1,653			5,585		5,560
Bank-Owned Life Insurance	1,861			1,911			4,908		5,010
Other	3,447			4,961			11,758		14,558
Total Noninterest Income	42,410			48,114			143,562		150,840
Noninterest Expense
Salaries and Benefits	51,626			49,725			153,341		150,528
Net Occupancy	7,727			8,510			24,026		22,671
Net Equipment	5,417			4,913			16,624		15,387
Data Processing	3,882			3,620			11,173		11,543
Professional Fees	3,044			2,396			8,415		7,082
FDIC Insurance	2,107			2,104			6,413		6,600
Other	14,795			16,264			45,363		47,178
Total Noninterest Expense	88,598			87,532			265,355		260,989
Income Before Provision for Income Taxes	66,129			61,994			204,025		198,837
Provision for Income Taxes	20,248			18,501			62,306		60,889
Net Income	$	45,881		$	43,493		$	141,719	$	137,948
Basic Earnings Per Share	$	1.09		$	1.02		$	3.35	$	3.23
Diluted Earnings Per Share	$	1.08		$	1.02		$	3.32	$	3.21
Dividends Declared Per Share	$	0.52		$	0.48		$	1.52	$	1.41
Basic Weighted Average Shares	42,251,541			42,543,122			42,336,441		42,730,571
Diluted Weighted Average Shares	42,565,364			42,778,346			42,662,163		42,947,059

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2017		2016			2017		2016
Net Income	$	45,881	$	43,493		$	141,719	$	137,948
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Gains (Losses) on Investment Securities	444		(5,528		)	8,444		8,323
Defined Benefit Plans	146		140			439		422
Total Other Comprehensive Income (Loss)	590		(5,388		)	8,883		8,745
Comprehensive Income	$	46,471	$	38,105		$	150,602	$	146,693

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)



(dollars in thousands)	September 30, 2017			December 31, 2016
Assets
Interest-Bearing Deposits in Other Banks	$	3,161		$	3,187
Funds Sold	512,868			707,343
Investment Securities
Available-for-Sale	2,322,668			2,186,041
Held-to-Maturity (Fair Value of $3,960,956 and $3,827,527)	3,960,598			3,832,997
Loans Held for Sale	9,752			62,499
Loans and Leases	9,573,956			8,949,785
Allowance for Loan and Lease Losses	(106,881		)	(104,273		)
Net Loans and Leases	9,467,075			8,845,512
Total Earning Assets	16,276,122			15,637,579
Cash and Due From Banks	245,487			169,077
Premises and Equipment, Net	125,162			113,505
Accrued Interest Receivable	51,526			46,444
Foreclosed Real Estate	1,393			1,686
Mortgage Servicing Rights	24,436			23,663
Goodwill	31,517			31,517
Bank-Owned Life Insurance	278,425			274,188
Other Assets	234,234			194,708
Total Assets	$	17,268,302		$	16,492,367

Liabilities
Deposits
Noninterest-Bearing Demand	$	4,825,643		$	4,772,727
Interest-Bearing Demand	2,896,559			2,934,107
Savings	5,363,866			5,395,699
Time	1,962,092			1,217,707
Total Deposits	15,048,160			14,320,240
Funds Purchased	—			9,616
Securities Sold Under Agreements to Repurchase	505,293			523,378
Other Debt	267,887			267,938
Retirement Benefits Payable	38,308			48,451
Accrued Interest Payable	6,717			5,334
Taxes Payable and Deferred Taxes	31,360			21,674
Other Liabilities	142,684			134,199
Total Liabilities	16,040,409			15,330,830
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: September 30, 2017 - 57,958,200 / 42,513,348 and December 31, 2016 - 57,856,672 / 42,635,978)	576			576
Capital Surplus	558,530			551,628
Accumulated Other Comprehensive Loss	(25,023		)	(33,906		)
Retained Earnings	1,491,830			1,415,440
Treasury Stock, at Cost (Shares: September 30, 2017 - 15,444,852 and December 31, 2016 - 15,220,694)	(798,020		)	(772,201		)
Total Shareholders’ Equity	1,227,893			1,161,537
Total Liabilities and Shareholders’ Equity	$	17,268,302		$	16,492,367

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

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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, 2016	42,635,978		$	576	$	551,628	$	(33,906	)	$	1,415,440		$	(772,201	)	$	1,161,537
Net Income	—		—		—		—			141,719			—			141,719
Other Comprehensive Income	—		—		—		8,883			—			—			8,883
Share-Based Compensation	—		—		5,332		—			—			—			5,332
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	319,377		—		1,570		—			(383		)	10,552			11,739
Common Stock Repurchased	(442,007	)	—		—		—			—			(36,371		)	(36,371		)
Cash Dividends Declared ($1.52 per share)	—		—		—		—			(64,946		)	—			(64,946		)
Balance as of September 30, 2017	42,513,348		$	576	$	558,530	$	(25,023	)	$	1,491,830		$	(798,020	)	$	1,227,893

Balance as of December 31, 2015	43,282,153		$	575	$	542,041	$	(23,557	)	$	1,316,260		$	(719,059	)	$	1,116,260
Net Income	—		—		—		—			137,948			—			137,948
Other Comprehensive Income	—		—		—		8,745			—			—			8,745
Share-Based Compensation	—		—		5,020		—			—			—			5,020
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	224,018		1		2,003		—			(314		)	6,224			7,914
Common Stock Repurchased	(772,658	)	—		—		—			—			(51,365		)	(51,365		)
Cash Dividends Declared ($1.41 per share)	—		—		—		—			(60,663		)	—			(60,663		)
Balance as of September 30, 2016	42,733,513		$	576	$	549,064	$	(14,812	)	$	1,393,231		$	(764,200	)	$	1,163,859

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended
	September 30,
(dollars in thousands)	2017			2016
Operating Activities
Net Income	$	141,719		$	137,948
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses	12,650			1,500
Depreciation and Amortization	9,832			9,734
Amortization of Deferred Loan and Lease Fees	(744		)	(1,089		)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	29,685			33,234
Share-Based Compensation	5,332			5,020
Benefit Plan Contributions	(11,098		)	(929		)
Deferred Income Taxes	3,871			6,465
Net Gains on Sales of Loans and Leases	(5,615		)	(8,061		)
Net Gains on Sales of Investment Securities	(11,047		)	(10,540		)
Proceeds from Sales of Loans Held for Sale	238,137			152,185
Originations of Loans Held for Sale	(231,464		)	(187,117		)
Net Tax Benefits from Share-Based Compensation	2,515			—
Excess Tax Benefits from Share-Based Compensation	—			(916		)
Net Change in Other Assets and Other Liabilities	(37,405		)	(14,297		)
Net Cash Provided by Operating Activities	146,368			123,137

Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities	278,719			288,928
Proceeds from Sales	11,052			10,766
Purchases	(417,899		)	(248,839		)
Investment Securities Held-to-Maturity:
Proceeds from Prepayments and Maturities	654,484			545,133
Purchases	(795,272		)	(394,547		)
Net Change in Loans and Leases	(722,352		)	(954,616		)
Proceeds from Sales of Loans	137,717			118,089
Premises and Equipment, Net	(21,489		)	(8,823		)
Net Cash Used in Investing Activities	(875,040		)	(643,909		)

Financing Activities
Net Change in Deposits	727,920			557,262
Net Change in Short-Term Borrowings	(27,701		)	(74,891		)
Proceeds from Long-Term Debt	—			75,000
Repayments of Long-Term Debt	—			(50,000		)
Excess Tax Benefits from Share-Based Compensation	—			916
Proceeds from Issuance of Common Stock	11,679			6,903
Repurchase of Common Stock	(36,371		)	(51,365		)
Cash Dividends Paid	(64,946		)	(60,663		)
Net Cash Provided by Financing Activities	610,581			403,162

Net Change in Cash and Cash Equivalents	(118,091		)	(117,610		)
Cash and Cash Equivalents at Beginning of Period	879,607			755,721
Cash and Cash Equivalents at End of Period	$	761,516		$	638,111
Supplemental Information
Cash Paid for Interest	$	32,331		$	28,952
Cash Paid for Income Taxes	49,957			51,257
Non-Cash Investing Activities:
Transfer from Loans to Foreclosed Real Estate	2,559			1,058
Transfers from Loans to Loans Held for Sale	86,625			140,439

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

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Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii. Bank of Hawaii Corporation and its subsidiaries (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands. The accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”).

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

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates in the Preparation of Financial Statements

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

Variable Interest Entities

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

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

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

Unfunded commitments to fund these low-income housing partnerships were $26.5 million and $16.2 million as of September 30, 2017 and December 31, 2016, respectively. These unfunded commitments are unconditional and legally binding

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

The Company also has limited partnership interests in solar energy tax credit partnership investments. These partnerships develop, build, own and operate solar renewable energy projects. Over the course of these investments, the Company expects to receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Tax benefits associated with these investments are generally recognized over six years.

These entities meet the definition of a VIE; however, the Company is not the primary beneficiary of the entities as the general partner has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. While the partnership agreements allow the limited partners, through a majority vote, to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause.

The investments in these entities are initially recorded at cost, which approximates the maximum exposure to loss as a result of the Company’s involvement with these unconsolidated entities. The balance of the Company’s investments in these entities was $83.3 million and $78.9 million as of September 30, 2017 and December 31, 2016, respectively, and is included in other assets in the consolidated statements of condition.

Correction of an Immaterial Error to the Financial Statements

The Company determined during the fourth quarter of 2016 the proceeds from the sale of residential mortgage loans transferred from portfolio to held for sale were incorrectly reported on the consolidated statements of cash flows. The consolidated statement of cash flows for the nine months ended September 30, 2016 was adjusted to decrease the originations of loans held for sale by $136.7 million, decrease the proceeds from sales of loans held for sale by $116.6 million, and decrease the net change in other assets and other liabilities by $0.1 million. The net result was a $20.1 million increase to the net cash provided by operating activities. In addition, the net change in loans and leases was increased by $138.2 million, and a new line item, proceeds from sales of loans, was inserted for $118.1 million, resulting in a $20.1 million increase to net cash used in investing activities. Lastly, listed in the Supplemental Information section as a non-cash investing activity, transfers from loans to loans held for sale was decreased by $3.5 million. These corrections did not impact the consolidated statements of income or the consolidated statements of condition. The Company evaluated the effect of the incorrect presentation of the consolidated statements of cash flows, both qualitatively and quantitatively, and concluded it did not materially misstate the Company’s previously issued financial statements.

Accounting Standards Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective; therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions. However, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. For the first nine months of 2017, the adoption of ASU No. 2016-09 resulted in a decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.

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In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. The Company elected to early adopt ASU No. 2017-09 in 2017. ASU No. 2017-09 did not have a material impact on the Company’s Consolidated Financial Statements.

Accounting Standards Pending Adoption

In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., to interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. The Company’s assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. The Company is also substantially complete with its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). In addition, the Company is evaluating the ASU’s expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price

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changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Although the Company has not finalized its evaluation of the impact of adopting ASU No. 2016-01, adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements. In addition, the Company is considering obtaining new software to aid in the transition to the new leasing guidance.

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

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the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is continuing its implementation efforts through its Company-wide implementation team. This team has assigned roles and responsibilities, key tasks to complete, and a general timeline to be followed. The implementation team meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, conferences, and peer bank meetings. Currently the team is in the process of gathering and reviewing historical data and evaluating different loss methodologies. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted: however, the Company has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, the Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

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Note 2. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2017 and December 31, 2016 were as follows:



(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	446,205	$	3,952	$	(953	)	$	449,204
Debt Securities Issued by States and Political Subdivisions	624,203		17,783		(23		)	641,963
Debt Securities Issued by Corporations	268,013		138		(2,305		)	265,846
Mortgage-Backed Securities:
Residential - Government Agencies	247,418		3,605		(1,047		)	249,976
Residential - U.S. Government-Sponsored Enterprises	646,013		1,056		(4,956		)	642,113
Commercial - Government Agencies	76,260		—		(2,694		)	73,566
Total Mortgage-Backed Securities	969,691		4,661		(8,697		)	965,655
Total	$	2,308,112	$	26,534	$	(11,978	)	$	2,322,668
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	425,086	$	380	$	(735	)	$	424,731
Debt Securities Issued by States and Political Subdivisions	239,462		14,283		—			253,745
Debt Securities Issued by Corporations	123,660		478		(1,156		)	122,982
Mortgage-Backed Securities:
Residential - Government Agencies	2,168,568		14,781		(21,313		)	2,162,036
Residential - U.S. Government-Sponsored Enterprises	795,992		1,637		(6,918		)	790,711
Commercial - Government Agencies	207,830		1,972		(3,051		)	206,751
Total Mortgage-Backed Securities	3,172,390		18,390		(31,282		)	3,159,498
Total	$	3,960,598	$	33,531	$	(33,173	)	$	3,960,956

December 31, 2016
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	407,478	$	2,531	$	(1,294	)	$	408,715
Debt Securities Issued by States and Political Subdivisions	662,231		11,455		(1,887		)	671,799
Debt Securities Issued by Corporations	273,044		5		(3,870		)	269,179
Mortgage-Backed Securities:
Residential - Government Agencies	240,412		4,577		(1,145		)	243,844
Residential - U.S. Government-Sponsored Enterprises	511,234		971		(5,218		)	506,987
Commercial - Government Agencies	89,544		—		(4,027		)	85,517
Total Mortgage-Backed Securities	841,190		5,548		(10,390		)	836,348
Total	$	2,183,943	$	19,539	$	(17,441	)	$	2,186,041
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	530,149	$	1,562	$	(771	)	$	530,940
Debt Securities Issued by States and Political Subdivisions	242,295		9,991		—			252,286
Debt Securities Issued by Corporations	135,620		416		(1,528		)	134,508
Mortgage-Backed Securities:
Residential - Government Agencies	1,940,076		20,567		(23,861		)	1,936,782
Residential - U.S. Government-Sponsored Enterprises	752,768		798		(10,919		)	742,647
Commercial - Government Agencies	232,089		940		(2,665		)	230,364
Total Mortgage-Backed Securities	2,924,933		22,305		(37,445		)	2,909,793
Total	$	3,832,997	$	34,274	$	(39,744	)	$	3,827,527

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The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2017. 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	$	79,756	$	80,005
Due After One Year Through Five Years	622,846		628,796
Due After Five Years Through Ten Years	164,664		172,362
Due After Ten Years	25,501		27,186
	892,767		908,349

Debt Securities Issued by Government Agencies	445,654		448,664
Mortgage-Backed Securities:
Residential - Government Agencies	247,418		249,976
Residential - U.S. Government-Sponsored Enterprises	646,013		642,113
Commercial - Government Agencies	76,260		73,566
Total Mortgage-Backed Securities	969,691		965,655
Total	$	2,308,112	$	2,322,668

Held-to-Maturity:
Due in One Year or Less	$	240,105	$	239,988
Due After One Year Through Five Years	255,274		257,753
Due After Five Years Through Ten Years	254,585		262,701
Due After Ten Years	38,244		41,016
	788,208		801,458
Mortgage-Backed Securities:
Residential - Government Agencies	2,168,568		2,162,036
Residential - U.S. Government-Sponsored Enterprises	795,992		790,711
Commercial - Government Agencies	207,830		206,751
Total Mortgage-Backed Securities	3,172,390		3,159,498
Total	$	3,960,598	$	3,960,956

Investment securities with carrying values of $2.7 billion and $2.4 billion as of September 30, 2017 and December 31, 2016, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

The table below presents the gains and losses from the sales of investment securities for the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2017			2016			2017			2016
Gross Gains on Sales of Investment Securities	$	—		$	—		$	12,467		$	11,180
Gross Losses on Sales of Investment Securities	(566		)	(328		)	(1,420		)	(640		)
Net Gains (Losses) on Sales of Investment Securities	$	(566	)	$	(328	)	$	11,047		$	10,540

The losses during the three and nine months ended September 30, 2017 and 2016 were due to fees paid to the counterparties of our prior Visa Class B share sale transactions.

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The Company’s investment securities in an unrealized loss position, segregated by continuous length of loss, were as follows:



	Less Than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2017
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	77,995	$	(420	)	$	152,914	$	(533	)	$	230,909	$	(953	)
Debt Securities Issued by States and Political Subdivisions	11,064		(20		)	746		(3		)	11,810		(23		)
Debt Securities Issued by Corporations	22,995		(8		)	202,713		(2,297		)	225,708		(2,305		)
Mortgage-Backed Securities:
Residential - Government Agencies	17,046		(4		)	12,048		(1,043		)	29,094		(1,047		)
Residential - U.S. Government-Sponsored Enterprises	389,869		(3,512		)	55,238		(1,444		)	445,107		(4,956		)
Commercial - Government Agencies	—		—			73,566		(2,694		)	73,566		(2,694		)
Total Mortgage-Backed Securities	406,915		(3,516		)	140,852		(5,181		)	547,767		(8,697		)
Total	$	518,969	$	(3,964	)	$	497,225	$	(8,014	)	$	1,016,194	$	(11,978	)
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	159,956	$	(238	)	$	49,804	$	(497	)	$	209,760	$	(735	)
Debt Securities Issued by Corporations	46,726		(716		)	14,589		(440		)	61,315		(1,156		)
Mortgage-Backed Securities:
Residential - Government Agencies	897,044		(6,532		)	516,479		(14,781		)	1,413,523		(21,313		)
Residential - U.S. Government-Sponsored Enterprises	508,545		(4,881		)	59,202		(2,037		)	567,747		(6,918		)
Commercial - Government Agencies	32,799		(573		)	55,820		(2,478		)	88,619		(3,051		)
Total Mortgage-Backed Securities	1,438,388		(11,986		)	631,501		(19,296		)	2,069,889		(31,282		)
Total	$	1,645,070	$	(12,940	)	$	695,894	$	(20,233	)	$	2,340,964	$	(33,173	)

December 31, 2016
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	143,715	$	(562	)	$	89,211	$	(732	)	$	232,926	$	(1,294	)
Debt Securities Issued by States and Political Subdivisions	211,188		(1,873		)	6,725		(14		)	217,913		(1,887		)
Debt Securities Issued by Corporations	67,332		(714		)	196,838		(3,156		)	264,170		(3,870		)
Mortgage-Backed Securities:
Residential - Government Agencies	38,355		(89		)	11,185		(1,056		)	49,540		(1,145		)
Residential - U.S. Government-Sponsored Enterprises	397,385		(5,218		)	—		—			397,385		(5,218		)
Commercial - Government Agencies	5,097		(164		)	80,420		(3,863		)	85,517		(4,027		)
Total Mortgage-Backed Securities	440,837		(5,471		)	91,605		(4,919		)	532,442		(10,390		)
Total	$	863,072	$	(8,620	)	$	384,379	$	(8,821	)	$	1,247,451	$	(17,441	)
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	169,926	$	(771	)	$	—	$	—		$	169,926	$	(771	)
Debt Securities Issued by Corporations	69,601		(971		)	15,933		(557		)	85,534		(1,528		)
Mortgage-Backed Securities:
Residential - Government Agencies	835,227		(15,313		)	231,377		(8,548		)	1,066,604		(23,861		)
Residential - U.S. Government-Sponsored Enterprises	693,047		(10,919		)	—		—			693,047		(10,919		)
Commercial - Government Agencies	87,586		(2,597		)	18,653		(68		)	106,239		(2,665		)
Total Mortgage-Backed Securities	1,615,860		(28,829		)	250,030		(8,616		)	1,865,890		(37,445		)
Total	$	1,855,387	$	(30,571	)	$	265,963	$	(9,173	)	$	2,121,350	$	(39,744	)

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The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2017, which were comprised of 306 securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. As of September 30, 2017 and December 31, 2016, the gross unrealized losses reported for mortgage-backed securities were mostly related to investment securities issued by the Government National Mortgage Association. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2017 and 2016 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2017		2016		2017		2016
Taxable	$	27,441	$	24,558	$	79,949	$	76,112
Non-Taxable	4,880		5,070		14,915		15,410
Total Interest Income from Investment Securities	$	32,321	$	29,628	$	94,864	$	91,522

As of September 30, 2017, included in the Company’s investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $510.3 million, representing 57% of the total fair value of the Company’s municipal debt securities. Of the entire Hawaii municipal bond portfolio, 95% were credit-rated Aa2 or better by Moody’s while the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Of the Company’s total Hawaii municipal bond holdings, 78% were general obligation issuances. As of September 30, 2017, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company’s municipal debt securities.

As of September 30, 2017 and December 31, 2016, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:



(dollars in thousands)	September 30, 2017		December 31, 2016
Federal Home Loan Bank Stock	$	20,000	$	20,000
Federal Reserve Bank Stock	20,645		20,063
Total	$	40,645	$	40,063

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

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of September 30, 2017, the conversion ratio was 1.6483.

During the first quarter of 2017, the Company recorded a $12.5 million gain on the sale of 90,000 Visa Class B shares. Concurrent with every sale of Visa Class B shares, the Company has entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 90,914 Class B shares (149,854 Class A equivalents) that the Company owns as of September 30, 2017 are carried at a zero cost basis.

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Note 3. Loans and Leases and the Allowance for Loan and Lease Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of September 30, 2017 and December 31, 2016:



(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial
Commercial and Industrial	$	1,252,238	$	1,249,791
Commercial Mortgage	2,050,998		1,889,551
Construction	232,487		270,018
Lease Financing	204,240		208,332
Total Commercial	3,739,963		3,617,692
Consumer
Residential Mortgage	3,366,634		3,163,073
Home Equity	1,528,353		1,334,163
Automobile	506,102		454,333
Other ¹	432,904		380,524
Total Consumer	5,833,993		5,332,093
Total Loans and Leases	$	9,573,956	$	8,949,785


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 $1.4 million and $3.6 million for the three months ended September 30, 2017 and 2016, respectively, and $4.6 million and $9.8 million for the nine months ended September 30, 2017 and 2016, respectively.

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

The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2017 and 2016. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of September 30, 2017 and 2016.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended September 30, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	66,182		$	40,171		$	106,353
Loans and Leases Charged-Off	(611		)	(5,607		)	(6,218		)
Recoveries on Loans and Leases Previously Charged-Off	598			2,148			2,746
Net Loans and Leases Recovered (Charged-Off)	(13		)	(3,459		)	(3,472		)
Provision for Credit Losses	295			3,705			4,000
Balance at End of Period	$	66,464		$	40,417		$	106,881
Nine Months Ended September 30, 2017
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,680		$	38,593		$	104,273
Loans and Leases Charged-Off	(909		)	(16,500		)	(17,409		)
Recoveries on Loans and Leases Previously Charged-Off	1,200			6,167			7,367
Net Loans and Leases Recovered (Charged-Off)	291			(10,333		)	(10,042		)
Provision for Credit Losses	493			12,157			12,650
Balance at End of Period	$	66,464		$	40,417		$	106,881
As of September 30, 2017
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	136		$	3,762		$	3,898
Collectively Evaluated for Impairment	66,328			36,655			102,983
Total	$	66,464		$	40,417		$	106,881
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	21,738		$	39,385		$	61,123
Collectively Evaluated for Impairment	3,718,225			5,794,608			9,512,833
Total	$	3,739,963		$	5,833,993		$	9,573,956

Three Months Ended September 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	62,029		$	41,903		$	103,932
Loans and Leases Charged-Off	(209		)	(4,707		)	(4,916		)
Recoveries on Loans and Leases Previously Charged-Off	296			2,221			2,517
Net Loans and Leases Recovered (Charged-Off)	87			(2,486		)	(2,399		)
Provision for Credit Losses	442			2,058			2,500
Balance at End of Period	$	62,558		$	41,475		$	104,033
Nine Months Ended September 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	60,714		$	42,166		$	102,880
Loans and Leases Charged-Off	(670		)	(12,888		)	(13,558		)
Recoveries on Loans and Leases Previously Charged-Off	7,619			5,592			13,211
Net Loans and Leases Recovered (Charged-Off)	6,949			(7,296		)	(347		)
Provision for Credit Losses	(5,105		)	6,605			1,500
Balance at End of Period	$	62,558		$	41,475		$	104,033
As of September 30, 2016
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	11		$	3,436		$	3,447
Collectively Evaluated for Impairment	62,547			38,039			100,586
Total	$	62,558		$	41,475		$	104,033
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	21,793		$	38,450		$	60,243
Collectively Evaluated for Impairment	3,467,761			5,166,093			8,633,854
Total	$	3,489,554		$	5,204,543		$	8,694,097

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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. 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.

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The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2017 and December 31, 2016.

September 30, 2017

(dollars in thousands)

Commercial

and Industrial

Commercial

Mortgage

Construction

Lease

Financing

Total

Commercial

Pass

1,206,294