0000046195-18-000047.txt : 20180723 0000046195-18-000047.hdr.sgml : 20180723 20180723170347 ACCESSION NUMBER: 0000046195-18-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 100 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180723 DATE AS OF CHANGE: 20180723 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF HAWAII CORP CENTRAL INDEX KEY: 0000046195 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 990148992 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06887 FILM NUMBER: 18965019 BUSINESS ADDRESS: STREET 1: 130 MERCHANT STREET CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8886433888 MAIL ADDRESS: STREET 1: 130 MERCHANT STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC CENTURY FINANCIAL CORP DATE OF NAME CHANGE: 19970430 FORMER COMPANY: FORMER CONFORMED NAME: BANCORP HAWAII INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HAWAII BANCORPORATION INC DATE OF NAME CHANGE: 19800128 10-Q 1 boh_20180630x10q.htm 10-Q Document

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 June 30, 2018
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 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 July 17, 2018, there were 42,031,229 shares of common stock outstanding.



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

1


Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(dollars in thousands, except per share amounts)
2018

 
2017

 
2018

 
2017

Interest Income
 

 
 

 
 

 
 

Interest and Fees on Loans and Leases
$
101,311

 
$
90,909

 
$
198,945

 
$
178,846

Income on Investment Securities
 
 
 
 
 
 
 
Available-for-Sale
12,380

 
11,835

 
24,521

 
22,919

Held-to-Maturity
20,711

 
19,918

 
42,007

 
39,624

Deposits
(4
)
 
2

 
14

 
7

Funds Sold
846

 
696

 
1,603

 
1,586

Other
341

 
208

 
641

 
438

Total Interest Income
135,585

 
123,568

 
267,731

 
243,420

Interest Expense
 

 
 

 
 

 
 

Deposits
9,459

 
4,998

 
17,040

 
8,689

Securities Sold Under Agreements to Repurchase
4,617

 
5,079

 
9,181

 
10,264

Funds Purchased
83

 
39

 
136

 
42

Short-Term Borrowings
13

 
64

 
29

 
64

Other Debt
917

 
1,109

 
1,893

 
2,210

Total Interest Expense
15,089

 
11,289

 
28,279

 
21,269

Net Interest Income
120,496

 
112,279

 
239,452

 
222,151

Provision for Credit Losses
3,500

 
4,250

 
7,625

 
8,650

Net Interest Income After Provision for Credit Losses
116,996

 
108,029

 
231,827

 
213,501

Noninterest Income
 

 
 

 
 

 
 

Trust and Asset Management
11,356

 
11,796

 
22,537

 
23,275

Mortgage Banking
2,179

 
3,819

 
4,324

 
7,119

Service Charges on Deposit Accounts
6,865

 
8,009

 
13,994

 
16,334

Fees, Exchange, and Other Service Charges
14,400

 
13,965

 
28,733

 
27,297

Investment Securities Gains (Losses), Net
(1,702
)
 
(520
)
 
(2,368
)
 
11,613

Annuity and Insurance
1,847

 
2,161

 
3,053

 
4,156

Bank-Owned Life Insurance
1,796

 
1,550

 
3,638

 
3,047

Other
4,557

 
4,456

 
11,422

 
8,311

Total Noninterest Income
41,298

 
45,236

 
85,333

 
101,152

Noninterest Expense
 

 
 

 
 

 
 

Salaries and Benefits
52,148

 
49,676

 
106,570

 
100,841

Net Occupancy
8,588

 
8,131

 
17,122

 
16,299

Net Equipment
5,845

 
5,706

 
11,372

 
11,207

Data Processing
4,563

 
3,881

 
8,454

 
7,291

Professional Fees
2,546

 
2,592

 
5,319

 
5,371

FDIC Insurance
2,182

 
2,097

 
4,339

 
4,306

Other
14,919

 
16,106

 
31,999

 
31,442

Total Noninterest Expense
90,791

 
88,189

 
185,175

 
176,757

Income Before Provision for Income Taxes
67,503

 
65,076

 
131,985

 
137,896

Provision for Income Taxes
12,785

 
20,414

 
23,227

 
42,058

Net Income
$
54,718

 
$
44,662

 
$
108,758

 
$
95,838

Basic Earnings Per Share
$
1.31

 
$
1.05

 
$
2.59

 
$
2.26

Diluted Earnings Per Share
$
1.30

 
$
1.05

 
$
2.57

 
$
2.24

Dividends Declared Per Share
$
0.60

 
$
0.50

 
$
1.12

 
$
1.00

Basic Weighted Average Shares
41,884,221

 
42,353,976

 
41,960,743

 
42,379,730

Diluted Weighted Average Shares
42,152,200

 
42,658,885

 
42,252,900

 
42,704,010

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

2


Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(dollars in thousands)
2018

 
2017

 
2018

 
2017

Net Income
$
54,718

 
$
44,662

 
$
108,758

 
$
95,838

Other Comprehensive Income (Loss), Net of Tax:
 

 
 

 
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
(2,974
)
 
3,106

 
(12,095
)
 
8,000

Defined Benefit Plans
216

 
147

 
432

 
293

Total Other Comprehensive Income (Loss)
(2,758
)
 
3,253

 
(11,663
)
 
8,293

Comprehensive Income
$
51,960

 
$
47,915

 
$
97,095

 
$
104,131

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

3


Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)
June 30,
2018

 
December 31,
2017

Assets
 

 
 

Interest-Bearing Deposits in Other Banks
$
3,524

 
$
3,421

Funds Sold
361,933

 
181,413

Investment Securities
 

 
 

Available-for-Sale
2,092,870

 
2,232,979

Held-to-Maturity (Fair Value of $3,500,497 and $3,894,121)
3,595,891

 
3,928,170

Loans Held for Sale
16,025

 
19,231

Loans and Leases
10,053,323

 
9,796,947

Allowance for Loan and Lease Losses
(108,188
)
 
(107,346
)
Net Loans and Leases
9,945,135

 
9,689,601

Total Earning Assets
16,015,378

 
16,054,815

Cash and Due From Banks
312,303

 
263,017

Premises and Equipment, Net
142,791

 
130,926

Accrued Interest Receivable
50,594

 
50,485

Foreclosed Real Estate
2,926

 
1,040

Mortgage Servicing Rights
24,583

 
24,622

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
281,018

 
280,034

Other Assets
263,052

 
252,596

Total Assets
$
17,124,162

 
$
17,089,052

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,729,203

 
$
4,724,300

Interest-Bearing Demand
3,111,069

 
3,082,563

Savings
5,389,763

 
5,389,013

Time
1,713,323

 
1,688,092

Total Deposits
14,943,358

 
14,883,968

Short-Term Borrowings
330

 

Securities Sold Under Agreements to Repurchase
504,193

 
505,293

Other Debt
235,681

 
260,716

Retirement Benefits Payable
36,730

 
37,312

Accrued Interest Payable
7,395

 
6,946

Taxes Payable and Deferred Taxes
15,136

 
24,009

Other Liabilities
133,622

 
138,940

Total Liabilities
15,876,445

 
15,857,184

Shareholders’ Equity
 

 
 

Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 30, 2018 - 58,070,285 / 42,084,066
and December 31, 2017 - 57,959,074 / 42,401,443)
577

 
576

Capital Surplus
566,436

 
561,161

Accumulated Other Comprehensive Loss
(53,855
)
 
(34,715
)
Retained Earnings
1,581,168

 
1,512,218

Treasury Stock, at Cost (Shares: June 30, 2018 - 15,986,219
and December 31, 2017 - 15,557,631)
(846,609
)
 
(807,372
)
Total Shareholders’ Equity
1,247,717

 
1,231,868

Total Liabilities and Shareholders’ Equity
$
17,124,162

 
$
17,089,052

 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, 2017
42,401,443

 
$
576

 
$
561,161

 
$
(34,715
)
 
$
1,512,218

 
$
(807,372
)
 
$
1,231,868

Net Income

 

 

 

 
108,758

 

 
108,758

Other Comprehensive Loss

 

 

 
(11,663
)
 

 

 
(11,663
)
Reclassification of the Income Tax Effects of the
Tax Cuts and Jobs Act from AOCI

 

 

 
(7,477
)
 
7,477

 

 

Share-Based Compensation

 

 
4,055

 

 

 

 
4,055

Common Stock Issued under Purchase and Equity
Compensation Plans
179,644

 
1

 
1,220

 

 
166

 
2,992

 
4,379

Common Stock Repurchased
(497,021
)
 

 

 

 

 
(42,229
)
 
(42,229
)
Cash Dividends Declared ($1.12 per share)

 

 

 

 
(47,451
)
 

 
(47,451
)
Balance as of June 30, 2018
42,084,066

 
$
577

 
$
566,436

 
$
(53,855
)
 
$
1,581,168

 
$
(846,609
)
 
$
1,247,717

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
42,635,978

 
$
576

 
$
551,628

 
$
(33,906
)
 
$
1,415,440

 
$
(772,201
)
 
$
1,161,537

Net Income

 

 

 

 
95,838

 

 
95,838

Other Comprehensive Income

 

 

 
8,293

 

 

 
8,293

Share-Based Compensation

 

 
3,726

 

 

 

 
3,726

Common Stock Issued under Purchase and Equity
Compensation Plans
275,605

 

 
1,055

 

 
(162
)
 
7,545

 
8,438

Common Stock Repurchased
(255,629
)
 

 

 

 

 
(21,287
)
 
(21,287
)
Cash Dividends Declared ($1.00 per share)

 

 

 

 
(42,788
)
 

 
(42,788
)
Balance as of June 30, 2017
42,655,954

 
$
576

 
$
556,409

 
$
(25,613
)
 
$
1,468,328

 
$
(785,943
)
 
$
1,213,757

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

5


Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
June 30,
(dollars in thousands)
2018

 
2017

Operating Activities
 

 
 

Net Income
$
108,758

 
$
95,838

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

 
 

Provision for Credit Losses
7,625

 
8,650

Depreciation and Amortization
6,788

 
6,565

Amortization of Deferred Loan and Lease Fees
(292
)
 
(535
)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net
17,632

 
20,027

Share-Based Compensation
4,055

 
3,726

Benefit Plan Contributions
(798
)
 
(741
)
Deferred Income Taxes
(2,496
)
 
3,635

Net Gains on Sales of Loans and Leases
(1,070
)
 
(3,971
)
Net Losses (Gains) on Sales of Investment Securities
2,368

 
(11,613
)
Proceeds from Sales of Loans Held for Sale
152,004

 
146,478

Originations of Loans Held for Sale
(148,513
)
 
(150,414
)
Net Tax Benefits from Share-Based Compensation
949

 
2,077

Net Change in Other Assets and Other Liabilities
(18,529
)
 
(21,803
)
Net Cash Provided by Operating Activities
128,481

 
97,919

 
 
 
 
Investing Activities
 

 
 

Investment Securities Available-for-Sale:
 

 
 

Proceeds from Sales, Prepayments and Maturities
209,572

 
203,177

Purchases
(99,254
)
 
(320,170
)
Investment Securities Held-to-Maturity:
 

 
 

Proceeds from Prepayments and Maturities
425,043

 
406,904

Purchases
(99,415
)
 
(365,498
)
Net Change in Loans and Leases
(264,304
)
 
(508,529
)
Proceeds from Sales of Loans

 
112,357

Premises and Equipment, Net
(18,652
)
 
(12,629
)
Net Cash Provided by (Used in) Investing Activities
152,990

 
(484,388
)
 
 
 
 
Financing Activities
 

 
 

Net Change in Deposits
59,390

 
464,409

Net Change in Short-Term Borrowings
(770
)
 
(27,702
)
Repayments of Long-Term Debt
(25,000
)
 

Proceeds from Issuance of Common Stock
4,498

 
8,457

Repurchase of Common Stock
(42,229
)
 
(21,287
)
Cash Dividends Paid
(47,451
)
 
(42,788
)
Net Cash Provided by (Used in) Financing Activities
(51,562
)
 
381,089

 
 
 
 
Net Change in Cash and Cash Equivalents
229,909

 
(5,380
)
Cash and Cash Equivalents at Beginning of Period
447,851

 
879,607

Cash and Cash Equivalents at End of Period
$
677,760

 
$
874,227

Supplemental Information
 

 
 

Cash Paid for Interest
$
27,830

 
$
21,498

Cash Paid for Income Taxes
24,487

 
32,058

Non-Cash Investing Activities:
 

 
 

Transfer from Loans to Foreclosed Real Estate
2,307

 
2,207

Transfers from Loans to Loans Held for Sale

 
62,727

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

6


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

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

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

The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. 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, 2017

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.


7


Unfunded commitments to fund these low-income housing partnerships were $13.8 million and $17.5 million as of June 30, 2018 and December 31, 2017, respectively. These unfunded commitments are unconditional and legally binding and are recorded in other liabilities in the consolidated statements of condition. See Note 6 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 $82.9 million and $87.6 million as of June 30, 2018 and December 31, 2017, respectively, and is included in other assets in the consolidated statements of condition.

Tax Cuts and Jobs Act

Public law No. 115-97, known as the Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The provisional amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company's deferred tax balance resulted in additional income tax expense of $3.6 million. An additional $0.1 million was expensed in the first quarter of 2018 due to the remeasurement of the Company’s deferred tax balance. In addition, during the first quarter of 2018, the Company recorded a $2.0 million basis adjustment on its low income housing partnership investments, which consequently reduced income tax expense by the same amount. The final impact of the Tax Act may differ from these estimates as a result of changes in management’s interpretations and assumptions, as well as new guidance that may be issued by the Internal Revenue Service.

Accounting Standards Adopted in 2018

In May 2014, 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. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including 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.” 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. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review 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. Based on this assessment, the

8


Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed 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). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs previously recorded as expense is now recorded as contra-revenue, and vice versa). These classification changes resulted in immaterial changes to both revenue and expense. The Company also determined that certain costs related to ATMs should be recorded as an expense rather than a reduction of revenue. This change did not have a material effect to noninterest income or expense. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the debit and credit card costs and the ATM costs reclassifications noted above. See Note 15 Revenue Recognition for more information.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company’s adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of June 30, 2018 using an exit price notion (see Note 14 Fair Value of Assets and Liabilities).

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” At the time, GAAP was unclear or did 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 was effective for interim and annual reporting periods beginning after December 15, 2017. Entities were 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. The Company adopted ASU No. 2016-15 on January 1, 2018. ASU No. 2016-15 did not 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 are required to 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 of net periodic benefit cost separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 became effective for interim and annual reporting periods beginning after December 15, 2017. 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 adopted ASU No. 2017-07 on January 1, 2018 and utilized 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 did not have a material impact on the Company’s Consolidated Financial Statements.


9


In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of the Tax Act.  Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected.  ASU No. 2018-02 is effective for the Company's reporting period beginning on January 1, 2019; early adoption is permitted. The Company elected to early adopt ASU No. 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. The reclassification decreased AOCI and increased retained earnings by $7.5 million, with zero net effect on total shareholders’ equity. The Company utilizes the individual securities approach when releasing income tax effects from AOCI for its investment securities.

Accounting Standards Pending Adoption

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 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 the Company’s 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. The Company is nearing completion of identifying a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. In addition, the Company purchased new software to aid in the transition to the new leasing guidance, and the majority of the Company’s leases have been entered into this new leasing software program.

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 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,

10


key tasks to complete, and a general timeline to be followed. The 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. The team is currently working with an advisory consultant in reviewing and validating the possible methodologies the Company can consider for CECL before determining the specific methodologies that will be utilized.  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.  The Company is continuing to evaluate the extent of the potential impact. 

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.


11


Note 2.  Cash and Cash Equivalents

The following table provides a reconciliation of cash and cash equivalents reported within the consolidated statements of condition that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
(dollars in thousands)
June 30,
2018

 
December 31,
2017

Interest-Bearing Deposits in Other Banks
$
3,524

 
$
3,421

Funds Sold
361,933

 
181,413

Cash and Due From Banks
312,303

 
263,017

Total Cash and Cash Equivalents
$
677,760

 
$
447,851

 
 
 
 


12


Note 3.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of June 30, 2018 and December 31, 2017 were as follows:

(dollars in thousands)
Amortized Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized Losses

 
Fair Value

June 30, 2018
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
446,766

 
$
578

 
$
(2,632
)
 
$
444,712

Debt Securities Issued by States and Political Subdivisions
587,160

 
6,655

 
(1,214
)
 
592,601

Debt Securities Issued by Corporations
224,997

 
79

 
(1,299
)
 
223,777

Mortgage-Backed Securities:
 

 
 

 
 

 
 

    Residential - Government Agencies
209,624

 
2,180

 
(1,108
)
 
210,696

    Residential - U.S. Government-Sponsored Enterprises
579,602

 
383

 
(20,117
)
 
559,868

    Commercial - Government Agencies
65,565

 

 
(4,349
)
 
61,216

Total Mortgage-Backed Securities
854,791

 
2,563

 
(25,574
)
 
831,780

Total
$
2,113,714

 
$
9,875

 
$
(30,719
)
 
$
2,092,870

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
364,604

 
$
1

 
$
(1,824
)
 
$
362,781

Debt Securities Issued by States and Political Subdivisions
236,567

 
7,400

 

 
243,967

Debt Securities Issued by Corporations
104,955

 

 
(2,977
)
 
101,978

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,003,782

 
4,976

 
(70,085
)
 
1,938,673

    Residential - U.S. Government-Sponsored Enterprises
701,326

 
273

 
(26,872
)
 
674,727

    Commercial - Government Agencies
184,657

 
45

 
(6,331
)
 
178,371

Total Mortgage-Backed Securities
2,889,765

 
5,294


(103,288
)

2,791,771

Total
$
3,595,891

 
$
12,695

 
$
(108,089
)
 
$
3,500,497

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

Available-for-Sale:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
424,912

 
$
2,053

 
$
(1,035
)
 
$
425,930

Debt Securities Issued by States and Political Subdivisions
618,167

 
9,894

 
(1,042
)
 
627,019

Debt Securities Issued by Corporations
268,003

 
199

 
(2,091
)
 
266,111

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
233,268

 
3,129

 
(1,037
)
 
235,360

    Residential - U.S. Government-Sponsored Enterprises
619,795

 
420

 
(10,403
)
 
609,812

    Commercial - Government Agencies
71,999

 

 
(3,252
)
 
68,747

Total Mortgage-Backed Securities
925,062

 
3,549

 
(14,692
)
 
913,919

Total
$
2,236,144

 
$
15,695

 
$
(18,860
)
 
$
2,232,979

Held-to-Maturity:
 

 
 

 
 

 
 

Debt Securities Issued by the U.S. Treasury and Government Agencies
$
375,074

 
$
18

 
$
(1,451
)
 
$
373,641

Debt Securities Issued by States and Political Subdivisions
238,504

 
9,125

 

 
247,629

Debt Securities Issued by Corporations
119,635

 
123

 
(1,591
)
 
118,167

Mortgage-Backed Securities:
 
 
 
 
 
 
 

    Residential - Government Agencies
2,229,985

 
9,975

 
(37,047
)
 
2,202,913

    Residential - U.S. Government-Sponsored Enterprises
763,312

 
911

 
(11,255
)
 
752,968

    Commercial - Government Agencies
201,660

 
797

 
(3,654
)
 
198,803

Total Mortgage-Backed Securities
3,194,957

 
11,683

 
(51,956
)
 
3,154,684

Total
$
3,928,170

 
$
20,949

 
$
(54,998
)
 
$
3,894,121


13



The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2018.  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
$
46,250

 
$
46,201

Due After One Year Through Five Years
628,271

 
628,659

Due After Five Years Through Ten Years
115,193

 
118,197

Due After Ten Years
22,994

 
23,856

 
812,708

 
816,913

 
 
 
 
Debt Securities Issued by Government Agencies
446,215

 
444,177

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
209,624

 
210,696

    Residential - U.S. Government-Sponsored Enterprises
579,602

 
559,868

    Commercial - Government Agencies
65,565

 
61,216

Total Mortgage-Backed Securities
854,791

 
831,780

Total
$
2,113,714

 
$
2,092,870

 
 
 
 
Held-to-Maturity:
 

 
 

Due in One Year or Less
$
244,843

 
$
244,173

Due After One Year Through Five Years
209,721

 
210,339

Due After Five Years Through Ten Years
234,444

 
236,128

Due After Ten Years
17,118

 
18,086

 
706,126

 
708,726

Mortgage-Backed Securities:
 

 
 

    Residential - Government Agencies
2,003,782

 
1,938,673

    Residential - U.S. Government-Sponsored Enterprises
701,326

 
674,727

    Commercial - Government Agencies
184,657

 
178,371

Total Mortgage-Backed Securities
2,889,765

 
2,791,771

Total
$
3,595,891

 
$
3,500,497


Investment securities with carrying values of $2.3 billion and $2.4 billion as of June 30, 2018 and December 31, 2017, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

The table below presents the gains and losses from the sales of investment securities for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2018

 
2017

 
2018

 
2017

Gross Gains on Sales of Investment Securities
$

 
$

 
$

 
$
12,467

Gross Losses on Sales of Investment Securities
(1,702
)
 
(520
)
 
(2,368
)
 
(854
)
Net Gains (Losses) on Sales of Investment Securities
$
(1,702
)
 
$
(520
)
 
$
(2,368
)
 
$
11,613


The losses during    the three and six months ended June 30, 2018 were due to fees paid to the counterparties of the Company’s prior Visa Class B share sale transactions combined with a $1.0 million liability related to a change in the Visa Class B conversion ratio. The losses during the three and six months ended June 30, 2017 were due to fees paid to the counterparties of the Company’s prior Visa Class B share sale transactions.


14


The Company’s gross unrealized losses and the related fair value of investment securities, aggregated by investment category and length of time in a continuous unrealized loss position, were as follows:
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

 
Fair Value

 
Gross Unrealized Losses

June 30, 2018
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
230,073

 
$
(1,367
)
 
$
142,480

 
$
(1,265
)
 
$
372,553

 
$
(2,632
)
Debt Securities Issued by States
   and Political Subdivisions
199,140

 
(1,207
)
 
677

 
(7
)
 
199,817

 
(1,214
)
Debt Securities Issued by Corporations
24,725

 
(275
)
 
163,972

 
(1,024
)
 
188,697

 
(1,299
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 


 


    Residential - Government Agencies
8,510

 
(71
)
 
18,042

 
(1,037
)
 
26,552

 
(1,108
)
    Residential - U.S. Government-Sponsored Enterprises
344,981

 
(10,255
)
 
191,811

 
(9,862
)
 
536,792

 
(20,117
)
    Commercial - Government Agencies

 

 
61,216

 
(4,349
)
 
61,216

 
(4,349
)
Total Mortgage-Backed Securities
353,491

 
(10,326
)
 
271,069

 
(15,248
)
 
624,560

 
(25,574
)
Total
$
807,429

 
$
(13,175
)
 
$
578,198

 
$
(17,544
)
 
$
1,385,627

 
$
(30,719
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$
273,578

 
$
(826
)
 
$
69,214

 
$
(998
)
 
$
342,792

 
$
(1,824
)
Debt Securities Issued by Corporations
54,449

 
(1,000
)
 
47,529

 
(1,977
)
 
101,978

 
(2,977
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
    Residential - Government Agencies
988,147

 
(31,731
)
 
684,927

 
(38,354
)
 
1,673,074

 
(70,085
)
    Residential - U.S. Government-Sponsored Enterprises
364,248

 
(11,698
)
 
304,212

 
(15,174
)
 
668,460

 
(26,872
)
    Commercial - Government Agencies
95,460

 
(1,154
)
 
76,595

 
(5,177
)
 
172,055

 
(6,331
)
Total Mortgage-Backed Securities
1,447,855

 
(44,583
)
 
1,065,734

 
(58,705
)
 
2,513,589

 
(103,288
)
Total
$
1,775,882

 
$
(46,409
)
 
$
1,182,477

 
$
(61,680
)
 
$
2,958,359

 
$
(108,089
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$
103,842

 
$
(599
)
 
$
132,071

 
$
(436
)
 
$
235,913

 
$
(1,035
)
Debt Securities Issued by States
     and Political Subdivisions
172,343

 
(1,032
)
 
734

 
(10
)
 
173,077

 
(1,042
)
Debt Securities Issued by Corporations
12,985

 
(15
)
 
192,927

 
(2,076
)
 
205,912

 
(2,091
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
11,035

 
(4
)
 
10,618

 
(1,033
)
 
21,653

 
(1,037
)
     Residential - U.S. Government-Sponsored Enterprises
429,342

 
(5,720
)
 
150,887

 
(4,683
)
 
580,229

 
(10,403
)
     Commercial - Government Agencies

 

 
68,747

 
(3,252
)
 
68,747

 
(3,252
)
Total Mortgage-Backed Securities
440,377

 
(5,724
)
 
230,252

 
(8,968
)
 
670,629

 
(14,692
)
Total
$
729,547

 
$
(7,370
)
 
$
555,984

 
$
(11,490
)
 
$
1,285,531

 
$
(18,860
)
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$
254,283

 
$
(532
)
 
$
89,391

 
$
(919
)
 
$
343,674

 
$
(1,451
)
Debt Securities Issued by Corporations
25,490

 
(110
)
 
58,869

 
(1,481
)
 
84,359

 
(1,591
)
Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
 
     Residential - Government Agencies
1,030,472

 
(12,262
)
 
704,545

 
(24,785
)
 
1,735,017

 
(37,047
)
     Residential - U.S. Government-Sponsored Enterprises
293,530

 
(3,106
)
 
339,232

 
(8,149
)
 
632,762

 
(11,255
)
     Commercial - Government Agencies
497

 
(5
)
 
82,288

 
(3,649
)
 
82,785

 
(3,654
)
Total Mortgage-Backed Securities
1,324,499

 
(15,373
)
 
1,126,065

 
(36,583
)
 
2,450,564

 
(51,956
)
Total
$
1,604,272

 
$
(16,015
)
 
$
1,274,325

 
$
(38,983
)
 
$
2,878,597

 
$
(54,998
)


15


The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2018, which were comprised of 468 securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  As of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2018

 
2017

 
2018

 
2017

Taxable
$
28,405

 
$
26,741

 
$
57,076

 
$
52,508

Non-Taxable
4,686

 
5,012

 
9,452

 
10,035

Total Interest Income from Investment Securities
$
33,091

 
$
31,753

 
$
66,528

 
$
62,543


As of June 30, 2018, included in the Company’s investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $478.1 million, representing 57% of the total fair value of the Company’s municipal debt securities. Of the entire Hawaii municipal bond portfolio, 94% were credit-rated Aa2 or better by Moody’s while the remaining Hawaii municipal bonds were credit-rated A1 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 June 30, 2018, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company’s municipal debt securities.

As of June 30, 2018 and December 31, 2017, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:
(dollars in thousands)
June 30,
2018

 
December 31,
2017

Federal Home Loan Bank Stock
$
19,000

 
$
20,000

Federal Reserve Bank Stock
20,796

 
20,645

Total
$
39,796

 
$
40,645


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 June 30, 2018, the conversion ratio was 1.6298. See Note 12 Derivative Financial Instruments for more information.

The Company occasionally sells these Visa Class B shares to other financial institutions. Concurrent with every sale the Company enters 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 83,014 Class B shares (135,296 Class A equivalents) that the Company owns as of June 30, 2018 are carried at a zero cost basis.


16


Note 4.    Loans and Leases and the Allowance for Loan and Lease Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of June 30, 2018 and December 31, 2017:

(dollars in thousands)
June 30,
2018

 
December 31,
2017

Commercial
 

 
 

Commercial and Industrial
$
1,282,967

 
$
1,279,347

Commercial Mortgage
2,169,357

 
2,103,967

Construction
185,350

 
202,253

Lease Financing
178,598

 
180,931

Total Commercial
3,816,272

 
3,766,498

Consumer
 

 
 

Residential Mortgage
3,548,444

 
3,466,773

Home Equity
1,622,314

 
1,585,455

Automobile
592,705

 
528,474

Other 1
473,588

 
449,747

Total Consumer
6,237,051

 
6,030,449

Total Loans and Leases
$
10,053,323

 
$
9,796,947

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 $0.5 million and $1.8 million for the three months ended June 30, 2018 and 2017, respectively, and $0.8 million and $3.2 million for the six months ended June 30, 2018 and 2017, respectively.

17


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

The following presents by portfolio segment, the activity in the Allowance for the three and six months ended June 30, 2018 and 2017.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of June 30, 2018 and 2017.

(dollars in thousands)
Commercial

 
Consumer

 
Total

Three Months Ended June 30, 2018
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
64,110

 
$
43,828

 
$
107,938

Loans and Leases Charged-Off
(485
)
 
(5,176
)
 
(5,661
)
Recoveries on Loans and Leases Previously Charged-Off
366

 
2,045

 
2,411

Net Loans and Leases Recovered (Charged-Off)
(119
)
 
(3,131
)
 
(3,250
)
Provision for Credit Losses
(279
)
 
3,779

 
3,500

Balance at End of Period
$
63,712

 
$
44,476

 
$
108,188

Six Months Ended June 30, 2018
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
65,822

 
$
41,524

 
$
107,346

Loans and Leases Charged-Off
(691
)
 
(10,958
)
 
(11,649
)
Recoveries on Loans and Leases Previously Charged-Off
694

 
4,172

 
4,866

Net Loans and Leases Recovered (Charged-Off)
3

 
(6,786
)
 
(6,783
)
Provision for Credit Losses
(2,113
)
 
9,738

 
7,625

Balance at End of Period
$
63,712

 
$
44,476

 
$
108,188

As of June 30, 2018
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
100

 
$
3,827

 
$
3,927

Collectively Evaluated for Impairment
63,612

 
40,649

 
104,261

Total
63,712

 
44,476

 
108,188

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
12,184

 
$
41,981

 
$
54,165

Collectively Evaluated for Impairment
3,804,088

 
6,195,070

 
9,999,158

Total
$
3,816,272

 
$
6,237,051

 
$
10,053,323

 
 
 
 
 
 
Three Months Ended June 30, 2017
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
66,893

 
$
38,171

 
$
105,064

Loans and Leases Charged-Off
(124
)
 
(5,363
)
 
(5,487
)
Recoveries on Loans and Leases Previously Charged-Off
266

 
2,260

 
2,526

Net Loans and Leases Recovered (Charged-Off)
142

 
(3,103
)
 
(2,961
)
Provision for Credit Losses
(853
)
 
5,103

 
4,250

Balance at End of Period
$
66,182

 
$
40,171

 
$
106,353

Six Months Ended June 30, 2017
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Balance at Beginning of Period
$
65,680

 
$
38,593

 
$
104,273

Loans and Leases Charged-Off
(298
)
 
(10,893
)
 
(11,191
)
Recoveries on Loans and Leases Previously Charged-Off
602

 
4,019

 
4,621

Net Loans and Leases Recovered (Charged-Off)
304

 
(6,874
)
 
(6,570
)
Provision for Credit Losses
198

 
8,452

 
8,650

Balance at End of Period
$
66,182

 
$
40,171

 
$
106,353

As of June 30, 2017
 

 
 

 
 

Allowance for Loan and Lease Losses:
 

 
 

 
 

Individually Evaluated for Impairment
$
45

 
$
3,792

 
$
3,837

Collectively Evaluated for Impairment
66,137

 
36,379

 
102,516

Total
$
66,182

 
$
40,171

 
$
106,353

Recorded Investment in Loans and Leases:
 

 
 

 
 

Individually Evaluated for Impairment
$
20,197

 
$
38,528

 
$
58,725

Collectively Evaluated for Impairment
3,684,715

 
5,644,173

 
9,328,888

Total
$
3,704,912

 
$
5,682,701

 
$
9,387,613


18


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 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.


19


The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 
Construction

 
Lease
Financing

 
Total
Commercial