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, 2017
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)
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| | |
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 18, 2017, there were 42,623,928 shares of common stock outstanding.
Bank of Hawaii Corporation
Form 10-Q
Index
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Part I - Financial Information | |
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Item 1. | Financial Statements (Unaudited) | |
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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) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
Interest Income | |
| | |
| | |
| | |
|
Interest and Fees on Loans and Leases | $ | 90,909 |
| | $ | 82,323 |
| | $ | 178,846 |
| | $ | 163,218 |
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Income on Investment Securities | | | | | | | |
Available-for-Sale | 11,835 |
| | 10,521 |
| | 22,919 |
| | 21,335 |
|
Held-to-Maturity | 19,918 |
| | 20,168 |
| | 39,624 |
| | 40,559 |
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Deposits | 2 |
| | 2 |
| | 7 |
| | 6 |
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Funds Sold | 696 |
| | 618 |
| | 1,586 |
| | 1,371 |
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Other | 208 |
| | 153 |
| | 438 |
| | 365 |
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Total Interest Income | 123,568 |
| | 113,785 |
| | 243,420 |
| | 226,854 |
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Interest Expense | |
| | |
| | |
| | |
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Deposits | 4,998 |
| | 3,081 |
| | 8,689 |
| | 5,967 |
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Securities Sold Under Agreements to Repurchase | 5,079 |
| | 6,134 |
| | 10,264 |
| | 12,287 |
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Funds Purchased | 39 |
| | 3 |
| | 42 |
| | 6 |
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Short-Term Borrowings | 64 |
| | — |
| | 64 |
| | — |
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Other Debt | 1,109 |
| | 1,017 |
| | 2,210 |
| | 2,020 |
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Total Interest Expense | 11,289 |
| | 10,235 |
| | 21,269 |
| | 20,280 |
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Net Interest Income | 112,279 |
| | 103,550 |
| | 222,151 |
| | 206,574 |
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Provision for Credit Losses | 4,250 |
| | 1,000 |
| | 8,650 |
| | (1,000 | ) |
Net Interest Income After Provision for Credit Losses | 108,029 |
| | 102,550 |
| | 213,501 |
| | 207,574 |
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Noninterest Income | |
| | |
| | |
| | |
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Trust and Asset Management | 11,796 |
| | 12,707 |
| | 23,275 |
| | 23,963 |
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Mortgage Banking | 3,819 |
| | 4,088 |
| | 7,119 |
| | 7,277 |
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Service Charges on Deposit Accounts | 8,009 |
| | 8,150 |
| | 16,334 |
| | 16,593 |
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Fees, Exchange, and Other Service Charges | 13,965 |
| | 13,978 |
| | 27,297 |
| | 27,422 |
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Investment Securities Gains (Losses), Net | (520 | ) | | (312 | ) | | 11,613 |
| | 10,868 |
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Annuity and Insurance | 2,161 |
| | 2,006 |
| | 4,156 |
| | 3,907 |
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Bank-Owned Life Insurance | 1,550 |
| | 1,551 |
| | 3,047 |
| | 3,099 |
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Other | 4,456 |
| | 4,351 |
| | 8,311 |
| | 9,597 |
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Total Noninterest Income | 45,236 |
| | 46,519 |
| | 101,152 |
| | 102,726 |
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Noninterest Expense | |
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| | |
| | |
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Salaries and Benefits | 50,113 |
| | 50,289 |
| | 101,715 |
| | 100,803 |
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Net Occupancy | 8,131 |
| | 7,158 |
| | 16,299 |
| | 14,161 |
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Net Equipment | 5,706 |
| | 5,065 |
| | 11,207 |
| | 10,474 |
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Data Processing | 3,881 |
| | 3,972 |
| | 7,291 |
| | 7,923 |
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Professional Fees | 2,592 |
| | 2,047 |
| | 5,371 |
| | 4,686 |
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FDIC Insurance | 2,097 |
| | 2,144 |
| | 4,306 |
| | 4,496 |
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Other | 15,669 |
| | 15,396 |
| | 30,568 |
| | 30,914 |
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Total Noninterest Expense | 88,189 |
| | 86,071 |
| | 176,757 |
| | 173,457 |
|
Income Before Provision for Income Taxes | 65,076 |
| | 62,998 |
| | 137,896 |
| | 136,843 |
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Provision for Income Taxes | 20,414 |
| | 18,753 |
| | 42,058 |
| | 42,388 |
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Net Income | $ | 44,662 |
| | $ | 44,245 |
| | $ | 95,838 |
| | $ | 94,455 |
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Basic Earnings Per Share | $ | 1.05 |
| | $ | 1.04 |
| | $ | 2.26 |
| | $ | 2.21 |
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Diluted Earnings Per Share | $ | 1.05 |
| | $ | 1.03 |
| | $ | 2.24 |
| | $ | 2.19 |
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Dividends Declared Per Share | $ | 0.50 |
| | $ | 0.48 |
| | $ | 1.00 |
| | $ | 0.93 |
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Basic Weighted Average Shares | 42,353,976 |
| | 42,729,731 |
| | 42,379,730 |
| | 42,825,369 |
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Diluted Weighted Average Shares | 42,658,885 |
| | 42,942,960 |
| | 42,704,010 |
| | 43,033,199 |
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The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
(dollars in thousands) | | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
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Net Income | | $ | 44,662 |
| | $ | 44,245 |
| | $ | 95,838 |
| | $ | 94,455 |
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Other Comprehensive Income, Net of Tax: | | |
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Net Unrealized Gains on Investment Securities | | 3,106 |
| | 5,157 |
| | 8,000 |
| | 13,851 |
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Defined Benefit Plans | | 147 |
| | 141 |
| | 293 |
| | 282 |
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Total Other Comprehensive Income | | 3,253 |
| | 5,298 |
| | 8,293 |
| | 14,133 |
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Comprehensive Income | | $ | 47,915 |
| | $ | 49,543 |
| | $ | 104,131 |
| | $ | 108,588 |
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The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
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| | | | | | | |
(dollars in thousands) | June 30, 2017 |
| | December 31, 2016 |
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Assets | |
| | |
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Interest-Bearing Deposits in Other Banks | $ | 3,913 |
| | $ | 3,187 |
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Funds Sold | 742,221 |
| | 707,343 |
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Investment Securities | |
| | |
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Available-for-Sale | 2,316,728 |
| | 2,186,041 |
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Held-to-Maturity (Fair Value of $3,785,641 and $3,827,527) | 3,782,702 |
| | 3,832,997 |
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Loans Held for Sale | 20,354 |
| | 62,499 |
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Loans and Leases | 9,387,613 |
| | 8,949,785 |
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Allowance for Loan and Lease Losses | (106,353 | ) | | (104,273 | ) |
Net Loans and Leases | 9,281,260 |
| | 8,845,512 |
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Total Earning Assets | 16,147,178 |
| | 15,637,579 |
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Cash and Due From Banks | 128,093 |
| | 169,077 |
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Premises and Equipment, Net | 119,569 |
| | 113,505 |
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Accrued Interest Receivable | 46,595 |
| | 46,444 |
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Foreclosed Real Estate | 1,991 |
| | 1,686 |
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Mortgage Servicing Rights | 24,471 |
| | 23,663 |
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Goodwill | 31,517 |
| | 31,517 |
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Bank-Owned Life Insurance | 277,235 |
| | 274,188 |
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Other Assets | 204,643 |
| | 194,708 |
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Total Assets | $ | 16,981,292 |
| | $ | 16,492,367 |
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Liabilities | |
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Deposits | |
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Noninterest-Bearing Demand | $ | 4,706,962 |
| | $ | 4,772,727 |
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Interest-Bearing Demand | 3,029,549 |
| | 2,934,107 |
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Savings | 5,364,191 |
| | 5,395,699 |
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Time | 1,683,947 |
| | 1,217,707 |
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Total Deposits | 14,784,649 |
| | 14,320,240 |
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Funds Purchased | — |
| | 9,616 |
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Securities Sold Under Agreements to Repurchase | 505,292 |
| | 523,378 |
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Other Debt | 267,904 |
| | 267,938 |
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Retirement Benefits Payable | 48,346 |
| | 48,451 |
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Accrued Interest Payable | 5,105 |
| | 5,334 |
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Taxes Payable and Deferred Taxes | 31,444 |
| | 21,674 |
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Other Liabilities | 124,795 |
| | 134,199 |
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Total Liabilities | 15,767,535 |
| | 15,330,830 |
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Shareholders’ Equity | |
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Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: June 30, 2017 - 57,972,647 / 42,655,954 and December 31, 2016 - 57,856,672 / 42,635,978) | 576 |
| | 576 |
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Capital Surplus | 556,409 |
| | 551,628 |
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Accumulated Other Comprehensive Loss | (25,613 | ) | | (33,906 | ) |
Retained Earnings | 1,468,328 |
| | 1,415,440 |
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Treasury Stock, at Cost (Shares: June 30, 2017 - 15,316,693 and December 31, 2016 - 15,220,694) | (785,943 | ) | | (772,201 | ) |
Total Shareholders’ Equity | 1,213,757 |
| | 1,161,537 |
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Total Liabilities and Shareholders’ Equity | $ | 16,981,292 |
| | $ | 16,492,367 |
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The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity (Unaudited)
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(dollars in thousands) | Common Shares Outstanding |
| | Common Stock |
| | Capital Surplus |
| | Accum. Other Compre- hensive Income (Loss) |
| | Retained Earnings |
| | Treasury Stock |
| | Total |
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Balance as of December 31, 2016 | 42,635,978 |
| | $ | 576 |
| | $ | 551,628 |
| | $ | (33,906 | ) | | $ | 1,415,440 |
| | $ | (772,201 | ) | | $ | 1,161,537 |
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Net Income | — |
| | — |
| | — |
| | — |
| | 95,838 |
| | — |
| | 95,838 |
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Other Comprehensive Income | — |
| | — |
| | — |
| | 8,293 |
| | — |
| | — |
| | 8,293 |
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Share-Based Compensation | — |
| | — |
| | 3,726 |
| | — |
| | — |
| | — |
| | 3,726 |
|
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits | 275,605 |
| | — |
| | 1,055 |
| | — |
| | (162 | ) | | 7,545 |
| | 8,438 |
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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 |
|
| | | | | | | | | | | | | |
Balance as of December 31, 2015 | 43,282,153 |
| | $ | 575 |
| | $ | 542,041 |
| | $ | (23,557 | ) | | $ | 1,316,260 |
| | $ | (719,059 | ) | | $ | 1,116,260 |
|
Net Income | — |
| | — |
| | — |
| | — |
| | 94,455 |
| | — |
| | 94,455 |
|
Other Comprehensive Income | — |
| | — |
| | — |
| | 14,133 |
| | — |
| | — |
| | 14,133 |
|
Share-Based Compensation | — |
| | — |
| | 3,314 |
| | — |
| | — |
| | — |
| | 3,314 |
|
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits | 201,445 |
| | 1 |
| | 1,573 |
| | — |
| | (277 | ) | | 4,900 |
| | 6,197 |
|
Common Stock Repurchased | (567,435 | ) | | — |
| | — |
| | — |
| | — |
| | (37,010 | ) | | (37,010 | ) |
Cash Dividends Declared ($0.93 per share) | — |
| | — |
| | — |
| | — |
| | (40,130 | ) | | — |
| | (40,130 | ) |
Balance as of June 30, 2016 | 42,916,163 |
| | $ | 576 |
| | $ | 546,928 |
| | $ | (9,424 | ) | | $ | 1,370,308 |
| | $ | (751,169 | ) | | $ | 1,157,219 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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| Six Months Ended |
| June 30, |
(dollars in thousands) | 2017 |
| | 2016 |
|
Operating Activities | |
| | |
|
Net Income | $ | 95,838 |
| | $ | 94,455 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
| | |
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Provision for Credit Losses | 8,650 |
| | (1,000 | ) |
Depreciation and Amortization | 6,565 |
| | 6,596 |
|
Amortization of Deferred Loan and Lease Fees | (535 | ) | | (773 | ) |
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net | 20,027 |
| | 22,277 |
|
Share-Based Compensation | 3,726 |
| | 3,314 |
|
Benefit Plan Contributions | (741 | ) | | (655 | ) |
Deferred Income Taxes | 3,635 |
| | (5,354 | ) |
Net Gains on Sales of Loans and Leases | (3,971 | ) | | (4,095 | ) |
Net Gains on Sales of Investment Securities | (11,613 | ) | | (10,868 | ) |
Proceeds from Sales of Loans Held for Sale | 146,478 |
| | 67,983 |
|
Originations of Loans Held for Sale | (150,414 | ) | | (84,660 | ) |
Net Tax Benefits from Share-Based Compensation | 2,077 |
| | — |
|
Excess Tax Benefits from Share-Based Compensation | — |
| | (884 | ) |
Net Change in Other Assets and Other Liabilities | (21,803 | ) | | (11,956 | ) |
Net Cash Provided by Operating Activities | 97,919 |
| | 74,380 |
|
| | | |
Investing Activities | |
| | |
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Investment Securities Available-for-Sale: | |
| | |
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Proceeds from Prepayments and Maturities | 191,564 |
| | 166,334 |
|
Proceeds from Sales | 11,613 |
| | 11,094 |
|
Purchases | (320,170 | ) | | (197,696 | ) |
Investment Securities Held-to-Maturity: | |
| | |
|
Proceeds from Prepayments and Maturities | 406,904 |
| | 352,035 |
|
Purchases | (365,498 | ) | | (178,347 | ) |
Net Change in Loans and Leases | (508,529 | ) | | (548,977 | ) |
Proceeds from Sales of Loans | 112,357 |
| | 19,055 |
|
Premises and Equipment, Net | (12,629 | ) | | (5,229 | ) |
Net Cash Used in Investing Activities | (484,388 | ) | | (381,731 | ) |
| | | |
Financing Activities | |
| | |
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Net Change in Deposits | 464,409 |
| | 392,704 |
|
Net Change in Short-Term Borrowings | (27,702 | ) | | (42,072 | ) |
Proceeds from Long-Term Debt | — |
| | 75,000 |
|
Repayments of Long-Term Debt | — |
| | (50,000 | ) |
Excess Tax Benefits from Share-Based Compensation | — |
| | 884 |
|
Proceeds from Issuance of Common Stock | 8,457 |
| | 5,304 |
|
Repurchase of Common Stock | (21,287 | ) | | (37,010 | ) |
Cash Dividends Paid | (42,788 | ) | | (40,130 | ) |
Net Cash Provided by Financing Activities | 381,089 |
| | 304,680 |
|
| | | |
Net Change in Cash and Cash Equivalents | (5,380 | ) | | (2,671 | ) |
Cash and Cash Equivalents at Beginning of Period | 879,607 |
| | 755,721 |
|
Cash and Cash Equivalents at End of Period | $ | 874,227 |
| | $ | 753,050 |
|
Supplemental Information | |
| | |
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Cash Paid for Interest | $ | 21,498 |
| | $ | 19,469 |
|
Cash Paid for Income Taxes | 32,058 |
| | 42,229 |
|
Non-Cash Investing Activities: | |
| | |
|
Transfer from Loans to Foreclosed Real Estate | 2,207 |
| | 1,040 |
|
Transfers from Loans to Loans Held for Sale | 62,727 |
| | 101,282 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).
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 $18.1 million and $16.2 million as of June 30, 2017 and December 31, 2016, respectively. These unfunded commitments are unconditional and legally binding 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 $77.5 million and $78.9 million as of June 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 six months ended June 30, 2016 was adjusted to decrease the originations of loans held for sale by $97.3 million, decrease the proceeds from sales of loans held for sale by $19.1 million, and decrease the net change in other assets and other liabilities by $0.1 million. The net result was a $78.1 million increase to the net cash provided by operating activities. In addition, the net change in loans and leases was increased by $97.2 million, and a new line item, proceeds from sales of loans, was inserted for $19.1 million, resulting in a $78.1 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 $2.3 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 six 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.
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., 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 continuing its overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.
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. ASU No. 2016-01 is effective for interim
and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.
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. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements.
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 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, 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 the latest news via webcasts, publications, conferences, and peer bank meetings. 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 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. ASU No. 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of June 30, 2017 and December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | |
(dollars in thousands) | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
|
June 30, 2017 | |
| | |
| | |
| | |
|
Available-for-Sale: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 430,208 |
| | $ | 3,732 |
| | $ | (963 | ) | | $ | 432,977 |
|
Debt Securities Issued by States and Political Subdivisions | 650,075 |
| | 17,905 |
| | (99 | ) | | 667,881 |
|
Debt Securities Issued by Corporations | 268,022 |
| | 138 |
| | (2,911 | ) | | 265,249 |
|
Mortgage-Backed Securities: | |
| | |
| | |
| | |
|
Residential - Government Agencies | 262,834 |
| | 3,858 |
| | (1,150 | ) | | 265,542 |
|
Residential - U.S. Government-Sponsored Enterprises | 613,512 |
| | 1,090 |
| | (4,701 | ) | | 609,901 |
|
Commercial - Government Agencies | 77,757 |
| | — |
| | (2,579 | ) | | 75,178 |
|
Total Mortgage-Backed Securities | 954,103 |
| | 4,948 |
| | (8,430 | ) | | 950,621 |
|
Total | $ | 2,302,408 |
| | $ | 26,723 |
| | $ | (12,403 | ) | | $ | 2,316,728 |
|
Held-to-Maturity: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 500,111 |
| | $ | 613 |
| | $ | (886 | ) | | $ | 499,838 |
|
Debt Securities Issued by States and Political Subdivisions | 240,413 |
| | 14,472 |
| | — |
| | 254,885 |
|
Debt Securities Issued by Corporations | 127,666 |
| | 405 |
| | (1,326 | ) | | 126,745 |
|
Mortgage-Backed Securities: | | | | | | | |
|
Residential - Government Agencies | 1,928,530 |
| | 15,726 |
| | (19,602 | ) | | 1,924,654 |
|
Residential - U.S. Government-Sponsored Enterprises | 772,212 |
| | 1,284 |
| | (7,144 | ) | | 766,352 |
|
Commercial - Government Agencies | 213,770 |
| | 2,213 |
| | (2,816 | ) | | 213,167 |
|
Total Mortgage-Backed Securities | 2,914,512 |
| | 19,223 |
|
| (29,562 | ) |
| 2,904,173 |
|
Total | $ | 3,782,702 |
| | $ | 34,713 |
| | $ | (31,774 | ) | | $ | 3,785,641 |
|
| | | | | | | |
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 |
|
The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 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 | $ | 86,725 |
| | $ | 86,878 |
|
Due After One Year Through Five Years | 585,928 |
| | 589,580 |
|
Due After Five Years Through Ten Years | 214,366 |
| | 223,309 |
|
Due After Ten Years | 31,629 |
| | 33,904 |
|
| 918,648 |
| | 933,671 |
|
| | | |
Debt Securities Issued by Government Agencies | 429,657 |
| | 432,436 |
|
Mortgage-Backed Securities: | |
| | |
|
Residential - Government Agencies | 262,834 |
| | 265,542 |
|
Residential - U.S. Government-Sponsored Enterprises | 613,512 |
| | 609,901 |
|
Commercial - Government Agencies | 77,757 |
| | 75,178 |
|
Total Mortgage-Backed Securities | 954,103 |
| | 950,621 |
|
Total | $ | 2,302,408 |
| | $ | 2,316,728 |
|
| | | |
Held-to-Maturity: | |
| | |
|
Due in One Year or Less | $ | 235,104 |
| | $ | 234,882 |
|
Due After One Year Through Five Years | 335,763 |
| | 338,517 |
|
Due After Five Years Through Ten Years | 258,942 |
| | 266,850 |
|
Due After Ten Years | 38,381 |
| | 41,219 |
|
| 868,190 |
| | 881,468 |
|
Mortgage-Backed Securities: | |
| | |
|
Residential - Government Agencies | 1,928,530 |
| | 1,924,654 |
|
Residential - U.S. Government-Sponsored Enterprises | 772,212 |
| | 766,352 |
|
Commercial - Government Agencies | 213,770 |
| | 213,167 |
|
Total Mortgage-Backed Securities | 2,914,512 |
| | 2,904,173 |
|
Total | $ | 3,782,702 |
| | $ | 3,785,641 |
|
Investment securities with carrying values of $2.7 billion and $2.4 billion as of June 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 six months ended June 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
Gross Gains on Sales of Investment Securities | $ | — |
| | $ | — |
| | $ | 12,467 |
| | $ | 11,355 |
|
Gross Losses on Sales of Investment Securities | (520 | ) | | (312 | ) | | (854 | ) | | (487 | ) |
Net Gains (Losses) on Sales of Investment Securities | $ | (520 | ) | | $ | (312 | ) | | $ | 11,613 |
| | $ | 10,868 |
|
The losses during the three and six months ended June 30, 2017 and 2016 were due to fees paid to the counterparties of our prior Visa Class B share sale transactions.
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 |
|
June 30, 2017 | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-Sale: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 42,325 |
| | $ | (285 | ) | | $ | 143,773 |
| | $ | (678 | ) | | $ | 186,098 |
| | $ | (963 | ) |
Debt Securities Issued by States and Political Subdivisions | 49,521 |
| | (99 | ) | | — |
| | — |
| | 49,521 |
| | (99 | ) |
Debt Securities Issued by Corporations | 62,472 |
| | (555 | ) | | 162,638 |
| | (2,356 | ) | | 225,110 |
| | (2,911 | ) |
Mortgage-Backed Securities: | | | | | | | | |
|
| |
|
|
Residential - Government Agencies | 23,520 |
| | (56 | ) | | 13,814 |
| | (1,094 | ) | | 37,334 |
| | (1,150 | ) |
Residential - U.S. Government-Sponsored Enterprises | 420,189 |
| | (4,398 | ) | | 10,611 |
| | (303 | ) | | 430,800 |
| | (4,701 | ) |
Commercial - Government Agencies | — |
| | — |
| | 75,178 |
| | (2,579 | ) | | 75,178 |
| | (2,579 | ) |
Total Mortgage-Backed Securities | 443,709 |
| | (4,454 | ) | | 99,603 |
| | (3,976 | ) | | 543,312 |
| | (8,430 | ) |
Total | $ | 598,027 |
| | $ | (5,393 | ) | | $ | 406,014 |
| | $ | (7,010 | ) | | $ | 1,004,041 |
| | $ | (12,403 | ) |
Held-to-Maturity: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 284,734 |
| | $ | (886 | ) | | $ | — |
| | $ | — |
| | $ | 284,734 |
| | $ | (886 | ) |
Debt Securities Issued by Corporations | 65,356 |
| | (835 | ) | | 15,027 |
| | (491 | ) | | 80,383 |
| | (1,326 | ) |
Mortgage-Backed Securities: | | | | | | | | | | | |
Residential - Government Agencies | 856,028 |
| | (11,817 | ) | | 222,166 |
| | (7,785 | ) | | 1,078,194 |
| | (19,602 | ) |
Residential - U.S. Government-Sponsored Enterprises | 598,035 |
| | (7,144 | ) | | — |
| | — |
| | 598,035 |
| | (7,144 | ) |
Commercial - Government Agencies | 79,883 |
| | (2,748 | ) | | 10,561 |
| | (68 | ) | | 90,444 |
| | (2,816 | ) |
Total Mortgage-Backed Securities | 1,533,946 |
| | (21,709 | ) | | 232,727 |
| | (7,853 | ) | | 1,766,673 |
| | (29,562 | ) |
Total | $ | 1,884,036 |
| | $ | (23,430 | ) | | $ | 247,754 |
| | $ | (8,344 | ) | | $ | 2,131,790 |
| | $ | (31,774 | ) |
| | | | | | | | | | | |
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 | ) |
The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2017, which were comprised of 291 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, 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 six months ended June 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2017 |
| | 2016 |
| | 2017 |
| | 2016 |
|
Taxable | $ | 26,741 |
| | $ | 25,567 |
| | $ | 52,508 |
| | $ | 51,554 |
|
Non-Taxable | 5,012 |
| | 5,122 |
| | 10,035 |
| | 10,340 |
|
Total Interest Income from Investment Securities | $ | 31,753 |
| | $ | 30,689 |
| | $ | 62,543 |
| | $ | 61,894 |
|
As of June 30, 2017, included in the Company’s investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $528.3 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 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 June 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 June 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) | June 30, 2017 |
| | December 31, 2016 |
|
Federal Home Loan Bank Stock | $ | 20,000 |
| | $ | 20,000 |
|
Federal Reserve Bank Stock | 20,167 |
| | 20,063 |
|
Total | $ | 40,167 |
| | $ | 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 not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of June 30, 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 June 30, 2017 are carried at a zero cost basis.
Note 3. Loans and Leases and the Allowance for Loan and Lease Losses
Loans and Leases
The Company’s loan and lease portfolio was comprised of the following as of June 30, 2017 and December 31, 2016:
|
| | | | | | | |
(dollars in thousands) | June 30, 2017 |
| | December 31, 2016 |
|
Commercial | |
| | |
|
Commercial and Industrial | $ | 1,241,953 |
| | $ | 1,249,791 |
|
Commercial Mortgage | 2,009,886 |
| | 1,889,551 |
|
Construction | 248,030 |
| | 270,018 |
|
Lease Financing | 205,043 |
| | 208,332 |
|
Total Commercial | 3,704,912 |
| | 3,617,692 |
|
Consumer | |
| | |
|
Residential Mortgage | 3,317,179 |
| | 3,163,073 |
|
Home Equity | 1,473,123 |
| | 1,334,163 |
|
Automobile | 484,092 |
| | 454,333 |
|
Other 1 | 408,307 |
| | 380,524 |
|
Total Consumer | 5,682,701 |
| | 5,332,093 |
|
Total Loans and Leases | $ | 9,387,613 |
| | $ | 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 $1.8 million and $4.4 million for the three months ended June 30, 2017 and 2016, respectively, and $3.2 million and $6.2 million for the six months ended June 30, 2017 and 2016, respectively.
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, 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 June 30, 2017 and 2016.
|
| | | | | | | | | | | |
(dollars in thousands) | Commercial |
| | Consumer |
| | Total |
|
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 |
|
| | | | | |
Three Months Ended June 30, 2016 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Balance at Beginning of Period | $ | 61,810 |
| | $ | 42,867 |
| | $ | 104,677 |
|
Loans and Leases Charged-Off | (204 | ) | | (3,551 | ) | | (3,755 | ) |
Recoveries on Loans and Leases Previously Charged-Off | 418 |
| | 1,592 |
| | 2,010 |
|
Net Loans and Leases Recovered (Charged-Off) | 214 |
| | (1,959 | ) | | (1,745 | ) |
Provision for Credit Losses | 5 |
| | 995 |
| | 1,000 |
|
Balance at End of Period | $ | 62,029 |
| | $ | 41,903 |
| | $ | 103,932 |
|
Six Months Ended June 30, 2016 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Balance at Beginning of Period | $ | 60,714 |
| | $ | 42,166 |
| | $ | 102,880 |
|
Loans and Leases Charged-Off | (461 | ) | | (8,181 | ) | | (8,642 | ) |
Recoveries on Loans and Leases Previously Charged-Off | 7,323 |
| | 3,371 |
| | 10,694 |
|
Net Loans and Leases Recovered (Charged-Off) | 6,862 |
| | (4,810 | ) | | 2,052 |
|
Provision for Credit Losses | (5,547 | ) | | 4,547 |
| | (1,000 | ) |
Balance at End of Period | $ | 62,029 |
| | $ | 41,903 |
| | $ | 103,932 |
|
As of June 30, 2016 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 7 |
| | $ | 3,195 |
| | $ | 3,202 |
|
Collectively Evaluated for Impairment | 62,022 |
| | 38,708 |
| | 100,730 |
|
Total | $ | 62,029 |
| | $ | 41,903 |
| | $ | 103,932 |
|
Recorded Investment in Loans and Leases: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 22,271 |
| | $ | 38,691 |
| | $ | 60,962 |
|
Collectively Evaluated for Impairment | 3,283,571 |
| | 4,986,936 |
| | 8,270,507 |
|
Total | $ | 3,305,842 |
| | $ | 5,025,627 |
| | $ | 8,331,469 |
|
Credit Quality Indicators
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.
The following are the definitions of the Company’s credit quality indicators:
| |
Pass: | Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass. |
| |
Special Mention: | Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention. |
| |
Classified: | Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of generally up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner. |
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, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
(dollars in thousands) | Commercial and Industrial |
| | Commercial Mortgage |
| | Construction |
| | Lease Financing |
| | Total Commercial |
|
Pass | $ | 1,197,264 |
| | $ | 1,937,447 |
| | $ | 246,283 |
| |