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 March 31, 2019
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 | 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 April 16, 2019, there were 40,988,012 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)
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| | | | | | | |
| Three Months Ended |
| March 31, |
(dollars in thousands, except per share amounts) | 2019 |
| | 2018 |
|
Interest Income | |
| | |
|
Interest and Fees on Loans and Leases | $ | 108,511 |
| | $ | 97,634 |
|
Income on Investment Securities | | | |
Available-for-Sale | 13,432 |
| | 12,141 |
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Held-to-Maturity | 21,921 |
| | 21,296 |
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Deposits | 15 |
| | 18 |
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Funds Sold | 1,444 |
| | 757 |
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Other | 319 |
| | 300 |
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Total Interest Income | 145,642 |
| | 132,146 |
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Interest Expense | |
| | |
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Deposits | 15,284 |
| | 7,581 |
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Securities Sold Under Agreements to Repurchase | 4,571 |
| | 4,564 |
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Funds Purchased | 157 |
| | 53 |
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Short-Term Borrowings | 36 |
| | 16 |
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Other Debt | 757 |
| | 976 |
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Total Interest Expense | 20,805 |
| | 13,190 |
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Net Interest Income | 124,837 |
| | 118,956 |
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Provision for Credit Losses | 3,000 |
| | 4,125 |
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Net Interest Income After Provision for Credit Losses | 121,837 |
| | 114,831 |
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Noninterest Income | |
| | |
|
Trust and Asset Management | 10,761 |
| | 11,181 |
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Mortgage Banking | 2,287 |
| | 2,145 |
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Service Charges on Deposit Accounts | 7,364 |
| | 7,129 |
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Fees, Exchange, and Other Service Charges | 14,208 |
| | 14,333 |
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Investment Securities Gains (Losses), Net | (835 | ) | | (666 | ) |
Annuity and Insurance | 2,578 |
| | 1,206 |
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Bank-Owned Life Insurance | 1,710 |
| | 1,842 |
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Other | 5,606 |
| | 6,865 |
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Total Noninterest Income | 43,679 |
| | 44,035 |
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Noninterest Expense | |
| | |
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Salaries and Benefits | 56,586 |
| | 54,422 |
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Net Occupancy | 7,594 |
| | 8,534 |
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Net Equipment | 6,833 |
| | 5,527 |
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Data Processing | 4,526 |
| | 3,891 |
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Professional Fees | 2,453 |
| | 2,773 |
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FDIC Insurance | 1,269 |
| | 2,157 |
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Other | 13,796 |
| | 17,080 |
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Total Noninterest Expense | 93,057 |
| | 94,384 |
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Income Before Provision for Income Taxes | 72,459 |
| | 64,482 |
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Provision for Income Taxes | 13,660 |
| | 10,442 |
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Net Income | $ | 58,799 |
| | $ | 54,040 |
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Basic Earnings Per Share | $ | 1.44 |
| | $ | 1.29 |
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Diluted Earnings Per Share | $ | 1.43 |
| | $ | 1.28 |
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Dividends Declared Per Share | $ | 0.62 |
| | $ | 0.52 |
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Basic Weighted Average Shares | 40,938,318 |
| | 42,038,573 |
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Diluted Weighted Average Shares | 41,213,453 |
| | 42,358,425 |
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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 |
| March 31, |
(dollars in thousands) | 2019 |
| | 2018 |
|
Net Income | $ | 58,799 |
| | $ | 54,040 |
|
Other Comprehensive Income (Loss), Net of Tax: | |
| | |
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Net Unrealized Gains (Losses) on Investment Securities | 6,919 |
| | (9,121 | ) |
Defined Benefit Plans | 246 |
| | 216 |
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Total Other Comprehensive Income (Loss) | 7,165 |
| | (8,905 | ) |
Comprehensive Income | $ | 65,964 |
| | $ | 45,135 |
|
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) | March 31, 2019 |
| | December 31, 2018 |
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Assets | |
| | |
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Interest-Bearing Deposits in Other Banks | $ | 3,550 |
| | $ | 3,028 |
|
Funds Sold | 243,867 |
| | 198,860 |
|
Investment Securities | |
| | |
|
Available-for-Sale | 1,859,256 |
| | 2,007,942 |
|
Held-to-Maturity (Fair Value of $3,637,496 and $3,413,994) | 3,668,811 |
| | 3,482,092 |
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Loans Held for Sale | 17,909 |
| | 10,987 |
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Loans and Leases | 10,548,609 |
| | 10,448,774 |
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Allowance for Loan and Lease Losses | (106,023 | ) | | (106,693 | ) |
Net Loans and Leases | 10,442,586 |
| | 10,342,081 |
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Total Earning Assets | 16,235,979 |
| | 16,044,990 |
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Cash and Due From Banks | 293,871 |
| | 324,081 |
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Premises and Equipment, Net | 159,344 |
| | 151,837 |
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Operating Lease Right-of-Use Assets | 104,166 |
| | — |
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Accrued Interest Receivable | 52,820 |
| | 51,230 |
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Foreclosed Real Estate | 3,225 |
| | 1,356 |
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Mortgage Servicing Rights | 24,149 |
| | 24,310 |
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Goodwill | 31,517 |
| | 31,517 |
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Bank-Owned Life Insurance | 285,155 |
| | 283,771 |
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Other Assets | 256,187 |
| | 230,882 |
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Total Assets | $ | 17,446,413 |
| | $ | 17,143,974 |
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Liabilities | |
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Deposits | |
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Noninterest-Bearing Demand | $ | 4,595,915 |
| | $ | 4,739,596 |
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Interest-Bearing Demand | 2,961,444 |
| | 3,002,925 |
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Savings | 5,946,881 |
| | 5,539,199 |
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Time | 1,763,070 |
| | 1,745,522 |
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Total Deposits | 15,267,310 |
| | 15,027,242 |
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Short-Term Borrowings | — |
| | 199 |
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Securities Sold Under Agreements to Repurchase | 504,299 |
| | 504,296 |
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Other Debt | 110,624 |
| | 135,643 |
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Operating Lease Liabilities | 111,230 |
| | — |
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Retirement Benefits Payable | 40,343 |
| | 40,494 |
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Accrued Interest Payable | 8,474 |
| | 8,253 |
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Taxes Payable and Deferred Taxes | 29,935 |
| | 19,736 |
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Other Liabilities | 104,508 |
| | 139,911 |
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Total Liabilities | 16,176,723 |
| | 15,875,774 |
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Shareholders’ Equity | |
| | |
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Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: March 31, 2019 - 58,166,535 / 41,078,688 and December 31, 2018 - 58,063,689 / 41,499,898) | 578 |
| | 577 |
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Capital Surplus | 574,594 |
| | 571,704 |
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Accumulated Other Comprehensive Loss | (43,878 | ) | | (51,043 | ) |
Retained Earnings | 1,674,264 |
| | 1,641,314 |
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Treasury Stock, at Cost (Shares: March 31, 2019 - 17,087,847 and December 31, 2018 - 16,563,791) | (935,868 | ) | | (894,352 | ) |
Total Shareholders’ Equity | 1,269,690 |
| | 1,268,200 |
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Total Liabilities and Shareholders’ Equity | $ | 17,446,413 |
| | $ | 17,143,974 |
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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, 2018 | 41,499,898 |
| | $ | 577 |
| | $ | 571,704 |
| | $ | (51,043 | ) | | $ | 1,641,314 |
| | $ | (894,352 | ) | | $ | 1,268,200 |
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Net Income | — |
| | — |
| | — |
| | — |
| | 58,799 |
| | — |
| | 58,799 |
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Other Comprehensive Income | — |
| | — |
| | — |
| | 7,165 |
| | — |
| | — |
| | 7,165 |
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Share-Based Compensation | — |
| | — |
| | 2,274 |
| | — |
| | — |
| | — |
| | 2,274 |
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Common Stock Issued under Purchase and Equity Compensation Plans | 131,529 |
| | 1 |
| | 616 |
| | — |
| | (203 | ) | | 1,673 |
| | 2,087 |
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Common Stock Repurchased | (552,739 | ) | | — |
| | — |
| | — |
| | — |
| | (43,189 | ) | | (43,189 | ) |
Cash Dividends Declared ($0.62 per share) | — |
| | — |
| | — |
| | — |
| | (25,646 | ) | | — |
| | (25,646 | ) |
Balance as of March 31, 2019 | 41,078,688 |
| | $ | 578 |
| | $ | 574,594 |
| | $ | (43,878 | ) | | $ | 1,674,264 |
| | $ | (935,868 | ) | | $ | 1,269,690 |
|
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Balance as of December 31, 2017 | 42,401,443 |
| | $ | 576 |
| | $ | 561,161 |
| | $ | (34,715 | ) | | $ | 1,512,218 |
| | $ | (807,372 | ) | | $ | 1,231,868 |
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Net Income | — |
| | — |
| | — |
| | — |
| | 54,040 |
| | — |
| | 54,040 |
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Other Comprehensive Loss | — |
| | — |
| | — |
| | (8,905 | ) | | — |
| | — |
| | (8,905 | ) |
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCI | — |
| | — |
| | — |
| | (7,477 | ) | | 7,477 |
| | — |
| | — |
|
Share-Based Compensation | — |
| | — |
| | 1,867 |
| | — |
| | — |
| | — |
| | 1,867 |
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Common Stock Issued under Purchase and Equity Compensation Plans | 121,299 |
| | 1 |
| | 570 |
| | — |
| | 252 |
| | 1,128 |
| | 1,951 |
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Common Stock Repurchased | (208,328 | ) | | — |
| | — |
| | — |
| | — |
| | (17,541 | ) | | (17,541 | ) |
Cash Dividends Declared ($0.52 per share) | — |
| | — |
| | — |
| | — |
| | (22,087 | ) | | — |
| | (22,087 | ) |
Balance as of March 31, 2018 | 42,314,414 |
| | $ | 577 |
| | $ | 563,598 |
| | $ | (51,097 | ) | | $ | 1,551,900 |
| | $ | (823,785 | ) | | $ | 1,241,193 |
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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 Cash Flows (Unaudited)
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| | | | | | | |
| Three Months Ended |
| March 31, |
(dollars in thousands) | 2019 |
| | 2018 |
|
Operating Activities | |
| | |
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Net Income | $ | 58,799 |
| | $ | 54,040 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
| | |
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Provision for Credit Losses | 3,000 |
| | 4,125 |
|
Depreciation and Amortization | 3,996 |
| | 3,339 |
|
Amortization of Deferred Loan and Lease Fees | (381 | ) | | (151 | ) |
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net | 5,290 |
| | 8,966 |
|
Amortization of Operating Lease Right-of-Use Assets | 3,185 |
| | — |
|
Share-Based Compensation | 2,274 |
| | 1,867 |
|
Benefit Plan Contributions | (372 | ) | | (375 | ) |
Deferred Income Taxes | (2,363 | ) | | (138 | ) |
Gains on Sale of Premises and Equipment | (558 | ) | | — |
|
Net Gains on Sales of Loans and Leases | (1,065 | ) | | (573 | ) |
Net Losses (Gains) on Sales of Investment Securities | 835 |
| | 666 |
|
Proceeds from Sales of Loans Held for Sale | 56,453 |
| | 66,003 |
|
Originations of Loans Held for Sale | (63,014 | ) | | (70,290 | ) |
Net Tax Benefits from Share-Based Compensation | 530 |
| | 767 |
|
Net Change in Other Assets and Other Liabilities | (49,491 | ) | | 6,632 |
|
Net Cash Provided by Operating Activities | 17,118 |
| | 74,878 |
|
| | | |
Investing Activities | |
| | |
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Investment Securities Available-for-Sale: | |
| | |
|
Proceeds from Sales, Prepayments and Maturities | 495,824 |
| | 89,399 |
|
Purchases | (341,234 | ) | | (59,160 | ) |
Investment Securities Held-to-Maturity: | |
| | |
|
Proceeds from Prepayments and Maturities | 177,841 |
| | 195,199 |
|
Purchases | (367,178 | ) | | (59,598 | ) |
Net Change in Loans and Leases | (104,120 | ) | | (124,225 | ) |
Purchases of Premises and Equipment | (11,583 | ) | | (9,614 | ) |
Proceeds from Sale of Premises and Equipment | 639 |
| | — |
|
Net Cash Provided by (Used in) Investing Activities | (149,811 | ) | | 32,001 |
|
| | | |
Financing Activities | |
| | |
|
Net Change in Deposits | 240,068 |
| | 73,165 |
|
Net Change in Short-Term Borrowings | (196 | ) | | — |
|
Repayments of Long-Term Debt | (25,019 | ) | | (25,000 | ) |
Proceeds from Issuance of Common Stock | 1,994 |
| | 1,959 |
|
Repurchase of Common Stock | (43,189 | ) | | (17,541 | ) |
Cash Dividends Paid | (25,646 | ) | | (22,087 | ) |
Net Cash Provided by Financing Activities | 148,012 |
| | 10,496 |
|
| | | |
Net Change in Cash and Cash Equivalents | 15,319 |
| | 117,375 |
|
Cash and Cash Equivalents at Beginning of Period | 525,969 |
| | 447,851 |
|
Cash and Cash Equivalents at End of Period | $ | 541,288 |
| | $ | 565,226 |
|
Supplemental Information | |
| | |
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Cash Paid for Interest | $ | 20,583 |
| | $ | 11,908 |
|
Cash Paid for Income Taxes | 2,764 |
| | 961 |
|
Non-Cash Investing and Financing Activities: | |
| | |
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Initial Recognition of Operating Lease Right-of-Use Assets | 106,514 |
| | — |
|
Initial Recognition of Operating Lease Liabilities | 113,394 |
| | — |
|
Transfer from Loans to Foreclosed Real Estate | 1,869 |
| | 1,728 |
|
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, 2018.
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 (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) 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 $13.2 million and $15.2 million as of March 31, 2019 and December 31, 2018, 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 $82.4 million and $85.9 million as of March 31, 2019 and December 31, 2018, respectively, and is included in other assets in the consolidated statements of condition.
Accounting Standards Adopted in 2019
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. 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. As the Company elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated statements of condition. The new guidance requires these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 16 Leases for more information.
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. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not currently utilize hedge accounting. As such, ASU No. 2017-12 did not impact the Company’s Consolidated Financial Statements.
In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on the Company’s Consolidated Financial Statements.
In December 2018, the FASB issued ASU No. 2018-20, “Narrow-Scope Improvements for Lessors.” This ASU (1) allows lessors to make an accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. The Company adopted ASU 2018-20 on its required effective date of January 1, 2019 and elected to present sales taxes and other similar taxes collected from lessees on a net basis as described in (1) above. ASU 2018-20 did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements.” This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
Accounting Standards Pending Adoption
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 are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”), which 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 approach will 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 and the Company is planning to adopt the standard in the first quarter of 2020. 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 team meets periodically to discuss the latest developments and ensure progress is being made. The team has been working with an advisory consultant and is finalizing the methodologies that will be utilized, which will be followed by developing and documenting processes, controls, policies and disclosure requirements in preparation for performing a full parallel run. 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 and expects that portfolio composition and economic conditions at the time of adoption will be a factor.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.
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) | March 31, 2019 |
| | December 31, 2018 |
|
Interest-Bearing Deposits in Other Banks | $ | 3,550 |
| | $ | 3,028 |
|
Funds Sold | 243,867 |
| | 198,860 |
|
Cash and Due From Banks | 293,871 |
| | 324,081 |
|
Total Cash and Cash Equivalents | $ | 541,288 |
| | $ | 525,969 |
|
| | | |
Note 3. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of March 31, 2019 and December 31, 2018 were as follows:
|
| | | | | | | | | | | | | | | |
(dollars in thousands) | Amortized Cost |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
|
March 31, 2019 | |
| | |
| | |
| | |
|
Available-for-Sale: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 365,787 |
| | $ | 450 |
| | $ | (2,515 | ) | | $ | 363,722 |
|
Debt Securities Issued by States and Political Subdivisions | 173,002 |
| | 3,738 |
| | (11 | ) | | 176,729 |
|
Debt Securities Issued by U.S. Government-Sponsored Enterprises | 189 |
|
| 1 |
|
| — |
| | 190 |
|
Debt Securities Issued by Corporations | 224,998 |
| | 59 |
| | (1,074 | ) | | 223,983 |
|
Mortgage-Backed Securities: | |
| | |
| | |
| | |
|
Residential - Government Agencies | 396,578 |
| | 3,582 |
| | (1,196 | ) | | 398,964 |
|
Residential - U.S. Government-Sponsored Enterprises | 560,506 |
| | 3,328 |
| | (8,591 | ) | | 555,243 |
|
Commercial - Government Agencies | 143,396 |
| | 982 |
| | (3,953 | ) | | 140,425 |
|
Total Mortgage-Backed Securities | 1,100,480 |
| | 7,892 |
| | (13,740 | ) | | 1,094,632 |
|
Total | $ | 1,864,456 |
| | $ | 12,140 |
| | $ | (17,340 | ) | | $ | 1,859,256 |
|
Held-to-Maturity: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 353,298 |
| | $ | 645 |
| | $ | (603 | ) | | $ | 353,340 |
|
Debt Securities Issued by States and Political Subdivisions | 233,609 |
| | 7,287 |
| | — |
| | 240,896 |
|
Debt Securities Issued by Corporations | 93,393 |
| | 17 |
| | (1,306 | ) | | 92,104 |
|
Mortgage-Backed Securities: | | | | | | | |
|
Residential - Government Agencies | 1,803,146 |
| | 6,771 |
| | (32,071 | ) | | 1,777,846 |
|
Residential - U.S. Government-Sponsored Enterprises | 1,010,892 |
| | 4,599 |
| | (11,013 | ) | | 1,004,478 |
|
Commercial - Government Agencies | 174,473 |
| | 336 |
| | (5,977 | ) | | 168,832 |
|
Total Mortgage-Backed Securities | 2,988,511 |
| | 11,706 |
|
| (49,061 | ) |
| 2,951,156 |
|
Total | $ | 3,668,811 |
| | $ | 19,655 |
| | $ | (50,970 | ) | | $ | 3,637,496 |
|
| | | | | | | |
December 31, 2018 | |
| | |
| | |
| | |
|
Available-for-Sale: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 394,485 |
| | $ | 493 |
| | $ | (2,577 | ) | | $ | 392,401 |
|
Debt Securities Issued by States and Political Subdivisions | 559,800 |
| | 5,227 |
| | (1,031 | ) | | 563,996 |
|
Debt Securities Issued by U.S. Government-Sponsored Enterprises | 56 |
| | — |
| | — |
| | 56 |
|
Debt Securities Issued by Corporations | 224,997 |
| | — |
| | (1,857 | ) | | 223,140 |
|
Mortgage-Backed Securities: | | | | | | | |
|
Residential - Government Agencies | 189,645 |
| | 1,726 |
| | (929 | ) | | 190,442 |
|
Residential - U.S. Government-Sponsored Enterprises | 589,311 |
| | 1,779 |
| | (12,563 | ) | | 578,527 |
|
Commercial - Government Agencies | 63,864 |
| | — |
| | (4,484 | ) | | 59,380 |
|
Total Mortgage-Backed Securities | 842,820 |
| | 3,505 |
| | (17,976 | ) | | 828,349 |
|
Total | $ | 2,022,158 |
| | $ | 9,225 |
| | $ | (23,441 | ) | | $ | 2,007,942 |
|
Held-to-Maturity: | |
| | |
| | |
| | |
|
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 353,122 |
| | $ | 186 |
| | $ | (1,093 | ) | | $ | 352,215 |
|
Debt Securities Issued by States and Political Subdivisions | 234,602 |
| | 6,150 |
| | — |
| | 240,752 |
|
Debt Securities Issued by Corporations | 97,266 |
| | — |
| | (1,755 | ) | | 95,511 |
|
Mortgage-Backed Securities: | | | | | | | |
|
Residential - Government Agencies | 1,861,874 |
| | 3,886 |
| | (51,773 | ) | | 1,813,987 |
|
Residential - U.S. Government-Sponsored Enterprises | 758,835 |
| | 1,590 |
| | (20,259 | ) | | 740,166 |
|
Commercial - Government Agencies | 176,393 |
| | 147 |
| | (5,177 | ) | | 171,363 |
|
Total Mortgage-Backed Securities | 2,797,102 |
| | 5,623 |
| | (77,209 | ) | | 2,725,516 |
|
Total | $ | 3,482,092 |
| | $ | 11,959 |
| | $ | (80,057 | ) | | $ | 3,413,994 |
|
The table below presents an analysis of the contractual maturities of the Company’s investment securities as of March 31, 2019. 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 | $ | 127,598 |
| | $ | 127,372 |
|
Due After One Year Through Five Years | 182,056 |
| | 182,631 |
|
Due After Five Years Through Ten Years | 66,783 |
| | 68,353 |
|
Due After Ten Years | 22,747 |
| | 23,538 |
|
| 399,184 |
| | 401,894 |
|
| | | |
Debt Securities Issued by Government Agencies | 364,792 |
| | 362,730 |
|
Mortgage-Backed Securities: | |
| | |
|
Residential - Government Agencies | 396,578 |
| | 398,964 |
|
Residential - U.S. Government-Sponsored Enterprises | 560,506 |
| | 555,243 |
|
Commercial - Government Agencies | 143,396 |
| | 140,425 |
|
Total Mortgage-Backed Securities | 1,100,480 |
| | 1,094,632 |
|
Total | $ | 1,864,456 |
| | $ | 1,859,256 |
|
| | | |
Held-to-Maturity: | |
| | |
|
Due in One Year or Less | $ | 179,808 |
| | $ | 179,302 |
|
Due After One Year Through Five Years | 311,027 |
| | 314,416 |
|
Due After Five Years Through Ten Years | 181,768 |
| | 184,499 |
|
Due After Ten Years | 7,697 |
| | 8,123 |
|
| 680,300 |
| | 686,340 |
|
Mortgage-Backed Securities: | |
| | |
|
Residential - Government Agencies | 1,803,146 |
| | 1,777,846 |
|
Residential - U.S. Government-Sponsored Enterprises | 1,010,892 |
| | 1,004,478 |
|
Commercial - Government Agencies | 174,473 |
| | 168,832 |
|
Total Mortgage-Backed Securities | 2,988,511 |
| | 2,951,156 |
|
Total | $ | 3,668,811 |
| | $ | 3,637,496 |
|
Investment securities with carrying values of $2.2 billion and $2.3 billion as of March 31, 2019 and December 31, 2018, 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 months ended March 31, 2019 and 2018.
|
| | | | | | | |
| Three Months Ended March 31, |
(dollars in thousands) | 2019 |
| | 2018 |
|
Gross Gains on Sales of Investment Securities | $ | 2,030 |
| | $ | — |
|
Gross Losses on Sales of Investment Securities | (2,865 | ) | | (666 | ) |
Net Gains (Losses) on Sales of Investment Securities | $ | (835 | ) | | $ | (666 | ) |
The gross losses on sales of investment securities during the three months ended March 31, 2019 included losses on sales of municipal debt securities and mortgage-backed securities as part of a portfolio repositioning. In addition, fees paid to the counterparties of our prior Visa Class B share sale transactions which are expensed as incurred also contributed to the losses during the three months ended March 31, 2019 and March 31, 2018.
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 |
|
March 31, 2019 | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-Sale: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 19,783 |
| | $ | (80 | ) | | $ | 290,176 |
| | $ | (2,435 | ) | | $ | 309,959 |
| | $ | (2,515 | ) |
Debt Securities Issued by States and Political Subdivisions | — |
| | — |
| | 7,314 |
| | (11 | ) | | 7,314 |
| | (11 | ) |
Debt Securities Issued by U.S. Government-Sponsored Enterprises | 75 |
| | — |
| | — |
| | — |
| | 75 |
| | — |
|
Debt Securities Issued by Corporations | — |
| | — |
| | 163,923 |
| | (1,074 | ) | | 163,923 |
| | (1,074 | ) |
Mortgage-Backed Securities: | | | | | | | | |
|
| |
|
|
Residential - Government Agencies | 119,098 |
| | (354 | ) | | 17,720 |
| | (842 | ) | | 136,818 |
| | (1,196 | ) |
Residential - U.S. Government-Sponsored Enterprises | 13,444 |
| | (29 | ) | | 403,072 |
| | (8,562 | ) | | 416,516 |
| | (8,591 | ) |
Commercial - Government Agencies | — |
| | — |
| | 58,643 |
| | (3,953 | ) | | 58,643 |
| | (3,953 | ) |
Total Mortgage-Backed Securities | 132,542 |
| | (383 | ) | | 479,435 |
| | (13,357 | ) | | 611,977 |
| | (13,740 | ) |
Total | $ | 152,400 |
| | $ | (463 | ) | | $ | 940,848 |
| | $ | (16,877 | ) | | $ | 1,093,248 |
| | $ | (17,340 | ) |
Held-to-Maturity: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | — |
| | $ | — |
| | $ | 129,299 |
| | $ | (603 | ) | | $ | 129,299 |
| | $ | (603 | ) |
Debt Securities Issued by Corporations | — |
| | — |
| | 72,951 |
| | (1,306 | ) | | 72,951 |
| | (1,306 | ) |
Mortgage-Backed Securities: | | | | | | | | | | | |
Residential - Government Agencies | 921 |
| | (1 | ) | | 1,368,236 |
| | (32,070 | ) | | 1,369,157 |
| | (32,071 | ) |
Residential - U.S. Government-Sponsored Enterprises | — |
| | — |
| | 550,564 |
| | (11,013 | ) | | 550,564 |
| | (11,013 | ) |
Commercial - Government Agencies | — |
| | — |
| | 143,052 |
| | (5,977 | ) | | 143,052 |
| | (5,977 | ) |
Total Mortgage-Backed Securities | 921 |
| | (1 | ) | | 2,061,852 |
| | (49,060 | ) | | 2,062,773 |
| | (49,061 | ) |
Total | $ | 921 |
| | $ | (1 | ) | | $ | 2,264,102 |
| | $ | (50,969 | ) | | $ | 2,265,023 |
| | $ | (50,970 | ) |
| | | | | | | | | | | |
December 31, 2018 | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-Sale: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 157,058 |
| | $ | (964 | ) | | $ | 173,763 |
| | $ | (1,613 | ) | | $ | 330,821 |
| | $ | (2,577 | ) |
Debt Securities Issued by States and Political Subdivisions | 38,138 |
| | (59 | ) | | 156,772 |
| | (972 | ) | | 194,910 |
| | (1,031 | ) |
Debt Securities Issued by Corporations | 59,770 |
| | (231 | ) | | 163,371 |
| | (1,626 | ) | | 223,141 |
| | (1,857 | ) |
Mortgage-Backed Securities: | | | | | | | | | | | |
Residential - Government Agencies | 6,299 |
| | (10 | ) | | 19,011 |
| | (919 | ) | | 25,310 |
| | (929 | ) |
Residential - U.S. Government-Sponsored Enterprises | — |
| | — |
| | 473,380 |
| | (12,563 | ) | | 473,380 |
| | (12,563 | ) |
Commercial - Government Agencies | — |
| | — |
| | 59,380 |
| | (4,484 | ) | | 59,380 |
| | (4,484 | ) |
Total Mortgage-Backed Securities | 6,299 |
| | (10 | ) | | 551,771 |
| | (17,966 | ) | | 558,070 |
| | (17,976 | ) |
Total | $ | 261,265 |
| | $ | (1,264 | ) | | $ | 1,045,677 |
| | $ | (22,177 | ) | | $ | 1,306,942 |
| | $ | (23,441 | ) |
Held-to-Maturity: | | | | | | | | | | | |
Debt Securities Issued by the U.S. Treasury and Government Agencies | $ | 99,440 |
| | $ | (237 | ) | | $ | 134,239 |
| | $ | (856 | ) | | $ | 233,679 |
| | $ | (1,093 | ) |
Debt Securities Issued by Corporations | — |
| | — |
| | 95,511 |
| | (1,755 | ) | | 95,511 |
| | (1,755 | ) |
Mortgage-Backed Securities: | | | | | | | | | | | |
Residential - Government Agencies | 12,974 |
| | (45 | ) | | 1,491,747 |
| | (51,728 | ) | | 1,504,721 |
| | (51,773 | ) |
Residential - U.S. Government-Sponsored Enterprises | — |
| | — |
| | 617,000 |
| | (20,259 | ) | | 617,000 |
| | (20,259 | ) |
Commercial - Government Agencies | 19,217 |
| | (61 | ) | | 145,715 |
| | (5,116 | ) | | 164,932 |
| | (5,177 | ) |
Total Mortgage-Backed Securities | 32,191 |
| | (106 | ) | | 2,254,462 |
| | (77,103 | ) | | 2,286,653 |
| | (77,209 | ) |
Total | $ | 131,631 |
| | $ | (343 | ) | | $ | 2,484,212 |
| | $ | (79,714 | ) | | $ | 2,615,843 |
| | $ | (80,057 | ) |
The Company does not believe that the investment securities that were in an unrealized loss position as of March 31, 2019, which were comprised of 392 individual securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. As of March 31, 2019 and December 31, 2018, 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 months ended March 31, 2019 and 2018 were as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
(dollars in thousands) | 2019 |
| | 2018 |
|
Taxable | $ | 31,992 |
| | $ | 28,671 |
|
Non-Taxable | 3,361 |
| | 4,766 |
|
Total Interest Income from Investment Securities | $ | 35,353 |
| | $ | 33,437 |
|
As of March 31, 2019, included in the Company’s investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $408.8 million, representing 98% 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. Most of 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, 80% were general obligation issuances.
As of March 31, 2019 and December 31, 2018, 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) | March 31, 2019 |
| | December 31, 2018 |
|
Federal Home Loan Bank Stock | $ | 14,000 |
| | $ | 15,000 |
|
Federal Reserve Bank Stock | 20,970 |
| | 20,858 |
|
Total | $ | 34,970 |
| | $ | 35,858 |
|
These securities can only be redeemed or sold at their par value and only to the respective issuing 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 will be 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 March 31, 2019, 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 March 31, 2019 are carried at a zero cost basis.
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 March 31, 2019 and December 31, 2018:
|
| | | | | | | |
(dollars in thousands) | March 31, 2019 |
| | December 31, 2018 |
|
Commercial | |
| | |
|
Commercial and Industrial | $ | 1,331,345 |
| | $ | 1,331,149 |
|
Commercial Mortgage | 2,381,213 |
| | 2,302,356 |
|
Construction | 132,775 |
| | 170,061 |
|
Lease Financing | 154,919 |
| | 176,226 |
|
Total Commercial | 4,000,252 |
| | 3,979,792 |
|
Consumer | |
| | |
|
Residential Mortgage | 3,702,553 |
| | 3,673,796 |
|
Home Equity | 1,698,666 |
| | 1,681,442 |
|
Automobile | 676,730 |
| | 658,133 |
|
Other 1 | 470,408 |
| | 455,611 |
|
Total Consumer | 6,548,357 |
| | 6,468,982 |
|
Total Loans and Leases | $ | 10,548,609 |
| | $ | 10,448,774 |
|
| |
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 $0.3 million for the three months ended March 31, 2019 and 2018, respectively.
Allowance for Loan and Lease Losses (the “Allowance”)
The following presents by portfolio segment, the activity in the Allowance for the three months ended March 31, 2019 and 2018. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of March 31, 2019 and 2018.
|
| | | | | | | | | | | |
(dollars in thousands) | Commercial |
| | Consumer |
| | Total |
|
Three Months Ended March 31, 2019 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Balance at Beginning of Period | $ | 66,874 |
| | $ | 39,819 |
| | $ | 106,693 |
|
Loans and Leases Charged-Off | (1,986 | ) | | (4,842 | ) | | (6,828 | ) |
Recoveries on Loans and Leases Previously Charged-Off | 501 |
| | 2,657 |
| | 3,158 |
|
Net Loans and Leases Recovered (Charged-Off) | (1,485 | ) | | (2,185 | ) | | (3,670 | ) |
Provision for Credit Losses | 2,138 |
| | 862 |
| | 3,000 |
|
Balance at End of Period | $ | 67,527 |
| | $ | 38,496 |
| | $ | 106,023 |
|
As of March 31, 2019 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 181 |
| | $ | 3,448 |
| | $ | 3,629 |
|
Collectively Evaluated for Impairment | 67,346 |
| | 35,048 |
| | 102,394 |
|
Total | 67,527 |
| | 38,496 |
| | 106,023 |
|
Recorded Investment in Loans and Leases: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 15,627 |
| | $ | 42,369 |
| | $ | 57,996 |
|
Collectively Evaluated for Impairment | 3,984,625 |
| | 6,505,988 |
| | 10,490,613 |
|
Total | $ | 4,000,252 |
| | $ | 6,548,357 |
| | $ | 10,548,609 |
|
| | | | | |
Three Months Ended March 31, 2018 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Balance at Beginning of Period | $ | 65,822 |
| | $ | 41,524 |
| | $ | 107,346 |
|
Loans and Leases Charged-Off | (206 | ) | | (5,782 | ) | | (5,988 | ) |
Recoveries on Loans and Leases Previously Charged-Off | 328 |
| | 2,127 |
| | 2,455 |
|
Net Loans and Leases Recovered (Charged-Off) | 122 |
| | (3,655 | ) | | (3,533 | ) |
Provision for Credit Losses | (1,834 | ) | | 5,959 |
| | 4,125 |
|
Balance at End of Period | $ | 64,110 |
| | $ | 43,828 |
| | $ | 107,938 |
|
As of March 31, 2018 | |
| | |
| | |
|
Allowance for Loan and Lease Losses: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 59 |
| | $ | 3,783 |
| | $ | 3,842 |
|
Collectively Evaluated for Impairment | 64,051 |
| | 40,045 |
| | 104,096 |
|
Total | $ | 64,110 |
| | $ | 43,828 |
| | $ | 107,938 |
|
Recorded Investment in Loans and Leases: | |
| | |
| | |
|
Individually Evaluated for Impairment | $ | 21,095 |
| | $ | 40,727 |
| | $ | 61,822 |
|
Collectively Evaluated for Impairment | 3,771,641 |
| | 6,083,165 |
| | 9,854,806 |
|
Total | $ | 3,792,736 |
| | $ | 6,123,892 |
| | $ | 9,916,628 |
|
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. |
The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of March 31, 2019 and December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
(dollars in thousands) | Commercial and Industrial |
| | Commercial Mortgage |
| | Construction |
| | Lease Financing |
| | Total Commercial |
|
Pass | $ | 1,296,226 |
| | $ | 2,309,833 |
| | $ | 131,481 |
| | $ | 153,911 |
| | $ | 3,891,451 |
|
Special Mention | 18,080 |
| | 56,233 |
| | — |
| | 4 |
| | 74,317 |
|
Classified | 17,039 |
| | 15,147 |
| | 1,294 |
| | 1,004 |
| | 34,484 |
|
Total | $ | 1,331,345 |
| | $ | 2,381,213 |
| | $ | 132,775 |
| | $ | 154,919 |
| | $ | 4,000,252 |
|
| | | | | | | | | |
(dollars in thousands) | Residential Mortgage |
| | Home Equity |
| | Automobile |
| | Other 1 |
| | Total Consumer |
|
Pass | $ | 3,696,769 |
| | $ | 1,695,120 |
| | $ | 675,996 |
| | $ | 469,375 |
| | $ | 6,537,260 |
|
Classified | 5,784 |
| | 3,546 |
| | 734 |
| | 1,033 |
| | 11,097 |
|
Total | $ | 3,702,553 |
| | $ | 1,698,666 |
| | $ | 676,730 |
| | $ | 470,408 |
| | $ | 6,548,357 |
|
Total Recorded Investment in Loans and Leases | | |
| | |
| | |
| | $ | 10,548,609 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(dollars in thousands) | Commercial and Industrial |
| | Commercial Mortgage |
| | Construction |
| | Lease Financing |
| | Total Commercial |
|
Pass | $ | 1,302,278 |
| | $ | 2,256,128 |
| | $ | 168,740 |
| | $ | 175,223 |
| | $ | 3,902,369 |
|
Special Mention | 17,688 |
| | 30,468 |
| | — |
| | 5 |
| | 48,161 |
|
Classified | 11,183 |
| | 15,760 |
| | 1,321 |
| | 998 |
| | 29,262 |
|
Total | $ | 1,331,149 |
| | $ | 2,302,356 |
| | $ | 170,061 |
| | $ | 176,226 |
| | $ | 3,979,792 |
|
| | | | | | | | | |
(dollars in thousands) | Residential Mortgage |
| | Home Equity |
| | Automobile |
| | Other 1 |
| | Total Consumer |
|
Pass | $ | 3,668,475 |
| | $ | 1,677,193 |
| | $ | 657,620 |
| | $ | 454,697 |
| | $ | 6,457,985 |
|
Classified | 5,321 |
| | 4,249 |
| | 513 |
| | 914 |
| | 10,997 |
|
Total | $ | 3,673,796 |
| | $ | 1,681,442 |
| | $ | 658,133 |
| | $ | 455,611 |
| | $ | 6,468,982 |
|
Total Recorded Investment in Loans and Leases | | |
| | |
| | |
| | $ | 10,448,774 |
|
| |
1 | Comprised of other revolving credit, installment, and lease financing. |
Aging Analysis
The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of March 31, 2019 and December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | 30 - 59 Days Past Due |
| | 60 - 89 Days Past Due |
| | Past Due 90 Days or More |
| | Non-Accrual |
| | Total Past Due and Non-Accrual |
| | Current |
| | Total Loans and Leases |
| | Non-Accrual Loans and Leases that are Current 2 |
|
As of March 31, 2019 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Commercial | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Commercial and Industrial | $ | 7,123 |
| | $ | 10 |
| | $ | 66 |
| | $ | 393 |
| | $ | 7,592 |
| | $ | 1,323,753 |
| | $ | 1,331,345 |
| | $ | 265 |
|
Commercial Mortgage | 2,674 |
| | — |
| | — |
| | 5,911 |
| | 8,585 |
| | 2,372,628 |
| | 2,381,213 |
| | 5,911 |
|
Construction | 200 |
| | — |
| | — |
| | — |
| | 200 |
| | 132,575 |
| | 132,775 |
| | — |
|
Lease Financing | — |
| | — |
| | — |
| | — |
| | — |
| | 154,919 |
| |