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Table of Contents

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)
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.


Table of Contents

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

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Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
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

Held-to-Maturity
21,921

 
21,296

Deposits
15

 
18

Funds Sold
1,444

 
757

Other
319

 
300

Total Interest Income
145,642

 
132,146

Interest Expense
 

 
 

Deposits
15,284

 
7,581

Securities Sold Under Agreements to Repurchase
4,571

 
4,564

Funds Purchased
157

 
53

Short-Term Borrowings
36

 
16

Other Debt
757

 
976

Total Interest Expense
20,805

 
13,190

Net Interest Income
124,837

 
118,956

Provision for Credit Losses
3,000

 
4,125

Net Interest Income After Provision for Credit Losses
121,837

 
114,831

Noninterest Income
 

 
 

Trust and Asset Management
10,761

 
11,181

Mortgage Banking
2,287

 
2,145

Service Charges on Deposit Accounts
7,364

 
7,129

Fees, Exchange, and Other Service Charges
14,208

 
14,333

Investment Securities Gains (Losses), Net
(835
)
 
(666
)
Annuity and Insurance
2,578

 
1,206

Bank-Owned Life Insurance
1,710

 
1,842

Other
5,606

 
6,865

Total Noninterest Income
43,679

 
44,035

Noninterest Expense
 

 
 

Salaries and Benefits
56,586

 
54,422

Net Occupancy
7,594

 
8,534

Net Equipment
6,833

 
5,527

Data Processing
4,526

 
3,891

Professional Fees
2,453

 
2,773

FDIC Insurance
1,269

 
2,157

Other
13,796

 
17,080

Total Noninterest Expense
93,057

 
94,384

Income Before Provision for Income Taxes
72,459

 
64,482

Provision for Income Taxes
13,660

 
10,442

Net Income
$
58,799

 
$
54,040

Basic Earnings Per Share
$
1.44

 
$
1.29

Diluted Earnings Per Share
$
1.43

 
$
1.28

Dividends Declared Per Share
$
0.62

 
$
0.52

Basic Weighted Average Shares
40,938,318

 
42,038,573

Diluted Weighted Average Shares
41,213,453

 
42,358,425

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

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Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
 
March 31,
(dollars in thousands)
2019

 
2018

Net Income
$
58,799

 
$
54,040

Other Comprehensive Income (Loss), Net of Tax:
 

 
 

Net Unrealized Gains (Losses) on Investment Securities
6,919

 
(9,121
)
Defined Benefit Plans
246

 
216

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).

3

Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)
March 31,
2019

 
December 31,
2018

Assets
 

 
 

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

Loans Held for Sale
17,909

 
10,987

Loans and Leases
10,548,609

 
10,448,774

Allowance for Loan and Lease Losses
(106,023
)
 
(106,693
)
Net Loans and Leases
10,442,586

 
10,342,081

Total Earning Assets
16,235,979

 
16,044,990

Cash and Due From Banks
293,871

 
324,081

Premises and Equipment, Net
159,344

 
151,837

Operating Lease Right-of-Use Assets
104,166

 

Accrued Interest Receivable
52,820

 
51,230

Foreclosed Real Estate
3,225

 
1,356

Mortgage Servicing Rights
24,149

 
24,310

Goodwill
31,517

 
31,517

Bank-Owned Life Insurance
285,155

 
283,771

Other Assets
256,187

 
230,882

Total Assets
$
17,446,413

 
$
17,143,974

 
 
 
 
Liabilities
 

 
 

Deposits
 

 
 

Noninterest-Bearing Demand
$
4,595,915

 
$
4,739,596

Interest-Bearing Demand
2,961,444

 
3,002,925

Savings
5,946,881

 
5,539,199

Time
1,763,070

 
1,745,522

Total Deposits
15,267,310

 
15,027,242

Short-Term Borrowings

 
199

Securities Sold Under Agreements to Repurchase
504,299

 
504,296

Other Debt
110,624

 
135,643

Operating Lease Liabilities
111,230

 

Retirement Benefits Payable
40,343

 
40,494

Accrued Interest Payable
8,474

 
8,253

Taxes Payable and Deferred Taxes
29,935

 
19,736

Other Liabilities
104,508

 
139,911

Total Liabilities
16,176,723

 
15,875,774

Shareholders’ Equity
 

 
 

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

Capital Surplus
574,594

 
571,704

Accumulated Other Comprehensive Loss
(43,878
)
 
(51,043
)
Retained Earnings
1,674,264

 
1,641,314

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

Total Liabilities and Shareholders’ Equity
$
17,446,413

 
$
17,143,974

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

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

 
Common Stock

 
Capital
Surplus

 
Accum.
Other
Compre-
hensive
Income
(Loss)

 
Retained Earnings

 
Treasury Stock

 
Total

Balance as of December 31, 2018
41,499,898

 
$
577

 
$
571,704

 
$
(51,043
)
 
$
1,641,314

 
$
(894,352
)
 
$
1,268,200

Net Income

 

 

 

 
58,799

 

 
58,799

Other Comprehensive Income

 

 

 
7,165

 

 

 
7,165

Share-Based Compensation

 

 
2,274

 

 

 

 
2,274

Common Stock Issued under Purchase and Equity
Compensation Plans
131,529

 
1

 
616

 

 
(203
)
 
1,673

 
2,087

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
42,401,443

 
$
576

 
$
561,161

 
$
(34,715
)
 
$
1,512,218

 
$
(807,372
)
 
$
1,231,868

Net Income

 

 

 

 
54,040

 

 
54,040

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

Common Stock Issued under Purchase and Equity
Compensation Plans
121,299

 
1

 
570

 

 
252

 
1,128

 
1,951

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

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

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Table of Contents

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended
 
March 31,
(dollars in thousands)
2019

 
2018

Operating Activities
 

 
 

Net Income
$
58,799

 
$
54,040

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

 
 

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
 

 
 

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
 

 
 

Cash Paid for Interest
$
20,583

 
$
11,908

Cash Paid for Income Taxes
2,764

 
961

Non-Cash Investing and Financing Activities:
 

 
 

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).

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Table of Contents

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.


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Table of Contents

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.


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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.


9

Table of Contents

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

 
 
 
 


10

Table of Contents

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


11

Table of Contents


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.


12

Table of Contents

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
)


13

Table of Contents

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.


14

Table of Contents

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.

15

Table of Contents

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


16

Table of Contents

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.


17

Table of Contents

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.

18

Table of Contents

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