Edgar Filing: BANK OF HAWAII CORP

BOH_2015.06.30_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

ended June 30, 2015

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 ý 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 ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of July 21, 2015, there were 43,501,279 shares of common stock outstanding.

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Bank of Hawaii Corporation

Form 10-Q

Index



		Page

Part I - Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Income – Three and six months ended June 30, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2015 and 2014	3

	Consolidated Statements of Condition – June 30, 2015 and December 31, 2014	4

	Consolidated Statements of Shareholders’ Equity – Six months ended June 30, 2015 and 2014	5

	Consolidated Statements of Cash Flows – Six months ended June 30, 2015 and 2014	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75

Item 4.	Controls and Procedures	75

Part II - Other Information

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 6.	Exhibits	76

Signatures		77

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
(dollars in thousands, except per share amounts)	2015		2014			2015		2014
Interest Income
Interest and Fees on Loans and Leases	$	73,565	$	65,818		$	144,526	$	129,344
Income on Investment Securities
Available-for-Sale	10,273		10,697			20,471		21,457
Held-to-Maturity	22,832		26,938			47,239		54,827
Deposits	2		1			5		4
Funds Sold	268		168			527		305
Other	310		302			612		604
Total Interest Income	107,250		103,924			213,380		206,541
Interest Expense
Deposits	2,405		2,393			4,773		4,751
Securities Sold Under Agreements to Repurchase	6,440		6,465			12,811		12,862
Funds Purchased	3		4			6		7
Other Debt	620		650			1,238		1,276
Total Interest Expense	9,468		9,512			18,828		18,896
Net Interest Income	97,782		94,412			194,552		187,645
Provision for Credit Losses	—		(2,199		)	—		(2,199		)
Net Interest Income After Provision for Credit Losses	97,782		96,611			194,552		189,844
Noninterest Income
Trust and Asset Management	12,355		12,005			24,535		23,857
Mortgage Banking	3,469		1,804			5,162		3,809
Service Charges on Deposit Accounts	8,203		8,638			16,740		17,516
Fees, Exchange, and Other Service Charges	13,352		13,370			26,249		26,309
Investment Securities Gains, Net	86		2,079			10,317		4,239
Annuity and Insurance	1,885		1,930			3,929		4,053
Bank-Owned Life Insurance	2,088		1,519			3,822		3,121
Other	4,487		3,136			7,478		6,345
Total Noninterest Income	45,925		44,481			98,232		89,249
Noninterest Expense
Salaries and Benefits	47,610		45,081			97,390		91,978
Net Occupancy	8,605		9,254			17,938		18,671
Net Equipment	4,826		4,669			10,114		9,272
Data Processing	3,673		3,842			7,446		7,491
Professional Fees	2,265		2,613			4,599		4,873
FDIC Insurance	2,068		2,055			4,208		4,131
Other	14,527		13,568			28,794		28,213
Total Noninterest Expense	83,574		81,082			170,489		164,629
Income Before Provision for Income Taxes	60,133		60,010			122,295		114,464
Provision for Income Taxes	18,979		18,520			38,699		34,382
Net Income	$	41,154	$	41,490		$	83,596	$	80,082
Basic Earnings Per Share	$	0.95	$	0.94		$	1.93	$	1.81
Diluted Earnings Per Share	$	0.95	$	0.94		$	1.92	$	1.81
Dividends Declared Per Share	$	0.45	$	0.45		$	0.90	$	0.90
Basic Weighted Average Shares	43,305,813		44,053,899			43,345,667		44,123,030
Diluted Weighted Average Shares	43,518,349		44,246,431			43,558,664		44,332,838

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
(dollars in thousands)	2015			2014		2015			2014
Net Income	$	41,154		$	41,490	$	83,596		$	80,082
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Gains (Losses) on Investment Securities	(7,610		)	8,617		(2,316		)	14,888
Defined Benefit Plans	220			156		440			312
Total Other Comprehensive Income (Loss)	(7,390		)	8,773		(1,876		)	15,200
Comprehensive Income	$	33,764		$	50,263	$	81,720		$	95,282

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)



(dollars in thousands)	June 30, 2015			December 31, 2014
Assets
Interest-Bearing Deposits in Other Banks	$	3,420		$	2,873
Funds Sold	602,598			360,577
Investment Securities
Available-for-Sale	2,275,361			2,289,190
Held-to-Maturity (Fair Value of $4,240,732 and $4,504,495)	4,199,121			4,466,679
Loans Held for Sale	18,483			5,136
Loans and Leases	7,428,438			6,897,589
Allowance for Loan and Lease Losses	(106,006		)	(108,688		)
Net Loans and Leases	7,322,432			6,788,901
Total Earning Assets	14,421,415			13,913,356
Cash and Due From Banks	150,874			172,126
Premises and Equipment, Net	108,439			109,854
Accrued Interest Receivable	44,475			44,654
Foreclosed Real Estate	1,989			2,311
Mortgage Servicing Rights	23,426			24,695
Goodwill	31,517			31,517
Bank-Owned Life Insurance	265,133			262,807
Other Assets	200,775			225,888
Total Assets	$	15,248,043		$	14,787,208

Liabilities
Deposits
Noninterest-Bearing Demand	$	4,156,847		$	3,832,943
Interest-Bearing Demand	2,699,517			2,559,570
Savings	5,044,711			4,806,575
Time	1,189,620			1,434,001
Total Deposits	13,090,695			12,633,089
Funds Purchased	8,459			8,459
Securities Sold Under Agreements to Repurchase	672,310			688,601
Other Debt	170,816			173,912
Retirement Benefits Payable	55,181			55,477
Accrued Interest Payable	5,254			5,148
Taxes Payable and Deferred Taxes	26,244			27,777
Other Liabilities	136,145			139,659
Total Liabilities	14,165,104			13,732,122
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: June 30 2015 - 57,745,324 / 43,535,020 and December 31, 2014 - 57,634,755 / 43,724,208)	575			574
Capital Surplus	536,782			531,932
Accumulated Other Comprehensive Loss	(28,562		)	(26,686		)
Retained Earnings	1,278,672			1,234,801
Treasury Stock, at Cost (Shares: June 30, 2015 - 14,210,304 and December 31, 2014 - 13,910,547)	(704,528		)	(685,535		)
Total Shareholders’ Equity	1,082,939			1,055,086
Total Liabilities and Shareholders’ Equity	$	15,248,043		$	14,787,208

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, 2014	43,724,208		$	574	$	531,932	$	(26,686	)	$	1,234,801		$	(685,535	)	$	1,055,086
Net Income	—		—		—		—			83,596			—			83,596
Other Comprehensive Loss	—		—		—		(1,876		)	—			—			(1,876		)
Share-Based Compensation	—		—		3,731		—			—			—			3,731
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	213,289		1		1,119		—			(408		)	5,394			6,106
Common Stock Repurchased	(402,477	)	—		—		—			—			(24,387		)	(24,387		)
Cash Dividends Declared ($0.90 per share)	—		—		—		—			(39,317		)	—			(39,317		)
Balance as of June 30, 2015	43,535,020		$	575	$	536,782	$	(28,562	)	$	1,278,672		$	(704,528	)	$	1,082,939

Balance as of December 31, 2013	44,490,385		$	572	$	522,505	$	(31,823	)	$	1,151,754		$	(631,032	)	$	1,011,976
Net Income	—		—		—		—			80,082			—			80,082
Other Comprehensive Income	—		—		—		15,200			—			—			15,200
Share-Based Compensation	—		—		3,820		—			—			—			3,820
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	274,621		1		959		—			(279		)	6,074			6,755
Common Stock Repurchased	(467,778	)	—		—		—			—			(26,987		)	(26,987		)
Cash Dividends Declared ($0.90 per share)	—		—		—		—			(40,045		)	—			(40,045		)
Balance as of June 30, 2014	44,297,228		$	573	$	527,284	$	(16,623	)	$	1,191,512		$	(651,945	)	$	1,050,801

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

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended
	June 30,
(dollars in thousands)	2015			2014
Operating Activities
Net Income	$	83,596		$	80,082
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses	—			(2,199		)
Depreciation and Amortization	6,386			6,172
Amortization of Deferred Loan and Lease Fees	(1,076		)	(938		)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	25,314			24,886
Share-Based Compensation	3,731			3,820
Benefit Plan Contributions	(1,072		)	(892		)
Deferred Income Taxes	(4,803		)	(222		)
Net Gains on Sales of Loans and Leases	(1,967		)	(1,650		)
Net Gains on Sales of Investment Securities	(10,317		)	(4,239		)
Proceeds from Sales of Loans Held for Sale	69,856			57,411
Originations of Loans Held for Sale	(81,374		)	(52,947		)
Tax Benefits from Share-Based Compensation	(356		)	(405		)
Net Change in Other Assets and Other Liabilities	28,133			(35,031		)
Net Cash Provided by Operating Activities	116,051			73,848

Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities	174,152			165,023
Proceeds from Sales	10,384			12,750
Purchases	(177,532		)	(126,791		)
Investment Securities Held-to-Maturity:
Proceeds from Prepayments and Maturities	410,311			374,734
Purchases	(154,681		)	(347,876		)
Net Change in Loans and Leases	(535,834		)	(336,068		)
Premises and Equipment, Net	(4,971		)	(5,651		)
Net Cash Used in Investing Activities	(278,171		)	(263,879		)

Financing Activities
Net Change in Deposits	457,606			755,378
Net Change in Short-Term Borrowings	(16,291		)	(25,938		)
Tax Benefits from Share-Based Compensation	356			405
Proceeds from Issuance of Common Stock	5,469			6,249
Repurchase of Common Stock	(24,387		)	(26,987		)
Cash Dividends Paid	(39,317		)	(40,045		)
Net Cash Provided by Financing Activities	383,436			669,062

Net Change in Cash and Cash Equivalents	221,316			479,031
Cash and Cash Equivalents at Beginning of Period	535,576			463,746
Cash and Cash Equivalents at End of Period	$	756,892		$	942,777
Supplemental Information
Cash Paid for Interest	$	18,313		$	18,170
Cash Paid for Income Taxes	34,339			27,696
Non-Cash Investing Activities:
Transfer from Loans to Foreclosed Real Estate	83			3,311
Transfers from Loans to Loans Held for Sale	61,526			—

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

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Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii. Bank of Hawaii Corporation and its subsidiaries (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands. The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements of the Company 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. In the opinion of management, the consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

Certain prior period information has been reclassified to conform to the current period presentation.

These statements 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, 2014. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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.

Accounting Standards Adopted in 2015

In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." 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. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects (see Note 5 to the Consolidated Financial Statements). The Company adopted ASU No. 2014-01 effective January 1, 2015. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that used the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. Prior to adoption of ASU No. 2014-01, the Company accounted for such investments using the effective yield method and continued to do so for these pre-existing investments after adopting ASU No. 2014-01. The Company expects future investments to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. There were no new investments being amortized since the adoption of ASU No. 2014-01 on January 1, 2015, and therefore, the adoption of ASU No. 2014-01 has not had a material impact on the Company's Consolidated Financial Statements.

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) The creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) The borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both: (1) The amount of foreclosed residential real estate property held by the creditor; and (2) The

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recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The Company adopted ASU No. 2014-04 effective January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact on the Company's Consolidated Financial Statements.

In June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures, effective for the current reporting period of June 30, 2015, about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings (see Note 6 to the Consolidated Financial Statements). The Company adopted the amendments in this ASU effective January 1, 2015. As of June 30, 2015, all of the Company's repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 did not have a material impact on the Company's Consolidated Financial Statements.

In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. However, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company adopted ASU No. 2014-12 effective January 1, 2015. As of June 30, 2015, the Company did not have any share-based payment awards that included performance targets that could be achieved after the requisite service period. As such, the adoption of ASU No. 2014-12 did not have a material impact on the Company's Consolidated Financial Statements.

In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The Company adopted ASU No. 2014-14 effective January 1, 2015. The adoption of ASU No. 2014-14 did not have a material impact on the Company's Consolidated Financial Statements.

Accounting Standards Pending Adoption

In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP comprised broad

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revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) Remove inconsistencies and weaknesses in revenue requirements; (2) Provide a more robust framework for addressing revenue issues; (3) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) Provide more useful information to users of financial statements through improved disclosure requirements; and (5) Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption is not permitted. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of ASU No. 2015-02 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s current method of accounting for fees paid in a cloud computing arrangement is consistent with the accounting guidance provided by ASU No. 2015-05. Therefore, the adoption of ASU No. 2015-05 is not expected to have a material impact on the Company's Consolidated Financial Statements.

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Note 2. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of June 30, 2015 and December 31, 2014 were as follows:



(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2015
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	365,844	$	5,048	$	(127	)	$	370,765
Debt Securities Issued by States and Political Subdivisions	731,724		18,911		(1,776		)	748,859
Debt Securities Issued by Corporations	313,196		421		(3,756		)	309,861
Mortgage-Backed Securities:
Residential - Government Agencies	379,489		9,085		(1,211		)	387,363
Residential - U.S. Government-Sponsored Enterprises	303,170		2,304		(703		)	304,771
Commercial - Government Agencies	159,862		—		(6,120		)	153,742
Total Mortgage-Backed Securities	842,521		11,389		(8,034		)	845,876
Total	$	2,253,285	$	35,769	$	(13,693	)	$	2,275,361
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	559,587	$	3,401	$	(177	)	$	562,811
Debt Securities Issued by States and Political Subdivisions	247,783		13,173		—			260,956
Debt Securities Issued by Corporations	159,031		1,202		(1,408		)	158,825
Mortgage-Backed Securities:
Residential - Government Agencies	2,517,442		38,545		(15,600		)	2,540,387
Residential - U.S. Government-Sponsored Enterprises	417,478		2,749		(80		)	420,147
Commercial - Government Agencies	297,800		1,970		(2,164		)	297,606
Total Mortgage-Backed Securities	3,232,720		43,264		(17,844		)	3,258,140
Total	$	4,199,121	$	61,040	$	(19,429	)	$	4,240,732

December 31, 2014
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	325,365	$	5,933	$	(40	)	$	331,258
Debt Securities Issued by States and Political Subdivisions	723,474		21,941		(1,445		)	743,970
Debt Securities Issued by Corporations	298,272		546		(3,985		)	294,833
Mortgage-Backed Securities:
Residential - Government Agencies	452,493		10,986		(1,043		)	462,436
Residential - U.S. Government-Sponsored Enterprises	276,390		2,262		(191		)	278,461
Commercial - Government Agencies	186,813		—		(8,581		)	178,232
Total Mortgage-Backed Securities	915,696		13,248		(9,815		)	919,129
Total	$	2,262,807	$	41,668	$	(15,285	)	$	2,289,190
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	498,767	$	2,008	$	(1,159	)	$	499,616
Debt Securities Issued by States and Political Subdivisions	249,559		15,459		—			265,018
Debt Securities Issued by Corporations	166,686		109		(3,442		)	163,353
Mortgage-Backed Securities:
Residential - Government Agencies	2,862,369		45,407		(20,636		)	2,887,140
Residential - U.S. Government-Sponsored Enterprises	379,365		3,635		(15		)	382,985
Commercial - Government Agencies	309,933		241		(3,791		)	306,383
Total Mortgage-Backed Securities	3,551,667		49,283		(24,442		)	3,576,508
Total	$	4,466,679	$	66,859	$	(29,043	)	$	4,504,495

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The table below presents an analysis of the contractual maturities of the Company’s investment securities as of June 30, 2015. 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	$	85,358	$	85,907
Due After One Year Through Five Years	436,379		437,170
Due After Five Years Through Ten Years	490,364		497,559
Due After Ten Years	93,204		99,012
	1,105,305		1,119,648

Debt Securities Issued by Government Agencies	305,459		309,837
Mortgage-Backed Securities:
Residential - Government Agencies	379,489		387,363
Residential - U.S. Government-Sponsored Enterprises	303,170		304,771
Commercial - Government Agencies	159,862		153,742
Total Mortgage-Backed Securities	842,521		845,876
Total	$	2,253,285	$	2,275,361

Held-to-Maturity:
Due in One Year or Less	$	79,884	$	80,195
Due After One Year Through Five Years	490,508		493,749
Due After Five Years Through Ten Years	270,234		275,890
Due After Ten Years	125,775		132,758
	966,401		982,592
Mortgage-Backed Securities:
Residential - Government Agencies	2,517,442		2,540,387
Residential - U.S. Government-Sponsored Enterprises	417,478		420,147
Commercial - Government Agencies	297,800		297,606
Total Mortgage-Backed Securities	3,232,720		3,258,140
Total	$	4,199,121	$	4,240,732

Investment securities with carrying values of $2.7 billion and $2.8 billion as of June 30, 2015 and December 31, 2014, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.

The table below presents the gains and losses from the sales of investment securities for the three and six months ended June 30, 2015 and 2014.



	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2015		2014		2015		2014
Gross Gains on Sales of Investment Securities	$	86	$	2,079	$	10,317	$	4,239
Gross Losses on Sales of Investment Securities	—		—		—		—
Net Gains on Sales of Investment Securities	$	86	$	2,079	$	10,317	$	4,239

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



	Less Than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
June 30, 2015
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	58,296	$	(102	)	$	5,178	$	(25	)	$	63,474	$	(127	)
Debt Securities Issued by States and Political Subdivisions	193,853		(1,776		)	—		—			193,853		(1,776		)
Debt Securities Issued by Corporations	126,177		(1,843		)	143,190		(1,913		)	269,367		(3,756		)
Mortgage-Backed Securities:
Residential - Government Agencies	17,450		(10		)	10,508		(1,201		)	27,958		(1,211		)
Residential - U.S. Government-Sponsored Enterprises	141,971		(703		)	—		—			141,971		(703		)
Commercial - Government Agencies	—		—			153,743		(6,120		)	153,743		(6,120		)
Total Mortgage-Backed Securities	159,421		(713		)	164,251		(7,321		)	323,672		(8,034		)
Total	$	537,747	$	(4,434	)	$	312,619	$	(9,259	)	$	850,366	$	(13,693	)
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	60,215	$	(101	)	$	30,169	$	(76	)	$	90,384	$	(177	)
Debt Securities Issued by Corporations	4,204		(1		)	75,540		(1,407		)	79,744		(1,408		)
Mortgage-Backed Securities:
Residential - Government Agencies	482,495		(3,675		)	469,731		(11,925		)	952,226		(15,600		)
Residential - U.S. Government-Sponsored Enterprises	86,791		(80		)	—		—			86,791		(80		)
Commercial - Government Agencies	110,069		(994		)	56,238		(1,170		)	166,307		(2,164		)
Total Mortgage-Backed Securities	679,355		(4,749		)	525,969		(13,095		)	1,205,324		(17,844		)
Total	$	743,774	$	(4,851	)	$	631,678	$	(14,578	)	$	1,375,452	$	(19,429	)

December 31, 2014
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	1,729	$	(2	)	$	5,546	$	(38	)	$	7,275	$	(40	)
Debt Securities Issued by States and Political Subdivisions	78,068		(305		)	94,543		(1,140		)	172,611		(1,445		)
Debt Securities Issued by Corporations	73,829		(1,171		)	180,335		(2,814		)	254,164		(3,985		)
Mortgage-Backed Securities:
Residential - Government Agencies	3,025		(8		)	12,215		(1,035		)	15,240		(1,043		)
Residential - U.S. Government-Sponsored Enterprises	103,824		(191		)	—		—			103,824		(191		)
Commercial - Government Agencies	—		—			178,232		(8,581		)	178,232		(8,581		)
Total Mortgage-Backed Securities	106,849		(199		)	190,447		(9,616		)	297,296		(9,815		)
Total	$	260,475	$	(1,677	)	$	470,871	$	(13,608	)	$	731,346	$	(15,285	)
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	70,016	$	(134	)	$	144,222	$	(1,025	)	$	214,238	$	(1,159	)
Debt Securities Issued by Corporations	46,196		(349		)	82,109		(3,093		)	128,305		(3,442		)
Mortgage-Backed Securities:
Residential - Government Agencies	280,967		(1,207		)	845,911		(19,429		)	1,126,878		(20,636		)
Residential - U.S. Government-Sponsored Enterprises	45,754		(15		)	—		—			45,754		(15		)
Commercial - Government Agencies	124,594		(179		)	171,091		(3,612		)	295,685		(3,791		)
Total Mortgage-Backed Securities	451,315		(1,401		)	1,017,002		(23,041		)	1,468,317		(24,442		)
Total	$	567,527	$	(1,884	)	$	1,243,333	$	(27,159	)	$	1,810,860	$	(29,043	)

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The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2015, which were comprised of 175 securities, represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. As of June 30, 2015 and December 31, 2014, the gross unrealized losses reported for mortgage-backed securities were primarily related to investment securities issued by the Government National Mortgage Association. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Interest income from taxable and non-taxable investment securities for the three and six months ended June 30, 2015 and 2014 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2015		2014		2015		2014
Taxable	$	27,776	$	32,316	$	57,068	$	65,743
Non-Taxable	5,329		5,319		10,642		10,541
Total Interest Income from Investment Securities	$	33,105	$	37,635	$	67,710	$	76,284

As of June 30, 2015, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $590.4 million, representing 58% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 91% were credit-rated Aa2 or better by Moody's while most of the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Approximately 77% of the Company's Hawaii municipal bond holdings were general obligation issuances. As of June 30, 2015, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company's municipal debt securities.

As of June 30, 2015 and December 31, 2014, the carrying value of the Company’s Federal Home Loan Bank of Des Moines (“FHLB Des Moines”) stock and Federal Reserve Bank stock was as follows:



(dollars in thousands)	June 30, 2015		December 31, 2014
Federal Home Loan Bank Stock	$	16,000	$	47,075
Federal Reserve Bank Stock	19,418		19,299
Total	$	35,418	$	66,374

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

Effective May 31, 2015, FHLB Des Moines completed its previously announced merger with the Federal Home Loan Bank of Seattle (“FHLB Seattle”). The continuing bank, FHLB Des Moines, remains headquartered in Des Moines with a western regional office in Seattle. Prior to the merger, the Company held stock in FHLB Seattle. Pursuant to the terms of the Merger Agreement, each share of FHLB Seattle stock was converted into one share of FHLB Des Moines stock. In addition, upon the merger, the Company's excess FHLB stock was redeemed and the Company’s membership effectively transferred to FHLB Des Moines. The merger did not have a material impact on the Company's Consolidated Financial Statements or the Company's dealings with the continuing bank.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares. As of June 30, 2015, the conversion ratio was 1.6483.

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During the first six months of 2015, the Company recorded a $10.1 million net gain on the sale of 95,000 Visa Class B shares. Concurrent with these sales, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 293,214 Class B shares (483,305 Class A equivalents) that the Company owns are carried at a zero cost basis. The Company also contributed 9,300 Visa Class B restricted shares to the Bank of Hawaii Foundation during the first six months of 2015. The contribution had no impact on noninterest expense; however, the contribution favorably impacted our effective tax rate in 2015.

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

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of June 30, 2015 and December 31, 2014:



(dollars in thousands)	June 30, 2015		December 31, 2014
Commercial
Commercial and Industrial	$	1,173,259	$	1,055,243
Commercial Mortgage	1,528,685		1,437,513
Construction	118,714		109,183
Lease Financing	222,113		226,189
Total Commercial	3,042,771		2,828,128
Consumer
Residential Mortgage	2,787,847		2,571,090
Home Equity	931,191		866,688
Automobile	352,128		323,848
Other ¹	314,501		307,835
Total Consumer	4,385,667		4,069,461
Total Loans and Leases	$	7,428,438	$	6,897,589


¹	Comprised of other revolving credit, installment, and lease financing.

The majority of the Company's lending activity is with customers located in the State of Hawaii. A substantial portion of the Company's real estate loans are secured by real estate in Hawaii.

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $1.8 million and $0.6 million for the three months ended June 30, 2015 and 2014, respectively, and $2.3 million and $1.3 million for the six months ended June 30, 2015 and 2014, respectively.

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

The following presents by portfolio segment, the activity in the Allowance for the three and six months ended June 30, 2015 and 2014. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of June 30, 2015 and 2014.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended June 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	65,834		$	41,627		$	107,461
Loans and Leases Charged-Off	(255		)	(3,241		)	(3,496		)
Recoveries on Loans and Leases Previously Charged-Off	486			1,555			2,041
Net Loans and Leases Recovered (Charged-Off)	231			(1,686		)	(1,455		)
Provision for Credit Losses	940			(940		)	—
Balance at End of Period	$	67,005		$	39,001		$	106,006
Six Months Ended June 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	64,551		$	44,137		$	108,688
Loans and Leases Charged-Off	(490		)	(7,094		)	(7,584		)
Recoveries on Loans and Leases Previously Charged-Off	1,222			3,680			4,902
Net Loans and Leases Recovered (Charged-Off)	732			(3,414		)	(2,682		)
Provision for Credit Losses	1,722			(1,722		)	—
Balance at End of Period	$	67,005		$	39,001		$	106,006
As of June 30, 2015
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	2,160		$	3,405		$	5,565
Collectively Evaluated for Impairment	64,845			35,596			100,441
Total	$	67,005		$	39,001		$	106,006
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	27,512		$	39,267		$	66,779
Collectively Evaluated for Impairment	3,015,259			4,346,400			7,361,659
Total	$	3,042,771		$	4,385,667		$	7,428,438

Three Months Ended June 30, 2014
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	71,390		$	42,736		$	114,126
Loans and Leases Charged-Off	(815		)	(3,182		)	(3,997		)
Recoveries on Loans and Leases Previously Charged-Off	2,156			3,752			5,908
Net Loans and Leases Recovered (Charged-Off)	1,341			570			1,911
Provision for Credit Losses	(845		)	(1,354		)	(2,199		)
Balance at End of Period	$	71,886		$	41,952		$	113,838
Six Months Ended June 30, 2014
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	71,446		$	44,008		$	115,454
Loans and Leases Charged-Off	(1,634		)	(6,401		)	(8,035		)
Recoveries on Loans and Leases Previously Charged-Off	3,097			5,521			8,618
Net Loans and Leases Recovered (Charged-Off)	1,463			(880		)	583
Provision for Credit Losses	(1,023		)	(1,176		)	(2,199		)
Balance at End of Period	$	71,886		$	41,952		$	113,838
As of June 30, 2014
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	8,693		$	3,332		$	12,025
Collectively Evaluated for Impairment	63,193			38,620			101,813
Total	$	71,886		$	41,952		$	113,838
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	27,089		$	38,007		$	65,096
Collectively Evaluated for Impairment	2,666,419			3,694,838			6,361,257
Total	$	2,693,508		$	3,732,845		$	6,426,353

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Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:


Pass:	Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

Special Mention:

Loans and leases in the classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The special mention credit quality indicator is not used for classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

Classified:

Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of generally up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from classified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner.

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 June 30, 2015 and December 31, 2014.



	June 30, 2015
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,119,752	$	1,461,791	$	116,971	$	221,647	$	2,920,161
Special Mention	16,460		24,289		—		83		40,832
Classified	37,047		42,605		1,743		383		81,778
Total	$	1,173,259	$	1,528,685	$	118,714	$	222,113	$	3,042,771

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	2,772,013	$	926,305	$	351,806	$	313,723	$	4,363,847
Classified	15,834		4,886		322		778		21,820
Total	$	2,787,847	$	931,191