Edgar Filing: BANK OF HAWAII CORP

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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 September 30, 2016

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, 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 x

As of October 18, 2016, there were 42,692,883 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 nine months ended September 30, 2016 and 2015	2

	Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2016 and 2015	3

	Consolidated Statements of Condition – September 30, 2016 and December 31, 2015	4

	Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2016 and 2015	5

	Consolidated Statements of Cash Flows – Nine months ended September 30, 2016 and 2015	6

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79

Item 4.	Controls and Procedures	79

Part II - Other Information

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80

Item 6.	Exhibits	80

Signatures		81

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands, except per share amounts)	2016			2015		2016		2015
Interest Income
Interest and Fees on Loans and Leases	$	83,489		$	75,874	$	246,707	$	220,400
Income on Investment Securities
Available-for-Sale	10,313			10,192		31,648		30,663
Held-to-Maturity	19,315			20,689		59,874		67,928
Deposits	1			2		7		7
Funds Sold	695			291		2,066		818
Other	166			312		531		924
Total Interest Income	113,979			107,360		340,833		320,740
Interest Expense
Deposits	3,232			2,410		9,199		7,183
Securities Sold Under Agreements to Repurchase	5,713			6,307		18,000		19,118
Funds Purchased	3			3		9		9
Other Debt	1,119			749		3,139		1,987
Total Interest Expense	10,067			9,469		30,347		28,297
Net Interest Income	103,912			97,891		310,486		292,443
Provision for Credit Losses	2,500			—		1,500		—
Net Interest Income After Provision for Credit Losses	101,412			97,891		308,986		292,443
Noninterest Income
Trust and Asset Management	11,008			11,907		34,971		36,442
Mortgage Banking	6,362			3,291		13,639		8,453
Service Charges on Deposit Accounts	8,524			8,669		25,117		25,409
Fees, Exchange, and Other Service Charges	14,023			13,340		41,445		39,589
Investment Securities Gains (Losses), Net	(328		)	24		10,540		10,341
Annuity and Insurance	1,653			1,721		5,560		5,650
Bank-Owned Life Insurance	1,911			1,609		5,010		5,431
Other	4,961			2,660		14,558		10,138
Total Noninterest Income	48,114			43,221		150,840		141,453
Noninterest Expense
Salaries and Benefits	49,725			46,576		150,528		143,966
Net Occupancy	8,510			7,403		22,671		25,341
Net Equipment	4,913			4,804		15,387		14,918
Data Processing	3,620			3,920		11,543		11,366
Professional Fees	2,396			2,258		7,082		6,857
FDIC Insurance	2,104			2,139		6,600		6,347
Other	16,264			24,788		47,178		53,582
Total Noninterest Expense	87,532			91,888		260,989		262,377
Income Before Provision for Income Taxes	61,994			49,224		198,837		171,519
Provision for Income Taxes	18,501			14,948		60,889		53,647
Net Income	$	43,493		$	34,276	$	137,948	$	117,872
Basic Earnings Per Share	$	1.02		$	0.79	$	3.23	$	2.72
Diluted Earnings Per Share	$	1.02		$	0.79	$	3.21	$	2.71
Dividends Declared Per Share	$	0.48		$	0.45	$	1.41	$	1.35
Basic Weighted Average Shares	42,543,122			43,181,233		42,730,571		43,290,137
Diluted Weighted Average Shares	42,778,346			43,427,730		42,947,059		43,514,898

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					Nine Months Ended
	September 30,					September 30,
(dollars in thousands)	2016			2015		2016		2015
Net Income	$	43,493		$	34,276	$	137,948	$	117,872
Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Gains (Losses) on Investment Securities	(5,528		)	7,051		8,323		4,735
Defined Benefit Plans	140			219		422		659
Total Other Comprehensive Income (Loss)	(5,388		)	7,270		8,745		5,394
Comprehensive Income	$	38,105		$	41,546	$	146,693	$	123,266

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)	September 30, 2016			December 31, 2015
Assets
Interest-Bearing Deposits in Other Banks	$	4,181		$	4,130
Funds Sold	506,604			592,892
Investment Securities
Available-for-Sale	2,213,482			2,256,818
Held-to-Maturity (Fair Value of $3,893,542 and $4,006,412)	3,815,915			3,982,736
Loans Held for Sale	68,066			4,808
Loans and Leases	8,694,097			7,878,985
Allowance for Loan and Lease Losses	(104,033		)	(102,880		)
Net Loans and Leases	8,590,064			7,776,105
Total Earning Assets	15,198,312			14,617,489
Cash and Due From Banks	127,326			158,699
Premises and Equipment, Net	110,288			111,199
Accrued Interest Receivable	46,925			44,719
Foreclosed Real Estate	1,747			824
Mortgage Servicing Rights	20,991			23,002
Goodwill	31,517			31,517
Bank-Owned Life Insurance	272,637			268,175
Other Assets	204,900			199,392
Total Assets	$	16,014,643		$	15,455,016

Liabilities
Deposits
Noninterest-Bearing Demand	$	4,437,963		$	4,286,331
Interest-Bearing Demand	2,777,095			2,761,930
Savings	5,306,880			5,025,191
Time	1,286,427			1,177,651
Total Deposits	13,808,365			13,251,103
Funds Purchased	9,616			7,333
Securities Sold Under Agreements to Repurchase	551,683			628,857
Other Debt	267,954			245,786
Retirement Benefits Payable	47,522			47,374
Accrued Interest Payable	6,115			5,032
Taxes Payable and Deferred Taxes	24,922			17,737
Other Liabilities	134,607			135,534
Total Liabilities	14,850,784			14,338,756
Shareholders’ Equity
Common Stock ($.01 par value; authorized 500,000,000 shares; issued / outstanding: September 30, 2016 - 57,854,843 / 42,733,513 and December 31, 2015 - 57,749,071 / 43,282,153)	576			575
Capital Surplus	549,064			542,041
Accumulated Other Comprehensive Loss	(14,812		)	(23,557		)
Retained Earnings	1,393,231			1,316,260
Treasury Stock, at Cost (Shares: September 30, 2016 - 15,121,330 and December 31, 2015 - 14,466,918)	(764,200		)	(719,059		)
Total Shareholders’ Equity	1,163,859			1,116,260
Total Liabilities and Shareholders’ Equity	$	16,014,643		$	15,455,016

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, 2015	43,282,153		$	575	$	542,041	$	(23,557	)	$	1,316,260		$	(719,059	)	$	1,116,260
Net Income	—		—		—		—			137,948			—			137,948
Other Comprehensive Income	—		—		—		8,745			—			—			8,745
Share-Based Compensation	—		—		5,020		—			—			—			5,020
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	224,018		1		2,003		—			(314		)	6,224			7,914
Common Stock Repurchased	(772,658	)	—		—		—			—			(51,365		)	(51,365		)
Cash Dividends Declared ($1.41 per share)	—		—		—		—			(60,663		)	—			(60,663		)
Balance as of September 30, 2016	42,733,513		$	576	$	549,064	$	(14,812	)	$	1,393,231		$	(764,200	)	$	1,163,859

Balance as of December 31, 2014	43,724,208		$	574	$	531,932	$	(26,686	)	$	1,234,801		$	(685,535	)	$	1,055,086
Net Income	—		—		—		—			117,872			—			117,872
Other Comprehensive Income	—		—		—		5,394			—			—			5,394
Share-Based Compensation	—		—		5,698		—			—			—			5,698
Common Stock Issued under Purchase and Equity Compensation Plans and Related Tax Benefits	246,851		1		1,482		—			(376		)	11,011			12,118
Common Stock Repurchased	(628,119	)	—		—		—			—			(38,933		)	(38,933		)
Cash Dividends Declared ($1.35 per share)	—		—		—		—			(58,881		)	—			(58,881		)
Balance as of September 30, 2015	43,342,940		$	575	$	539,112	$	(21,292	)	$	1,293,416		$	(713,457	)	$	1,098,354

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)



	Nine Months Ended
	September 30,
(dollars in thousands)	2016			2015
Operating Activities
Net Income	$	137,948		$	117,872
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses	1,500			—
Impairment on Equipment Held for Sale	—			9,453
Depreciation and Amortization	9,734			9,541
Amortization of Deferred Loan and Lease Fees	(1,089		)	(1,282		)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net	33,234			38,753
Share-Based Compensation	5,020			5,698
Benefit Plan Contributions	(929		)	(1,413		)
Deferred Income Taxes	6,465			(10,618		)
Net Gains on Sales of Loans and Leases	(8,061		)	(2,510		)
Net Gains on Sales of Investment Securities	(10,540		)	(10,341		)
Proceeds from Sales of Loans Held for Sale	268,752			142,391
Originations of Loans Held for Sale	(323,837		)	(137,293		)
Tax Benefits from Share-Based Compensation	(916		)	(403		)
Net Change in Other Assets and Other Liabilities	(14,231		)	9,719
Net Cash Provided by Operating Activities	103,050			169,567

Investing Activities
Investment Securities Available-for-Sale:
Proceeds from Prepayments and Maturities	288,928			256,581
Proceeds from Sales	10,766			68,166
Purchases	(248,839		)	(317,458		)
Investment Securities Held-to-Maturity:
Proceeds from Prepayments and Maturities	545,133			715,776
Purchases	(394,547		)	(389,213		)
Net Change in Loans and Leases	(816,440		)	(800,482		)
Premises and Equipment, Net	(8,823		)	(8,673		)
Net Cash Used in Investing Activities	(623,822		)	(475,303		)

Financing Activities
Net Change in Deposits	557,262			303,873
Net Change in Short-Term Borrowings	(74,891		)	(56,463		)
Proceeds from Long-Term Debt	75,000			100,000
Repayments of Long-Term Debt	(50,000		)	—
Tax Benefits from Share-Based Compensation	916			403
Proceeds from Issuance of Common Stock	6,903			7,244
Repurchase of Common Stock	(51,365		)	(38,933		)
Cash Dividends Paid	(60,663		)	(58,881		)
Net Cash Provided by Financing Activities	403,162			257,243

Net Change in Cash and Cash Equivalents	(117,610		)	(48,493		)
Cash and Cash Equivalents at Beginning of Period	755,721			535,576
Cash and Cash Equivalents at End of Period	$	638,111		$	487,083
Supplemental Information
Cash Paid for Interest	$	28,952		$	27,168
Cash Paid for Income Taxes	51,257			52,808
Non-Cash Investing Activities:
Transfer from Loans to Foreclosed Real Estate	1,058			787
Transfers from Loans to Loans Held for Sale	143,918			93,539

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 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. All significant 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, 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.

Variable Interest Entities

Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the variable interest entity ("VIE"). The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.

The Company has limited partnership interests in several low-income housing partnerships. These partnerships provide funds for the construction and operation of apartment complexes that provide affordable housing to low-income households. If these developments successfully attract a specified percentage of residents falling in that lower income range, state and/or federal income tax credits are made available to the partners. The tax credits are generally recognized over 10 years. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained.

Prior to January 1, 2015, the Company utilized the effective yield method whereby the Company recognized tax credits generally over 10 years and amortized the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the Company. On January 1, 2015, the Company adopted ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects" prospectively for new investments. ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. As permitted by ASU No. 2014-01, the Company elected to continue to utilize the effective yield method for investments made prior to January 1, 2015.

Unfunded commitments to fund these low-income housing partnerships were $22.4 million and $25.3 million as of September 30, 2016 and December 31, 2015, respectively. These unfunded commitments are unconditional and legally binding

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and are recorded in other liabilities in the consolidated statements of condition. See Note 5 Affordable Housing Projects Tax Credit Partnerships for more information.

The Company also has limited partnership interests in solar energy tax credit partnership investments. These partnerships develop, build, own and operate solar renewable energy projects. Over the course of these investments, the Company expects to receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Tax benefits associated with these investments are generally recognized over 6 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 $78.0 million and $79.0 million as of September 30, 2016 and December 31, 2015, respectively, and is included in other assets in the consolidated statements of condition.

Accounting Standards Adopted in 2016

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. The Company adopted ASU No. 2015-02 effective January 1, 2016. The adoption of ASU No. 2015-02 did not 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. The purpose of ASU 2015-05 is to clarify which fees paid in a cloud computing arrangement should be capitalized and which fees should be expensed as incurred. The Company prospectively adopted ASU No. 2015-05 effective January 1, 2016. The adoption of ASU No. 2015-05 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 consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in

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exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date" which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” and ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients.” The Company is currently evaluating the provisions of ASU No. 2014-09 and its related updates 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 January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company's Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, "Leases." Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company is currently evaluating the provisions of

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ASU No. 2016-02 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 March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company expects adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company's Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.

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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 September 30, 2016 and December 31, 2015 were as follows:



(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2016
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	421,460	$	2,999	$	(1,325	)	$	423,134
Debt Securities Issued by States and Political Subdivisions	669,062		28,026		(28		)	697,060
Debt Securities Issued by Corporations	273,057		36		(4,026		)	269,067
Mortgage-Backed Securities:
Residential - Government Agencies	228,422		5,712		(762		)	233,372
Residential - U.S. Government-Sponsored Enterprises	493,409		5,169		(71		)	498,507
Commercial - Government Agencies	94,523		—		(2,181		)	92,342
Total Mortgage-Backed Securities	816,354		10,881		(3,014		)	824,221
Total	$	2,179,933	$	41,942	$	(8,393	)	$	2,213,482
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	530,167	$	4,076	$	—		$	534,243
Debt Securities Issued by States and Political Subdivisions	243,226		19,553		—			262,779
Debt Securities Issued by Corporations	139,569		2,106		(229		)	141,446
Mortgage-Backed Securities:
Residential - Government Agencies	1,917,954		38,056		(3,845		)	1,952,165
Residential - U.S. Government-Sponsored Enterprises	740,467		12,514		(87		)	752,894
Commercial - Government Agencies	244,532		5,689		(206		)	250,015
Total Mortgage-Backed Securities	2,902,953		56,259		(4,138		)	2,955,074
Total	$	3,815,915	$	81,994	$	(4,367	)	$	3,893,542

December 31, 2015
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	356,260	$	3,472	$	(838	)	$	358,894
Debt Securities Issued by States and Political Subdivisions	709,724		22,498		(304		)	731,918
Debt Securities Issued by Corporations	313,136		236		(4,502		)	308,870
Mortgage-Backed Securities:
Residential - Government Agencies	310,966		6,546		(1,267		)	316,245
Residential - U.S. Government-Sponsored Enterprises	442,760		1,368		(2,264		)	441,864
Commercial - Government Agencies	103,227		—		(4,200		)	99,027
Total Mortgage-Backed Securities	856,953		7,914		(7,731		)	857,136
Total	$	2,236,073	$	34,120	$	(13,375	)	$	2,256,818
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	489,747	$	1,359	$	(1,139	)	$	489,967
Debt Securities Issued by States and Political Subdivisions	245,980		17,114		—			263,094
Debt Securities Issued by Corporations	151,301		368		(2,041		)	149,628
Mortgage-Backed Securities:
Residential - Government Agencies	2,191,138		27,893		(19,067		)	2,199,964
Residential - U.S. Government-Sponsored Enterprises	647,762		1,656		(2,616		)	646,802
Commercial - Government Agencies	256,808		2,381		(2,232		)	256,957
Total Mortgage-Backed Securities	3,095,708		31,930		(23,915		)	3,103,723
Total	$	3,982,736	$	50,771	$	(27,095	)	$	4,006,412

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The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2016. 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	$	28,664	$	28,814
Due After One Year Through Five Years	578,537		584,235
Due After Five Years Through Ten Years	292,485		307,096
Due After Ten Years	42,984		46,532
	942,670		966,677

Debt Securities Issued by Government Agencies	420,909		422,584
Mortgage-Backed Securities:
Residential - Government Agencies	228,422		233,372
Residential - U.S. Government-Sponsored Enterprises	493,409		498,507
Commercial - Government Agencies	94,523		92,342
Total Mortgage-Backed Securities	816,354		824,221
Total	$	2,179,933	$	2,213,482

Held-to-Maturity:
Due in One Year or Less	$	104,990	$	105,116
Due After One Year Through Five Years	460,841		466,200
Due After Five Years Through Ten Years	276,259		289,962
Due After Ten Years	70,872		77,190
	912,962		938,468
Mortgage-Backed Securities:
Residential - Government Agencies	1,917,954		1,952,165
Residential - U.S. Government-Sponsored Enterprises	740,467		752,894
Commercial - Government Agencies	244,532		250,015
Total Mortgage-Backed Securities	2,902,953		2,955,074
Total	$	3,815,915	$	3,893,542

Investment securities with carrying values of $2.4 billion and $2.5 billion as of September 30, 2016 and December 31, 2015, 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 nine months ended September 30, 2016 and 2015.



	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2016			2015			2016			2015
Gross Gains on Sales of Investment Securities	$	—		$	1,504		$	11,180		$	11,821
Gross Losses on Sales of Investment Securities	(328		)	(1,480		)	(640		)	(1,480		)
Net Gains (Losses) on Sales of Investment Securities	$	(328	)	$	24		$	10,540		$	10,341

The losses during the three and nine months ended September 30, 2016 were due to fees paid to the counterparties of our prior Visa Class B share sale transactions.

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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
September 30, 2016
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	190,291	$	(841	)	$	33,670	$	(484	)	$	223,961	$	(1,325	)
Debt Securities Issued by States and Political Subdivisions	2,425		(4		)	6,745		(24		)	9,170		(28		)
Debt Securities Issued by Corporations	63,316		(1,695		)	172,662		(2,331		)	235,978		(4,026		)
Mortgage-Backed Securities:
Residential - Government Agencies	8,300		(13		)	12,773		(749		)	21,073		(762		)
Residential - U.S. Government-Sponsored Enterprises	39,245		(71		)	—		—			39,245		(71		)
Commercial - Government Agencies	5,195		(80		)	87,147		(2,101		)	92,342		(2,181		)
Total Mortgage-Backed Securities	52,740		(164		)	99,920		(2,850		)	152,660		(3,014		)
Total	$	308,772	$	(2,704	)	$	312,997	$	(5,689	)	$	621,769	$	(8,393	)
Held-to-Maturity:
Debt Securities Issued by Corporations	$	30,524	$	(7	)	$	16,751	$	(222	)	$	47,275	$	(229	)
Mortgage-Backed Securities:
Residential - Government Agencies	193,359		(327		)	255,196		(3,518		)	448,555		(3,845		)
Residential - U.S. Government-Sponsored Enterprises	20,489		(87		)	—		—			20,489		(87		)
Commercial - Government Agencies	52,574		(110		)	18,923		(96		)	71,497		(206		)
Total Mortgage-Backed Securities	266,422		(524		)	274,119		(3,614		)	540,541		(4,138		)
Total	$	296,946	$	(531	)	$	290,870	$	(3,836	)	$	587,816	$	(4,367	)

December 31, 2015
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	144,260	$	(822	)	$	5,452	$	(16	)	$	149,712	$	(838	)
Debt Securities Issued by States and Political Subdivisions	72,248		(252		)	6,798		(52		)	79,046		(304		)
Debt Securities Issued by Corporations	101,269		(1,747		)	162,304		(2,755		)	263,573		(4,502		)
Mortgage-Backed Securities:
Residential - Government Agencies	30,679		(130		)	9,117		(1,137		)	39,796		(1,267		)
Residential - U.S. Government-Sponsored Enterprises	346,603		(2,264		)	—		—			346,603		(2,264		)
Commercial - Government Agencies	—		—			99,026		(4,200		)	99,026		(4,200		)
Total Mortgage-Backed Securities	377,282		(2,394		)	108,143		(5,337		)	485,425		(7,731		)
Total	$	695,059	$	(5,215	)	$	282,697	$	(8,160	)	$	977,756	$	(13,375	)
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	264,747	$	(1,139	)	$	—	$	—		$	264,747	$	(1,139	)
Debt Securities Issued by Corporations	28,218		(66		)	71,208		(1,975		)	99,426		(2,041		)
Mortgage-Backed Securities:
Residential - Government Agencies	562,502		(5,828		)	414,207		(13,239		)	976,709		(19,067		)
Residential - U.S. Government-Sponsored Enterprises	450,147		(2,616		)	—		—			450,147		(2,616		)
Commercial - Government Agencies	74,040		(958		)	52,207		(1,274		)	126,247		(2,232		)
Total Mortgage-Backed Securities	1,086,689		(9,402		)	466,414		(14,513		)	1,553,103		(23,915		)
Total	$	1,379,654	$	(10,607	)	$	537,622	$	(16,488	)	$	1,917,276	$	(27,095	)

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The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2016, which were comprised of 120 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 September 30, 2016 and December 31, 2015, the gross unrealized losses were primarily related to investment securities issued by Ginnie Mae and corporate debt securities. 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 nine months ended September 30, 2016 and 2015 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2016		2015		2016		2015
Taxable	$	24,558	$	25,569	$	76,112	$	82,638
Non-Taxable	5,070		5,312		15,410		15,953
Total Interest Income from Investment Securities	$	29,628	$	30,881	$	91,522	$	98,591

As of September 30, 2016, included in the Company's investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $543.8 million, representing 57% of the total fair value of the Company's municipal debt securities. Of the entire Hawaii municipal bond portfolio, 94% were credit-rated Aa2 or better by Moody's while the remaining Hawaii municipal bonds were credit-rated A2 or better by at least one nationally recognized statistical rating organization. Of the Company's total Hawaii municipal bond holdings, 77% were general obligation issuances. As of September 30, 2016, 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 September 30, 2016 and December 31, 2015, 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)	September 30, 2016		December 31, 2015
Federal Home Loan Bank Stock	$	20,000	$	19,000
Federal Reserve Bank Stock	19,958		19,836
Total	$	39,958	$	38,836

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

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account not be sufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares. As of September 30, 2016, the conversion ratio was 1.6483.

During the first quarter of 2016, the Company recorded an $11.2 million net gain on the sale of 100,000 Visa Class B shares. Concurrent with every sale of Visa Class B shares, the Company has entered into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 184,814 Class B shares (304,629 Class A equivalents) that the Company owns are carried at a zero cost basis.

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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 September 30, 2016 and December 31, 2015:



(dollars in thousands)	September 30, 2016		December 31, 2015
Commercial
Commercial and Industrial	$	1,217,849	$	1,115,168
Commercial Mortgage	1,807,190		1,677,147
Construction	263,079		156,660
Lease Financing	201,436		204,877
Total Commercial	3,489,554		3,153,852
Consumer
Residential Mortgage	3,098,936		2,925,605
Home Equity	1,295,993		1,069,400
Automobile	437,659		381,735
Other ¹	371,955		348,393
Total Consumer	5,204,543		4,725,133
Total Loans and Leases	$	8,694,097	$	7,878,985


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 $3.6 million and $1.8 million for the three months ended September 30, 2016 and 2015, respectively, and $9.8 million and $4.1 million for the nine months ended September 30, 2016 and 2015, 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 nine months ended September 30, 2016 and 2015. 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 September 30, 2016 and 2015.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended September 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	62,029		$	41,903		$	103,932
Loans and Leases Charged-Off	(209		)	(4,707		)	(4,916		)
Recoveries on Loans and Leases Previously Charged-Off	296			2,221			2,517
Net Loans and Leases Recovered (Charged-Off)	87			(2,486		)	(2,399		)
Provision for Credit Losses	442			2,058			2,500
Balance at End of Period	$	62,558		$	41,475		$	104,033
Nine Months Ended September 30, 2016
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	60,714		$	42,166		$	102,880
Loans and Leases Charged-Off	(670		)	(12,888		)	(13,558		)
Recoveries on Loans and Leases Previously Charged-Off	7,619			5,592			13,211
Net Loans and Leases Recovered (Charged-Off)	6,949			(7,296		)	(347		)
Provision for Credit Losses	(5,105		)	6,605			1,500
Balance at End of Period	$	62,558		$	41,475		$	104,033
As of September 30, 2016
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	11		$	3,436		$	3,447
Collectively Evaluated for Impairment	62,547			38,039			100,586
Total	$	62,558		$	41,475		$	104,033
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	21,793		$	38,450		$	60,243
Collectively Evaluated for Impairment	3,467,761			5,166,093			8,633,854
Total	$	3,489,554		$	5,204,543		$	8,694,097

Three Months Ended September 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	67,005		$	39,001		$	106,006
Loans and Leases Charged-Off	(160		)	(4,233		)	(4,393		)
Recoveries on Loans and Leases Previously Charged-Off	504			1,921			2,425
Net Loans and Leases Recovered (Charged-Off)	344			(2,312		)	(1,968		)
Provision for Credit Losses	(2,708		)	2,708			—
Balance at End of Period	$	64,641		$	39,397		$	104,038
Nine Months Ended September 30, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	64,551		$	44,137		$	108,688
Loans and Leases Charged-Off	(650		)	(11,327		)	(11,977		)
Recoveries on Loans and Leases Previously Charged-Off	1,726			5,601			7,327
Net Loans and Leases Recovered (Charged-Off)	1,076			(5,726		)	(4,650		)
Provision for Credit Losses	(986		)	986			—
Balance at End of Period	$	64,641		$	39,397		$	104,038
As of September 30, 2015
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	1,977		$	3,336		$	5,313
Collectively Evaluated for Impairment	62,664			36,061			98,725
Total	$	64,641		$	39,397		$	104,038
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	29,016		$	39,013		$	68,029
Collectively Evaluated for Impairment	3,094,229			4,527,514			7,621,743
Total	$	3,123,245		$	4,566,527		$	7,689,772

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 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 September 30, 2016 and December 31, 2015.



	September 30, 2016
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,164,869	$	1,707,003	$	250,918	$	200,701	$	3,323,491
Special Mention	20,880		60,080		10,625		6		91,591
Classified	32,100		40,107		1,536		729		74,472
Total	$	1,217,849	$	1,807,190	$	263,079	$	201,436	$	3,489,554

(dollars in thousands)	Residential Mortgage		Home Equity